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Insiders Buy Celgene's Setback

ByJonathan Moreland, RealMoney Contributor

Celgene is considered a growth name in the biotech space, but having traced a sinusoidal curve since August 2009, its shares are actually at the same price as 16 months ago, despite beating expectations and raising guidance in its latest quarter. Making this surprising comparison possible right now was the recent gap down in Celgene's stock in reaction to two poor pieces of clinical news in December. Not only have questions been raised about the side effects of Celgene's multiple myeloma drug, Revlimid, when used for an extended period of time but the drug's efficacy was also found wanting in trials for a new indication. The first bit of bad news was the most concerning. Revlimid generated just over 70% of the company's third-quarter sales, allowing Celgene to increase non-GAAP EPS by 34% year over year, to $0.75. So far this year, the company's bottom line has increased 42%, to $2.07. Revlimid's sales have grown strongly, even though it is only approved as a treatment for patients that have failed other, more traditional frontline therapies for myeloma. Imagine the growth if Revlimid was approved as a frontline therapy itself. Celgene is trying to get that status for Revlimid in both Europe and the U.S., and acceptance would mean sooner and longer-lasting use of Celgene's main breadwinner. Unfortunately, the study released by the American Society of Hematology earlier this month showed a potential increase in the incidence of certain secondary cancers in patients using the drug for an extended period of time.

Wide-Ranging Growth

So, although Celgene will remain a growth story based on existing usage in the near term, the extent and longevity of that growth is unclear. Not that 2010 is in question. Estimates for Celgene have earnings increasing 35% this year, to $2.82 per share, on a 34% jump in sales. The average forecast for next year calls for EPS to increase another 20%, to $3.37, and for revenue to rise 23%, to $4.4 billion. But don't mistake this average for consensus. The range in 2011 EPS estimates is a very wide $2.82 to $3.75. Sales could be $500 million higher or lower. Such a wide range of top- and bottom-line estimates for next year represents obvious uncertainty. And two insiders seem to think this uncertainty (exacerbated by the recent, disappointing announcements) also presents an opportunity. CEO Robert Hugin and Director Ernest Mario each acquired Celgene's shares during their Dec. 6 gap down. Mr. Mario purchased $55,000 worth of the shares, increasing his holdings by 4.3%. Mr. Hugin expressed his optimism by dishing out $949,000 to exercise 37,000 options and holding on to all of them. His "opting in," as I call it, increased the holdings he's willing to let fluctuate with the market by 9.9%. Interestingly, CEO Hugin's last open-market transaction was in October 2009. At that point, Celgene had staged a nice rebound from its financial-crisis lows of $37, and Mr. Hugin determined that flipping a large chunk of options as his stock was trading near yearly highs at just under $54 made sense. Over a year later, he now decides to hold on to his exercised options despite the immediate tax burden, even though he could have sold them immediately for $55. That's a bullish change of sentiment by this CEO about the capital gains prospects of his shares at this price. Ernest Mario, on the other hand, already signaled Celgene as a value in the mid-$50 range this summer. In May and June, he bought 12,500 shares of Celgene for $53 and $55.49. Since then, Celgene surged to $63 before pulling back on the recent poor clinical news. So, though Mr. Mario's recent buy is relatively small, it seems to indicate a belief that the setback for these shares is temporary. (We should also point out that Mr. Mario is further indicating that shares of both Celgene and Boston Scientific are relatively better values that those of Pharmaceutical Product Development at their present prices. He's a director at all three companies and is presently buying Celgene and Boston Scientific while selling Pharmaceutical Product Development.)

Imperfect but Effective

Expecting Celgene's setback to be temporary is not unreasonable and not just because concerns that the secondary cancers in the control group of the American Society of Hematology's study may have been underreported. The bottom line of this disappointing study is that patients taking Revlimid had only a 50% reduction in the risk of the disease progressing instead of 60%. That's still an impressive risk reduction compared to present treatments for myeloma, which is an accumulation or malfunctioning of cancerous plasma cells. And regarding the other study finding that Revlimid didn't help overly much when used to treat acute myeloid leukemia: The fact is that Revlimid is being tested for efficacy in over 100 clinical trials. It cannot possibly produce positive results in all these trials. In any case, the biggest deal for Celgene will be if Revlimid gains frontline approval for the indications for which it is already in use. For those focused on the downside risk of Celgene's stock, its shares now trade for just over 20x the low-end EPS forecast for 2011. That's not cheap for a stock that would have no growth if that scenario plays out, but it's hardly a stratospheric valuation unless Revlimid suddenly became dead in the water with future growth prospects as well. That seems unlikely based solely on the geographical expansion that the drug is seeing under current indications. More likely is that the bullish duo of Celgene insiders expects their firm's 2011 to perform more in line with the average or upper end of expectations. So do I, and I'm following the execs into the firm's stock.