Earnings Preview: Celgene

Celgene Corporation (CELG) is all set to announce its fourth quarter and full year 2010 results on January 27, 2011. The Zacks Consensus Estimate for the fourth quarter is 67 cents, representing a year-over-year increase of 15.3%. The Zacks Consensus Estimate for 2010 is $2.49, up 29.6%.

Third Quarter 2010 Recap

Celgene’s third quarter 2010 earnings (excluding special items but including stock-based compensation expense) of 65 cents per share were above the Zacks Consensus Estimate by a penny and the year-ago earnings by 17 cents per share. On a reported basis (including special items), the company earned 60 cents as opposed to 46 in the year-ago quarter.

The impressive showing was primarily due to strong sales of Celgene’s cancer products Revlimid and Vidaza. These products boosted Celgene’s third quarter 2010 revenues 30.9% to $910.1 million. Revenue for the quarter handsomely beat the Zacks Consensus revenue Estimate of $878 million.

(Read our full coverage on the earnings report at Celgene Tops, Lifts View )

Agreement of Estimate Revisions

Over the past thirty days, four analysts covering Celgene have reduced their earnings estimates for the final quarter of 2010 with no movement in the opposite direction. The annual estimates for 2010 have been lowered by 3 analysts with no movement in the opposite direction. The downward movement is attributable to the release of data at the American Society of Hematology (ASH) late last year which highlighted the risk of cancer associated with the use of Celgene’s key growth engine, Revlimid, as a maintenance therapy in patients suffering from multiple myeloma (MM).

Magnitude of Revisions

Estimates for the fourth quarter and full year 2010 have gone down by $0.01 and $0.04, respectively. The reduction in estimates is mainly due to concerning data on Revlimid. Data from some studies presented at the ASH in December 2010 suggested an increase in the number of patients with secondary malignancies in the Revlimid arm compared to placebo.

Even though management at Celgene was not perturbed by the data as they claimed the figures to be within the expected range and data revealed that treatment with Revlimid prolonged progression free survival, we believe that any setback regarding Revlimid, Celgene’s key growth driver, would be catastrophic for the company.

Our Take & Recommendation

We recently downgraded Celgene to ‘Neutral’ from ‘Outperform’ following the risk of cancer associated with the use of Revlimid as a maintenance therapy in MM patients. Another cause for concern is the disappointing performance of another cancer drug, Thalomid. The continuing decline in Thalomid sales has the potential to hurt Celgene’s top line if other products do not perform impressively enough.

Moreover, in September 2010, Indian pharma company Natco Pharma filed an Abbreviated New Drug Application (ANDA) with the US Food and Drug Administration (FDA) seeking permission to manufacture and market a generic version of Revlimid. Subsequently, Watson Pharmaceuticals Inc (WPI) inked a deal with Natco Pharma to develop and sell the generic version if the application is approved. Although Celgene has challenged the application, a decision in favor of Natco would be devastating for Celgene.

However, the impressive oncology portfolio at Celgene and its efforts to expand through acquisitions please us. The impressive portfolio notwithstanding, the risk of cancer associated with the use of Revlimid as a maintenance therapy in MM patients causes us to revert to a Neutral recommendation on Celgene. Our long-term ‘Neutral’ recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

CELGENE CORP (CELG): Free Stock Analysis Report

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