Missouri-based investment firm Wedgewood Partners loves Celgene Corporation (NASDAQ:CELG), an $81-billion global biopharmaceutical company whose shares lost nearly 10% of their value in 2017. In its Q4 investor letter (you can download a copy here), Wedgewood said that Celgene was a top detractor to its performance during the fourth quarter due to a couple negative news events. However, the investment firm sees a value in the biotechnology company and believes that it offers a ‘compelling growth opportunity.’ Let’s take a look at comments made by Wedgewood about Celgene in the letter.
[Celgene] announced they would discontinue a phase III trial for their drug GED-0301 in Crohn’s disease (CD) and an extension trial, following a recommendation of the Data Monitoring Committee. They also decided that another phase III trial for Crohn’s disease would not be initiated. While a phase II trial with GED-0301 in ulcerative colitis is still ongoing, [Celgene Corporation (NASDAQ:CELG)] is currently awaiting review of data to determine their next steps for this indication. In the absence of any information on whether the trial failure was due to something specific to CD or the drug itself, it is currently assumed to be a high-risk program for that indication. This study was deemed a high risk/low probability study, especially when compared to other IBD drugs. However, its success could have been a blockbuster Inflammation & Immunology (I&I) asset for the company, making its failure a disappointing loss.
In addition to these trial failures, during the third quarter earnings release, management brought down 2020 guidance, partially due to the discontinuation of GED-0301 program in CD. While sales were only modest in their 2020 model, management did forecast multibillion-dollar peak sales potential for the drug. The largest impact to 2020 guidance, however, was weak performance of their existing drug Otezla, which experienced headwinds due to slowing growth and increased competition in the psoriatic arthritis and psoriasis markets.
The updated guidance takes into account GED-0301, the market dynamics impacting Otezla, as well as reassesses the opportunities and risks associated with the remaining phase III studies expected to read out by the end of 2018. We believe management took a conservative stance with their update and yet the resulting guide maintains more than +14% revenue growth and nearly +20% earnings growth on a compounded annual basis through 2020.
We realize there will be phase III failures; and with each failure comes the potential for more risk and less growth. We reiterate that the Company has a very broad pipeline, with 12 phase III studies set to read out between now and the end of this year, making setbacks like these more manageable in the longer term. Celgene has substantially more phase III assets than any other biotech company. Several of these pipeline assets are not incorporated in the current 2020 guidance, as they read out at a date when any sales potential will contribute at future dates. With nearly +20% compounded annual earnings growth through 2020 and free cash flow generation of $100 billion over the next ten years, Celgene continues to offer a compelling growth opportunity.
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Celgene Corporation (NASDAQ:CELG) is engaged in the discovery, development and commercialization of innovative therapies for the treatment of cancer and immune-inflammatory related diseases. Its portfolio of commercial products include REVLIMID, VIDAZA, THALOMID, POMALYST/IMNOVID, ABRAXANE, OTEZLA, ISTODAX and IDHIFA.
On Thursday, Celgene reported financial results for the fourth quarter and full year of 2017. For the quarter, it had total revenues of $3.48 billion, up 17% year-over-year. The company posted a loss of $81 million, or $0.10 loss per share, for the fourth quarter, versus a profit of $429 million, or $0.53 earnings per share, for the same quarter in 2016. Adjusted net income for the fourth quarter rose 23% to $1.59 billion, or $2.00 per share, versus $1.29 billion, or $1.61 per share, in the 2016 quarter. For the full year 2017, total revenue was $13.0 billion, an increase of 16% year-over-year. Full-year net income was $2.94 billion, or $3.64 per share, versus $2.0 billion, or $2.49 per share, for the full year 2016.
On Jan. 7, Celgene Corporation (NASDAQ:CELG) announced it agreed to acquire Impact Biomedicines for $7 billion. Impact is engaged in developing fedratinib for myelofibrosis and polycythemia vera. In addition, earlier this week, Celgene announced it would acquire Juno Therapeutics for $9 billion. Juno is developing CAR (chimeric antigen receptor) T and TCR (T cell receptor) therapeutics, a new type of cancer drug technology. The deal was praised by analysts and biotech journalists, who called it as a “smart” biotech acquisition, according to a report in Fortune.
Meanwhile, Celgene is a popular stock among the hedge funds covered by Insider Monkey. There were 63 funds in our database with bullish positions in the biotechnology company.
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For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
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