Celgene Corp.'s (NASDAQ:CELG) is arguably one of the globe's most successful biotech companies, yet analysts at investment researcher Morgan Stanley cut their rating on the company from equal weight to underweight on Friday. Analysts' ratings often impact stock prices in the short term -- Celgene's shares were down 5% as of this writing -- but over the long term, investor returns are driven by a company's execution, not by analyst whims and whispers.

Since Celgene has proven it knows a thing or two about successfully developing and commercializing top-selling drugs, you might want to take this downgrade with a grain of salt. 

What could go wrong?

In explaining the downgrade, Morgan Stanley's analyst cited a sooner-than-expected threat to Celgene's top-selling drug, Revlimid. Revlimid is a biologic that's been on the market for more than a decade and is used to treat various hematological cancers, including multiple myeloma. Generally, Wall Street is modeling for generic competition to challenge Revlimid in 2026, but in Morgan Stanley's view, the potential exists for that to happen in 2020.

A man in a suit with two hands raised. In one hand is a green dollar sign and in the other is a red dollar sign.


Revlimid's efficacy has turned it into the most prescribed first- and second-line drug used to treat multiple myeloma patients and a steady stream of label expansions have made it one of the world's top-selling medicines. In the second quarter alone, Revlimid's sales were $2.03 billion, up 19.6% year over year. Based on that performance, management's guiding for Revlimid sales of $8 billion this year. If so, then Revlimid will account for more than 60% of Celgene's expected $13 billion in sales this year.

Since Revlimid's generating the bulk of Celgene's sales, it's understandable to worry about what could happen if generic drugmakers launch a copycat earlier than anticipated. Certainly, the threat of generic competition to Revlimid shouldn't be ignored. Investors, though, might want to keep this threat in perspective given all of the activity in Celgene's pipeline. After all, it's drugs in the pipeline that will determine Celgene's future, regardless of when Revlimid biosimilars arrive. 

What could go right?

Celgene's fully aware of its reliance on Revlimid and it's actively working toward diversifying itself.

The company's Pomalyst, for example, was launched in 2013 and it's already the best-selling third-line multiple myeloma treatment on the market with an expected $1.6 billion in sales this year. Celgene's pancreatic cancer drug, Abraxane, produces nearly $1 billion in sales and studies are ongoing that could expand its use to other solid tumor cancers, including non-small cell lung cancer. Additionally, Otezla is one of the fastest-growing psoriasis drugs of all time with anticipated sales of $1.5 billion this year despite only having won Food and Drug Administration approval in 2014. Trials evaluating Otezla in other big-money indications like ulcerative colitis could eventually push its sales above $2 billion. 

In addition to label expansions for those drugs, Celgene's R&D team is hard at work developing new drugs that can reduce the company's reliance on Revlimid. For instance, Celgene's already completed phase 3 studies proving its oral multiple sclerosis drug, ozanimod, is effective. A filing for FDA approval should be complete soon, and if it's approved, a solid safety profile could arguably make it the best-in-class oral MS drug available. Since the multiple sclerosis drug market is worth about $20 billion per year, ozanimod's got a very good shot at becoming Celgene's next billion-dollar blockbuster. Studies evaluating ozanimod in other diseases could further increase its peak sales potential.

Recently, its R&D team notched FDA approval for Idhifa, the first drug specifically OK'd to treat relapsed or refractory acute myeloid leukemia (AML) patients with a specific genetic mutation. Idhifa's addressable market is between 1,200 to 1,500 patients and it costs nearly $25,000 per month, so it could generate nine figures in sales. Celgene licensed the drug from Agios, so it will have to share profit, but the approval validates Agios platform and that could mean more trials included in their collaboration pan out for Celgene.

Celgene's also working with Acceleron Pharma on luspatercept, a phase 3 drug being studied for use in patients with lower-risk myelodysplastic syndromes and transfusion-dependent beta-thalassemia. Data on luspatercept is anticipated in the middle of 2018. A collaboration with Juno Therapeutics gives it exposure to chimeric antigen receptor T-cell therapy (CAR-T), which could be the next big thing in non-Hodgkin lymphoma treatment. And, a license with bluebird bio gives it exposure to bb2121, a potential next-generation CAR-T for multiple myeloma that's in phase 1 trials.

Additional collaborations that are worth considering are its partnership with Beigene in China and its work with Forma Therapeutics on protein homeostasis, which could lead to novel treatments.

Stay the course

The competitive threat to Revlimid is still years away and that gives Celgene a lot of time to prepare for it. In the meantime, management's outlook for the next few years is compelling. It targets revenue of $21 billion in 2020, up from $13 billion this year, and earnings per share of $13, up from $7.25 this year.

Overall, Revlimid's patent situation shouldn't be ignored, but it should be kept in perspective because there's a lot going right at this company that could reward investors who take the long view.