(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of CELG.)
Celgene Corp. (CELG) shares took a hit in early trading after the company announced it was terminating a trial in ulcerative colitis for its drug GED-0301. The stock is trading down by nearly 10.50 percent, to around $121.75 per share, in early Friday trading.
The bad news is likely to drag down the sector today, as Celgene maintains a weighting of nearly 8 percent in the Nasdaq Biotech ETF (IBB). The 10.5 percent hit the stock took amounts to an $11 billion drop in the company's market cap, pulling its total market cap below the $100 billion mark, to $95.7 billion.
According to an article in Forbes, the drug GED-0301 was projected to reach peak sales of about $2 billion in a decade. The market is taking nearly 5 times peak sales off the market cap of Celgene today for a drug that had low expectations among fund managers, according to the Forbes article. The sell-off in the stock seems overdone even for the short-term.
Focusing on Ozanimod
Investors need to keep track of Celgene's drug Ozanimod, which resulted from its purchase of Receptos for $7.2 billion. The company noted in a press release that it would be releasing new data for Ozanimod next week at MS Paris 2017 from October 25 to 28. Ozanimod is currently in Phase 3 trials to treat relapsing multiple sclerosis and ulcerative colitis, with a Phase 2 study for Crohn's disease. Ozanimod is seen as having peak sales of nearly $4.5 billion, according to a report.
Analysts' consensus estimates currently show Celgene's revenue growing by 16 percent in each of the next two years, to $15.44 billion in 2018 and $17.95 billion in 2019. It is worth noting that analysts slightly trimmed estimates for 2019, from $17.99 billion to $17.95 billion.
Earnings per share are expected to grow by 20 percent in 2018 and 2019, to $8.90 and $10.71. Analysts have trimmed 2019 estimates by only $0.04 from $10.75.
At the current multiples and projected growth rates, the stock seems cheap, trading at only 11.3 times 2019 earnings estimates. It seems estimates would have to come down more before Celgene shares become expensive. The termination of the GED-0301 drug trial does not seem to be the trigger that should substantially drag estimates lower.
The recent pull-back seems like a near-term hiccup.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.