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The Motley Fool: A Biopharma Grower

The Motley Fool

Biotech blue chip Celgene (Nasdaq: CELG) is a major player in the rapidly growing oncology market, with three primary methods of growth.

First, Celgene can grow organically. Its main growth driver is its Revlimid drug, which is delivering increasing revenue due to a growing number of multiple myeloma diagnoses, longer treatment time frames and pricing power. Celgene’s Pomalyst, for multiple myeloma, and Otezla, for plaque psoriasis, are also growing quickly, and the company has a pipeline that’s full of opportunity.

Second, Celgene can grow inorganically via acquisitions. It acquired Abraxis BioScience in 2010 for its metastatic breast cancer drug Abraxane, which had $315 million in sales in 2009. Abraxane’s label was expanded to treat advanced pancreatic cancer and advanced nonsmall-cell lung cancer, and its sales this year could touch $1 billion, though competition has grown. For $7.2 billion, Celgene has now bought Receptos, for its ozanimod drug that treats multiple sclerosis and ulcerative colitis. Its annual sales potential tops $4 billion.

Finally, Celgene can use collaborations to its advantage, and is leveraging its R&D by partnering with more than 30 different drug developers to discover first-in-class treatments for cancer, immunology and inflammation.

Management is aiming to more than double sales and nearly triple profits over the next five years, and Celgene stock has been trading at an attractive price recently. (The Motley Fool owns shares of and has recommended Celgene.)

Ask the Fool

Q: Can you explain how a company’s earnings per share can rise when its earnings don’t grow? – T.W., Manteo, North Carolina

A: That can happen if the company’s share count shrinks, such as via share buybacks. Imagine that the One-Legged Chair Co. (ticker: WOOPS) has 10 million shares outstanding and $60 million in quarterly net income. Its earnings per share (EPS) is $6. If it buys back a million shares and then earns $60 million again in the next quarter, its EPS has suddenly risen to $6.67. (Sixty million divided by 9 million equals 6.67.)

Share buybacks can be good, making remaining shares worth more – as long as they aren’t executed when the stock is overvalued. Paying too much for the shares wastes company (and shareholder) money.

Q: I gather that interest rates are likely to rise in the coming years. That will be good for my bank accounts, but what will it hurt? – G.L., Warren, Ohio

A: Higher interest rates will be bad news for interest-sensitive sectors of the economy, such as mortgage lending and real estate. Rising mortgage rates can price many potential buyers out of a home purchase, even if they have good credit. This in turn could force sellers to lower asking prices to make them more affordable for prospective buyers.

Those with adjustable-rate mortgages (ARMs) will see their mortgage payments gradually increase. Rising rates are also trouble for homebuilders, as they can lead to not only lower demand but also higher inventory carrying costs.

For investors with bond-heavy portfolios, especially retirees on limited incomes, rising rates will likely lead to falling bond prices, which can hurt. The price of gold has been known to fall, too, when interest rates rise.

My dumbest investment

Money managers are definitely a high-risk endeavor! When I started having to manage my investments, I asked friends and others whom they would recommend. Thankfully, I didn’t put all my eggs in one basket and instead divided my money into fourths.

One “manager” managed to lose more than 4 percent in a very good year with “conservative” investments and got me into a pile of stocks that faced ongoing litigation. Another put me in the mutual funds that gave him the biggest commissions. The third has grown the investments by more than 6 percent yearly while providing me with all my living expenses and half the tuition and book costs for two grandchildren. That firm inherited the leftovers from the 4 percent loser!

And the bit I have managed myself with mostly Motley Fool recommendations has about doubled in the last 10 years. I’m about ready to fly solo! - J., Austin, Texas

The Fool responds: You learned some good lessons, such as how “conservative” investments don’t always turn out to be so conservative and how some advisers have conflicts of interest. You were also smart to try managing some of the money on your own, because most of us are more than capable of doing so, as long as we’re willing to do the work involved – reading, learning, studying and so on.

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