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Celgene's Mixed Guidance Is No Reason to Panic

By Sean Williams - May 2, 2016 at 1:02PM

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Celgene's forward guidance proves it's fallible, but that's nothing for investors to fear.

Image source: NIH Image Gallery.

Just in case you missed the memo, we're entering the heart of earnings season for the healthcare industry. Some of the biggest mature and high-growth drug developers have recently reported their first-quarter results, or are slated to report them in the coming days. On Thursday, before the opening bell, we witnessed biotech blue-chip Celgene (CELG) open its books to investors.

Celgene Q1 and guidance, by the numbers
For the quarter, Celgene generated $2.51 billion in total revenue, a 21% increase from the prior-year quarter. Sales were affected to the tune of negative 2% because of currency exchange effects. Adjusted net income for the quarter increased 19% to $1.06 billion, with adjusted EPS rising 23% to $1.32. Comparably, Wall Street had been expecting only $1.27 in EPS, but about $70 million more in product sales.

On the surface, this looks like business as usual for Celgene. But Celgene's transparent full-year guidance showed some unexpected turbulence.

For full-year 2016, Celgene lifted the low end of both its EPS and sales guidance. Previously, it had forecast $5.50 to $5.70 in EPS and $10.5 billion to $11 billion in revenue. Now it anticipates $5.60 to $5.70 in EPS and $10.75 billion to $11 billion in sales. Additionally, Celgene stuck by its prior long-term sales and EPS guidance for 2020.

However, Celgene's full-year forecast for 2017 was a bit of a shock. The company's guidance for next year is now pegged at $12.7 billion to $13 billion in revenue and $6.75 to $7 in EPS. This compares to previous guidance that had called for $13 billion to $14 billion in sales and $7.25 in EPS.

Image source: Roche. 

What went wrong?
Investors have become accustomed to Celgene beating the pulp out of Wall Street's earnings expectations over the years, so to see the company as somewhat fallible may be cause for concern.

What's causing this notable sales and profit revision? The bulk of Celgene's worries can be traced to a slowdown in sales for cancer drug Abraxane. When Abraxane was acquired in 2010, it was merely an advanced breast cancer therapy. Since this acquisition, Abraxane has been expanded into advanced lung and pancreatic cancer, and its sales have essentially tripled since the end of 2009. Celgene had been projecting that revenue for Abraxane was on pace to hit $1.5 billion to $2 billion by 2017, largely as a result of its two newest approvals in lung and pancreatic cancer. However, growth for Abraxane now appears to be hitting a brick wall. Sales of the drug grew by a meager 1% in Q1 to $225 million, including a 10% decline in the U.S.

Image source: Celgene.

The culprit? Look no further than cancer immunotherapies and "increasing competition" in the advanced lung and pancreatic cancer space. Celgene describes Abraxane's woes as a "new market entrant" problem, but I view it differently. Immunotherapies, which work by supercharging the immune system to efficiently and effectively locate and destroy cancer cells, are moving into the first-line and second-line space in a number of the most common cancer types, such as lung and breast cancer. It's possible Abraxane could find its sales reinvigorated if combination studies with Roche's atezolizumab provide starkly positive results in 2017, but for the time being, Celgene has reduced expectations for Abraxane to roughly $1 billion in sales in 2017.

What's going right?
Here's what investors need to keep in mind: When discussing what's going right, we're talking about literally everything else aside from Abraxane.

Multiple myeloma blockbuster Revlimid saw sales increase by 17% to $1.58 billion, a very slight decline from the 18% year-over-year growth delivered in Q4 2015 from Q4 2014. Revlimid generated the bulk of its gains in the U.S. (23% sales increase), and it continues to hold or improve its market share because of a greater number of multiple myeloma diagnoses, as well as longer duration of treatment. Furthermore, Celgene is now guiding Revlimid revenue to be at the high end of its 2016 range ($6.7 billion), and it anticipates reporting $8 billion in sales for the drug in 2017, up from a prior forecast calling for $7 billion in sales.

But this isn't just a Revlimid story -- multiple myeloma drug Pomalyst and oral anti-inflammatory Otezla are kicking butt and taking names as well. Pomalyst's Q1 sales increased 38% to $274 million, again driven by increases in market share and improved duration of treatment, just as we saw with Revlimid. Otezla sales more than tripled to $196 million, with rapid sequential quarterly growth on pace to put it well over $1 billion in sales for the year.

Image source: Celgene.

Even Celgene's big jump in research and development expenses to $591 million in Q1 from $431 million in the year-ago quarter is nothing to fear. A prime reason for this increase was $65 million in milestone payments paid to collaboration partners during the quarter. By partnering with more than 30 other drug developers, Celgene has found a smart way to outsource, if you will, its R&D expenses. This allows Celgene to pay milestones only to programs showing the most promise. It also allows Celgene to get a piece of the pie when it comes to innovative, first-in-class medicines in oncology, immunology, and inflammation.

As icing on the cake, operating cash flow improved to $975 million in Q1, a 14% year-over-year increase.

No reason to panic
If Celgene's first-quarter report taught us anything, it's that Abraxane's sales slowdown is no reason to panic. Celgene has three other therapies growing by double-digit percentages, and it has oral experimental multiple sclerosis and ulcerative colitis therapy ozanimod, which was acquired in Celgene's $7.2 billion buyout of Receptos last year, waiting in the wings. Ozanimod is widely believed to have $4 billion peak annual sales potential if approved to treat MS.

From a valuation perspective, Celgene still appears inexpensive. Its forward P/E, based on the midpoint of its updated 2017 guidance, is still under 16, and its PEG ratio below one signifies that investors would still be getting solid value here. No company can grow like lightning forever, but Celgene still has plenty of years of double-digit sales growth left in front of it. I'd consider this just as strong a stock today as it was prior to its Q1 report.

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