Earnings Preview: Celgene (CELG)

Celgene Corp. (CELG) is scheduled to report its second quarter 2010 results on Wednesday, July 29, before the opening bell. The Zacks Consensus Estimate for the quarter is earnings of 60 cents per share (with an upside of 3.33%), compared with earnings of 46 cents in the year-earlier period. The Zacks Consensus Estimate for second-quarter 2010 revenues is $821 million as against $629 million reported in the year-ago quarter.

First-Quarter Recap

Celgene’s first quarter 2010 earnings (excluding special items) of 63 cents per share beat the Zacks Consensus Estimate by 8 cents. The company earned 44 cents (excluding special items) in the year-ago quarter. On a reported basis the company earned 50 cents per share as opposed to 35 cents in the year-ago quarter.

Total revenue climbed 30.8% year-over-year to $791.3 million. The US healthcare reform legislation negatively impacted revenues by approximately $4 million in the first quarter.

The rise in total revenue was driven by worldwide market share gains. Revlimid net sales came in at $530.5 million reflecting an increase of 46% over the year-ago period. The drug is currently approved for myelodysplastic syndromes and second-line multiple myeloma, and the company is expanding its label into other indications.

Net sales of Thalomid, also approved for multiple myeloma, stood at $104 million in the reported quarter. Vidaza net sales for the quarter came in at $120.3 million, an increase of 60% over the first quarter of 2009.

Research and development (R&D) spend climbed to $204.7 million from $181.2 million in the year-ago quarter. Selling, general and administrative expenses in the quarter increased approximately 20% year-over-year to $208 million.

Net interest and other income slipped to $17.4 million in the first quarter of 2010 from $49.6 million in the year-ago quarter.

Agreement of Analysts

Only 1 of 8 analysts covering the stock has moved in the upward direction over the last 30 days. However there has been no downward estimate revision over the last 30 days. We believe sales in the yet-to-be reported quarter, which will be driven by Celgene’s lead cancer product Revlimid, will only be moderately affected by currency headwinds, courtesy Celgene’s hedging program.

However, 2011 estimates have been revised downwards by 5 analysts as against 3 upward movements over the last 30 days. We believe that the downward bias for the 2011 annual estimates stems from the stagnating sales of Celgene’s Thalomid and the impending acquisition of Abraxis BioScience Inc. (ABII) which is expected to modestly hurt 2011 earnings.

Magnitude of Estimate Revisions

There has not been any significant revision in estimates over the last 30 days. As a result, the majority of the analysts have refrained from revising estimates over the past 30 days. The Zacks Consensus Estimate for the second quarter of 2010 has remained constant at 60 cents. The Zacks Consensus estimate for 2010 has too stayed put at $2.40 over the last 30 days as strong Revlimid sales are expected to offset the dilutive effects of the impending Abraxis acquisition.

However, 2011 estimates have moved down 5 cents to $2.93 over the last 30 days. The downward movement is primarily fueled by the dilutive effects of the Abraxis acquisition, which is expected to close by the end of 2010.

Our Take

The impending acquisition of Abraxis BioScience and that of Gloucester Pharmaceuticals earlier this year have boosted Celgene’s cancer portfolio, which will drive growth in the coming quarters. The company’s key growth engine is Revlimid and Celgene is expanding its label into other indications.

Although Celgene, with Vidaza and Revlimid, will dominate the myelodysplastic syndrome market, it will face tough competition in the multiple myeloma market. The negative growth of its other product Thalomid, approved as a treatment for multiple myeloma, is likely to continue due to better alternatives in the market for multiple myeloma.

Our Recommendation

Celgene is a Zacks #3 Rank (Hold) stock. This implies that the company is expected to perform in line with the broader US equity market over the next 1-3 months. The lack of estimate revisions over the last 30 days justifies our short-term stance on the stock. The lack of revisions indicates the absence of directional pressure on the stock.

We are Neutral on Celgene in the long-term, since the outlook is stable and growth is expected to be driven by Revlimid, Vidaza and the acquired cancer drugs. Our long-term Neutral stance on the company indicates that the stock is expected to perform in line with the overall US equity market for the next 6+ months. Consequently, we advise investors to retain the stock over the time-period.

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