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Should You Avoid Celgene Stock After Its Big Pipeline Setback?

By Keith Speights - Oct 22, 2017 at 8:17AM

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The market is reacting like Celgene's future hinged on failed Crohn's disease drug GED-0301. It doesn't.

Even some of the biggest and best have things go wrong every now and then. Celgene (CELG) has been the best-performing biotech stock over the last five years among big biotechs with market caps over $50 billion. And now, something has gone terribly wrong for Celgene.

The company announced after the market closed on Thursday that it was discontinuing a late-stage study of GED-0301 (mongersen) in treating Crohn's disease, and wouldn't start another planned late-stage study of the drug in the same indication. Celgene stock sank on Friday following the update. With this big pipeline setback, should you now avoid Celgene stock altogether?

Man with hand to head facing chalkboard with lots of question marks drawn on it

Image source: Getty Images.

How bad was the news?

There's no way to sugarcoat it: The late-stage failure for GED-0301 was pretty bad for Celgene. Prior to the announcement that the Crohn's disease study was being halted, the biotech had projected peak sales of over $2 billion for GED-0301. The drug ranked among the top three pipeline candidates for which Celgene hoped to win approval by 2020. 

Celgene hasn't shared any details on the late-stage Resolve trial of GED-0301 in treating Crohn's disease. The company only said that its data-monitoring committee recommended halting the study after a recent interim futility analysis, concluding that the drug wasn't providing enough benefit to continue testing. Celgene said that there were "no meaningful safety imbalances" identified in the trial.

GED-0301 is also being evaluated in a phase 2 study for treatment of ulcerative colitis. Celgene said that it would wait to review the full data from that study before deciding the next steps in the indication. In my view, though, most investors are already writing off the prospects for GED-0301 in ulcerative colitis.

Although some analysts are now hinting that they were unsure about GED-0301 all along, most of them were assuming success for the drug in their models, with peak sales projections between $1 billion and $2 billion. Expect those models to be quickly changed with zeros replacing those billions.

Investing case for Celgene

Let's return to the original question: Should you avoid Celgene stock in light of the latest clinical failure? First, it's a good idea to reevaluate the investing thesis for a biotech stock any time a major development happens. Asking questions is the smart thing to do.

Losing GED-0301 is a big blow to Celgene, for sure. But the market immediately priced in that blow. Celgene lost over $10 billion in market cap overnight. Whether or not you should avoid the biotech stock now depends on how you view the sell-off and how you view Celgene's prospects without GED-0301.

A big drop in Celgene stock's price wasn't unexpected. However, I think it was overdone. Market research firm EvaluatePharma calculated a net present value for GED-0301 of $3.3 billion before the late-stage failure. Even if the firm's estimate was off by a sizable margin, it's still a lot less than the amount that the market shaved off of Celgene's market cap.

While GED-0301 was certainly an important pipeline candidate for Celgene, it was one of many. Ozanimod is worth a lot more to the biotech -- EvaluatePharma pegged its net present value at $8.2 billion. The drug is being evaluated in late-stage clinical studies for treating multiple sclerosis and ulcerative colitis.

Positive results from a phase 2 study of ozanimod in treating Crohn's disease were also recently presented at a major conference. In addition to ozanimod, Celgene has eight other pipeline candidates with blockbuster potential that could be approved within the next five years.

Of course, the biggest factor behind Celgene's past success will continue to be a major driver of its future growth: Revlimid. The blood-cancer drug is on track to generate sales of around $8 billion this year. By 2022, Revlimid is projected to be the top-selling cancer drug in the world, with annual sales of more than $14 billion.

There's a lot more to like about Celgene and its prospects, as well. Sales for multiple myeloma drug Pomalyst and Otezla, which treats psoriasis and psoriatic arthritis, are growing faster than Revlimid's. 

Looking ahead

One clinical setback isn't enough to make Celgene stock lose its luster, in my opinion. There are simply too many other drivers of long-term growth for the stock.

Around a month ago, I cautioned against underestimating Celgene. Even with the failure for GED-0301, I still feel the same way. A pullback was certainly warranted, but I think that the market is overreacting to the company's clinical update. If Celgene has more major pipeline flops, the premise for the stock should be reevaluated. However, unless there's more bad news, I'm sticking with Celgene and continue to view it as one of the best biotech stocks on the market.

Keith Speights owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.

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