How Big of a Deal Is Celgene's Flop?

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Celgene (NASDAQ: CELG) shuttered two GED-301 Crohn's disease trials this week after an interim look at data by independent monitors proved disappointing. The late-stage failure dings Celgene's pipeline and it will result in a writedown, but investors might not want to sell shares on the news. Why? Because Celgene's got plenty of other drugs in its pipeline that could pan out, including one that could still allow it to become a big player in the indication someday.

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Bump in the road

Celgene has a voracious appetite for acquisitions and collaborations and frankly, it would be surprising if they didn't end up with a few duds along the way, especially since historically, about 40% of phase 3 trials fail.

Celgene paid privately held Nogra Pharma $710 million upfront for rights to GED-301 in April 2014. Nogra Pharma had phase 2 data in hand and Celgene ushered GED-301 into confirmatory phase 3 studies soon thereafter.

Unfortunately, Celgene reported on Thursday that GED-301 has fallen flat in that pivotal study. Celgene is shuttering GED-301 development in Crohn's disease based on a futility assessment and as a result, Celgene plans to take up to a $500 million pre-tax charge in Q4 due to the termination of its Crohn's disease trials. A mid-stage study of GED-301 in ulcerative colitis will continue and it will ultimately determine whether GED-301 ends up in the laboratory dustbin altogether.

Multiple shots on goal

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Crohn's disease is a blockbuster indication so it's little wonder why Celgene is interested in addressing it as part of its push into treating autoimmune disease.

GED-301's failure in the indication is disappointing, but Celgene could still end up winning a slice of this market thanks to ozanimod, a selective S1P1 inhibitor that it acquired when it bought Receptos in 2015.

After succeeding in phase 3 multiple sclerosis trials, ozanimod is on its way to FDA regulators soon and on Oct. 16, Celgene reported positive results from a phase 2 trial of it in Crohn's disease. Specifically, 27% of 60 patients, saw a reduction in a simple endoscopic score for Crohn's disease (SES-CD) from baseline of at least 50% and 43% of patients saw at least a 25% reduction from baseline.

Active Crohn's disease is defined as having a Crohn's disease activity index (CDAI) score of between 220 to 450. In the trial, 66% of ozanimod patients had a CDAI response (CDAI decrease ≥100) and 46% of patients had CDAI remission (CDAI <150). For perspective, Stelara won FDA approval in Crohn's disease after phase 3 trials showed that 49% to 53% of patients achieved CDAI below 150.

Celgene's going to provide more color on the data at an upcoming conference, but based on the fact that many Crohn's disease patients fail to achieve remission on existing therapy, these results suggest Celgene will continue evaluating ozanimod in this indication.

In addition to still being able to tackle Crohn's disease with ozanimod, it also has mid-stage studies underway that are evaluating ozanimod and Otezla in ulcerative colitis. This offers a bit of insulation against a GED-301 failure in that indication too.

Irons in the fire

Cancer drugs will produce the bulk of Celgene's $13 billion in expected sales this year, but its plan to diversify itself into autoimmune disease indications continues despite GED-301's setback.

The company has already won approval for Otezla, a psoriasis drug, and it's already achieved billion-dollar blockbuster status. Otezla's sales were $358 million in Q2, 2017, up 49% year over year.

Ozanimod's application for approval in multiple sclerosis should be in the FDA's hands soon and if it's approved, best in class safety in trials could turn it into a top-selling oral MS therapy. The market for MS drugs is about $20 billion and about $8 billion of that money is spent on oral drugs.

Overall, Celgene's evaluating seven different drugs in 10 additional inflammation and immunology indications, excluding GED-301.

Investor takeaway

A GED-301 win would've been nice, but it's not necessary to Celgene's long-haul success. The company's long-term guidance is for sales to grow to at least $21 billion in 2020 from $13 billion this year, and GED-301 isn't baked into that outlook.

Celgene remains one of the best in the business at developing and commercializing drugs and it's got a lot of drugs in its pipeline targeting blockbuster indications both in and outside of cancer. Ultimately, I believe this is more a bump than a bust moment for the company and if I'm correct, then buying shares on this sell-off could be profit-friendly down the road. 

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