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 period, 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 from 21.28% in 2014 to 18.00% in 2018. However, this decline was not substantial enough to offset the negative economic profit, particularly in the earlier years. The rate of decrease slowed considerably between 2017 and 2018.

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 continued negative economic profit.

Economic Profit

Economic profit remained negative throughout the period. The largest negative economic profit was recorded in 2015 at US$-1,748 million. While the negative economic profit lessened in subsequent years, it remained substantial, reaching US$-323 million in 2018. The reduction in negative economic profit in 2018 correlates with the significant increase in NOPAT, despite the continued growth in invested capital.

In summary, despite increases in NOPAT and invested capital, the consistently negative economic profit suggests that the returns generated were insufficient to cover the cost of capital employed. The substantial increase in NOPAT in 2018 resulted in the smallest negative economic profit during the period, indicating a potential improvement in profitability relative to capital employed.

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 economic spread ratio exhibited a notable trend over the five-year period. Initially negative, the ratio demonstrated significant deterioration before showing signs of improvement towards the end of the observed timeframe. Economic profit consistently remained negative throughout the period, while invested capital increased substantially.

Economic Spread Ratio

The economic spread ratio began at -2.73% in 2014 and declined sharply to -9.64% in 2015. This represents a substantial widening of the gap between the company’s return on invested capital and its cost of capital. The ratio remained high at -9.35% in 2016 and decreased slightly to -8.69% in 2017. A significant improvement is observed in 2018, with the ratio increasing to -1.16%, indicating a narrowing of the gap between returns and costs.

Economic Profit

Economic profit experienced a considerable decrease from -269 million in 2014 to -1,748 million in 2015. It remained relatively stable at -1,746 million in 2016 and -1,639 million in 2017. A substantial increase in economic profit occurred in 2018, moving to -323 million, suggesting improved profitability relative to capital employed.

Invested Capital

Invested capital demonstrated a consistent upward trend throughout the period. It increased from 9,844 million in 2014 to 18,136 million in 2015, then to 18,672 million in 2016 and 18,857 million in 2017. The most significant increase occurred in 2018, reaching 27,773 million. This growth in invested capital occurred concurrently with negative economic profit, contributing to the initially worsening economic spread ratio.

The improvement in the economic spread ratio in 2018, coupled with the reduced negative economic profit, suggests a positive shift in the company’s ability to generate returns on its invested capital. However, the continued negative economic profit indicates that the company’s returns still do not cover its cost of capital, despite the improvement.

The economic profit margin exhibited significant fluctuations between 2014 and 2018. Initially negative, the margin demonstrated a substantial decline before exhibiting improvement towards the end of the period. A review of the economic profit and adjusted net product sales reveals the underlying drivers of this trend.

Economic Profit Margin

The economic profit margin began at -3.55% in 2014. This metric then deteriorated considerably, reaching -19.01% in 2015, indicating a substantial decrease in economic profit relative to adjusted net product sales. A moderate improvement followed in 2016, with the margin increasing to -15.62%. This positive movement continued into 2017, reaching -12.61%. The most significant improvement occurred between 2017 and 2018, with the margin rising to -2.11%, suggesting a considerable reduction in the disparity between economic profit and adjusted net product sales.

Economic Profit

Economic profit was negative throughout the observed period. The largest negative value occurred in 2015 at -1,748 US$ millions. While negative, economic profit lessened in magnitude in 2016 (-1,746 US$ millions) and 2017 (-1,639 US$ millions). By 2018, economic profit had improved substantially to -323 US$ millions, aligning with the improvement observed in the economic profit margin.

Adjusted Net Product Sales

Adjusted net product sales consistently increased throughout the period. Starting at 7,569 US$ millions in 2014, sales grew to 9,195 US$ millions in 2015, 11,177 US$ millions in 2016, 12,999 US$ millions in 2017, and reached 15,302 US$ millions in 2018. This consistent growth in sales likely contributed to the observed improvement in the economic profit margin, despite the continued negative economic profit.

The trend suggests that while the company consistently generated economic losses, the rate of loss diminished over time. The substantial growth in adjusted net product sales appears to have partially offset the negative economic profit, leading to a progressively less negative economic profit margin.