Blow ups in its Celgene’s (CELG) R&D pipeline have caused bulls to question the company’s future growth. Generic drug makers could now pose challenges to Revlimid, the company’s blockbuster cancer treatment. Celgene is currently embroiled in a tete-a-tete with Mylan (MYL) over its refusal to provide Mylan with samples to develop generic Revlimid:
Mylan, a generic drug company, wants to obtain samples to develop a generic version of Revlimid, a brand-name cancer medicine sold by Celgene. At a court hearing in Newark in December, Jonathan M. Jacobson, a lawyer for Mylan, told a federal district judge that “Revlimid costs patients who are dying $20,000 a month.”
“These are some of the most ill patients in the world,” he said, and “if there were generics on the market, the price would be much lower, and people would live longer.”
Celgene said in court papers that it had no obligation to help a potential competitor and that it had “valid business justifications for declining to sell samples on the terms demanded by Mylan.” Moreover, Celgene said its overriding concern was for the safety of patients.
The Trump Administration is seeking ways to tamp down rising drug prices. To prove that generic Revlimid is equivalent to the original version, Mylan needs samples of the drug. The Federal Trade Commission (“FTC”) is looking into the practice of denying to provide samples of brand name drugs to generic competitors. Lawmakers also have suggested legislation that could penalize branded drug makers who refuse to provide samples on “commercially reasonable terms.”
Celegene Is Highly Dependent Upon Revlimid
Celgene was previously known for its vaunted R&D pipeline. That image was shattered in Q3 2017 after it discontinued phase III trials and an extension trial for Mongersen which was expected to treat Crohn’s Disease. In addition to missing revenue estimates, the company gave weak forward guidance. That same quarter I pointed out how revenue growth for Revlimid and Otezla were slowing:
Despite the focus on Otezla, Celgene’s fortunes still lie with Revlimid. The blockbuster cancer drug generated $2.1 billion in revenue or 63% of the company’s total revenue. Its top line grew 10% Y/Y … that pales in comparison to the 20% Y/Y growth Revlimid achieved in Q2. Secondly, its Q3 revenue was practically flat compared to the $2.0 in revenue the drug generated in Q2. With Revlimid’s robust growth slowing and Otezla facing headwinds, Celgene could potentially experience single-digit revenue growth by the first half of 2018.
I also suggested the company’s dismal growth prospects did not support its 15x EBITDA multiple. Right on cue Celgene hiked prices for Revlimid and Pomalyst in October 2017, bringing price increases on the drugs to nearly 20% in 2017. In my opinion, the price hikes exposed the fact Celgene’s growth was dead and its double-digit EBITDA multiple was untenable.
It also underscored how dependent Celgene was upon Revlimid. It represented over 60% of the company’s total revenue. Its ability to hike Revlimid prices at will also created built-in double-digit revenue growth. In Q1 2018 Celgene’s total revenue of $3.5 billion was up 20% Y/Y.
Otezla, another catalyst, grew revenue by 46% Y/Y. However, it fell by about 5% sequentially. The onslaught of Johnson & Johnson’s (JNJ) Tremfya took a toll on several psoriasis competitors in Q1. I predict Temfya’s success, along with new entrants from Valeant (VRX) and Sun Pharma (OTCPK:SMPQY), could punish Otezla going forward.
Generic Revlimid could potentially cut Revlimid’s revenue by 50% or more simply due to a decline in price. It could stymie Celgene’s largest product and hurt its main catalyst for growth. In denying Mylan samples of the drug Celgene may have created unnecessary drama. Constant pressure from Mylan and/or lawmakers to provide the Revlimid samples could put a spotlight on the threat of generic Revlimid and hurt sentiment for CELG.
Dr. Reddy’s Wants A Piece Of Revlimid
Revlimid is set to lose patent protection in 2020. That did not stop Dr. Reddy’s from seeking FDA approval for five patents pursuant to the drug. Celgene filed a patent infringement lawsuit alleging Dr. Reddy’s generic Revlimid infringed upon those patents. It would behoove Celgene to try to reach a settlement with Dr. Reddy’s to prevent generic Revlimid from entering the market earlier than expected. That said, the tete-a-tete with Mylan and the potential for other generic drug makers to seek FDA approval could hurt sentiment for CELG.
Did HHS Secretary Alex Azar Put Celgene On Blast?
Earlier this month Health and Human Services (“HHS”) Secretary Alex Azar made a speech on runaway drug prices and what to do about them. HHS runs the Medicare and Medicaid programs and buys about $130 billion in prescription drugs annually. Azar mentioned plans to change the way Medicare and Medicaid pay for medications and how the FDA approves drug marketing.
Azar mentioned three specific ideas to lower the cost of prescription drugs: (1) restructure the way pharmacy benefit managers deal with drug makers, (2) change the way Medicare pays for certain high-priced drugs and (3) make prices more transparent. David Mitchell of Patients For Affordable Drugs believes Azar referenced Celgene’s price hikes for Revlimid specifically:
Given the heightened scrutiny over rising drug prices I assumed it would be a matter of time before lawmakers questioned Celgene’s price hikes for Revlimid and Pomalyst. If Azar puts a spotlight on Celgene it could cause investors to question whether 20% price hikes are sustainable and whether its now 14x EBITDA multiple is warranted. If Medicare or Medicaid attempts to negotiate lower prices for Revlimid or reduce outlays for the drug it could be devastating for the company and the stock.
Generic competition for Revlimid or Medicare’s attempt to negotiate a lower price for the drug sounds foreboding. Sell CELG.
Disclosure: I am/we are short CELG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.