Recommendation No. 1: Celgene (NSDQ: CELG)

“Sell to Open” Celgene April $75 Call

Option Symbol: CELG120421C75

Limit Order Price: $3.00 or more

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Income generated: $300 per options contract (representing 100 shares of stock)
• 64-day rate of return at current stock price of $74.60: 4.0 percent (22.9 percent annualized)
• Tell your broker:

I want to sell a covered call against 100 shares of my Celgene (CELG) stock. Specifically, I want to “sell to open” one April $75 call for a credit of $3.00 per share or more.

• Remember: You should only sell one call option per 100 shares of stock purchased. The trade can only be done in 100-share increments (100, 200, 300, 400, 500, etc.).

Alternative Trade for Those Who Don’t Already Own Celgene:

Buy/Write on Celgene (NSDQ: CELG):

Buy the Stock and Simultaneously “Sell to Open” the April $75 Call

Option Symbol: CELG120421C75

Limit Order Price: $71.60 or less (stock is at $74.60 and April $75 call is at $3.00)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Net cost of buy/write: $7,160 per 100 shares
• 64-day return if stock does not move: 4.0 percent (22.9 percent annualized)
• Brokers vary as to whether they call this trade a “buy/write” or a “covered stock” trade.
• Do the trade simultaneously at a single limit price, if possible. For example, if you want to buy 100 shares of stock, tell your broker:

I want to do a buy/write trade. Specifically, I want to buy 100 shares of Celgene (CELG) and “sell to open” one April $75 call for a net debit of $71.60 per share or less.

• Some brokers require that you buy the stock and sell the call in separate trades. If your broker is one of these, always buy the stock first and sell the call against it second. Tell your broker:

Trade No. 1:

I want to buy 100 shares of Celgene (CELG) for $74.60 per share or less.

Trade No. 2:

I want to sell a covered call against 100 shares of my Celgene (CELG) stock. Specifically, I want to “sell to open” one April $75 call for a credit of $3.00 per share or more.

• Ex-Dividend Date: The stock doesn’t pay a dividend, so nothing to worry about concerning early exercise for dividend capture.
• Why the April $75 Strike?: The first calendar quarter is typically a weak seasonal period for biotech stocks. According to Personal Finance editor Elliott Gue, the long-term potential of Celgene’s anti-cancer drug Revlimid remains bright, but over the next two months the stock is likely to remain range-bound.

Price Adjustments Regarding This Trade

Stock prices are currently fluctuating and option prices fluctuate with them. Consequently, the limit prices recommended in this trade alert may no longer be immediately fillable by the time the alert has been published. The alerts are valid for seven trading days, so please be patient and place your limit orders as “good ‘til cancelled” for seven trading days.

Investment Rationale for Underlying Stock:

Biopharmaceutical outfit Celgene Corp’s (NSDQ: CELG) portfolio includes five commercial drugs, but the $3.2 billion in sales chalked up by cancer treatment Revlimid represented over 66 percent of the firm’s revenue in 2011. Management forecasts sales of this blockbuster drug to grow 19 percent during 2012 to $3.8 billion to $3.9 billion in net product sales, a modest deceleration from the 30 percent growth in sales Revlimid experienced during 2011.

Revlimid and its predecessor Thalomid have amassed a more than 60 percent share of the US market for the treatment of multiple myeloma, a cancer afflicting the plasma cells that grow in bone marrow. The firm also has a robust presence on the global market, with international sales of Revlimid accounting for roughly 43 percent of its $855 million in fourth-quarter sales of the drug.

Revlimid is currently approved as a second-line treatment for multiple myeloma in nearly 70 countries, so now the firm is focusing its efforts on garnering first-line approval for treatment with the drug in key markets around the world. In the EU, the drug accounts for about half the market as a second- and third-line therapy. But Celgene has put Revlimid through the third phase of clinical trials and should secure approval as a first-line treatment for multiple myeloma in the EU during the first half of 2012–a huge potential catalyst for the stock.

Additionally, the firm plans to submit marketing applications to secure similar approvals from US regulators as well as regulatory agencies in other markets during 2012. And by the end of the year, management expects a decision on its marketing application for the use of Revlimid as a second- and third-line treatment for multiple myeloma in China.

Celgene’s revenue could grow even more rapidly if ongoing third-phase trials demonstrate Revlimid’s efficacy treating leukemia and non-Hodgkin’s lymphoma. Recent studies have also suggested that using Revlimid over a longer period improves multiple-myeloma sufferers’ outcomes. Extended treatment periods increase Celgene’s revenue.

Revlimid’s recent success in Japan underscores Celgene’s growth opportunities in international markets. One year after Revlimid’s commercial launch in the island nation, the drug has amassed a 22 percent share of the market for treatments targeting multiple myeloma.

Emerging markets account for a negligible percentage of Celgene’s sales today, but management expects the company to reap long-term rewards from rising health care consumption in Brazil, China and Russia.

But Celgene is far from a one-trick pony. The firm’s breast cancer treatment Abraxane generated $104 million in sales in the fourth quarter of 2011, an 8.8 percent decline from the prior three months that management attributed to supply chain issues. However, if positive outcomes from ongoing third-phase clinical trials expand Abraxane’s purview to pancreatic cancer, melanoma and lung cancer, the drug’s annual sales could eclipse $1 billion.

Celgene reported fourth-quarter net income of $410 million, a 95.2 percent increase from the $210 million earned during the prior-year period. And the firm’s full-year profits jumped 49.7 percent in 2011 to $1.3 billion, as compared to $881 million from the prior year.

In late January, Celgene announced its plans to acquire privately held Avila Therapeutics for $350 million in cash. The deal also includes as much as $575 million in additional payments if certain milestones are met with regard to the development and approval of Avila’s treatments for B-Cell diseases such as lymphoma. Celgene’s management expects the acquisition to leverage its hematology franchise because Avila’s research and development efforts dovetail with Celgene’s existing programs.

Celgene Corp is rated as a buy under 80 in the Personal Finance Growth Portfolio.