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Will Celgene Whiff on Its 2017 Guidance?

By Todd Campbell - Mar 18, 2016 at 9:41AM

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Currency exchange headwinds make it hard to handicap if the company will deliver on its promises for next year.

IMAGE SOURCE: CELGENE CORPORATION.

Worry that the company may not be able to deliver on its long-standing sales target for 2017 may be to blame for Celgene Corporation's (CELG) shares failing to budge this year. According to Celgene's management, currency headwinds caused by converting overseas sales back into dollars may make it fall short of its outlook. Can the company overcome currency risk and deliver on its forecast? Read on to find out more about Celgene's targets for next year, its currency challenges, and whether it even matters if they miss the mark.

Setting the bar high
When revenue was on track to hit $6 billion in 2013, management took the uncommon step of providing shareholders with a five-year, long-range sales and profit forecast.

That forecast was for an auspicious $12 billion in sales and $6.50 to $7 (split-adjusted) per share in earnings in 2017. Since that original forecast, Celgene's management has upped its guidance for next year to between $13 billion and $14 billion in sales and $7.50 in EPS.

At the time, Celgene's optimism was fueled by growing demand for its multiple myeloma drug, Revlimid. Expectations that Revlimid's label would expand to allow its use in more patients led to Celgene forecasting that Revlimid's sales would jump from $4.3 billion in 2013 to $7 billion in 2017.

Celgene also held out high hopes for its other drugs.

Despite winning approval in early 2013, management predicted sales of its third-line multiple myeloma drug Pomalyst would eclipse $1.5 billion in 2017. The C-suite also predicted that Abraxane, a pancreatic cancer drug with sales of $649 million in 2013, would boast $1.5 billion in revenue next year, and that Otezla, which didn't even get Food and Drug Administration approval until last year, would add another $1.5 billion to its top line.

On track (mostly)
Fast-forward to today, and we find that the company's estimates weren't too far afield. 

Revlimid and Pomalyst exited 2015 at a $6 billion and $1.2 billion sales clip, respectively. Abraxane generated sales of $270 million, up 14%, in Q4, putting it on a $1.1 billion pace, and Otezla hauled in $183 million in fourth-quarter sales, up 32% from the third quarter.

Given those run rates, the company thinks total revenue will between $10.5 billion and $11 billion and that EPS will be within the range of $5.50 to $5.70 (up 19% from 2015) this year.

Because Celgene's 2016 revenue outlook puts it only about 10% away from its 2017 sales goal, it would seem it is well positioned to deliver on what was once a pretty lofty target.

However, CFO Peter Kellogg threw a bit of cold water on that line of thinking during the company's first-quarter conference call.

Specifically, Kellogg indicated that while sales are tracking on a pace that's roughly in line with management's original expectations, currency conversion could make it tough to hit its 2017 projections. How tough? Because the dollar has strengthened considerably against other currencies since 2013, currency is weighing on Celgene's top line to the tune of $800 million.

Delivering on promises
Celgene's currency headwind is substantial, but it could still hit its 2017 target. Management is currently crunching numbers and expects to update investors on 2017 during its first-quarter conference call.

That update will be based on current currency exchange rates and expected revenue performance for its products, including Revlimid, which is expected to enjoy sales growth of 15% this year to at least $6.6 billion. The outlook could also factor in opportunities to improve its margin so that it can deliver on its EPS outlook. Celgene believes that leveraging sales growth against fixed costs will allow it to increase its adjusted operating margin by 1.5% to 53.5% this year alone.

Looking ahead
Management shouldn't be faulted too much if currency conversion makes it miss next year's goal. After all, currency risk is part and parcel of competing internationally, and hedges often can't be rolled over year after year at the same favorable levels as they were previously.

Therefore, if management misses its targets on a reported basis but hits its targets on a constant currency basis, I'll say "good enough" and shift my focus to seeing whether the company can deliver on its next target: $21 billion in sales in 2020. Given its 2020 outlook calls for another doubling of its sales, investors might benefit from focusing on that goal than next year's target anyway.

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