CELG: Buy the dip: upping the PT to $73

JP Morgan is holding HealthCare conference in San Francisco, CA this week. Ahead of the conference, CELG held investor meeting and the provided the guidance for year end result 06 and fiscal year 07. The press release hit the wire after the market today.

(see http://biz.yahoo.com...).

In its guidance, CELG is guiding for sales of $315 ~ $320 mil for Revlimid, largely in line with the consensus number out there. Thalomid is guided to bring the revenue in the range of $425 ~ $430 mil, again in line with the street expectation. Total revenue for 06 will be around $890 with EPS that triples the 05 number. This puts the EPS for 06 to be around 57 cents, about 4 cents above the mean estimate number shown by yahoo figure. This guidance implies 3 to 4 cents EPS upside for the upcoming quarterly results that is going to be released in early Feb.

For 07, CELG is predicting the topline number of 1.3 billion with the EPS of roughly $1. This number is again largely in line with the consensus number (consensus 1.39 billion with EPS of $1.09). As CELG shares trade with premiere multiple to its peers due to much higher earning growth rate, this number is seen as disappointing; momentum investors always expect the company to continue to blow away the estimate. In fact, there has been some negative press release after the market by Street.com, calling the 07 guidance as earning short fall. However, 90 mil shy of overall 1300 mil is less than 7% of the total revenue. As Revlimid is ramping up fast and is penetrating much wider market than originally estimated, I believe that the company is providing extremely conservative and crude number. So in no way the guided numbers fell short of the original estimate. In my opinion, 07 numbers have a lot of conservatism built into it given the rapid Revlimid uptake and increased marketing expense upon European approval of Revlimid. Nevertheless, I expect the momentum traders to seize the opportunity to take the share price down tomorrow. Should this happens, I want you to step in and buy the shares. I see fairly strong price support in mid 50's and this could provide you with good entry point. Given possible volatility you may see in January for the overall market, don't commit all of your money at once. Buy the stocks in steps. Use tomorrow weakness to commit 30% of your money and should there be a further dip, open up additional 30%. Once uptrend is confirmed again, you can commit the remaining 40% of the intended fund.

Despite what may seem as rather anemic guidance from CELG, I am upping my long term price target to $73 from $60. I promised to you guys that I will assess my long term price target for CELG as it is nearing my revised TP of $60. Last ASH (American Society of Hematology) in Dec was an extremely powerful event for CELG franchise. What became evident out of 06 ASH was the much wider than expected market potential for Revlimid. Once thought as a specialty drug in niche market in the blood cancer, Revlimid was seen to garner a fair share in specific form of MDS and (late line) MM market. With both US and European approval, Revlimid is set to bring in roughly 2 billion revenue for the company, which it is likely to surpass sometime in 08. However, ASH is revealing extremely compelling data for Revlimid to be effective in much wider areas of MDS (non-5q) and MM (1st line). Furthermore, it has a clear potential in CLL and NHL market with 500 mil and 4 billion dollar revenue potential. So the Revlimid may have far greater than 2 billion potential currently being perceived. In fact, some analysts are taking off the label usage of Revlimid in CLL and are bumping up earning estimate and consequently, the share price has been very, very strong in recent times.

As seen in the figure (http://www.investorhives.com/big_pic.php?fname=uploaded_files2%2Fjongyoo143.png&caption=CELG%20product%20pipeline&msgid=294), outside of Revlimid, CELG is armed with one of the most potent pipeline among biotech companies. It has more advanced IMiDs that targets inflammatory and immunological diseases. The company is also targeting many solid tumor and cancer areas for its advanced line of IMiDs drugs. The company also has early products in development which includes Bezopyranes, Kinase Inhibitors, as well as Ligase Inhibitors. Furthermore, I believe CELG's stem cell product is poised to get more attention with investor community as Democrats become more vociferous in pushing congressional efforts with healthcare programs with Stem Cell Technology.

Robust uptake in Revlimid and strong pipeline with near term potential puts the company for fast growth for considerable period of time. I expect that by late 09 to early 2010, the CELG may be able to show annual revenue run rate of roughly 3.5 billion with net profit margin exceeding 30% due to extremely high gross margin of Revlimid. EPS is likely to surpass $3 a share based on 352 mil share counts. Let us assume contracted PE multiple of 30 to 35 from current 50 to 60. Well you do the calculation, but the whole point of this exercise is the stock still has plenty of upside. I know it is hard to believe given the great gain in the share price. But I have to call it as I see it.

The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Novellus, Sirf Technology, Avid Technology, Trident Systems, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)

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