We continue to have a Neutral recommendation on Celgene Corp. (CELG), following the release of second quarter 2011 financial results. Celgene’s second quarter adjusted earnings of 78 cents per share whiskered past the Zacks Consensus Estimate by a penny. Adjusted revenues climbed 38%, driven by cancer drugs Revlimid and Vidaza. Following the strong showing, Celgene upped its revenue and earnings guidance for 2011.
In 2011, the company expects to earn in the range of $3.45-$3.55 per share (on an adjusted basis) on revenues of $4.60 billion to $4.70 billion. The previous guidance hinted at adjusted earnings in the range of $3.35-$3.40 per share on revenues of $4.45 billion to $4.55 billion. The healthcare reform is expected to impact 2011 revenues by $70 – $80 million. (Read our full coverage on earnings report: Celgene Tops, Lifts View)
We are impressed by Celgene’s financial flexibility and strong balance sheet. The company remains in excellent financial health, with $2.79 billion in cash on hand at the end of the second quarter of 2011 and with a debt-to-capitalization ratio of under 18%. Celgene bought back 4.1 million shares during the second quarter of 2011. Management stated that it has bought back about 32 million shares since 2009. The buyback process has seen the company returning $1.75 billion to stockholders. In August 2011, the board of directors cleared a program to buy back up to an additional $2 billion of its common stock. We believe that the share repurchase program highlights the company’s commitment to create value for shareholders.
Further, Celgene boasts of an interesting and diversified pipeline which includes about 25 late-stage and 20 early-stage candidates. It is evaluating Revlimid in all stages of multiple myeloma and conducting late-stage studies of the drug in non-Hodgkin’s lymphoma (NHL) and chronic lymphocytic leukemia (CLL). Celgene is looking to boost its pipeline further and currently has several late-stage candidates including apremilast, pomalidomide, amrubicin which are targeting diseases like cancer and psoriasis among others. The company is also advancing the development of the early-stage candidates in its pipeline. We believe that the successful development and commercialization of the pipeline would drive Celgene’s top line.
However, we are concerned about the loss of exclusivity of one of Celgene’s key drugs, Vidaza, in the US in May 2011. The product has performed impressively since being launched. Sales climbed 23% in the second quarter of 2011 to $162 million. The genericization of the drug in the US will hamper sales due to generic competition thereby impacting the stock adversely.
Additionally, Thalomid’s performance remains a cause for concern. In the second quarter of 2011, Thalomid sales declined 10% to $88 million. We believe this decline will continue as safer and more effective drugs are available for multiple myeloma like Revlimid and Takeda’s Velcade. The decline in Thalomid sales can hurt Celgene’s top line if other products fail to perform.
We currently advise investors to retain the stock.
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