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Celgene At $100: Buy, Sell, or Hold?

It's been a rotten couple of weeks to be a shareholder of Celgene (NASDAQ: CELG). The biotech giant's shares have been in near-freefall after they reached an all-time high of $147 on Oct. 2. Investors who bought at the peak have lost more than 33% in a matter of weeks. Ouch.

A drop of that magnitude begs the question: Should investors buy the dip, or is the bull case for owning this stock busted? 

Image source: Getty Images.

How we got here

Celgene's stock was humming along until management shared some bad clinical news with investors. The company announced that it was ending a clinical trial for a hopeful compound called GED-0301 as a potential treatment for Crohn's disease. The trial was terminated in response to a futility analysis performed by a data monitoring committee. The committee determined that the overall benefits of using GED-0301 in Crohn's disease did not justify the risk.

That sad news sent shares down 10% in a single day. However, Celgene was quick to point out that there were "no meaningful safety imbalances identified." That gave management confidence to continue working on a phase 2 trial testing the drug in another disease called ulcerative colitis.

Unfortunately, shareholders were dealt another blow after the company reported third-quarter earnings. The headline numbers from the period looked fine -- revenue jumped 10%, and EPS climbed 21% -- but traders freaked out after management provided Wall Street with updated financial guidance. For 2017, Celgene is calling for revenue to come in around $13 billion. While that still represents double-digit growth, the figure is at the low end of the company's previous guidance range of $13 billion to $13.4 billion.

Why the shortfall? Management stated that sales of its anti-inflammatory drug Otezla were slowing significantly. The company had previously projected full-year Otzela revenue of $1.5 billion to $1.7 billion. The updated figure is just $1.25 billion. 

Image source: Getty Images.

If that weren't bad enough, Celgene also reigned in its 2020 financial targets. The company now expects total product sales to land between $19 billion and $20 billion. That's a drop from its prior guidance of "more than $21 billion."

The guidance change is largely a result of lowered expectations for Celgene's inflammation and immunology (I&I) and oncology drugs. The company had previously expected I&I sales to exceed $4 billion by 2020. However, the slowing Otezla sales and the loss of GED-0301 caused management to revise that number down to a range of $2.6 billion to $2.8 billion. Expectations for Celgene's oncology franchise were also dropped from $2.2 billion to a new range of $1 billion to $1.1 billion.

Given the revenue shortfall, Celgene said it expected adjusted EPS to be "more than $12.50 per share" by 2020. That's a $0.50 decrease from its prior outlook.

Since Celgene has been touting its 2020 growth plan for years, it makes sense that the lowered expectations are not sitting well with traders.

Time to throw in the towel?

While I understand all the near-term doom and gloom, this shareholder isn't deterred. Why? Three main reasons.

First, while Otezla's recent results are disappointing, it's far from being the company's only growth engine. Both Revlimid and Pomalyst continue to perform well, and the company has plenty of promising drugs in its pipeline. For perspective, Celgene counts more than 50 molecules in various stages of development across more than 100 indications. Of particular interest to this Fool is ozanimod, which holds promise to be a megablockbuster treatment for multiple sclerosis, ulcerative colitis, and Crohn's disease.

Second, while the company reduced its long-term growth expectations, its updated numbers are still fantastic in absolute terms. Celgene's new 2020 target calls for revenue and non-GAAP EPS growth of 14.5% and 20% annualized, respectively. Those are numbers that most large-cap companies would kill for.

Finally, management is acutely aware that its share price is weak and is taking action to fix the situation. Consider this direct quote from Celgene's CFO Peter Kellogg: "Given this robust outlook and the current status of market valuation for Celgene, we are immediately initiating a strong share repurchase program."

Celgene ended September with more nearly $12 billion in cash on its balance sheet and generated more than $1.1 billion in cash flow during the third quarter alone. That's a lot of financial firepower that could meaningful reduce the company's share count at current prices.

Celgene is a buy

There's no doubt that there's plenty of near-term sentiment working against Celgene right now. Wall Street is accustomed to the company beating estimates and then raising guidance. This quarter simply proves that Celgene is mortal.

Moreover, the recent beatdown has pushed Celgene's valuation down to around 11 times forward earnings estimates. That's simply too cheap for this best-of-breed biotech.

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Brian Feroldi owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.