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Was Celgene’s Third Quarter Really Crash-Worthy?

By Todd Campbell – Oct 26, 2017 at 7:30PM

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Stumbles caused management to trim their outlook, which has some investors wondering if they're going to regret owning shares of the biotech.

On the heels of reporting a disappointing late-stage trial failure, Celgene Corp. (CELG) issued a poor third-quarter financial report that's stoking investors' fears. Has the biotech lost its golden touch, or is it a bargain-bin buy in the making?

First, some background

Celgene is one of the world's biggest biotech companies. Its track-record includes successfully developing and commercializing four billion-dollar-plus blockbuster drugs: Revlimid, Pomalyst, Otezla, and Abraxane.

A man watching as a giant red arrow crashes through a concrete floor.


Of the four, Revlimid is by far its biggest success. It's the market-share-leading first- and second-line multiple myeloma treatment, and is one of the top-selling prescription drugs of any type, with an expected $8 billion in sales this year. Pomalyst has carved out a niche as a market share leading third-line multiple myeloma drug, Abraxane is used to treat pancreatic cancer, and Otezla is used to treat psoriasis patients. 

Last year, Celgene's drugs produced $11.3 billion in sales and nearly $2 billion in GAAP net income. Because those metrics have more than doubled since 2010, Celgene has been considered one of the best biopharma stocks to own.

CELG Revenue (Annual) Chart

CELG Revenue (Annual) data by YCharts

Setbacks cause a crash

Celgene has been reinvesting its cash flow back into collaborations and internal R&D to bulk up its product line and further diversify away from Revlimid, but this strategy exposes it to the risk of high-profile trial failures, given that roughly 90% of drugs flop in clinical trials.

These risks were front-and-center in early October when the company shelved GED-301 as a Crohn's disease treatment candidate following a futility analysis of interim phase 3 data. Celgene licensed GED-301 back in 2014 for a princely $710 million up front, then quickly ushered it into phase 3 studies. The company lost more than $10 billion in market cap as investors worried about how GED-301's failure would impact Celgene's financials. 

Today, we learned Celgene won't be able to fully absorb GED-301's failure. In the Q3 earnings report, management lowered its GAAP EPS estimate to between $4.78 to $5.19 from its prior $5.36 to $5.62 range, partially based on the expectation that it will write off as much as $500 million because of GED-301. 

The company's bad news didn't stop there. It also cut the high end of its 2017 sales guidance amid a slowdown in sales growth for Otezla.

Quarterly revenue increased 10.2% year-over-year to $3.3 billion as sales of Revlimid grew 10%, Pomalyst grew 22%, Otezla grew 12%, and Abraxane grew 8% year-over-year. Sales growth boosted non-GAAP EPS by 20.9% to $1.91.

Those are hardly horrible numbers, but revenue was $120 million shy of industry watchers' forecasts. The miss was at least partially due to Otezla's slowing growth. The launch of new psoriasis drugs this year, including Siliq and Tremfya, is creating headwinds. In the earnings release, management conceded Otezla's sales were negatively impacted by "an increase in gross-to-net adjustments from contracts implemented in January and a slowing in overall category growth due to a more challenging market access environment."

Because of that, management was forced to lower its full-year sales outlook for Otezla to approximately from the $1.5 billion to $1.7 billion range to $1.25 billion. Reflecting that, management now expects full-year revenue will be about $13 billion, where it previously forecast between $13 billion to $13.4 billion.

Management also indicated that GED-301's failure will take a toll on Celgene's long-term results, which is probably the biggest reason why the stock price is falling so significantly. Previously, the company was targeting $21 billion of sales and at least $13 in EPS in 2020. It had expected new products to contribute $1.8 billion in sales to that. Now, it only expects new products to contribute $1.4 billion to sales that year, a change that contributed to it lowering its sales forecast for 2020 to $20 billion from $21 billion and its EPS forecast to $12.50 from $13. 

Buy, sell, or hold?

The cluster of bad news has understandably shaken the market's confidence in Celgene. And the guidance cuts create uncertainty that warrants some revision to its stock price. Nevertheless, investors might want to avoid panicking, because there are a lot of things that can still go right for the company from here. 

I have low expectations for GED-301's ulcerative colitis data when it comes out later this quarter, but Celgene's collaboration partners bluebird bio (BLUE 11.56%) and Juno Therapeutics (JUNO) are expected to update cancer trial data for two promising CAR-T therapies later this year, and those readouts could help boost confidence. Earlier this year, bluebird bio reported a 100% response rate for bb2121 in a small group of heavily pretreated multiple myeloma patients. Similarly, Juno Therapeutics said its JCAR17 was effective and potentially offers best-in-class safety based on interim results from a study in non-Hodgkin lymphoma. A pivotal trial for bb2121 is on course to begin soon, and one is already enrolling patients for JCAR17.

Celgene is also on the cusp of submitting ozanimod for approval in multiple sclerosis this quarter, a $20 billion market. Based on ozanimod's safety in its trials, it could capture a big chunk of the $8 billion or so spent on oral MS drugs if it earns FDA approval. 

Overall, the company has both a stable of top-selling medicines and a lot of irons in the fire, which is why I think investors are warranted in holding onto shares rather than selling. But those who are interested in adding Celgene to their portfolios might want to dollar-cost average into their position, at least until we get a better handle on Otezla's sales trends.

Todd Campbell owns shares of Celgene. The Motley Fool owns shares of and recommends Bluebird Bio and Celgene. The Motley Fool recommends Juno Therapeutics. The Motley Fool has a disclosure policy.

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