Here's Where Things Went Wrong for Celgene Corporation in 2017

MarketsMotley Fool

Up until a couple years ago, Celgene Corporation (NASDAQ: CELG) had had one of the best-performing stocks among big biotechs. But in the last half of 2017, the company's most important products hit some stumbling blocks that sent investors running for the hills.

Here's a closer look at what went wrong for Celgene in 2017.

Continue Reading Below

Visibility issues

Back in 2015, Celgene raised a lot of eyebrows with extremely optimistic predictions that included net product sales rising to $21.0 billion in 2020, from just $7.7 billion recorded in 2014. Going into the second half of 2017, Celgene's top line had been rising fast enough to reach its lofty goal.

But markets loathe uncertainty, which is why the stock tumbled about 18% when management revised its 2020 outlook downward in its third-quarter report this October. Now Celgene expects net product sales to land between $19 billion and $20 billion in 2020, instead of the $21 billion figure the company rolled out a few years ago.

To understand why the stock took a beating that seems disproportionate to the downward revision, we need to look at the moving pieces that informed management's estimate. Celgene's been reducing its dependence on Revlimid sales, which still comprise about 63% of the company's total revenue. Previous long-term guidance suggested sales of inflammation and immunology drugs would pass $4.0 billion in 2020, but now the company expects $2.8 billion or less.

Intense competition for patients with chronic immune disorders is a big part of the problem. Sales of Celgene's Otezla tablets, for the treatment of psoriasis, exploded following its 2014 commercial launch, but American pharmacy benefit managers have upped their game. In the vital U.S. market, Otezla sales grew just 2.5% in the third quarter compared to the same period last year. Just a few months earlier, Celgene reported second-quarter Otezla sales rose 41% year on year.

Development issues

Stagnating Otezla sales are only part of the reason Celgene lowered the outlook for its burgeoning inflammation and immunology segment. A late-stage flop with GED-301, an intended treatment for ulcerative colitis, poked another hole in the company's outlook. Celgene bought rights to the experimental therapy for $710 million upfront after it succeeded in a midstage clinical trial, and will continue another irritable bowel study with the drug. But the ulcerative-colitis trial failure will probably be the end of the line for an asset previously expected to contribute more $500 million in annual sales at its peak.

With GED-301 wiped from Celgene's future, and Otezla getting pinched in the present, the company will probably rely more heavily on Revlimid than investors had hoped. Since its 2005 launch, the oral therapy has become one of the world's most successful cancer drugs, with sales expected to top $8 billion this year. The lion's share of Revlimid sales originate from patients with a type of blood cancer called multiple myeloma; continued sales growth depends, in part, on expanding the drug's addressable patient population to patients with non-Hodgkin lymphomas.

Revlimid's expansion hit a major stumbling block when results of the Relevance trial showed that adding Celgene's flagship drug to Roche Holdings' (NASDAQOTH: RHHBY) Rituxan failed to provide an overall survival benefit, compared to Rituxan plus standard chemotherapy, for newly diagnosed patients with follicular lymphoma.

Investors will want to look for upcoming results from the Augment trial, which enrolled lymphoma patients who had already relapsed after standard treatment. There's a better chance of success because the trial is designed to measure Revlimid-plus-Rituxan against Rituxan on its own, but investors need to understand this indication isn't nearly as important as the first-line spot. Newly diagnosed patients tend to stay on therapy much longer than those who have already relapsed.

It wasn't all bad

Celgene stock may have tanked in October, but success among some partnered programs limited the losses for the entire year to about 9.4% at recent prices. In August the U.S. Food and Drug Administration approved Idhifa to treat patients who have acute myeloid leukemia with a specific genetic mutation.

Celgene expects annual Idhifa sales from this indication to top out around $500 million. On its own, this drug won't drive growth for Celgene. However, it's just one among dozens of partnered compounds wending their way from the clinic to pharmacy shelves. Another is bb2121 from bluebird bio (NASDAQ: BLUE).

Celgene licensed Bluebird's experimental cell-based cancer therapy early on, and the bold move could pay off in spades. The program continues to thrill oncologists with unprecedented responses among heavily pretreated multiple-myeloma patients who had run out of options. It's still too early to know how far Celgene's tie-up with Bluebird will fly, but it looks like the company has enough irons in the fire to overcome 2017's misfortune.

10 stocks we like better than CelgeneWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Celgene wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017

Cory Renauer owns shares of Celgene. The Motley Fool owns shares of and recommends Bluebird Bio and Celgene. The Motley Fool has a disclosure policy.