The Only Good Way for a Biotech to Spend Money

CELG’s Dip Could be Opportunistic

Dear Bottarelli Research Member,

Today’s move in Celgene (CELG – NASDAQ) once again explains why I like to take profits leading up to an earnings announcement. Today, CELG beat analysts by a penny, but their net profit fell to $9.6 million from $10.8 million a year ago. What’s interesting is that CELG’s net profits fell despite their revenue rising from $105.4 million last year to $176.4 million this year.

The reason for the revenue rise/net profit fall was attributed to the cost of introducing new products. Their recent expenses rose from $41.4 million to $82.8 million — driven mainly by higher marketing costs to help launch Revlimid and expand sales of both Revlimid and Thalomid in Europe, Japan, Australia and Canada.

Here’s my take on this…

When it comes to biotech companies, there can be a slew of reasons to burn through cash. Paying high-priced researchers or conducting expensive (yet inconclusive) drug studies are a few that come to mind. But in my book, there is one good reason for a biotech company to spend cash — and that’s to promote their top-line FDA approved drugs.

Once you have a drug on the market that’s a leader in its class, you need to get the word out to the world — and that’s exactly what CELG is doing. The fact that Wall Street is punishing the stock today (while expected) is probably setting up a strong second entry point. Think of it as a case of instant gratification — while Wall Street wasn’t happy to see increased marketing costs in today’s report, I’ll bet they’ll be happy to see the returns generated from those costs in a future earnings report. Plus, as you can see by the chart, CELG is very reactionary to its 50-day moving average. Whenever the stock approaches this line, even if it’s on an intra-day basis, the stock usually pops up. That’s why I’ll consider using today’s dip to re-recommend CELG calls when appropriate.

It looks like we timed our second entry on Barrick Gold (ABX – NYSE) very nicely. This morning, ABX gapped to the upside, which pushed the average entry prices of our ABX October 30 Calls (ABX JF) back into the black. With these calls trading as high as $2.70 today, that’s a nice 35% gain just off yesterday’s entry. Hold for more gains.

Also jumping higher (finally!) is Caterpillar (CAT – NYSE) on the news that U.S. diesel engine maker Cummins (CMI – NYSE) reported a 56% rise in Q2 earnings and raised their full year earnings guidance. This is bullish for CAT since they’re a supplier of the North American truck market.

I still find it odd that CAT can rally $2.00 on indirect good news from CMI, but it couldn’t mount a rally when they reported blowout earnings themselves. I still feel CAT should’ve been up $5 to $7 on their last earnings report, but heck, what do I know? Today’s CAT up-move has pushed your CAT November 75 Calls (CAT KO) up to $3.70, enough to push our total basket price in the black. In fact, we’re now up 37% from our $2.70 entry position from July 17^th. If CAT can hold these levels above its 50-day moving average, we could be in for more upside. Hold for more gains.

We’re also seeing a nice jump in CSX today, which could hopefully establish a floor to rally off. Maintain your CSX November 65 Calls (CSX KM).

In terms of new trades, I’ve got a few candidates lined up — but I’ll probably hold off until next week. That way, we’ll see how the markets react to this week’s nice upside run. If anything, I may add a new put to our ledger tomorrow. Until then…

Lock and load!

Sincerely,