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Celgene May be The Single Best Biotech in the World



I have written extensively on biotechs. Here are links to those stories:


➜ CELG has 15 products in Phase II trials and 12 products in the Phase III trials.

Celgene (CELG) stock has outperformed the other mega biotechs (Gilead (GILD), Biogen (BIIB) and Amgen (AMGN)) over the last year and there's good reason for it. Further, given the company's organic growth potential, and acquisition of of Receptos (RCPT), the company suddenly presents an even stronger bullish thesis and several potential blockbuster drugs. The company may very well be the most compelling large cap biotech stock in the entire world.

In the last year, CELG has generated just over $8.4 billion in revenue. The company's revenue is driven by five key products: (1) Anemia and cancer treatment REVLIMID ($5B) (2) Breast, lung and pancreatic cancer treatment ABRAXANE ($850M) (3) Myeloma drug POMALYST/IMNOVID ($680M) (4) Bone marrow disorder myelodysplastic syndrome (MDS) drug VIDAZA ($612M) and (5) Plaque psoriasis treatment OTEZLA ($70M).

In the image below, we have plotted the number of Phase III trials on the y-axis and the number of Phase II trials on the x-axis for large cap biotechs. Note that CELG has the most products in Phase III and and Phase II; a remarkable position to be in.

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There is a lot going on with this company, and it's all very exciting. Here's a quick summary:

In the latest earnings release the company crushed revenue and EPS estimates, and in fact, a week prior to the earnings release, the firm pre-announced that it would do just that. The company also raised full-year adjusted EPS forecasts to $4.75-$4.85, up from $4.60-$4.75.

While Celgene's number one drug (REVLIMID) accounts for 60% of sales, the company is working diligently to diversify its portfolio. But, the company also loudly proclaimed that Revlimid's market share is getting stronger for certain indications and it has the potential to hit $7 billion in sales (up from $5 billion). But, don't fear the risk of a "one-trick pony."

In the earnings report the company noted that its number two drug (ABRAXANE) was on the verge of being a blockbuster. Celgene received a positive supplemental new drug application for Abraxane in late 2013 as a treatment for pancreatic cancer, and since then sales are booming. The company notes the product's strength in the face of competition, growing market share and a possible expanded label into triple-negative breast cancer. All of that translates into a possible revenue stream of more than $2 billion a year.

When Celgene purchased RCPT, the focal point was a drug that presents possible usage for multiple sclerosis and irritable bowel disorders. Upon acquisition of RCPT, Celgene made a bold case that the drug could ultimately yield $4-$6 billion in annual sales (remember, Celgene's total sales in the trailing-twelve-months is $8.4 billion). Just to get a little more bullish, on the earnings call Celgene reminded us that the $4-$6 billion projection does not include other future possible uses for ozanimod, such as Crohn's disease and lupus. With a positive ruling from the FDA, this drug could run well north of $6 billion in sales on its own.

Celgene has seen its selling, general and administrative (SG&A) expense rise to all-time highs. In fact, here's a chart.

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While the expense has risen to all-time highs, the company made an emphatic note that expenses will in fact start to slow in the near future, and further, margins will benefit from that increased spend over the last several years. Further, both selling costs and integration costs for the acquisition will lessen and that means even higher margins.

➜ CELG generates $1.20 in revenue for every $1 in expense, which is very high and considerably above the sector average of $0.70.

➜ CELG generates $1.3 million in revenue per employee which is above the sector average of $588,000.

Technicals   |   Support: 128.05   |   Resistance: 132.72   

Golden Cross Alert: The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

CELG has a four bull (high rated) technical rating because it's trading above both its 50- and 200-day moving averages. We do note that the stock is trading below the short-term 10-day moving average.

Now, let's take a deep dive into the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Stock Returns and Chart

CELG is up +10.6% over the last three months and up +7.5% over the last six months. The stock price is up +41.4% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Revenue (TTM US$ Millions) 8,4267,0335,930

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case it has been more than 40 consecutive quarters). Revenue (TTM) is up 20% year-over-year and 42% over the last two-years. Further, after that l;ast earnings call, the company has its eye on topping $10 billion and more, very soon.

What do all these numbers mean?
CELG's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 1.201.681.56FALLING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter CELG showed a ratio of 1.20. We will see in the chart below that CELG has seen its operating margin decrease of late, but that is directly due to the spending in SG&A we discussed earlier. With that expense dropping, expect to see an operating margin up above 1.5 very soon.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.68. In the last year we can see operating margins are decreasing but are greater than 1.0 for the most recent period.

CELG's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was negative (lowers the rating a little bit).

Let's look at Operating Revenues/Operating Expense in the chart below.

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Net Income (TTM US$ Millions) 2,1981,4641,550RISING

Net Income (after tax profit) over the trailing twelve months (TTM) for CELG is up a staggering 50% year-over-year even after accounting for increased SG&A expense.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars Note the rising bars from a year ago (four quarters ago).

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Levered Free Cash Flow (TTM US$ Millions) 2,1631,7331,813RISING

Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. Again, even after accounting for the increased expenses, CELG just broke an all-time high in free cash flow in the trailing-twelve-months. The metric has grown 25% year-over-year.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note that the green bar indicates an all-time high.

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Research and Development (US$ Millions) 525432372RISING

R&D is the life blood of a biotech, and Celgene is maintaining its position of power and growth by continually investing in R&D. We see a 21% increase year-over-year and a 41% increase over the last to-years.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars.

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Celgene is breaking all-time highs in revenue and free cash flow. Net income is growing, its pipeline is rich both from organically developed products and through acquisition. The firm's $8 billion in revenue over the last year could easily cross well over $15 billion in the next five years. It's number one drug is growing and at the same time it is successfully diversifying away from it, through even greater growth opportunities in its current line-up. While I once wrote that Celgene's peer, Gilead (GILD), may have the single strongest fundamentals of any company, Celgene may have just stepped up was the most compelling large cap biotech stock in the world.

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