Competitive Heat Melts Celgene

The company's third-quarter results were lackluster, hampered by a stumble in Revlimid's European commercial launch. Then Celgene announced a deal to acquire Pharmion(PHRM) for nearly $3 billion in cash and stock. The acquisition is intended to strengthen Celgene's European operations and its overall cancer drug business, but many investors said the company paid too high a price.

Now, competition from Millennium and Cephalon is being added to the mix. Investors are clearly worried that the growth to justify a rich stock price may not be there anymore.

At Friday's closing price of $57.36, Celgene was trading at 36 times the consensus 2008 earnings estimate of $1.58 a share. That's the priciest earnings multiple among the big-cap biotech firms. To its credit, Celgene is forecast to grow earnings per share 50% from 2008 over 2007, also tops among the big-cap biotechs.

By comparison, Genentech(DNA) trades at 20 times its 2008 earnings per share estimate, Gilead Sciences(GILD) at 25 times 2008 earnings, Biogen Idec(BIIB) at 23 times, and Amgen(AMGN), for obvious reasons, 12 times. (These figures are all based on Friday closing stock prices.)

But even with Monday's shellacking, Celgene is still the most richly valued biotech in the group. Until investors regain confidence that Celgene can deliver the outsized earnings growth they've grown accustomed to, it seems that multiple contraction will be the order of the day.

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