20 February 2008

Celgene - CELG - The Last (and out of alphabetical order--my bad) of the Zacks Top 10 for 2008

I drafted this post a week ago, but neglected to post it. Whoops.

Stock #1: Biopharmaceutical giant on a growth spurt. Several recent government approvals have already jump-started sales and earnings growth. One of the company's drugs may soon be approved to treat a second disease.

Here is what Morningstar had to say about CELG back in November:

Celgene is in the midst of a global expansion led by its blood cancer drug Revlimid, and its pending acquisition of Pharmion only adds to the strength of its portfolio. We think that Revlimid and a growing cancer and immunoinflammatory drug pipeline provide plenty of potential for sales growth and that the firm's expertise in immunomodulatory drugs warrants a narrow economic moat.

Celgene funded its rich pipeline with sales of Thalomid, a drug that led to thousands of birth defects when it entered the market in the 1950s. Celgene recognized the drug's value to treat the blood cancer known as multiple myeloma, and with a system in place to restrict distribution, Thalomid has achieved annual U.S. sales of more than $400 million. Although patents on the molecule have expired, Celgene's patented STEPS distribution system and various other formulation patents have kept generic competition at bay.

Celgene is looking to a less toxic and more potent derivative of Thalomid, known as Revlimid, for future growth. Revlimid received Food and Drug Administration approval for low-risk myelodysplastic syndrome (MDS) at the end of 2005 and relapsed multiple myeloma in mid-2006. Although Thalomid will remain an important part of multiple myeloma therapy--particularly in Europe, where its lower price tag could boost top-line growth if Pharmion receives approval in early 2008--it should take a backseat to Revlimid in the long term, and we think Revlimid sales will reach $2.8 billion by 2011.

But recently, there has been quite a bit of negative news about the prospects for Revlimid, which goes directly to the Zacks thesis for acquiring CELG stock.

Here is Morningstar's updated take:

Future potential headaches for Celgene also came to the surface. Cephalon's Treanda showed impressive efficacy for the treatment of chronic lymphocytic leukemia and could be approved next year; this could make Revlimid's expansion into new blood cancer indications a tougher challenge. Japanese pharmaceutical firm Eisai announced that it plans to acquire MGI Pharma for $3.9 billion in cash, putting a high-powered firm behind MGI's Dacogen, which is a key competitor to Pharmion's (soon to be Celgene's) Vidaza. Making matters worse, if Celgene shares continue to trade at current prices leading up to the close of the Pharmion acquisition next year, shareholders will face additional dilution, according to the terms of the agreement.

Here is Brett Scott's take on Celgene's Revlimid woes:

Back in September, I was neutral on a high-flying Celgene (CELG). The stock has dropped 27% since then, and I feel now is a better time to get in on the stock. The last quarter of 2007 trading was not too kind to Celgene. The company offered lower guidance; the third quarter was disappointing; and then the stock lost 11% on December 10 as Millennium Pharmaceuticals (MLNM) announced that its multiple myeloma drug Velcade fared better in clinical trials than Celgene's Revlimid.

However, analysts came out afterward with bullish sentiment on Revlimid, and Monday Celgene said that Revlimid likely beat Street estimates for 2007 revenues, and the company upped its 2008 guidance, which is providing a boost for the stock.

This news makes Celgene my stock to watch for this week. The stock appears to have bottomed and is trading at more manageable levels. The Revlimid scare appears to be behind us, and growth for 2008 for Revlimid, as well as Celgene as a whole, should be good once again (around 40%).

Here are some daily and weekly charts for your edification:

Biopharma stocks can provide quite a bit of pop to a portfolio. They can also pop a hole in a portfolio.

I am not sure the Revlimid thesis is still intact. Granted, the recent drop in Celgene's share price reflects this increased risk and uncertainty in Revlimid's (and Celgene's) growth. However, the charts show CELG shares climbing again as December's news fades.

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