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Celgene Corporation Has "Optionality and Opportunity"

Celgene (NASDAQ: CELG) got crushed after announcing third-quarter earnings, saying revenue would come in at the bottom of previous guidance, and lowering its 2020 guidance. All things considered, though, the biotech isn't in that bad of a shape: It still expects to grow revenue and earnings by double digits over the next three years.

Celgene results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$3.29 billion

$2.98 billion

10%

Income from operations

$1.09 billion

$412 million

163%

Earnings per share (EPS)

$1.21

$0.21

476%

Adjusted EPS

$1.91

$1.58

21%

Data source: Celgene.

What happened with Celgene this quarter?

  • Sales of top-selling Revlimid were up 10% year over year. Sales outside the U.S. were down 2%, but that was to be expected after a large order from Russia and a clinical-trial purchase that created lumpy sales in the year-ago quarter.
  • Pomalyst sales were up 22% year over year, as the drug is being used in combination with Johnson & Johnson's Darzalex and dexamethasone for relapsed/refractory multiple myeloma.
  • Abraxane sales increased 8% year over year, with most of that growth coming outside the U.S. Stateside, sales were up just 3%, but that's not too shabby considering the competition from newer medications, especially for the breast and lung cancers that it's approved to treat.
  • The big disappointment for the quarter came from Otezla; it increased 12% year over year, but U.S. sales increased just 2%, as insurers squeezed a lower price out of Celgene that it wasn't able to make up for with substantial increase in volume.

Image source: Getty Images.

What management had to say

CEO Mark Alles explained the issue with Otezla in more detail:

Our 2017 forecast assumptions did not adequately anticipate the deep and persistent slowing growth of the psoriatic arthritis and psoriasis markets, especially during the entire third quarter. When combined with the discounts tied to the execution of our ongoing managed-care contracting strategy, we missed our third-quarter Otezla sales target.

Alles also commented on the failure of GED-0301 that was announced earlier this month, trying to make lemons into lemonade -- the company has a backup compound, ozanimod, being tested in the same disease:

This immediate shift from GED-0301 to ozanimod in Crohn's disease is a great example of the pipeline optionality and opportunity we have built, and continue to build, into our research model for hematology, oncology, and inflammation and immunology.

Chief financial officer Peter Kellogg said Celgene is going start repurchasing shares, given the share-price decline, but stressed that the company will retain enough cash to license and acquire drugs to boost its pipeline:

Given this robust outlook and the current status of market valuation for Celgene, we are immediately initiating a strong share-repurchase program. As a reminder, our No. 1 priority for capital deployment will continue to be strategic investment in our business. Now, given our strong balance sheet and expected earnings growth, we can also be aggressively opportunistic with respect to share repurchases when we see market dislocations, without materially impacting our ability to execute on strategic investments.

Looking forward

No doubt the third-quarter results and adjustment to 2020 guidance were disappointments, but Celgene is still looking for revenue to grow by about 13.5% from 2017 to 2020, and adjusted earnings per share to increase by about 19.5%. If Celgene can meaningfully decrease the share count while the share price is low, we could see an even larger increase in earnings per share.

In addition to increasing sales of existing drugs, some of that growth will come from ozanimod, mentioned for its potential to replace GED-0301, but ozanimod has already passed its phase 3 trials in multiple sclerosis and should be submitted to the U.S. Food and Drug Administration by the end of the year.

The rest of the growth is going to come from the pipeline, including 12 phase 3 studies that are scheduled to read out between now and the end of 2018. In the short term, investors should keep an eye out for data from two trials that could boost Revlimid sales even more: Revelance in patients with front-line follicular lymphoma, which will read out by year-end, and the Augment trial in relapsed disease, which will read out in early 2018.

Fortunately, with that many shots on goal, not all of them need to be positive to meet the company's revenue guidance.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Celgene and Johnson & Johnson. The Motley Fool has a disclosure policy.