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Has Celgene Corporation Run Out of Steam in 2014?

By Peter Stephens - Mar 9, 2014 at 7:00AM

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After an awesome 2013, Celgene (NASDAQ: CELG) has made a bad start to the year. Can it recover?

Last year was a fantastic one for Celgene ( CELG ) shareholders. Shares rose by 117% -- easily beating the S&P 500, which still managed to post a very respectable gain of just under 32%. Furthermore, Celgene was able to beat two of its biotechnology sector peers, Alexion ( ALXN ) and Amgen ( AMGN 0.63% ), which both had slightly disappointing years (at least on a relative basis); they gained 44% and 34%, respectively.

However, in the first part of 2014, it seems as though Celgene has lost some momentum. Shares have fallen by more than 7% and have underperformed the S&P 500, as well as its two previously mentioned biotechnology peers (Alexion is up a whopping 26% and Amgen is up more than 7% year to date). After a bad start, is it too late for Celgene to make a strong recovery and outperform its rivals (and the broader market) in 2014?

Strong results 
Its performance so far in 2014 is somewhat understandable, since Celgene missed its fourth-quarter expectations. While it was forecast to deliver earnings per share of $1.54, it posted EPS of $1.51. That said, revenue increased by 21% in the fourth quarter of 2013 when compared with the fourth quarter of 2012. Furthermore, adjusted diluted earnings per share still increased by 14% in the fourth quarter. 

Among the products that contributed to double-digit sales growth were Abraxane, a cancer treatment, whose sales increased by 90% in the fourth quarter following increased use in non-small cell lung cancer and pancreatic cancer, while in Europe the drug saw market share gains in metastatic breast cancer. In addition, Revlimid (Celgene's best-selling drug) posted sales growth of 14% in the quarter because of market share gains and an increased duration of therapy. 

More positives 
Celgene's news flow in 2014 has been upbeat, too. For instance, Pomalyst in combination with dexamethasone was approved in Canada for patients with multiple myeloma for whom both lenalidomide and bortezomib have failed, who have received at least two prior treatment regimens and have demonstrated disease progression on their last regimen. 

Therefore, a share slide of more than 7% this year appears to be more likely a result of profit-taking after a very strong 2013 and also some slight disappointment that the company narrowly missed its fourth-quarter EPS forecast, as opposed to doubts surrounding Celgene's future prospects. On that topic, Celgene is forecast to continue to deliver impressive levels of EPS growth in 2014 and 2015, with it set to grow by 23% in 2014 and by 32% in 2015. When combined with a forward price-to-earnings ratio of 16.3 (to the end of 2015), this translates into an impressive five-year price/earnings-to-growth, or PEG, ratio of 0.88.

Elsewhere in the sector 
Although both EPS growth figures are considerably ahead of the market average, they are set to be beaten by Alexion since it is forecast to grow EPS by 26% in 2014 and by 32% in 2015. Indeed, Alexion has raised its own forecasts for sales of its Soliris drug in 2014, with the company now anticipating over $2 billion in annual revenue for Soliris -- considerably higher than the $1.55 billion that was delivered in 2013 and even higher than market forecasts for 2014 of $1.97 billion. 

The main reason for the increased sales of Soliris is additional marketing approvals that Alexion is seeking. However, when Alexion's forward P/E ratio of 32.7 (to December 2015) is combined with EPS growth forecasts, a five-year PEG ratio of 1.5 results. Although still attractive, it is less attractive than Celgene's 0.88. 

Meanwhile, news flow in 2014 has also been positive for Amgen. For instance, it announced two separate successful phase 3 trials evaluating evolocumab in patients with high cholesterol and also patients with the rare disease homozygous familial hypercholesterolemia. In addition, the future also looks exciting for Amgen, with the company having multiple projected milestones for its late-stage pipeline in 2014. 

Despite this, its EPS growth is forecast to be well below that of Alexion or Celgene, averaging 7% in each of the next two years. Combining this growth rate with a forward P/E ratio of 14 (to the end of 2015) gives a five-year PEG ratio of 2.2, which is higher than for Celgene or Alexion (and therefore less attractive).

Future performance 
All three stocks have the potential to perform well this year; however, Celgene could yet prove to be the star performer over the remainder of the year in part to what I see as a reasonable valuation given its growth potential. As such, despite missing fourth quarter estimates and seeing a weakening of market sentiment during the first part of 2014, it could have a strong final 10 months of 2014.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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