Upside And Downside Scenarios For Celgene; Is The Selloff Overdone?

Celgene Corporation CELG stock tanked Thursday, dropping close to 20 percent on roughly nine times its average volume.

The downside was orchestrated by weaker-than-expected third-quarter revenues announced by the company Thursday.

At the time of writing, shares of Celgene were down 20.01 percent at $95.64.

Oppenheimer in a note discussed the upside and downside scenarios for Celgene. The firm estimates that even in the eventuality of the risks materializing, the stock could trade down to the low-$120 levels, which questions the rationale of the selling spree witnessed in reaction to the results.

Celgene reported third-quarter adjusted net income of $1.91 per share on revenues of $3.29 billion, up 10 percent year over year.

The consensus estimates had called for adjusted earnings per share of $1.87 on revenues of $3.42 billion.

Trimming its 2017 forecast for Otezla revenues, the company lowered its revenue guidance to the low-end of its previous guidance range, and the GAAP operating margin and GAAP earnings per share guidance.

Otezla is a pill indicated to treat moderate to severe plaque psoriasis and psoriatic arthritis.

However, the company raised the low-end of its 2017 adjusted earnings per share forecast, while maintaining the upper end intact.

See also: Amgen Stock Falls After 'Boring' Q3 Beat

Otezla Softness

Commenting on the results, Oppenheimer said products sales were lower than expected, primarily due to soft Otezla sales. The firm lowered its revenue estimates to account for changes in Otezla estimates, lowering them by 1.7-4 percent per year through 2021. The firm also reduced its earnings per share estimates by less than 1-3.6 percent in years 2018-2021.

Based on the reduced GAAP earnings per share estimate for 2019, the firm lowered its price target for the shares from $175 to $163. Meanwhile, the firm maintained its Outperform rating, as it believes Celgene has a favorable risk/reward trade-off at its current stock price.

Based on base case assumption, analyst Leah Rush Cann estimates Celgene's revenues to grow at a CAGR of 17.1 percent over the next five years, increasing to $24.7 billion in 2021, and GAAP earnings per share to grow at a CAGR of 30.65 percent to $9.45 in 2021.

The analyst also delved on upside and downside scenario for Celgene.

Upside Scenario

• Price increases for existing drugs.
• Higher-than-estimated pricing for new drugs.
• Faster-than-expected launch of new drugs.
• Increased penetration of existing drugs, especially in auto-immune settings.
• Positive clinical data.

Downside Scenario

• Experimental therapies, Luspatercept, Idhifa, Ozanimod and CC-486, floundering at the FDA altar.
• Slow market penetration and adoption of Revlimid, Otezla and Pomalyst.
• Loss of patent protection.
• Structural changes to the healthcare market.

The analyst believes Celgene could trade down to the low-$120 levels if experimental product AG-221 has a slow launch and Revlimid, Otezla and Pomalyst fail to increase market penetration. These two risks, according to the analyst, could lead to reduced 2019 GAAP earnings per share of $6.20 and the five-year growth rate being reduced to 25.6 percent from 30.65 percent.

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