Price Hikes Insulate Celgene From a Failure

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After independent monitors concluded a phase 3 trial of GED-301 in Crohn's disease was a failure, Celgene (NASDAQ: CELG) shelved its plans to develop this drug for use in that billion-dollar indication. The setback is bruising for the company because management spent $710 million upfront to license it just three years ago. The failure forces Celgene to write down hundreds of millions of dollars and it eliminates a drug that could've added a billion dollars or more in annual sales. 

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Overcoming the headwinds associated with GED-301's failure pressures Celgene to succeed in its efforts to boost demand for its existing drugs and develop new drugs, but drug development isn't the only way Celgene will close the gap created by GED-301. Drug price increases will also help make up the difference.

Riding coattails

Celgene's track record for discovering and commercializing blockbuster medicine is envy-inspiring, but Revlimid is by and far its biggest success.

Initially approved in 2006 for use in multiple myeloma patients who have failed at least one prior therapy, Revlimid's label has since expanded to include its use in the first-line multiple myeloma setting and as a maintenance therapy for multiple myeloma patients.

Revlimid's efficacy has made it the most commonly prescribed first- and second-line drug in the indication, and a growing addressable market because of label expansions has helped turn it into one of the world's best-selling medicines. However, it's not just solid efficacy and a bigger patient pool that's sent Revlimid revenue soaring. Price increases have had a lot to do with Revlimid's revenue growth, too.

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According to SunTrust analyst Yatin Suneja, Revlimid's wholesale acquisition cost (WAC) has almost doubled to $18,546 from $9,853 in 2010. Revlimid's price has increased steadily over the period, but prices are increasing by an abnormally large amount this year. After a 9% increase earlier this month, Revlimid's WAC is 19.8% higher than it was at the start of 2017. For perspective, Revlimid's average annual price increase was 7.85% between 2010 and 2016. The 9% increase in October follows a 1.8% increase in July and an 8% increase in January, according to SunTrust's research.

The following table shows how Revlimid's price has changed over time. 

Year Price Change
2010 $9,853 --
2011 $10,445 6.01%
2012 $11,071 5.99%
2013 $11,745 6.09%
2014 $13,140 11.88%
2015 $14,075 7.12%
2016 $15,483 10.00%
2017 $18,546 19.78%

Prices close the gap

Given Revlimid's selling at an annualized quarterly pace of $8.1 billion exiting the second quarter, the impact of price increases this year on future sales will be substantial because any future increase will be calculated off of a higher base price.

To illustrate just how big of an impact the price increase this year could have on Revlimid's revenue, let's consider a couple hypothetical scenarios.

First, let's imagine that Revlimid's price increased by the historical average of 7.85% in 2017, 2018, 2019, and 2020. In that scenario, its WAC would grow to $20,948 in 2020, which is 32.7% higher than its WAC exiting 2016. If Revlimid's 2016 revenue of $6.97 billion grew 32.7%, then Revlimid's sales would be $9.25 billion following the increases.

Now, let's see how price increases impact revenue based on the 19.8% increase this year. If Celgene follows up this year with increases to Revlimid's price by 7.85% in 2018, 2019, and 2020, respectively, then Revlimid's WAC will grow to $23,265 in 2020, which is 50.3% higher than its 2016 price. In this scenario, Revlimid's sales would grow to $10.5 billion, which is $1.25 billion more per year than under the first scenario. 

In short, leveraging this year's increase into the future will add billions of dollars to Celgene's top line over time, arguably closing the gap created by lost sales and write-offs associated with the shuttering of GED-301.

The takeaway

Payers negotiate prices based on discounts to the WAC price, so Revlimid's price increases will translate into revenue tailwinds. The size of these tailwinds depends on the size of future price increases. However, it's possible that the positive impact on sales will be bigger than in my hypothetical scenarios. I held prescription volume constant in my examples, but in reality, prescription volume should climb following Revlimid's approval as a maintenance treatment earlier this year.

Celgene's set a goal for itself of $21 billion in sales and $13 per share in earnings in 2020, and reaching or exceeding that goal will depend on a variety of strategies, including label expansions, price increases, and new drug approvals. The optics of price increases are poor, but from an investor's standpoint, pricing power remains an important tailwind to future growth that helps insulate the company from inevitable setbacks like GED-301.

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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.