I'm biased.

It's best that I acknowledge that right out of the gate. I've owned Celgene Corporation (NASDAQ:CELG) stock for several years. I've seen it go up, and I've seen it go down. Yet through good times and bad, I've held on to my shares because I liked the long-term prospects for the biotech.

But I'll do my best to put all biases aside to take a hard look at Celgene. My goal is to help investors who don't own the stock to determine whether it's a smart pick. Here's what you need to consider when deciding whether Celgene stock is a buy.

Man and woman wearing lab coats looking at a monitor

Image source: Getty Images.

All the reasons to stay away

Celgene's share price didn't plunge 37% since last October for nothing. Investors have soured on the biotech stock for several reasons. Some of those concerns are still relevant.

One major negative catalyst was Celgene's disappointing result from a phase 3 clinical study of GED-0301 in treating Crohn's disease. The company had previously projected that GED-0301 would generate peak annual sales of at least $2 billion. 

The clinical setbacks for GED-0301 were announced in October 2017. In March 2018, Celgene had even more bad news: The U.S. Food and Drug Administration (FDA) had issued a Refusal to File Letter for the company's filing of ozanimod in treating multiple sclerosis. This was widely seen as a huge blunder for Celgene. It's rare that a big drugmaker receives a Refusal to File letter, which is sent only when a regulatory application isn't complete enough for the FDA to review. 

These hurdles underscore Celgene's pipeline risk. Market research firm EvaluatePharma estimated cumulative sales for pipeline candidates between 2018 and 2024 as a percentage of total revenue for all major drugmakers. Celgene ranked at the top of the list, indicating the highest pipeline risk. 

The disappointing developments with GED-0301 and ozanimod also raise serious questions about Celgene's management team. Executives had played up the potential for both drugs. The failure of GED-0301 in a late-stage clinical study ought to make investors wonder if Celgene could be missing something critical with its other late-stage candidates. And the Refusal to File letter for ozanimod could cause some to view Celgene's management team as inept.

What's worse is that Celgene's pipeline risk only draws more attention to another major concern -- the biotech's concentration risk. Celgene generates 64% of its total revenue from Revlimid. The biotech's top three drugs account for around 87% of total revenue. No other big drugmakers in EvaluatePharma's analysis made more than 80% of total revenue from their top three drugs.

To add fuel to the fire, Revlimid's patents are being challenged in court. Should Celgene lose in the ongoing litigation, a significant amount of the company's revenue would be in serious jeopardy.    

All the reasons to buy

You might think there's nothing but bad news for Celgene. That's not the case at all.

The flip side to Celgene's pipeline risk is that there are many very promising treatments under development. Celgene expects to launch 10 blockbuster drugs over the next few years. Half of those could generate peak annual sales of $2 billion or more. In total, Celgene could add another $16 billion or more in peak revenue through 2030 just with these 10 pipeline candidates.

While we can't rule out the possibility of more pipeline setbacks, several of Celgene's top candidates are relatively de-risked. Despite the earlier stumble with ozanimod, Celgene plans to file for approval again in early 2019. The drug should have a really high chance of winning approval based on its clinical results. Positive results from phase 3 studies of luspatercept also bode well for success.

Celgene has also made some changes to its executive team following the ozanimod blunder. Celgene CEO Mark Alles stated a couple of months ago that there is "a more accountable structure" in place now. He acknowledged that the ozanimod setback was especially "frustrating and humbling." Alles said that more oversight could have led to better decisions and that this additional oversight now exists.

What about the threat to Revlimid? It's important to know that this isn't the first time Celgene has fought off a potential generic rival. The company reached a settlement with Natco Pharma that allows an authorized generic version of Revlimid to be sold in the U.S., beginning in March 2022 and only at limited volumes until 2026. Celgene remains confident that it will be able to protect its intellectual property for its top drug and intends to make sure any future settlements are favorable to the company.

Celgene expects its revenue to increase at a compound annual growth rate of 14.5% through 2020 with adjusted earnings-per-share growth of around 19% annually. That earnings projection is right in line with what Wall Street expects.

As a result of the big sell-off over the past year, Celgene stock now trades at less than 8.7 times expected earnings. Its price-to-earnings-to-growth ratio is a super-low 0.53. You won't find other biotechs with the revenue and earnings that Celgene generates with stocks so attractively valued.

To buy or not to buy?

As I said at the outset, I'm biased. I like Celgene. But I also think that the weight of the evidence shows that Celgene is a pretty good pick for investors. 

The single biggest threat to Celgene is the patent challenge for Revlimid. However, it stands to reason that the legal arguments that persuaded Natco Pharma to settle aren't any different now than they were a few years ago. 

Like any drugmaker, Celgene faces the possibility that its drugs in development could flop in clinical trials or fail to win regulatory approval. But when you look at the efficacy and safety results from previous clinical studies of the individual drugs in Celgene's pipeline, the company should have pretty good chances of winning approval for many of them.

I think that Celgene is a buy. The stock's valuation is really great. Its growth prospects are really great. These are good reasons to be optimistic about a stock.

Keith Speights owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.