Celgene Corp. (NASDAQ:CELG)

The period under review demonstrates a fluctuating relationship between net operating profit after taxes, cost of capital, and invested capital, resulting in consistently negative economic profit. While NOPAT and invested capital generally increased over the five-year span, the cost of capital remained relatively stable, preventing a shift towards positive economic profit.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced initial volatility, decreasing from US$1,826 million in 2014 to US$1,787 million in 2015, before increasing to US$1,954 million in 2016 and US$1,913 million in 2017. A substantial increase is observed in 2018, with NOPAT reaching US$4,676 million. This represents the most significant change in the observed period.

Cost of Capital

The cost of capital exhibited a decreasing trend throughout the period. Starting at 21.20% in 2014, it declined to 19.42% in 2015, 19.75% in 2016, 18.77% in 2017, and further to 17.94% in 2018. While decreasing, the cost of capital remained a significant factor impacting economic profit.

Invested Capital

Invested capital showed a marked increase from US$9,844 million in 2014 to US$18,136 million in 2015. Growth continued, albeit at a slower pace, reaching US$18,672 million in 2016 and US$18,857 million in 2017. A further substantial increase occurred in 2018, with invested capital reaching US$27,773 million. This growth in invested capital, coupled with the cost of capital, contributed to the negative economic profit.

Economic Profit

Economic profit remained negative throughout the entire period. It began at -US$261 million in 2014 and deteriorated to -US$1,735 million in 2015 and -US$1,733 million in 2016. A slight improvement was seen in 2017 with a value of -US$1,626 million, but remained negative. Despite the significant increase in NOPAT in 2018, economic profit remained negative at -US$305 million, indicating that the return on invested capital still fell short of the cost of capital.

In summary, while NOPAT and invested capital experienced growth, the cost of capital remained substantial enough to consistently result in negative economic profit. The substantial increase in NOPAT in 2018 did not fully offset the impact of the invested capital and cost of capital, preventing the generation of positive economic profit.

Net Income

The net income demonstrates a fluctuating yet generally upward trend over the five-year period. Starting at $2,000 million in 2014, it experienced a notable decline to $1,602 million in 2015. This was followed by a recovery in 2016, reaching $1,999 million, subsequently increasing more substantially in 2017 to $2,940 million. The most significant growth occurred in 2018, with net income reaching $4,046 million, more than doubling the 2015 low point and exceeding the 2014 figure by a substantial margin. This trend suggests an overall improvement in profitability, with a particularly strong performance in the final year under review.

Net Operating Profit After Taxes (NOPAT)

NOPAT shows a more consistent pattern over the period, with marginal fluctuations between 2014 and 2017. It started at $1,826 million in 2014, experienced a slight decrease to $1,787 million in 2015, then increased moderately to $1,954 million in 2016, before a small decrease to $1,913 million in 2017. A significant increase occurred in 2018, with NOPAT more than doubling to $4,676 million. This sharp rise contrasts with the relative stability of previous years and indicates a substantial improvement in operational efficiency or profitability in 2018. The disparity between net income and NOPAT values also suggests changes in tax impact or non-operating items affecting earnings.

Overall Analysis

Both net income and NOPAT reveal a period of relative stability or moderate variation from 2014 to 2017, followed by significant growth in 2018. The sharp increase in 2018 for both metrics represents a notable positive shift in financial performance. While net income shows some volatility, NOPAT is comparatively stable until the final year, indicating consistent operating profitability prior to the substantial improvement. The data suggests the company may have implemented effective strategies or benefited from market conditions that dramatically enhanced profitability and operational results in 2018.

Provision for taxes on income

The provision for taxes on income exhibited fluctuations over the observed period. Starting at $328 million in 2014, it increased to $422 million in 2015, then decreased to $373 million in 2016. A significant rise occurred in 2017, reaching $1,374 million, followed by a notable decline to $786 million in 2018. This pattern indicates volatility in the tax obligations estimated for income taxes, with a pronounced peak in 2017.

Cash operating taxes

Cash operating taxes showed a similar volatile pattern. Beginning at $654 million in 2014, the value fell to $555 million in 2015, then rose substantially to $884 million in 2016. A dramatic increase was observed in 2017, peaking at $2,853 million. The following year, 2018, saw a sharp decrease to $903 million. This trend suggests a significant variation in the actual cash tax payments, with the highest cash outflow recorded in 2017.

Comparative insights

Both provisions for income taxes and cash operating taxes demonstrate notable volatility with peaks in 2017. The magnitude of cash operating taxes consistently exceeds the provision for taxes, particularly evident in 2017 when cash taxes were more than double the provision amount. This discrepancy might indicate timing differences or adjustments between accrued tax expenses and actual cash payments during these periods.

Overall trend

The data reveals inconsistent patterns in both tax provisions and cash taxes over the five years, with a significant spike in 2017 followed by a decrease in 2018. The spikes may be linked to underlying changes in earnings, tax planning strategies, or external tax regulations affecting the company’s tax liabilities and payments.

Total reported debt & leases

The total reported debt and leases exhibited a significant upward trend over the five-year period. Starting at $7,068 million in 2014, the figure more than doubled by 2015 to $14,456 million. It then remained relatively stable in 2016 around $14,480 million before increasing consistently to reach $20,645 million by 2018. This indicates a growing reliance on debt and lease obligations to finance operations or investments during this timeframe.

Stockholders’ equity

Stockholders’ equity showed some fluctuations with no clear positive trend. The equity started at $6,525 million in 2014, decreased to $5,919 million in 2015, then increased gradually in 2016 and 2017 to reach $6,921 million. However, in 2018, equity declined again to $6,161 million. This pattern may suggest variability in retained earnings, issuance or repurchase of shares, or other equity-related activities affecting the net book value of shareholders' investment.

Invested capital

Invested capital expanded substantially over the period assessed. It nearly doubled from $9,844 million in 2014 to $18,136 million in 2015 and then continued to grow steadily to $18,672 million in 2016 and $18,857 million in 2017. A marked increase occurred in 2018, with invested capital soaring to $27,773 million. This substantial growth points to increased capital deployment into long-term assets or working capital, possibly reflecting strategic expansion or acquisition initiatives supported partially by rising debt levels.

The financial performance, as indicated by economic value added metrics, demonstrates a fluctuating but generally improving trend over the observed period. Economic profit consistently registers as negative, though the magnitude of the loss diminishes over time. Invested capital increases steadily throughout the period, while the economic spread ratio, reflecting the efficiency of capital allocation, exhibits a marked improvement in the final year.

Economic Profit

Economic profit begins at a loss of US$261 million in 2014. This loss significantly widens to US$1,735 million in 2015 and remains substantial at US$1,733 million in 2016. A modest reduction in the loss is seen in 2017, with economic profit at negative US$1,626 million. The final year, 2018, shows a considerable improvement, with the loss decreasing to US$305 million. This suggests a growing ability to generate returns, though still insufficient to cover the cost of capital.

Invested Capital

Invested capital demonstrates a consistent upward trend. Starting at US$9,844 million in 2014, it increases to US$18,136 million in 2015, then to US$18,672 million in 2016, and US$18,857 million in 2017. The most significant increase occurs in 2018, reaching US$27,773 million. This indicates a continued investment in the business, potentially supporting future growth, despite the initial negative economic profits.

Economic Spread Ratio

The economic spread ratio, expressed as a percentage, reflects the difference between the return on invested capital and the cost of capital. It begins at -2.65% in 2014 and declines to -9.57% in 2015, remaining negative and relatively stable at -9.28% in 2016 and -8.62% in 2017. A substantial improvement is observed in 2018, with the ratio increasing to -1.10%. This suggests that the return on invested capital is approaching the cost of capital, indicating improved capital allocation efficiency and a narrowing gap between profitability and capital costs.

In summary, while economic profit remains negative throughout the period, the trend suggests a positive shift, particularly in 2018. The increasing invested capital, coupled with the improving economic spread ratio, indicates a potential for future value creation as the business scales and capital allocation becomes more efficient.

The economic profit margin exhibited significant fluctuation over the five-year period. Initially negative, the margin demonstrated a substantial decline before exhibiting signs of improvement towards the end of the observed timeframe. A consistent pattern of negative economic profit was present throughout the period, indicating that the company’s returns were not exceeding its cost of capital.

Economic Profit Margin Trend

The economic profit margin began at -3.45% in 2014. It then experienced a marked deterioration, reaching -18.87% in 2015. A moderate recovery was observed in 2016, with the margin improving to -15.50%. This improvement continued in 2017, reaching -12.51%. The most substantial positive change occurred between 2017 and 2018, with the margin increasing to -1.99%, representing the smallest negative value over the period.

Relationship between Net Product Sales and Economic Profit

Adjusted net product sales consistently increased throughout the period, rising from US$7,569 million in 2014 to US$15,302 million in 2018. Despite this growth in sales, economic profit remained negative for all years. The initial decline in economic profit margin in 2015 coincided with a significant increase in net product sales, suggesting that the increase in sales was not sufficient to offset rising costs or capital charges. The later improvement in the economic profit margin, while sales continued to rise, indicates a potential improvement in cost management or capital efficiency.

The trend suggests that while the company was able to grow its sales, it struggled to generate returns exceeding its cost of capital for much of the period. The recent improvement in the economic profit margin, though still negative, is a positive indicator and warrants further investigation to understand the drivers behind this change.