Celgene Corp. (Summit NJ) plummeted 20% Thursday (October 26, 2017) to $99.99 after releasing third-quarter earnings. And it wasn’t so much third-quarter revenue, which was up 10% year over year, or the adjusted earnings per share, which jumped 21% year over year, but the lowered guidance that has investors concerned, said Motley Fool.
The biotech adjusted both 2017 guidance and its long-term 2020 guidance that was originally given in early 2015, although it was the latter that was most concerning.
This year, Celgene is looking for revenue of “approximately $13 billion,” which is at the low end of the previous guidance for revenue to fall between $13 billion and $13.4 billion. The lower expectations are due to a decrease in the expected sales of its anti-inflammatory drug Otezla by $250 million to $450 million. Guidance for adjusted earnings was moved to the high end of previous guidance, with current expectations to come in at $7.30 to $7.35 per share.
For 2020, Celgene expects product sales between $19 billion and $20 billion, down from previous guidance of more than $21 billion. Hematology sales are expected to be higher than previous expectations, but they can’t make up for a sharp decline in inflammation and immunology (I&I) drugs, which were expected to exceed $4 billion, but which Celgene now hopes will fall in the $2.6 billion to $2.8 billion range. The slower Otezla sales plus the loss of GED-0301 in Crohn’s disease is clearly hurting the I&I category.
Expectations for Celgene’s oncology drugs also fell from more than $2.2 billion previously to a range of $1 billion to $1.1 billion.
On the bottom line, Celgene expects adjusted earnings of more than $12.50 per share, down from previous guidance of more than $13.00 per share.
Today’s news from Celgene and the market’s quick reaction was a konk on my head. But I’ve learned to remind myself not to lose perspective completely about the reality of events like this one and dig a little. Well, most of the time.
I’m in full agreement with Matthew Herper at Forbes. He points out that, yes, in three weeks, the company has lost a third of its market value. Even before today’s earnings miss, investors were unnerved by the failure of mongersen, a potential treatment for the intestinal disorder Crohn’s disease that Celgene had purchased for $710 million. Now, the earnings miss could cause investors to ask questions not just about Celgene, but also about the biotech sector in general.
“Investors are likely to ask whether the company’s good fortune has run out, with disappointments (mongersen) and negative revisions (Otezla) left and right,” wrote Geoffrey Porges, the biotechnology analyst at Leerink, in a note to clients.
Even this quarter, with revenue missing, Celgene managed to beat expectations on earnings excluding special items. Balance sheet flexibility is great, Herper notes. But drug investors have always preferred top-line growth with an earnings miss, as Bristol-Myers Squibb produced, today, to the reverse. At some point, you can’t cut your way to growth.
The big unease is when Revlimid will go generic. Unlike many other drugs made by biotech companies, Revlimid is a small molecule, not a hard-to-make protein, and that means when generics do arrive its sales could decline rapidly. Celgene notes that it has 23 different patents on the drug, the latest of which expires in 2027, but investors are fearful that generic challengers might manage to launch sooner.
Celgene still expects Otezla to be a blockbuster. Alles also said that part of the reason for the changed guidance is just timing: data for ozanimod in ulcerative colitis, a gastrointestinal disease, will read out later than expected, pushing potential sales out of the 2020 timeframe.
A big test will read out in coming days, when Celgene is expected to unveil new data on ozanimod, its experimental drug for multiple sclerosis. Executives argue, fairly, that nothing has changed about the company’s long-term strategy.
“There’s nothing fundamentally wrong with Celgene,” said Robert Hugin, the company’s chairman, on the conference call. “The future is bright.”
The stampede out of Celgene shares is a reminder that investors tend to believe a company like Celgene’s public vision of the future, which has consistently featured relentless optimism and rapidly expanding sales growth. In fact, though, long-term forecasts–those 2020 revenue targets were set back in 2015–are akin to playing pin the tail on the donkey for any company. And biopharma firms do it blindfolded just like we did playing that childhood birthday classic.
Long-term forecasts aren’t especially reliable in any business. But they are particularly speculative in biopharma. Long-term drug sales are incredibly difficult to predict as competitors arrive, pricing power shifts, side effects emerge, and companies work to extend their medicines to new patients. A single clinical trial result or FDA decision can shave billions of dollars from a medicine’s prospects.
And forecasts for drugs still in development are even more of a dice-roll. All the factors mentioned above are compounded by an even longer timeline, and drug trials unexpectedly fail on a regular basis.
Investors and analysts like long-term guidance because it gives a sense of surety and a handy measuring stick. Hopefully, Celgene has learned its lesson about giving them exactly what they want.
What do the analysts think?
- Leerink, Geoffrey Porges
(Outperform, $156 Price Target)
- Cantor Fitzgerald, Mara Goldstein
(Overweight, $162 Price Target)
- Mizuho, Salim Syed
(Buy, $158 Price Target)
- Barclays, Geoff Meacham
(Equal-weight, $135 Price Target)
- Cowen, Eric Schmidt
(Outperform, $150 Price Target)
- RBC, Brian Abrahams
(Top Pick, $166 Price Target)
- Wells Fargo, Jim Birchenough
(Downgrades to Market Perform from Outperform, Price Target cut to $101 from $163)
Celgene management “was forthright in admitting where it made mistakes in its projections,” as Mizuho analyst Salim Syed said. “We believe there will be a rebuilding process with investors in the months to come to pave the path forward and restore confidence/credibility, but today was a good first step, in our view.”
The reduced guidance is certainly disappointing, especially for a company that tends to be conservative, so investors have become accustomed to seeing guidance increased throughout the year.Steve's Take:@Celgene still has good growth numbers and is a good rational bet Click To Tweet
But even at the low end of guidance, Celgene’s management thinks it can grow revenue by 46% from 2017 to 2020; that’s 13.5% compounded annually. And adjusted earnings are expected to increase by about 70% over those three years–a 19.5% compound annual growth rate.
Those are pretty good growth numbers, if you ask me.
If you consider that the median, 12-month share-price forecast of the analysts mentioned herein is $146.86, there’s a potential upside of 46.87%, based on today’s closing price. It’s risky, no doubt, what with the guidance miss, but still a rational bet and not an outright gamble. Only for the aggressive, risk-tolerant portfolio.