Biopharmaceutical stocks will never show up on a value investor's stock screen; the average trailing-12-month P/E ratio of the top five biotechs is greater than 120. Drug maker Celgene (Nasdaq: CELG ) , which just reported its earnings numbers last week, is the best example of this situation, trading at a multiple of nearly 300 times its 2006 GAAP earnings. However, the company is going through an operational metamorphosis as its new cancer drug, Revlimid, turns it into an earnings powerhouse.
For the quarter, revenue was up 84%, to $275 million, and gross margins gained more than 500 basis points, to 87%. Measuring biotech bottom-line results is always a little tricky, since companies like to back out all sorts of non-cash expenses, but Celgene's adjusted earnings were up sixfold to $0.18 a share in the fourth quarter. To see more of Celgene's Foolish financials, look here.
In 2007, Celgene is guiding for revenue to rise more than 40%, to around $1.3 billion, and for adjusted earnings to almost double to $1 a share, compared to the $0.53 a share it earned in 2006. Although it probably won't contribute meaningfully to the top line this year, because of the months it takes to set up reimbursement in many countries, Revlimid may get European Union marketing approval. The other interesting pipeline news this year will be the initiation of more clinical trials with Celgene's other thalidomide analogue, CC-4047.
On the negative side of things, this quarter marked the start of a patent fight with Barr Pharmaceuticals (NYSE: BRL ) over patents protecting Celgene's Thalomid. An outcome from the litigation over the Thalomid patents is still years away at the earliest, since Celgene automatically gets a 30-month stay of FDA action on Barr's generic Thalomid marketing application. Thalomid accounted for 48% of Celgene's revenue last year, but with its sales growth moderating to 2% quarter over quarter and Revlimid sales expanded by 22%, the substitution of Revlimid for Thalomid already seems to be happening in the multiple myeloma setting.
Biopharma investors know it's not the past that matters the most in this sector; it's the outlook. And while Celgene's 2007 adjusted earnings multiple seems high at nearly 54, Revlimid will provide it with years of growth, and that multiple will come down.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.
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