Wednesday, March 24, 2010

Who is printing money? A look at the balance sheet of biotechnology company ....... Celgene

Dow Jones 10,850.36 (UP) week ending 03-26-2010

Biotechnology companies have a similar cost structure to oil companies that drill oil wells. Oil companies make large capital investments in drilling equipment and they often hit dry wells. But sometimes, occasionally, they hit a gusher. Biotechnology companies have a similar investment scenario. They spend a sizable amount of capital investment up front for research and development and Phase One, Two and Three testing for the viability of a new medicine. Many times these ventures are partial or total failures. However, they go through this exercise in the hopes of developing that one big blockbuster drug. When that happens it can mean years of solid revenue stream and company growth with lots of dollars falling right down to the balance sheet bottom-line.

In the case of Celgene (Symbol CELG, $62.43) that gusher and blockbuster goes by the name of Revlimid. According to Celgene's website,"REVLIMID® (lenalidomide) in combination with dexamethasone can slow the progression of multiple myeloma. REVLIMID® is an oral medication that can stop or slow the growth of cancerous myeloma cells within the bone marrow."
Celgene did 2.69 billion in sales in 2009 powered by the blockbuster REVLIMID at an unbelievable gross margin of 93.55%. Now that is printing money! Net margins run at 28.88%. The quarterly balance sheet shows a quick ratio of assets to liabilities as being 7.7 to 1. Celgene has no long term debt. The stock is only up 13.78% year to date, so it really hasn't taken off yet this year. You can still get in and buy the stock here. I tried to investigate the patent situation on the drug REVLIMID® and it appears to have 12 patents which range from expiring the end of 2010 all the way out to 2026. So further homework should be done in this area to discern the implications to sales revenue, because I am certainly a novice on this subject. The PE on the stock is currently 27.4. However, the 5 year revenue growth rate for Celgene has been running at 51.63%. So it is fairly common for a stock to have a higher PE that is growing at that fast a rate with those high profit margins. I don't know the impact of what Celgene's competitors may be offering to patients to compete against this drug, so I cannot factor that into the value of the price of the stock.

So Celgene could add a nice growth component to your portfolio. It does not offer a dividend, but instead puts that money back into R&D for future products. (This is good thinking to sustain the rapid growth.)

Hope you have good spring weather for gardening which is my other hobby.

Please feel free to leave comments on this blog about other stocks that print money! This is just my opinion and one idea offered on the subject. There are lots of others.


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