Source: Celgene.com.
Celgene Corp. (CELG +0.00%) has been one of the fastest growing biotech companies of late, with its market cap climbing a remarkable 254% in the past five years:
Because of this meteoric rise, Celgene has become the 15th most valuable public healthcare company in the world. What's noteworthy, though, is that it is among the few within its immediate peer group not to offer a dividend.
A deeper look at Celgene's cash position, in relation to companies of similar size, suggests that it could indeed support a dividend:
In short, Celgene has almost twice as much cash as Novo Nordisk (NVS 2.57%), and it is the only one seeing a rapid uptick in its cash position over the last few quarters. Given that a number of high-profile funds dumped Celgene in the third quarter, I think it's a good time to ask whether this rising drugmaker should consider offering a dividend to broaden its investor base going forward -- or whether there's a more lucrative use for all that cash.
Celgene's earnings have been moving northward for years
Because of growing sales for its cancer drugs Revlimid, Abraxane, and Pomalyst, Celgene's adjusted diluted earnings per share have steadily been tracking upward for years:
Source: Celgene.com
With the commercial launch of Celgene's new psoriasis drug, Otezla, in the U.S. and a looming approval in the EU, there are ample reasons to believe this trend will continue for the foreseeable future.
Celgene's improving top and bottom lines have subsequently translated into strong cash flows. In the third quarter, for instance, the company reported $901 million in operating cash flows and $6.861 billion in cash, cash equivalents, and marketable securities.
What is Celgene doing with its cash?
In light of its strong and growing cash position, investors should be asking how management plans to use this vital resource to either create further value down the line or reward its loyal shareholder base. To answer this question, I took a deeper look at the company's third-quarter 10-Q, showing a significant rise in both R&D and SG&A expenses. Specifically, Celgene increased its R&D spending by 12.6% to $419 million, compared with a year ago, to support the development of its early to mid-stage clinical candidates. On the SG&A side, expenses rose by 8.8% to $441 million, relative to the period a year ago, mainly because of the commercial launch of Otezla. Finally, we learned that the company bought back $252 million of its own shares during the quarter. All told, Celgene spent $1.112 billion on growing its business and rewarding shareholders during the quarter.
Despite this hefty investment in growth and shareholder rewards, Celgene was still able to grow its cash position by a healthy $655 million, quarter over quarter, in the third quarter. Putting this number into context, this was a 10.5% rise in cash in just three months, which isn't unusual for Celgene based on its recent history.
So should Celgene start doling out a dividend?
I think it's still slightly premature for this rapidly growing biotech to pay out a dividend given its heavy investments in clinical research and the commercial launch of Otezla. But the fact that management hasn't been tapping its $3.68 billion share repurchase program much in recent quarters, despite ample cash to do so, suggests that something else entirely might be brewing.
As Celgene has been one of the more active players on the M&A landscape almost from its inception, I find this stockpiling of cash quite intriguing. I will therefore be keen to learn whether the company has significantly upped its share repurchases in the fourth quarter or continued to put a larger portion into the till. Put simply, I think Celgene's growing cash position could mean that it has an eye on a mid-sized acquisition target, most likely in the oncology space. So stay tuned!
