Celgene: When Biotechs Use Stock Buybacks to Juice Price and Earnings


When companies start buying back their common stock on the open market, it can have multiple outcomes. It can offset employee stock option dilution, and it can lower the public share float. It can drive up the price of the stock, as it can create the equivalent of a new institutional buyer in the market. It can increase earnings per share due to a smaller share price. And in some cases it can create a short squeeze.

This morning we are seeing shares of Celgene Corp (NASDAQ: CELG) rise on news that the company is launching a $600 million accelerated share buyback plan. There is a large difference between a tradition share buyback and an accelerated share buyback plan. A traditional share buyback plan is generally a fixed dollar amount or a fixed share amount, and it means that companies have the right to buy up to that amount over whatever period it specifies. The problem is that many companies announce traditional share buybacks and they repurchase only a portion of the shares. Some are mere gimmicks.

An accelerated share buyback plan can be a part of an existing buyback plan, and that is what we are seeing today. Celgene already has repurchased approximately $5.05 billion of its common stock over the past four years, and it has repurchased about $385 million of its common stock year to date. Celgene has approximately $1.450 billion remaining in the existing share buyback program.

Here is where this $600 million matters. Celgene will pay $600 million to an investment bank in exchange for shares of Celgene's common stock, and the company currently anticipates that all repurchases under the accelerated stock repurchase will be completed no later than May 20, 2013.

If you round the stock price, this comes to roughly 6 million shares of common stock that will be bought over the next 90 days. Celgene trades 3.5 million shares per day, so this is absorbing almost two full days worth of volume in what is effectively about 66 or so trading days. It is also worth noting that Celgene is worth about $42 billion as of Tuesday's closing price, and that means that it is about 1.4% of the implied market value.

Shares are trading up at $102.00, after closing at $100.46 yesterday. This also matters because the 52-week trading range is $58.53 to $102.29.

Filed under: 24/7 Wall St. Wire, Biotech, Dividends & Buybacks, Healthcare Tagged: CELG, featured