Celgene (CELG): Growth AND Value Stock #3

By Paul Goodwin, Chief Analyst, Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 10/12/13 Sign up for free Cabot Wealth Advisory

The third of my 10 stocks that share growth and value characteristics is Celgene (CELG), a pharmaceutical company with a market cap of more than $63 billion, nearly $6 billion in annual sales and an after-tax profit margin of 40.8%.

These numbers are not typical of the growth stocks that show up every week in Cabot Top Ten Trader, but they’re not outlandish, either. But a look at the long-term chart for CELG will show you why it’s a growth stock.

Pharmaceutical companies are closer to thoroughbred racing stables than to factories turning out widgets. While a successful stable will make money from boarding, breeding and selling horses, the only way to strike it rich is to have a horse that wins races. A horse that wins a Triple Crown race generates bucketloads of money.
Pharmas and biopharmas that develop a promising drug and successfully shepherd it through the grueling clinical trial and FDA approval process can turn from unprofitable to profitable in short order.

For Celgene, the Triple Crown winner is Revlimid, an oral cancer drug that’s used to fight multiple myeloma. Of Celgene’s $5.5 billion in revenue in 2012, 68% of it came from sales of Revlimid, which costs well north of $150,000 a year for treatment.

Vidaza, Celgene’s treatment for some kinds of bone marrow cancers and blood cell disorders, costs $6,000 per month, with an average treatment duration of 10 months. This brought in 15% of 2012 revenues. Abraxane, a treatment for certain types of breast and pancreatic cancer that costs between $6,000 and $8,000 per month, brought in 8% of 2012 revenues.

The economics of drug treatments are fairly staggering, but you can imagine what an investor in Celgene must be thinking when one of its candidate drugs—the company has a robust pipeline of new drugs and new uses for old drugs in clinical trials—approaches a successful conclusion.

Celgene was first featured in Cabot Top Ten Trader back in March 2003, more than two years before Revlimid was finally approved by the FDA. The company was finding support from investors who had been following the trials results, and were getting their bets down early. The stock was trading at a split-adjusted 6.52.
CELG went on to top 77 in August 2008, which illustrates why growth investors with a taste for risk love drug companies.

At that point, CELG (which doesn’t pay a dividend) ran out of good news, and the stock began trading sideways, dipping to as low as 37 in April 2009. The stock finished 2012 trading at 78.

At that point, CELG looked like a good buy to the value screens used by Cabot Benjamin Graham Value Investor. The stock is still listed in Value Investor with a Maximum Buy Price of 77.88. Roy Ward, Value Investor’s chief analyst, calculated that the stock could be held until it reached a Minimum Sell Price of 112.93, at which point it would be fairly valued and should be sold.

CELG tagged that minimum sell price during the week of March 11, which would have handed a value investor a handsome 45% return in just three months.

But as a growth investor, I have to point out the main beef I have with value investors, which is that they sell stocks that are still in strong growth trends! A value investor who sold CELG at 113 would have missed out on a continuing rally that pushed CELG as high as 158 on October 4. (It’s trading at 153 as I write this.)

My only conclusion to the whole story is that stocks that combine the fundamental soundness and low valuation of the value discipline and the momentum of the growth discipline are a pleasure to watch in action.