What: Shares of biotechnology giant Celgene (NASDAQ:CELG) moved lower on Wednesday by $0.08, or less than 0.1%, to finish at $123.10, despite receiving a substantial price target increase from research firm Argus.
So what: According to analysts at Argus, who held firm on their "buy" rating for Celgene and lifted their price target nearly 20% to $155 from $130, the company has generated strong sales for its oncology and hematology products and looks poised to benefit from its next generation of products.
Analysts at Argus feel confident that Celgene could reach a fair value of $155 because its management team has laid out clear goals over the next five years and appears to be on its way to meeting those forecasts. Additionally, Argus pointed to the strength of Celgene's balance sheet, noting that its beefy margins and high interest coverage ratio should support continued growth with minimal worries for investors.
Now what: The real question that investors need to ask here is whether or not Celgene can tack on an additional 26% upside from yesterday's closing price.
Obviously Celgene has already come a long way, with the stock quintupling over the trailing four-year period. A trailing P/E of 52, a price-to-sales of 13, and a distinct lack of a dividend are all factors that would make a surface-scratching value investor worried about Celgene's prospects.
But if you dig a bit deeper, I believe you'll find that $155 is more than fair.
For starters, Celgene is growing organically, which is almost unheard of in the biotech space these days. It's utilizing expanded labels for cancer therapies Revlimid and Abraxane to boost sales, as well as relying on the successful launch and label expansion of anti-inflammatory Otezla to drive additional sales. Also, both price increases and demand growth are driving revenue higher.
It also isn't shy about forging collaborations that could complement its areas of focus. Collaborations with OncoMed Pharmaceuticals targeted at cancer stem cells and Agios Pharmaceuticals for various types of blood cancers could be key growth drivers well into the next decade if they pan out. As you can see above, Celgene has no shortage of drug development platforms or partnerships.
Considering that management laid out the goal of doubling revenue and tripling profits organically over a five-year period in early 2013, I believe Celgene's PEG ratio of one could imply it's still inexpensive. A successful launch of Otezla and growing label indications certainly support Argus' thesis that Celgene is worth $155, or perhaps even more.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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