Judging by the market reaction to Celgene's (NASDAQ:CELG) third-quarter results, you'd think one of the Four Horsemen of the Apocalypse just rode down Wall Street. Or maybe two of them did.
Celgene missed revenue expectations. The biotech reduced its full-year 2017 outlook. It lowered its 2020 projections.
All of that was bad news, for sure, but it would make a lot of sense for investors selling Celgene stock like it was radioactive to stop and take a deep breath. Instead of panicking, I recommend paying close attention to one thing stated by Celgene's management in the company's third-quarter conference call.
Celgene's conference call included the executives you would expect to participate: CEO Mark Alles, CFO Peter Kellogg, COO Scott Smith, inflammation and immunology president Terrie Curran, and hematology/oncology president Nadim Ahmed. The call also included Robert Hugin. He is currently Celgene's executive chairman, but Hugin joined the company back in 1999 as CFO and served as CEO for nearly six years prior to passing the baton to Alles.
Bob Hugin didn't say a whole lot during the call, but there's one statement he made that everyone who follows Celgene needs to ponder. One analyst noted that Celgene's market cap has dropped by around one-third in the last three weeks and asked what the company planned to do in response. A couple of top executives answered first, but then Hugin chimed in.
He started out by reminding the analysts on the call that the biopharmaceutical industry is volatile. Hugin then focused on Celgene's history, stating that "we have had significant ups and downs," adding that "it's part of the business cycle we're involved in."
What Hugin said next is vital for any investor in any company: "It's important to put things into perspective." He then added that Celgene has "an incredibly bright future" with a "broad pipeline and market-leading top-line and bottom-line growth" along with a great executive team.
To those comments, I say, "Preach on, Bob." Every word he said is true, in my opinion. But the market is treating Celgene stock like the biotech is facing ginormous problems. I don't think that's the case.
About those numbers
Let's look at the numbers that rattled the market so much. Celgene reported third-quarter revenue of $3.28 billion, up 11% year over year. That was roughly $140 million below the consensus analyst estimate. The company previously projected full-year revenue between $13 billion and $13.4 billion, but now expects 2017 revenue at the low end of that range.
These disappointing results stemmed primarily from headwinds for Otezla. One challenge for the autoimmune-disease drug is that Celgene's pricing was lower because of gross-to-net adjustments in contracts implemented this year. The company also experienced difficulties with payers restricting market access. As a result, Celgene now thinks full-year 2017 sales for Otezla will be around $1.25 billion instead of between $1.5 billion and $1.7 billion, as previously anticipated.
Then there were the longer-range projections. Celgene now expects total net net product sales of between $19 billion and $20 billion in 2020, down from a $20 billion estimate made back in 2015. Adjusted diluted earnings per share in 2020 is projected to be $12.50 or higher compared to the 2015 projection of $13.
Acknowledgement of changing market dynamics for Otezla was part of the downward change to the 2020 outlook. The failure of GED-0301 in a late-stage study targeting Crohn's disease was another. Sales expectations for Celgene's solid tumor drug Abraxane dropped around $1 billion, as well.
Now for the reality check. Celgene beat earnings expectations in the third quarter. The company is still on track to grow revenue by a compounded annual growth rate of 14.5% through 2020. Adjusted earnings per share is on pace to grow by 19.5% annually. Sales for Revlimid and Pomalyst remain solid. Celgene has a long list of very promising pipeline candidates, including ozanimod, luspatercept, bb2121, and marizomib.
Over the last few weeks, Celgene's market cap has plunged around $40 billion. The GED-0301 failure was disappointing, as were the downward revisions. But Bob Hugin was exactly right: Put things into perspective.
Just ask Warren Buffett
If you don't want to listen to Bob Hugin, try Warren Buffett. My colleague Matthew Frankel pulled together several gems from Buffett's 2017 letter to shareholders. They're all worth reading, but here's one that I think is especially relevant: "First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy."
There's a lot of widespread fear about Celgene right now. As a result, the stock trades at only 11 times expected earnings. You could panic, but as Buffett said, your own fear is your worst enemy. Instead, buying Celgene stock is the smartest thing to do right now, in my view.
Keep a long-term perspective and take advantage of a great buying opportunity that now exists. You just might make a nice profit listening to Hugin and Buffett.