Celgene Corp. (CELG) has been one of biotech's brightest stars over the past decade, but its shares lost some luster following third-quarter 2017 financial results that were shy of what investors were looking for. Management recently updated investors on its strategy at a key industry conference, and its forecast included insight that's critical to understanding Celgene's future growth potential. Can this outlook get the large-cap biotech stock back on track?
First, a little background
Celgene manufactures four distinct billion-dollar blockbuster drugs, including Revlimid, a multiple myeloma drug that's commonly used in the first-line setting and that accounts for more than 60% of sales. Price increases and trials that have expanded Revlimid's use have turned it into a behemoth with sales north of $8 billion per year.
In addition to Revlimid, Celgene also markets the third-line multiple myeloma drug Pomalyst, the pancreatic cancer drug Abraxane, and the psoriasis drug Otezla. Pomalyst and Abraxane delivered fourth-quarter sales of $442 million and $251 million, respectively, in the fourth quarter, but Otezla's been the big story to watch lately.
Otezla's sales had been surging since its launch in 2014. However, its sales of $308 million only grew 12% year over year in the third quarter of 2017 and that was a marked decline from the torrid 49% year-over-year growth it produced in the second quarter. Management previously blamed this slowing sales growth on the decision to compete on price to expand its market share, but that failed to fuel optimism among investors concerned that competition could crimp Otezla's peak sales projections.
Otezla's slowing growth was additionally frustrating because it came on the heels of Celgene reporting disappointing phase 3 results for GED-0301 in Crohn's disease. After GED-0301 failed to hit its endpoints, Celgene was forced to take a writedown on it. It also had to ratchet back its 2020 sales forecast to $19 billion to $20 billion from prior expectations of at least $21 billion.
What management's saying
At the annual J.P. Morgan Healthcare Conference this week, Celgene's management rolled out a relatively optimistic outlook for its business.
First, management told investors that sales grew by a very healthy 16% and earnings by an even healthier 25% in 2017. That growth is particularly impressive because it's occurring on a larger base of sales. In the fourth quarter of 2017, total revenue of $3.4 billion increased 17% year over year and, importantly, Otezla revenue reaccelerated, growing 22% year over year to $371 million. Otezla's run rate is still below projections at the beginning of 2017, but the bounce back in its growth is nevertheless good news.
Management also provided its outlook for 2018, indicating that sales will grow 12% and earnings per share will expand by another 18% this year. Contributing to the bottom line will be a 2% improvement in operating margin and a reduction in its tax rate to 18% following U.S. tax reform.
As for the company's long-term growth targets, management reaffirmed its lowered 2020 goal and reiterated that that reflects compounded top- and bottom-line growth of 14.5% and 19%, respectively, per year.
Advances that are extending the lives of people diagnosed with multiple myeloma and new drugs making their way through the pipeline could help Celgene reach those targets. Overall survival for multiple myeloma patients has grown by more than two years since 2008, and that's increasing Revlimid and Pomalyst prescription volume. In December, Celgene's collaboration partner, bluebird bio (BLUE 5.33%), reported that bb2121, their chimeric antigen receptor T-cell therapy, is putting up over 90% response rates in early-stage multiple myeloma trials. If those results are confirmed in an ongoing pivotal trial, bb2121 could make its way to the Food and Drug Administration for approval as a late-line therapy in 2019.
Outside of multiple myeloma, Celgene partner Juno Therapeutics (JUNO) is making progress toward commercialization. The two companies are developing JCAR017, a CAR-T for non-Hodgkin lymphoma that's already in pivotal trials. Results from that trial are anticipated this year. So far, data is impressive. Six-month response rates appear higher than competing CAR-T drugs in NHL that have already won FDA approval and rates of severe adverse events appear to be lower than those other options.
Results from a third drug, luspatercept, that's being developed with Acceleron Pharma (XLRN) are also on tap for this year. If those results are good, then luspatercept could be on its way to the FDA for use in treating myelodysplastic syndromes. If approved, Acceleron thinks it has a chance at becoming a multibillion-dollar asset for the companies.
There's also some big news on its way for Celgene in autoimmune diseases. In December, the company finished filing ozanimod for FDA approval. Ozanimod, a selective oral S1P inhibitor for multiple sclerosis, may offer best-in-class safety. If the FDA greenlights it, it could end up winning a big chunk of sales away from existing oral MS drugs, including Gilenya, that generate over $9 billion annually in combined sales. There are studies as well evaluating ozanimod in other autoimmune diseases, including Crohn's disease and ulcerative colitis, that are ongoing.
What's next for investors
Celgene's growth rate is slipping, but this company's still growing by double-digit percentages and that could make its shares a bargain-bin buy following their sell-off last fall. Whether the company can deliver on its 2020 outlook will depend on Otezla's performance from here and outpacing its outlook will hinge significantly on how trials read out for luspatercept, bb2121, and JCAR017. Overall, while investors are probably still smarting from GED-0301's failure. Celgene's got enough shots on goal coming up for me to think that buying its shares is a better bet than selling them.