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Motley Fool: A biotech bargain?

Drugmaker Celgene’s adjusted earnings per share are expected to increase by more than 19 percent annually on average over the next few years. (Celgene)
Drugmaker Celgene’s adjusted earnings per share are expected to increase by more than 19 percent annually on average over the next few years. (Celgene)

Not long ago, biotech company Celgene (Nasdaq: CELG) was a darling in the investment community. That’s no longer the case. Over the past six months, Celgene stock has plunged about 40 percent.

What went wrong? A once-promising Crohn’s disease drug flopped in a late-stage clinical study, Celgene’s fast-growing psoriasis drug Otezla is facing competition and slowing growth, and the company lowered its financial outlook for 2020.

The market seems to think Celgene is in horrible shape, but the biotech still claims a compelling growth story, with adjusted earnings per share expected to increase by more than 19 percent annually on average over the next few years.

Celgene’s current lineup, featuring blood cancer drugs Revlimid and Pomalyst, continues to perform well. Those two drugs contributed nearly $10 billion to the company’s roughly $13 billion in sales last year. Celgene also markets the blockbuster cancer drug Abraxane. Thanks to label expansions, growing demand and price increases, the company’s sales grew 16 percent year over year in 2017. Meanwhile, many expect Celgene’s multiple sclerosis drug ozanimod to be approved and reach blockbuster status.

With a forward-looking price-to-earnings (P/E) ratio recently in the single digits, Celgene’s stock seems a bargain for long-term investors. (The Motley Fool owns shares of and has recommended Celgene.)

Ask the Fool

Q: Should I use some extra funds to pay off my car loan or invest in the stock market? – K.M., Fort Wayne, Indiana

A: If you have any high-interest debt, such as from credit cards, pay that off first. Otherwise, compare your car debt with your alternatives.

Say your car loan interest rate is 5 percent. If you invest in the stock market, the average annual gain in that over many decades is roughly 10 percent, but that’s just an average and far from certain. The stock market can be volatile, especially over short periods. So consider your risk tolerance and decide whether you’d rather save a definite 5 percent or hope for a 10 percent gain.

It can be worth paying a little in interest while aiming to earn more through stock appreciation. Just make sure you’re investing for the long haul.

Q: What’s a leveraged buyout? – L.B., Hendersonville, North Carolina

A: Sometimes referred to as an LBO, a leveraged buyout is when a company is bought out by another entity (or entities), using a lot of debt. Private equity investors are typically involved, borrowing lots of money without using much of their own, and often using the acquiree’s assets as collateral.

The acquired company is generally taken private, no longer trading publicly on the stock market. It’s likely to go public again later, after some changes have been made (such as layoffs, the selling of assets or dividend increases or decreases).

While some LBOs are executed by members of management, others are hostile, executed by outsiders and not welcomed by their targets. Many LBOs don’t end well for the company or its shareholders (there are substantial interest payments due, after all), though the acquirers often do well.

My dumbest investment

When I got back into the stock market in 2009 after inheriting some money, I made the mistake of listening to this guy who guessed wrong a lot. As a result, I lost money with some bad investments. Now I listen to him less, while listening more to The Motley Fool and a few others I trust.

Oh, the guy who guessed wrong a lot over the past eight years or so? Me. – R.L., Cincinnati

The Fool responds: We’re glad that you trust us, but don’t sell yourself short so quickly. A big problem in the scenario you described can be boiled down to one word you used: guessed. The less guessing you employ in investing, the better your results are likely to be.

Sure, no one knows exactly what a given stock or the entire market is going to do in the next day or year, but the more you know, the fewer surprises you’ll likely encounter. If you study a company you’re interested in, learning about how it makes its money, what its competitive advantages are, how financially healthy it is and what its growth potential is, you can make an educated estimate of its value and its attractiveness as an investment.

Remember, too, that you’ll never be perfect in your investment decisions. We’ve made our share of regrettable calls, and the world’s best investors have erred, too.

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