Source: Dr. Wendy Longo via Flickr.
We're taught, as investors, to keep our eyes on the future because the stock market rarely gives much credence to what a business has done in the past. This couldn't be truer when it comes to the biopharmaceutical sector, which is predominantly valued based on the promise of its drug-development pipeline.
Whereas most businesses are easily labeled as expensive or cheap based on their sales and profitability, it can be years or decades before some biopharmaceutical companies turn profitable. Though many biopharmaceutical companies are still in the clinical-stage or early commercial phase of their existence, Celgene (CELG +0.00%) is among a rare class of elite biopharmaceutical companies that offers both the solace of existing drug sales, as well as the promise of more innovative drugs within its drug development pipeline.
Today, in order to get a better feel for Celgene, and perhaps understand why its shares have more than quadrupled since the stock market's lows in March 2009, we're going to take a quick look at its drug-development pipeline, and outline which pipeline drugs are the most crucial to its ongoing success.
Celgene's drug-development pipeline
Celgene may not be considered one of the "big boys" of the pharmaceutical sector, but it has one of the most impressive pipelines, with more than 50 ongoing clinical studies, some of which have experimental drugs currently under review by the Food and Drug Administration. Based on its latest pipeline update, I count 18 phase 1, or early-stage pipeline products, 17 phase 2, or mid-stage developing drugs, 13 phase 3, or late-stage drugs, and six experimental drugs where a new drug application has been filed with the FDA and is currently under review.
Source: Celgene.
Why is Celgene's drug-development pipeline so important? The reason is that branded drugs only have a finite patent exclusivity period, which starts when a company gets the OK from the FDA to begin human clinical trials. By the time an approved drug makes it to pharmacy shelves, it may only have a few years to a little more than a decade of exclusivity remaining. Therefore, biopharmaceutical companies always need to remain vigilant in their pursuit to create new and innovative therapies to replace those that will eventually be lost to generic competition.
For Celgene, this is somewhat of a distant worry, as it isn't set to lose a key patented drug for many years down the road. However, the company's overreliance on Revlimid, a drug designed to treat anemia caused by myelodysplastic syndrome and various types of blood cancer, can't be overlooked. In the second quarter, for instance, Revlimid accounted for 66% of Celgene's $1.85 billion in net product sales. By 2017, Celgene still expects Revlimid to generate half of its revenue. Therefore, finding revenue to replace Revlimid when it eventually goes off patent is the smart thing for Celgene to do.
Three developing drugs worth watching
The way I view it, Celgene has three clinical drugs that offer make-or-break potential during the next decade. It's a bit of an irony, but Celgene's most worthwhile experimental candidate is probably Revlimid. It might seem like a head-scratcher, but Revlimid has the potential to expand to a number of new indications, which would lengthen its patent life far beyond 2019, when its first patents are forecast to begin expiring.
Source: Celgene.
For example, Revlimid is being tested for the following:
- As a first-line (ABC-subtype) and maintenance therapy for diffuse large B-cell lymphoma.
- As a first-line follicular lymphoma treatment.
- As a relapsed/refractory indolent lymphoma treatment.
- For second-line chronic lymphocytic leukemia maintenance therapy.
These indications combined could garner well over $1 billion in annual sales for Celgene, if approved, and certainly slow the sales cliff for Revlimid once we head into the next decade. In addition, Revlimid is being studied in other regions, such as adult T-cell leukemia and lymphoma in Japan, and for relapsed/refractory mantle cell lymphoma in the EU. These are all small slices of pie that, when combined, make Revlimid a giant drug for Celgene.
Secondly, and keeping with the theme of Celgene really relying on label expansion to drive its growth, I'd look for anti-inflammatory Otezla to drive its drug development pipeline. Otezla has already been approved by the FDA as a treatment for psoriasis and psoriatic arthritis. Where I'd focus my attention if I were a shareholder or interested investor, is on how Otezla performs as a treatment for rheumatoid arthritis and Crohn's disease, which are in phase 2 and phase 1 studies, respectively.
Of the two, rheumatoid arthritis is the far more profitable indication for Celgene, as it effects a greater number of people. Also, according to FiercePharma, anti-rheumatics made up the second-largest treatment area by sales globally in 2013, at $41.1 billion, behind only oncology drugs at $68 billion. If Celgene can gain a label expansion into rheumatoid arthritis right as some of the world's top-selling rheumatoid arthritis drugs are coming off patent, it could see some serious benefits. Of course, its trial data will have to do the talking first.
Source: Celgene.
Finally, I'd keep an eye on underdog experimental drug sotatercept as a treatment for various types of anemias. Though sotatercept is currently being tested in four indications, it's the beta-thalassemia trial, which is currently in mid-stage studies, which has my interest.
The drug, which is being developed in collaboration with Acceleron Pharmaceuticals (XLRN +0.00%), was granted orphan drug status in December of last year for the beta-thalassemia indication, which will only further strengthen its exclusivity if it were eventually approved. In phase 1 trials, the duo of Celgene and Acceleron noted that dose dependent increase in hemoglobin were noted at all three dose levels that were evaluated, and that it was generally well tolerated and safe at all dose levels.
It's tough to say what sort of peak potential sotatercept could be looking at, with the drug still so wet behind the ears. There is, however, plenty of potential for it to creep into the blockbuster category with positive trial results across multiple indications -- especially beta-thalassemia.
Business as usual
For the time being, everything is clicking perfectly for Celgene and its drug development pipeline. Between existing drugs, label expansion of existing drugs, collaborations, and the development of new compounds, Celgene really has a lot to offer biopharmaceutical investors.
That isn't to say the company isn't without risks as was evidenced above by its overreliance on Revlimid. However, I suspect it's safe to say that Celgene's ability to find new indications for its blockbuster will help alleviate concerns that the company will go cliff diving once 2020 hits. As an investor on the outside looking in, I still see the potential for this stock to head higher.
