Celgene (CELG) delivered Q4 revenue of $3.5 billion and non-GAAP eps of $2.00. Revenue was up 6% sequentially and 17% Y/Y. I had the following takeaways on the report:
Is Otezla’s Growth Sustainable?
Heading into the quarter Celenge appeared to be on the ropes and at risk of losing its image as a growth company. Slowing growth for Revlimid and Otezla and weak forward guidance caused CELG to fall by double digits in Q3. Q4 results were impressive with total revenue up by high double-digits Y/Y. However, the CELG could stall if the market questions the the quality of the company’s revenue and earnings.
Blockbuster cancer treatment Revlimid is 63% of Celgene’s total revenue. As Revlimid goes so goes the company. That’s why Celgene’srecent 20% price hikes for Revlimid and Pomalyst (13% of revenue) gave me pause. My interpretation was that the company was trying to mask a potential slow down in these drugs’ revenue growth, or offset a potential demise of psoriasis treatment Otezla. It may have been the latter.
Any time a company has to hike prices 20% for its top drugs just to meet revenue guidance it could smack of desperation. Otezla’s Q3 revenue was up 12% Y/Y, but down 14% sequentially. Management had to offer discounts in the managed care market to move the product. Revenue bounced back in Q4, up 20% sequentially and 22% Y/Y. However, competition in the psoriasis market is stiff and the market is becoming more crowded.
Novartis’s (NVS) Cosentyx and Johnson & Johnson’s (JNJ) Stelara have been gaining out-sized share in the psoriasis market. Both brands grew by double digits in Q3 amid Otezla’s pull back. Cosentyx grew 11% sequentially in Q4 from $556 million to $615 million. If you back out rebates, Stelara’s Q4 sequential growth was relatively flat. JNJ launched Tremfya in Q3 2017, and the drug generated $47 million in revenue in Q4:
To conclude Immunology, we are very pleased with the uptake of TREMFYA launched for moderately severe to severe psoriasis in the third quarter of 2017. Sales totaled $47 million in the fourth quarter and the product is already the new to brand share leader when accounting for both IMS Claims Data and internal data on samples.
Growth from Cosentyx, Stelara and Tremfya will have to come at the expense of other psoriasis players like Otezla, Eli Lilly’s (LLY) Taltz or Pfizer’s (PFE) Xeljanx. At the end of the day, I envision more headwinds for Otezla going forward.
Acquisitions Might Not Bear Fruit For Years
Celgene and Gilead (GILD) are known for making strategic acquisitions of late-state biotech companies. Celgene has been particularly active over the past month. The company recently acquired privately-held Impact Biomedicines for up to $7B. The transaction came after the FDA allowed Impact to resume clinical trials for fedratimid; the drug treats myelofibrosis (“MF”) and polycythemia vera – two types of cancers. MF is a rare disease that has an estimated 16,000 to 18,500 people in the U.S. First of all, fedratimid, has to receive FDA approval. Secondly, Celgene needs to price the product high enough to make an impact on its current revenue stream of about $13 billion. That could take a while.
Celgene followed up the Impact deal with the $9 billion acquisition of Juno Therapeutics (JUNO); Juneo is a clinical stage biotech company focused on the development of immunotherapy products designed to help patients fight cancer by harnessing the power of their own immune systems. The acquisition allows Celgene to capitalize on future advances in cellular immunotherapy. Juno’s JAR017 could have peak sales of around $3 billion, and is expected to receive FDA approval around 2019. However, both Gilead (GILD) and Novartis have a first mover advantage in immunotherapy. It could take about two years for Juno to contribute to Celgene’s revenue and $3 billion peak sales could be challenged going forward.
Strategic deals are exactly what Celgene should be doing. However, once price hikes for Revlimid and Pomalyst run their course it could be difficult for the company to justify its trading value of over 16x run-rate EBITDA. CELG remains a sell.