Celgene (CELG): Play offense and defense with biotech

"Their commercial stage products are REVLIMID®, THALOMID® and VIDAZA®. Celgene is also researching stem cells derived from the human placenta as well as from the umbilical cord, thus tapping into a promising new technology while avoiding the political and ethical questions dogging others involved in stem cell research.

"In addition to the commercial products, the company has plenty of potential products in late stage development. In a public release on June 15, Celegene said that a drug candidate, apremilast, improved symptoms of psoriatic arthritis compared with a placebo in a midstage study.

"Patients who took apremilast every day for 12 weeks improved significantly more than those who took the placebo. Psoriatic arthritis is a form of arthritis that affects people who have psoriasis.

"One benefit of being a big player in the biotech industry is that it gives you the ability to acquire competitors or fund a development stage company's research.

"Celgene and development stage company GlobeImmune, recently announced a strategic collaboration. In return for a $40 million upfront payment from Celgene, GlobeImmune is granting Celgene an exclusive option to all oncology programs.

"Celgene'ss $2.6 billion in cash, minimal debt exposure and $245 million in cash flow from operations makes this biotechnology company relatively safe. Celgene has proven capable of generating positive net income.

"Analysts have been very accurate with projecting revenue and earnings for Celgene in the past few quarters.

"Using these estimates, Celgene shares trade at 21 times current year EPS of $2.04 and 16 times forward year EPS of $2.64. Revenues are expected to increase 17% to $2.6 billion this year and over 20% to $3.2 billion in 2010.

"If these numbers prove to be reliable, which we believe that they will, shares are cheap. Biotech stocks always trade with higher PE multiples than other industry groups.

"Very often certain biotech companies will not have positive earnings so price-to-sales is another metric often used to value biotech stocks. Since Celgene has proven its ability to deliver positive earnings, we will focus on PE as our primary valuation metric for shares.

"We think that a company growing earnings over 20% per year, with CELG is doing, deserves to trade with a forward PE of more than 16. Shares of CELG should trade at a multiple of 21 times forward earnings. Using the 2010 estimate of $2.64 results in a $56 target price."

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