Celgene (CELG) reported Q3 earnings Thursday and it did not go well. Investors did not like what they heard and pummeled CELG, driving the stock down over 15%. The company missed on revenue by $120 million, but delivered an earnings beat. Below are three reasons why I believe the stock sold off.
Managing Wall Street’s expectations is highly-important for a publicly-traded company. Analysts hate negative surprises; Celgene surprised everyone with weak full-year guidance. Management gave full-year revenue guidance of approximately $13.0 billion. That was slightly below the mid-point of $13.2 billion previously provided.
The guidance for each of the company’s products was unchanged except for Otezla which is expected to achieve $1.25 billion in full-year revenue. That compares unfavorably to the previous guidance of $1.50 to $1.70 billion. Revenue from the psoriasis treatment was $308 million, up 12% Y/Y. However, Otezla is being hit by a deceleration in the overall market:
In the past two years, the U.S. market for psoriasis and psoriatic arthritis grew strongly, posting TRx growth rates in the high teens versus previous years. This was fueled by new launches, including OTEZLA, which expanded the total pool of patients on treatment …
However, year to date through September, both markets have experienced a significant slowdown in growth as a result of increasingly restrictive PBM formulary control. While OTEZLA demand continues to outpace the overall market, we are seeing lower-than-expected revenue due to market deceleration, increases in gross-to-net discounts to drive biologic step free access and inventory fluctuations.
Success breeds competition. Valeant (VRX) is expected to enter the market with Siliq and Johnson & Johnson (JNJ) just launched Tremfya. Otezla currently represents 9% of Celgene’s total revenue. That said, revenue growth from drug could be muted until a shake-out in the market occurs, if at all.
Slowing Growth From Revlimid
Celgene’s total revenue grew by 11% Y/Y. Despite the focus on Otezla, Celgene’s fortunes still lie Revlimid. The blockbuster cancer drug generated $2.1 billion in revenue or 63% of the company’s total revenue. Its top line grew 10% Y/Y – impressive given its scale.
However, that pales in comparison to the 20% Y/Y growth Revlimid achieved in Q2. Secondly, its Q3 revenue was practically flat compared to the $2.0 in revenue the drug generated in Q2. With Revlimid’s robust growth slowing and Otezla facing headwinds, Celgene could potentially experience single-digit revenue growth by the first half of 2018. CELG trades at over 15x run-rate EBITDA, which connotes a growth stock. The stock’s trading multiple could be reduced as its product lines continue to mature.
Questions Over The Pipeline
Celgene is known throughout the biotech space for its vaunted late-stage pipeline. Seekingalpha’s DoctorX previously put CELG’s pipeline in perspective:
It may also have the best pipeline in all of biotech except for Roche (OTCQX:RHHBY), which has pharmaceutical sales triple that of CELG and which spends much more heavily on R&D as a percentage of sales than do Pfizer (NYSE:PFE) and Merck (NYSE:MRK). PFE has pharma sales that are quadruple those of CELG, and on an absolute basis, I rank CELG’s later-stage pipeline as approximately as good as that of PFE.
Two noteworthy drugs were its Crohn’s disease drug mongersen, and ozanimod, a treatment for relapsing multiple sclerosis. Last week the company announced it would discontinue phase III trials and an extension trial for Crohn’s disease. As a result Celgene will write off about $1.6 billion of in-process R&D, offset by certain contingent liabilities. The full amount, to be recognized in Q4, is expected to range from $300 to $500 million after tax.
Clinical trials do not always work out. Now Celgene must go back to the drawing board to determine the right products to put capital to behind in order to continue to grow revenue and earnings.
In the near-term Celgene’s revenue growth will likely slow, while the company plows more capital into R&D to develop the next blockbuster drug. In my opinion, its near-term growth prospects do not warrant its 15x EBITDA multiple. Investors should continue to avoid CELG.
Trump And The Global Economy – October 24, 2017
We had our second installment of Trump And The Global Economy town hall in October. Professor Lance Brofman, Coconut Rob, Wuyi Jacobs (AfroBeats Radio) and the Shock Exchange chopped it up with hundreds of members of the Brooklyn community. The town hall is designed to give the public real information about Trump’s policies on taxes, immigration, the economy, the stock market, etc. and how they will impact the country and the community.
You guessed it, price-gouging drug makers like Valeant, Celgene, Mallinckrodt, Insys, Depomed, and Allergan were the topic. We explained Allergan’s shenanigans over tax avoidance, price-gouging and its recent controversial decision to sell its dry eye patents to the St. Regis Mohawks to avoid a patent challenge from Mylan and Teva. We also explained in detail how the president and should reign in drug makers, and how Trump’s ineffectiveness could embolden North Korea’s Kim Jon Un. The video is below.