Biopharmaceutical companies with drugs early in their launch often appear to have obscene valuations -- but only if the drugs' future sales growth isn't fully taken into account. Celgene (NASDAQ:CELG) and its future blockbuster cancer drug Revlimid fit this situation pretty closely, as evident in the third-quarter results it announced last week.

Revenues grew 89% year over year, to $245 million for the quarter. Adjusted earnings jumped to $59 million for the quarter from the $11 million Celgene earned in 2005. Thalomid net sales were up 9.3% to $108 million, but the growth of Revlimid was the greatest revenue driver.


Revlimid Sales

Sequential Growth

Q3 06



Q2 06



Q1 06



Sales figures in millions.

Gross, operating, and net margins all expanded nicely. Gross margins increased to 86%, where they will likely peak, but operating margins should continue to climb from the 22% level achieved this quarter, as sales growth outstrips increases in research and development and sales, general, and administrative spending.

Speaking of R&D spending, it was up 30% to $64 million, due to four late-stage studies testing Revlimid in various cancer-related indications, plus the testing of other drugs. Unlike other types of increased expenses, this type of spending should propel revenue growth for a long time, should Revlimid prove successful in treating these cancers.

For the third quarter, cash and equivalents increased $115 million, for 15% sequential growth; cash now stands at $873 million. With such solid profitability, what will Celgene do with all the cash on its balance sheet? Retiring $400 million worth of convertible debt due in 2008 makes sense, but that still leaves Celgene with nearly $500 million and a rapidly growing cash stockpile.

Trading at 129 times trailing-12-month adjusted earnings, Celgene looks ridiculously expensive, until one considers its awesome sales and earnings growth in that time period. With Revlimid sales gaining traction -- the drug was only approved in late 2005 -- and R&D expenses moderating as a portion of sales, if Celgene's share price remains at its current level, it won't appear so overvalued for much longer.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .