Biotech blue-chip stock Celgene (NASDAQ: CELG) knows only one gear when it comes to earnings season: overdrive. With the exception of the fourth-quarter of 2013, Celgene has topped Wall Street's quarterly EPS estimates in 11 of the past 12 quarters.
On Thursday, Celgene essentially kept that streak alive even though it preannounced that its second-quarter sales and EPS would crush the current consensus on the Street a week prior. For the quarter, it delivered $1.23 in EPS, in-line with what it had forecast in the prior week, and still well ahead of the $1.17 that Wall Street had been projecting. Its overall sales of $2.278 billion pretty much met its boosted expectations and rose by 22% on a year-over-year basis.
In total, we got a lot of questions answered that we'd been waiting to hear from Celgene prior to its Q2 earnings report, but we were also left with some new questions as well.
Celgene delivers as expected
For instance, cancer drug Abraxane saw sales rise by 13% to $244 million, driven primarily by the expanded use of Abraxane in treating pancreatic cancer -- one of the most difficult types of cancer to treat. Celgene forecast that total sales of Abraxane would range between $1 billion and $1.25 billion this year, which is a vast improvement from the slightly more than $300 million that Abraxane brought in during the entirety of fiscal 2009 prior to Celgene acquiring Abraxis BioScience for $2.9 billion. In previous forecasts Celgene has suggested that Abraxane could deliver $1.5 billion to $2 billion in annual sales by 2017.
Additionally, the Otezla launch appears to be moving along smoothly. Otezla is Celgene's anti-inflammatory product approved to treat psoriatic arthritis and moderate-to-severe plague psoriasis in 2014. Sales of Otezla rose by 49% in the sequential second-quarter to $90 million, including $85 million in the U.S. markets. Like Abraxane, Celgene's management has projected that Otezla has $1.5 billion to $2 billion in sales potential by 2017. The half-dozen other indications that Otezla is currently being studied for could certainly go a long way to helping Otezla reach those lofty goals.
And, of course, the anchor of Celgene's portfolio, blood cancer drug Revlimid, remains as strong as ever despite the potential for increasing competition in the oncology space. Revlimid sales rocketed 19% higher in Q2 to $1.44 billion with practically everything working in its favor, including greater demand, longer duration of therapy, and increased market share in the multiple myeloma market.
New questions raised
However, a few interesting questions were raised with the release of Celgene's second-quarter results.
First of all, we learned that its recent immuno-oncology partnership with AstraZeneca, its $1 billion collaboration with Juno Therapeutics, and its $7.2 billion purchase of Receptos, which allows Celgene access to the potential blockbuster relapsing multiple sclerosis drug RPC1063 (also known as ozanimod), won't be paying dividends to investors until at least 2019. In fancier terms, these are dilutive acquisitions to Celgene's bottom-line, which is not unexpected considering how much of its cash flow it's had to funnel toward these deals.
In Q2, Celgene generated operating cash flow of $284 million, but this figure includes a cash outflow of $570 million for upfront payment related to research and development collaborations. Albeit, it's not as if Celgene is hurting for cash with $7.5 billion in cash and cash equivalents as of the end of the quarter.
Still, this raises the question of whether or not Celgene does have room to run higher or whether investors have been overzealous with their expectations of how quickly these transactions will pay off.
Another interesting component to Celgene's earnings release was that the company raised its full-year guidance while also noting that these three collaborations would be an earnings drag through 2018. Celgene's new adjusted annual EPS forecast calls for $4.75 to $4.85, which is up from $4.60 to $4.75. Conversely, its forecasted annual GAAP earnings (which include one-time costs and benefits) were lowered to a fresh range of $2.17 to $2.46 from a range of $2.97 to $3.19 to reflect its aggressive deal-making.
Normally investors might simply cheer an EPS update that implies beefier profits, but it's a bit odd that Celgene didn't go into discussion in its report concerning how this earnings boost came about. Celgene did recently authorize a $4 billion buyback on top of the more than $1 billion it had remaining (it ended Q2 with $5.1 billion still left under that buyback program), so it could aggressively repurchase its shares to lower its share count and boost its EPS that way. Another possibility is that it could reduce its research and development expenses by relying on its collaborators more and its internal R&D less. Lower costs should lead to higher margins and a bigger profit.
The question that arises here is whether or not a spending cut or boost in share repurchases could signal the end of Celgene making big deals. Let's be clear, Celgene already has more than 30 collaborations in its pipeline, so it's not like the company is hurting for opportunities. However, investors have become accustomed to Celgene targeting first-in-class drugs in recent years. If that's off the table for the near-term it could certainly change the dynamics of the company, and perhaps even its valuation.
Can Celgene motor higher?
The real question that investors need to ask here is whether or not Celgene has the growth in its sails to merit a potentially higher valuation. Although there are clearly questions about expanding its product portfolio beyond a heavy reliance on Revlimid (which RPC1063 and Otezla should help do), and surrounding the expected EPS dilution from its recent transactions, I don't believe these factors will affect Celgene much beyond the near-to-intermediate term.
Celgene has an absolute bounty of cancer oncology partnerships that could turn into a gold mine for this company, and it can continue to ride its anchor drug Revlimid for years without worrying about generic competition. Best of all, Celgene is able to grow almost entirely by organic means. It's witnessing demand rising for its key therapies, and it has the ability to substantially expand the label indications for Otezla and Revlimid. Long story short, I would keep my expectations realistic, but I could certainly foresee Celgene outpacing the return of the broader market over the next five or 10 years.