Celgene Admits It Screwed Up Otezla Estimates; Investors Lose Confidence

Q3 revenue grew 10% to $3.29bn, but came in below consensus, mostly due to Otezla. The blockbuster drug's new reality and recent GED-0301 failure in Crohn's disease contributed to Celgene's decision to lower guidance for both 2017 and 2020.

CEO Mark Alles started Celgene Corp.'s third quarter earnings call with a mea culpa, admitting that the company's estimates for Otezla (apremilast) – the cornerstone of its inflammation and immunology franchise – "did not adequately anticipate" psoriasis and psoriatic arthritis market realities.

Confidence in Celgene's forecasting abilities was understandably shaken on Oct. 26, since just three months earlier executives spent a good part of the company's second quarter call reassuring analysts and investors that a quarter-over-quarter dip in Otezla sales during the first quarter had been corrected. (Also see "Celgene Eases Angst Over Otezla, Sets The Stage For Growth" - Scrip, 27 Jul, 2017.) Celgene's share price plunged as a result of the company's third quarter total revenue and Otezla sales performance, coupled with lowered expectations for the PDE4 inhibitor's sales and a decrease in earnings guidance for 2017 and 2020. The stock closed down 16.4% at $99.99.

Third quarter total revenue increased 10% on a year-over-year basis to $3.29bn, versus analyst consensus of $3.43bn, including $308m in Otezla sales versus consensus of $411m.

"Let me start by just admitting that we're very disappointed with the results of the quarter and are committed to rebounding very quickly with respect to Otezla and our overall performance," Alles told the call.

Terrie Curran, Celgene's president of inflammation and immunology (I&I), provided more color about the market miscalculations that led the company – and, as a result, its investors – to believe that Otezla would perform better than it did in the third quarter.

"In the past two years, the US market for psoriasis and psoriatic arthritis grew strongly, posting [prescription] growth rates in the high teens versus previous years. This was fueled by new launches, including Otezla, which expanded the total pool of patients on treatment. We assumed that category growth rates would maintain these historical levels in setting our 2017 targets," Curran said.

"However, year-to-date through September, both markets have experienced a significant slowdown in growth as a result of increasingly restrictive [pharmacy benefit manager (PBM)] formulary control," she continued. "While Otezla demand continues to outpace the overall market, we are seeing lower-than-expected revenue due to market deceleration, increases in gross-to-net discounts to drive [treatment authorization without requiring a prior biologic failure] and inventory fluctuations."

Rebound A Ways Off

The rebound Alles alluded to apparently won't be immediate, however, since Celgene said it now expects 2017 revenue to total $13bn versus prior guidance of $13bn to $13.4bn. The Otezla forecast for the year is now $1.25bn compared with the earlier estimate of $1.5bn to $1.7bn – a remarkable pair of revisions, since the company is known for beating consensus and raising guidance on a regular basis.

The shift comes at a tough time for Celgene, which took a hit less than a week earlier when it discontinued development of GED-0301 (mongersen) in Crohn's disease – a Phase III program for a drug acquired from Nogra Pharma Ltd. for $710m up front in 2014. Ulcerative colitis will be assessed after completion of a Phase II study. (Also see "1Q EARNINGS: Celgene boosts sales, bets big on Crohn's drug" - Scrip, 25 Apr, 2014.)

"The discontinuation of GED-0301 in Crohn's disease exacerbates Celgene's negatively revised outlook, and PharmaVitae has revised its 2017 top-line forecast to $13.2bn" from $13.5bn, said PharmaVitae analyst Edward Thomason, a division of Datamonitor Healthcare.

The late-stage blowup in Celgene's I&I franchise was a disappointment not only because of the investment in the asset, but also because it was one of just a few expected blockbusters acquired to help diversify Celgene's portfolio beyond its dominant hematology and oncology franchise. The firm's revenue is driven by sales from the multiple myeloma powerhouse Revlimid (lenalidomide); Revlimid sales jumped 10% to $2.08bn in the third quarter versus consensus of $2.11bn.

The GED-0301 failure in Crohn's disease and Otezla's muted growth trajectory contributed to Celgene's revised guidance, but the firm is also lowering expectations for oncology and new hematology products. The company now expects to bring in $19bn to $20bn in 2020 revenue versus a prior estimate of more than $21bn (see table below), which also includes a boost in the forecast for established hematology products – namely Revlimid and the newer multiple myeloma therapy Pomalyst (pomalidomide).

Celgene's Updated 2020 Guidance
	Original Targets (2015)	New Targets (2017)
Established hematology indications and products	$13bn	$14.7bn
New hematology indications and products	$1.8bn	$700m to $1.4bn
Total hematology	>$14.8bn	$15.4bn to $16.1bn
Total oncology	>$2.2bn	$1bn to $1.1bn
Total I&I	>$4bn	$2.6bn to $2.8bn
Total net product sales	>$21bn	$19bn to $20bn

"Celgene has had disappointing quarter, but out to 2021, Celgene will still grow at a strong mid-teen [compound annual growth rate (CAGR)], driven primarily by the continued uptake of Revlimid and Pomalyst," Thomason said. "PharmaVitae expects the company to resume a policy of aggressive deal-making to bolster its pipeline, undeterred by the expensive GED-301 failure, given its strong cash flow.”

Business Development's Importance Grows

Executive Vice President and Chief Financial Officer Peter Kellogg said the CAGR between 2017 and 2020 will be 14.5%. Kellogg also noted repeatedly during Celgene's earnings call that the company has the financial wherewithal to do deals, including $11.8bn in cash as of Sept. 30 and agreements with its creditors to expand its debt capacity as needed.

Alles noted that the company is putting its money to work in both internal research and development as well as business development.

"Our research and early development team continues to discover new molecules at a rapid pace, with five [investigational new drug (IND) applications] filed year-to-date and another three on deck. This tremendous productivity is a result of our multi-year strategy to invest in internal and external transformative technology, drug discovery platforms and paradigm shifting science," the CEO said.

In response to a question about business development later in the call, he said: "Celgene's track record of doing aggressive business development and continuing to build our innovation engine will continue. I don't know that the miss on GED-0301 makes us more or less likely to do the kinds of innovative partnerships we've done over the years. It's clear that we have a gap, and it's clear that something we're going to work hard to fill organically. And from an external point of view, we look for opportunity all the time. I've said it many times – wherever there's great science, wherever innovation's happening, whether it's happening here at Celgene or through another start-up or another company, we're interested in following that science to build our company."

Celgene also announced that it would institute an aggressive program to buy back stock in the company from its investors – a move that usually pleases shareholders. However, Jefferies analyst Michael Yee said in an Oct. 26 note that Celgene's investors would rather see the company put the money into deal-making activity that will drive revenue growth.

"Celgene should be aggressive and has plenty of capacity … to buy synergistic oncology companies with FDA-approved drugs," Yee wrote, suggesting that the company consider buying Nerlynx (neratinib) developer Puma Biotechnology Inc., Rubraca (rucaparib) developer Clovis Oncology Inc., or Exelixis Inc. with Cabometyx (cabozantinib), Cometriq (cabozantinib) and Cotellic (cobimetinib).

"This would 'diversify' and add revenues (preferred over buying larger companies)," Yee continued. "At this point, and with negative sentiment, investors prefer lower-risk products rather than higher-risk early-stage stuff, which Celgene has plenty of already."

Later-Stage Led By Ozanimod

Celgene talked up later-stage drug development programs, including ozanimod – a key asset in the pipeline. Pivotal Phase III results in multiple sclerosis, to be filed with the US FDA later this year, will be presented at the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) Congress in Paris on Oct. 27 and 28.

Both ozanimod – a selective sphingosine 1-phosphate (S1P) 1 and 5 receptor modulator – and Otezla are also being developed for inflammatory bowel disease (IBD). Otezla is in Phase II for ulcerative colitis (UC), while ozanimod is in Phase III for UC and in Phase II for Crohn's disease.

Celgene is enthusiastic about ozanimod's prospects in UC based on Phase II data, but the company said it will take a while longer to report the Phase III results because of the competition for patients among companies running IBD clinical trials. Enrollment in the Phase III TRUE NORTH study won't be complete until the second half of 2018, by current estimates, versus prior expectations of the second half of 2017.

"We are committed to building a leading inflammatory bowel disease franchise now led by ozanimod for the treatment of ulcerative colitis and Crohn's and perhaps Otezla in one or both of these serious unmet need medical conditions," Alles said. "And this immediate shift from GED-0301 to ozanimod and Crohn's disease is a great example of the pipeline optionality and opportunity we have built and continue to build into our research model for hematology/oncology and inflammation and immunology."