Celgene Tries To Rejoin The Party

1/11/18

Background

Celgene (CELG) has rejoined the group of biotechs trading at the same price they first reached when ascending to new heights in 2014. At $105-106 as I write this Tuesday afternoon, it is at the same price it first reached in November 2014. That's roughly the same total return as Gilead (GILD), which is trading at the price it first reached exactly 4 years ago but has paid dividends for nearly three years. This similarity in multi-year price action for two different companies with different stories raises the question of whether CELG is beginning to suffer what many have called the Gilead disease: shrinking P/Es as major product lines grow old.

I actually think it's more definitive than that: the stock has the "disease" already, once one adjusts for the high level of R&D spending that CELG expends as part of its core operations. I'll go into that later, but to digress and put CELG in some context, my general view on large-cap biotechs has not changed much since December 2016. This view is that they got unduly cheap to the large-cap market (SPY) as an overreaction to having become too expensive. CELG may have made too many deals for too much money near the top of the biotech cycle, and the stock may in part be paying the price for that.

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