The Celgene Conundrum

Celgene now has the best valuation in the large cap biotech space. While the P/E is higher than the other large cap biotechs the growth rate is a lot higher and they have patent protection for a lot longer. When comparing large cap biotech stocks using a discounted cash flow model with the same WACC and terminal growth rate, Celgene comes out the cheapest.

The latest fall has been blamed on Revlimid, their cancer treatment. The stock is already down 25% on this news and earnings for the most part have been adjusted by far less. I believe the reason that the stock is falling so hard is that momentum/growth funds are the largest shareholders. They are indiscriminate buyers and indiscriminate sellers and right now they are selling. Price does not matter.

Celgene has a small share repurchase program but is not buying back their shares as aggressively as the other large cap biotechs. Gilead and Amgen are both aggressively repurchasing shares and the growth investors have largely fled those stocks already. These are the reasons I have waited until now to initiate a position in the shares even though the valuation is better than Amgen and Gilead. A large repurchase program and a further turnover of the shareholder base would make this my favorite biotech stock.

1 comment:

Anonymous said...

CELG doesn't have hard support till 38. If the market breaks down, CELG will make new lows.