A trial failure, disappointing long-term guidance, and an embarrassing stumble at the FDA's finish line have erased billions of dollars from Celgene Corp.'s (NASDAQ:CELG) market cap and called into question its long-standing reputation of success. Do the company's stumbles mean Celgene's best days are behind it, or can new drugs in its pipeline get its stock back to its winning ways?

In this episode of Industry Focus: Healthcare, host Kristine Harjes is joined by Motley Fool contributor Todd Campbell to discuss whether this large-cap biotech still deserves a spot in investors' portfolios.

A full transcript follows the video.

This video was recorded on June 13, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is June 13th, and this is the Wednesday Healthcare edition of the show. I'm your host, Kristine Harjes, and I have healthcare specialist Todd Campbell on the line. Hey, Todd!

Todd Campbell: Hi, Kristine! Are we ready to do our sequel?

Harjes: We are! Those of you who listen every week will have noticed that last week, when Todd and I were covering Gilead Sciences, we got a little bit carried away. [laughs] And I looked up, and the clock was way longer than it should have been. So, we decided to save what was supposed to be the second half of that show and just do it fresh, clean, rejuvenated this week. Last week, when we talked Gilead, we talked about them because they are this giant biotech that's been kind of disappointing for investors, ourselves included, and we wanted to talk about what's next for this company, is it worth still having shares, and why did shares fall so much to begin with. 

Now, we want to tell a similar story with another big biotech, Celgene, which has also had a kind of lackluster stock performance. They're down about 30% over the past three years. What happened?

Campbell: I think the whole interest in the topic was sparked by FoolFest, right, Kristine? You had a lot of people who came up to you and were asking about these two companies. It makes sense. They're in our portfolio. They're probably owned in your portfolio, listeners. Even if you don't think you own they, you probably own them, because they're both very large companies that are members of very popular indexes. 

One of the things that I think is very difficult, we talked about this on last week's show, is when you have companies that are big and they're stumbling, it's sometimes hard to stick with those ideas. Kristine, I think you and I were both thinking about looking at this show and trying to figure out, how can we help put all of that in perspective for our listeners so they can figure out whether or not, you know, are these stocks that you want to continue to own in the future? Or is your money best placed somewhere else?

You look at Celgene and what's going on at Celgene over the course of the last year, and if that was your only history or exposure to Celgene, you would think that this was a company that really just does not have its act together. And maybe, in some ways, that's far from the truth. They have had multiple setbacks, right, Kristine? They had GED-0301 fail in Crohn's disease. They were forced to roll back their 2020 sales outlook by about $2 billion because of that failure and some slower sales of their psoriasis drug, Otezla, last summer. And then, what I think was probably the biggest blow to them was the stumble that they had in receiving the refusal to file letter that they had gotten from the FDA on their multiple sclerosis drug, Ozanimod.

Harjes: Yeah. There are a handful of concerns for this company. We'll talk a little bit more about each one and how they're planning to address the different concerns. But, I do want to point out that we used to be so impressed with this stock because they had this five-year long-term guidance that they were going to be doing $21 billion in sales by the year 2020. And they still have a pretty impressive projection for their future sales growth runway, but they did have to revise it downwards after a couple of these stumbles.

Let's take them one by one. The failure of GED-0301 in Crohn's, this was back in October 2017. This was a drug that had a peak sales estimate of around $2 billion, and it just wasn't an effective drug, they found out. When this failure happened, the company lost about $10 billion in market cap, which is a very big reaction to a single drug in a large and diversified company.

Campbell: Yeah, and it wasn't even one of the most anticipated drugs that the company was developing, so it took people by surprise. Obviously, Phase III trials, you never want to see that happen. Hopefully, in Phase I trials, which are really small and not that costly to run, you discover problems and you get rid of it. If it goes into Phase II, those are a little bit bigger trials, but they're still less costly than the Phase III trials, so, maybe you discover trouble there and you get away from the drug and don't continue developing it. When you get into Phase III, it's a blow. You've made a big commitment to fund that trial and enroll all these patients for this long period to evaluate the efficacy and the safety of the drug. So, yes, it's disappointing that GED-0301 did fail in Crohn's disease, a multibillion-dollar indication, as you just alluded to. 

But, it's certainly not the only thing that was going on at Celgene. And perhaps, Kristine, like you said, rolling back the guidance, that was also tied to some disappointing sales growth for Otezla in the back half of last year. Sales of Otezla have reaccelerated, as I'm sure we'll talk about in a minute. 

Then, of course, the Ozanimod setback was, I think, the biggest problem, because that is a drug that would compete against the $4 billion Tecfidera, oral multiple sclerosis drug, and the $3 billion Gilenya, which is a Novartis drug for multiple sclerosis. Theoretically, that's a massive market opportunity for the company that's now been delayed. I think a lot of people had been wondering, how long is it delayed? Does the refusal to file mean that this drug is going to be dead in the water? Again, we'll talk about this in a minute, I'm sure, but it does not necessarily appear that way.

Harjes: Right. The biggest part of this failure that investors need to remember is that it's more a failure of the management team and how competent they are. Honestly, a refuse to file is kind of embarrassing. This is the FDA determining that your drug application isn't complete, they needed more information. 

I just saw in the news earlier this morning that, recently, the President of Hematology and Oncology for Celgene, Nadim Ahmed, remarked that it wasn't Celgene's fault, it was actually the fault of Receptos, which is a company that Celgene acquired back in 2015 for $7.2 billion. Ozanimod was the reason for that acquisition. Ahmed gave this quote, I'm just going to read it because, honestly, it's a burn. He says, "I think that 99% of folk at Celgene wouldn't have submitted," meaning the application, "but we had Receptos out on the West Coast, and for whatever reason, the decision was made to submit." Ouch! [laughs] That's downright rude!

Campbell: Yes. [laughs] The blame game, right? I mean, on their first quarter conference call, they were very open about the fact that they've had stumbles. And I like to see that. I like to see leadership admit when they make mistakes, and take responsibility for them -- the buck stops here, if you will. So, I was a little bit eh with this thing that came out today. But, I think that the reason was, they're trying to provide some more context to show people that they've gone back and they've looked at what went wrong.

Celgene has always operated with giving people autonomy. And giving people autonomy is great, unless you're giving them autonomy over a drug application that they're obviously going to drop the ball on, in the case of this drug, and that's what happened. So I think that they're looking back at that, they're saying, "OK, we made a mistake, we should have made sure that all the i's were dotted and t's were crossed before this went in. Shame on us. We wouldn't have done this. We had given autonomy to Receptos, and we won't make the same mistake again." 

I think one of the things you and I are going to talk about in a minute, Kristine, is probably the acquisitions that Celgene has done. I'm sure that this is going to shape their future of how they handle drug applications stemming from drugs that have been developed by other companies. Fedratinib is one that we're going to talk about in a couple of minutes, part of that Impact Biomedicines acquisition earlier this year. I think that's one of the reasons they've gone from saying, "We'll file in the middle of 2018," to now, "We're going to file by the end of the year." They really want to make sure that they don't make the same mistake again.

Harjes: Exactly. They can't make the same mistake again. Making it once was embarrassing enough. This just isn't something that you see a big biotech flub. To that point, we've seen management shake-ups, too. Because so many things have not gone well for Celgene, the executive suite has had some turnover, and that's another thing that leaves investors jittery. 

You add that all up, you add in concerns over their key drug, Revlimid, which makes up 63% of revenue, there's some nervousness about how well the patents on Revlimid are going to hold up -- you add that all up, and you have a stock that has not performed as well as it was expected to several years ago.

Campbell: Yeah, Kristine, right?

Harjes: Yeah! So, that's all in the rearview, that sets the stage, and we want to talk about the most recent quarterly results. We'll also go to what's going to happen in the quarters and the years and years ahead. So, what happened in the most recent quarter, Todd? Can you lay out the numbers for us?

Campbell: You would have thought, by the way the stock has acted, that this was just a dismal, dismal quarter. But Kristine, sales were up 19% year over year to $3.5 billion. That's pretty darn good for a company of this size, to still be growing nearly 20% year over year. 

Importantly, over 15.5% of the growth didn't come from pricing, it came from volume, which shows that there's still a tremendous amount of demand for its top-selling drugs -- which, already, in the early part of the show, you mentioned Revlimid, which is their biggest-selling drug. Sales of that drug were up 19% to $2.2 billion. Pomalyst, which is another multiple myeloma drug -- Revlimid is used in the maintenance setting, in the first-line setting of multiple myeloma. Pomalyst is used in the third-line setting. Sales of that drug jumped 24% to $453 million. Otezla, which we also talked about or mentioned really quickly before, that's a psoriasis drug. Sales have reaccelerated, now they're up 46% year over year in the first quarter to $353 million. And then, Abraxane, which has kind of been just a single-digit grower over the course of the last couple of years, that's a pancreatic cancer drug. Sales of that drug were $262 million.

I think you have this franchise of really big drugs that are growing very well for the size that they are, and it's being driven by volume, not pricing. Those are all good things, in my view.

Harjes: Yeah. Price increases are driving the sales a little bit, but it is very important to note how much of it is really volume. You can't keep kicking up prices forever, especially because, those patents will eventually expire, meaning that you can't just rely on prices going up and up and up forever; but rather, building that market share is super important. Also important is looking down the line at what is coming next. Aside from these four drugs that we highlighted, what will be the future drugs that we highlight when we give the earnings rundown? 

I think one that is very exciting, although a bit early stage, is in oncology. This comes out of a partnership with bluebird bio. It's a drug called bb2121, which is a CAR-T therapy, which is something that we've talked about plenty on this show. It's a new way of treating cancer.

Campbell: Right. Right now, the target is the BCMA protein, which is slightly different than the CAR-Ts that have already won approval. That's allowing its use in multiple myeloma. Kristine, if they can duplicate the data that's been demonstrated so far for this drug, this is a remarkable, revolutionary, game-changing potential medication for people who have tried and failed and tried and failed on multiple myeloma. Multiple myeloma, Revlimid and Pomalyst and some of these other drugs that have come out in the last ten years or so have done a great job in improving overall survival and extending out the time in between progression, but there's still a really, really big unmet need in the fourth-line or higher, meaning patients that have had four or more prior treatments and they're relapsing or they're refractory. 

I think that bb2121 could not only win approval as soon as next year in that fourth-line setting; I think that Celgene is looking at this as a potential successor to Revlimid and to Pomalyst. What we've seen with Revlimid is, Revlimid is now most widely used in the first-line setting. It's getting increasingly used in the post-transplant setting. And now, Pomalyst is moving from the third-line up, potentially, to the second-line after some strong data that it's demonstrated. Then, you can roll this bb2121 in as the fourth-line, and eventually move that up. So, maybe Revlimid loses patent protection in a few years, and Pomalyst takes over as a first-line setting, and then bb2121 becomes a second-line drug, and maybe a first-line drug. Do you know what I mean?

Harjes: Yeah, absolutely. I think the key to whether or not bb2121 will be able to move up the lines like that will be safety, of course. It's something that we talk a lot about with the CAR-T drugs, because safety has been an issue, particularly cytokine release syndrome, which is when these millions of destroyed cancer cells enter the bloodstream all at once. It causes a very deadly reaction in the body. Fortunately, even though most of the patients that were dosed with a sufficient amount of this drug had some evidence of CRS, not very many were hospitalized, and none of them were life-threatening. That's pretty promising. That's going to be really essential to watch, because it has shuttered other CAR-T programs before.

I guess that's a good time to jump right over to Juno and their drugs. Celgene acquired Juno earlier this year for its CAR-T program. This is another way that Celgene is exposing itself to the CAR-T market. Their lead drug, which is JCAR017, is right now in Phase III. That's even farther along than bb2121 is. Right now, it's looking very promising. They're looking at a potential approval for the drug in 2019 after seeing, in relapse or refractory Non-Hodgkin's lymphoma, data that there was durable responses with good safety.

Campbell: We can't talk about either of these drugs, bb2121 or JCAR017, which is liso-cel now, without mentioning the ASCO conference from, what, two weeks ago?

Harjes: Yeah, major oncology conference.

Campbell: Yeah. There was new data that was presented on both of these drugs. I think that our listeners probably want to get updated on that, as well. One of the things, just to go back to bb2121 for a second, because of the ASCO data, people may have been looking at it and saying, "I don't understand. bb2121 had new data, and the data looked so good. And Todd, you say it could be revolutionary. Why didn't Celgene shares pop more than they did after all that data came out at ASCO?" I think that you need to recognize that there was a little bit of a hype factor. There was a whisper number out there that bb2121 could extend progression-free survival to as much as 15 months in that late-line indication. And where it came in at was about a year, 12 months, a few months shy of that whisper number. I think that disappointed some people. But, what you need to remember, listeners, is that's about three times longer than the existing therapies can delay progression. So, despite missing the whisper number, this is still a really big thing.

And then, jumping back over to JCAR017, because it's easier to say JCAR017, if you look at their data at ASCO, lots to like there, too. You had a 49% overall response rate in the group. You had 46% complete response rate, which is great. And importantly, like you were alluding to before about the safety with these CAR-Ts, low rates of severe adverse events that theoretically could derail this drug and keep it from getting approval, specifically, very low rate relative to what we've seen in other CAR-Ts they have already won after FDA approval of cytokine release syndrome, CRS, and of neurotoxicity. The neurotoxicity rate was only 13%, and I want to say that, with these other CAR-Ts that have won approval, it's been north of 20%.

Harjes: We talked about their partnership with bluebird, we talked about the acquisition of Juno. Let's talk about another acquisition and where that currently stands. Earlier this year, I believe it was in January, Celgene acquired a company called Impact Bio for this drug called Fedratinib, which you mentioned earlier in the show, Todd. This was actually originally a Sanofi drug that was scrapped after the FDA halted trials due to safety. Some Sanofi researchers decided that they were going to create Impact back in 2016 to continue developing this drug because it looked really promising from an efficacy standpoint.

They are currently studying it in myelofibrosis, where currently, the standard of care is this blockbuster drug called Jakafi. But, up to 75% of patients that are on Jakafi discontinue it within five years because of toxicity or intolerance. So, clearly, there's room for a better standard of care here. That's where Fedratinib comes in.

Campbell: This is a poor prognosis, limited treatment options for people with myelofibrosis. Fedratinib's trials, like you said, efficacy looked good already in treatment-naive patients, patients who hadn't been treated with Jakafi, and in patients who had been treated with Jakafi but could no longer tolerate it or discontinued treatment with it. 

So, you had good data. Then, what happened is, these people who left Sanofi, they went back and they looked at all the data, they crunched everything. They went back to the FDA, and they said, "Listen, we looked at all of this data, and this is how we think we can explain the safety concern that you had." FDA agreed, and they lifted the clinical trial hold. That's what sparked Celgene going out and saying, "OK, we'll buy you." 

And, now, of course, they're, hopefully, crossing all those t's and dotting all those i's in preparation for filing that for FDA approval, which theoretically could come as soon as 2019. So, you could get bb2121, you could get JCAR017, and you could get Fedratinib decisions from the FDA within the next year to 18 months.

Harjes: One more somewhat short-term catalyst for Celgene is Phase III data for a drug called Luspatercept in MDS and beta thalassemia. That's expected pretty much any day now. This drug is something that Celgene is working on with a company called Acceleron Pharma. Basically, what it does is restore production of red blood cells in patients with a handful of different diseases, hopefully reducing the need for blood cell transfusions, which are not only kind of risky -- they carry the risk of iron overload, which can be very damaging to organs -- but, they're also extremely burdensome to patients and their families.

Campbell: Big-time. If you asked these patients if they'd be willing to try a new drug, a new therapy, that can reduce that transfusion burden, overwhelmingly they say "Yes, we absolutely would." If you look at Celgene's most recent investor presentation, you'll notice that they broke this drug out as a potential $2 billion or more in peak sales opportunity. The data that we're getting is Phase III trials in both of those indications. If the data is good, then I would expect that, again, within the next six to nine months, we're going to see FDA applications, and then a decision ten to 12 months after that, so, maybe as early as 2020 for a multibillion-dollar indication.

Now, Kristine, everybody's on the edge of the seat, right? Because, all the stumbles that they've had, people are looking at this going, "Oh, please don't let this drug implode, too."

Harjes: Right. I think any sort of additional stumble would be pretty severely punished by investors. But, honestly, I would go out on a limb and say that any sort of reaction like that would probably be an over-reaction. At this point, I think Celgene, they know what they're doing, they're being very careful, and they have so many different irons in the fire. Honestly, we could go on and detail every single drug in their pipeline, and we would be here all day long. This is a company that certainly has a lot of scrutiny on it right now, and they don't have a lot of room for error. But, I do have to say that, in the long term, I think they will be just fine.

For example, we talked about Ozanimod earlier in the show. They're going to resubmit that for approval. The long-term expectations of peak sales of $4 billion, that's not going to change, it's just a delay, it's a little bump in the road. This drug is still something that long-term investors should be excited about. It's expanding even beyond MS. They're looking at Phase III data from ulcerative colitis and Crohn's. I believe both of those trials are starting up this year. And they're also able to expand the label of the other drugs that are in their product portfolio, already approved, to treat more and more patients.

Campbell: Absolutely. Maybe, the takeaway -- because, like you said, we could talk about every single drug in the pipeline, and we would have three shows, we'd have sequel after sequel, it would be like Star Wars -- but, if we look at the late-stage pipeline. Again, take this with a grain of salt. This is what management is saying, and they have disappointed us in the past year. But, if you look at their late-stage pipeline, they believe that those drugs could add $16 billion in sales through 2030, and that there could be as many as ten different blockbuster launches. 

So, yes, lots of different irons in the fire, a lot of different opportunities for growth. Especially when you think about, $16 billion by 2030 from these new drugs, Kristine. Sales this year are going to be, what, $14.8 billion? So, more in sales, potentially, from the pipeline than they're generating out right now. 

And, you might be looking at it and saying, "Yeah, but they ratcheted back their 2020 guidance, and if Luspatercept fails, too, then they're going to have to ratchet it back again." But, the way it stands right now, you're still talking about a company that's forecasting 14.5% compounded annual sales growth between now and 2020, despite all its struggles.

Harjes: Exactly. It's also a company that's trading pretty cheaply. If you look at almost all valuation multiples for Celgene, it looks like a bargain. If you do still have confidence in management's estimates, which sound very promising -- and, I personally do have confidence in that -- and you think that some of these drugs look promising, you like their strategy -- which is another thing that, I know, Todd, you and I have talked about a ton on the show. They have this strategy of partnering with companies early on that look promising and working with them to develop these drugs, so that they have a finger in a bunch of different pots. And, hopefully all of them will do great, but even if not, it's like constructing an ETF. Maybe not all of those partnerships will be winners, but some of them will win so much that it'll more than make up for the losers.

So, for me, the line that you just read, Todd, about the $16 billion in additional sales through 2030 and ten potential blockbuster launches, that is bolded in my notes because I do think that's really the bottom line of this story.

Campbell: Right. I own the stock. I'm down on the stock. You may be as well, fellow listeners. So the question then becomes, do I have any plans to sell it? No. This is part of a long-term portfolio. I have a diversified portfolio. This happens to be one stock in it. Would I love if it was at a gain right now? Absolutely. But, I'm going to give this company a pretty wide berth. And, yeah, there could be some stumbles along the way, but I think that over time, I'll be rewarded for patience.

Harjes: Yeah. I believe the same. Thank you so much, Todd!

As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes, thanks for listening and Fool on!

Kristine Harjes owns shares of GILD. Todd Campbell owns shares of BLUE, Celgene, and GILD. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends BLUE, Celgene, and GILD. The Motley Fool has a disclosure policy.