Eager to diversify its revenue away from multiple myeloma treatments, Celgene (CELG)spent $7.2 billion in 2015 to acquire the promising multiple sclerosis drug candidate ozanimod. Then, it rushed ozanimod through phase 3 trials, and submitted it to the FDA.

On Tuesday after the closing bell, we learned that Celgene may have moved too quickly. The FDA has returned ozanimod's application for approval with a Refusal to File letter, citing inadequate information in the application's "nonclinical and clinical pharmacology" sections. This delays any potential launch of the drug, and adds a new item to the biotech's growing list of setbacks. 

Targeting new indications

Celgene is the market-share leader in drugs to treat multiple myeloma, a deadly form of blood cancer. Its Revlimid and Pomalyst are the go-to first-line and third-line treatments, respectively, and contributed nearly $10 billion of the company's $13 billion in sales last year.

A man holds his head in his hands while staring at a monitor showing a declining stock price chart.


That reliance puts Celgene at risk if new multiple myeloma therapies emerge. Also, patent protection for Revlimid -- which produced more than $8 billion in revenue last year -- could end anywhere between 2022 and 2026, depending on how patent-infringement lawsuits progress.

To reduce its risk, Celgene has been working feverishly to develop new drugs unrelated to that niche. It made its first big splash outside of the cancer treatment arena in 2014 when it won FDA approval for Otezla, an oral pill for psoriasis -- a multibillion-dollar indication. It followed that victory up with its acquisition of ozanimod the following year, a move that was cheered because of the drug's potential best-in-class safety, and the fact that the multiple sclerosis market is worth over $20 billion annually.

A string of disappointments

Celgene's growth efforts have suffered a series of setbacks lately. In October, management revealed that its candidate GED-0301 had failed in a pivotal late-stage trial evaluating it as Crohn's disease treatment -- a multibillion-dollar indication -- and that sales for Otezla were shrinking. 

The double-whammy forced management to ratchet back its long-term  forecast, reducing its outlook for sales in 2020 to a range of between $19 billion and $20 billion from previous guidance of over $21 billion.

The combination of GED-0301's failure, an increasingly competitive psoriasis market for Otezla, and lowered guidance has taken a big toll on the company's market value. Since making its announcement last fall, Celgene's shares dropped from a peak of $145 to a low of $90. And the stock price could put in a new low on Wednesday in response to the this latest news.

Ozanimod is a selective S1P targeting drug that reduces MS relapses by sequestering lymphocytes so that they don't respond to inflammation. It works similarly to Gilenya; however, Gilenya is a non-selective S1P drug while ozanimod interacts only with S1P1 and S1P5. Ozanimod's greater selectivity is important because Gilenya can cause cardiovascular and kidney problems -- side effects that haven't been seen in ozanimod's studies.

The possible safety advantage positions ozanimod to win a healthy portion of Gilenya's sales, which eclipsed $3 billion last year. The one big risk, though, is if that apparent safety advantage turns out to be partially or entirely illusory. According to Leerink analyst Geoffrey Porges, the FDA may have bounced the application back because it wanted to see more information regarding variances in a pharmacokinetic/pharmacodynamic modeling study that Celgene completed late last year.

Until the company meets with regulators to discuss the specifics behind the Refusal to File letter, we can have little insight into timelines for a resubmission or approval. Celgene said on its conference call that it has a handle on the problem, but at this point, investors will probably want more than simple reassurances from a management team that arguably dropped the ball on this filing. 

Steady the course

As frustrating as this latest stumble is, Celgene remains one of biotech's most innovative drug developers. And Refusal to File letters aren't uncommon, though that's cold comfort to shareholders now.

Ozanimod's efficacy and safety in trials appear solid enough to think that once the t's are crossed and the i's are dotted -- and the FDA's questions are adequately answered -- the drug could secure a green light. If it does, Celgene thinks it could generate between $4 billion and $6 billion in annual peak sales -- assuming trials in other indications pan out.

Outside of ozanimod, Celgene has a promising pipeline of drugs in development. It recently acquired gene therapy pioneer Juno Therapeutics for its cancer CAR-T program, and it's working with bluebird bio on a fourth-line multiple myeloma CAR-T that it could submit for FDA approval in 2019. Beyond those, a slate of its collaboration partners are working on intriguing candidates that could provide it with additional revenue further in the future.

Overall, the setback for ozanimod is undeniably unwelcome news, but management is maintaining its 2018 financial forecast, and assuming its FDA application gets refiled this year, the delay will arguably have only a short-term impact on Celgene.