Developing new drugs is wildly expensive. Since 2007, for instance, the average cost of bringing a novel drug to market (a new molecular entity) has hovered around a jaw-dropping $3.9 billion, according to EvaluateGroup. When all drugs are thrown into the mix, however, this figure balloons to an unreal $5.5 billion.
The point here is that it's extremely painful for big pharmas and blue-chip biotechs when their star clinical candidates flame out in late-stage testing, or suffer a serious regulatory setback. Even so, clinical and regulatory setbacks happen all the time in the pharma industry. Investors therefore need to have a solid understanding of how these setbacks impact valuations in the sector from both a short- and long-term perspective.
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With this theme in mind, here is a look at how AbbVie (NYSE: ABBV) and Celgene Corporation (NASDAQ: CELG) made the two most costly mistakes halfway through 2018 and why investors in these two elite biopharmas shouldn't necessarily panic over these blunders.
1. AbbVie's Rova-T
In June 2016, AbbVie doled out $5.8 billion to acquire Stemcentrx for its cancer stem-cell therapy called Rova-T (rovalpituzumab tesirine) as a possible game-changing treatment for small-cell lung cancer. Immediately thereafter, analysts chimed in to name Rova-T as one of the most valuable experimental therapies in the clinic at the time. EvaluateGroup, for example, had the therapy's peak sales coming in at a staggering $8.3 billion by 2023, which would have propelled it into the top five best-selling pharma products in the world.
What a difference two years make. After posting dismal midstage trial results for third-line small-cell lung cancer last March, AbbVie revealed at the recent American Society for Clinical Oncology meeting that Rova-T's ongoing trials are showing little sign of efficacy, and poor side-effect profiles to boot. The point being that Rova-T went from a shining star to a potential complete dud in a year's time. As a result, EvaluateGroup downgraded its outlook for the drug's peak sales to a mere $193 million by 2024. That's a stunning 98% drop from where the drug stood in terms of market value back in 2017.
How did this setback impact AbbVie's valuation? Over the course of Jan. 1, 2017, to the day before Rova-T's midstage results were released in March 2018, AbbVie's shares were up by 80%. That kind of high-flying action is certainly unusual for a large-cap biotech stock, perhaps reflecting the market's enthusiasm for this key pipeline asset. In the intervening three-plus months since Rova-T's initial data release, however, AbbVie's shares have been extremely volatile, shedding nearly 7% of their value overall. That's not the end of the world, but AbbVie's upward momentum has certainly tapered off noticeably.
2. Celgene's ozanimod
Approximately three years ago, Celgene purchased Receptos for a noteworthy $7.2 billion for its experimental immunomodulatory drug ozanimod. At the time, the drug was already in human trials for both multiple sclerosis and ulcerative colitis; it had shown promise as a truly game-changing therapeutic option for these hard-to-treat conditions. Celgene thus rolled out a peak sales estimate for ozanimod of between $4 billion to $6 billion during its initial press release announcing the acquisition.
The take-home point here is that with this pricey acquisition, the blue-chip biotech appeared to have finally found its heir apparent to the aging multiple-myeloma drug Revlimid as its next flagship product.
Then the wheels fell off. Despite strong late-stage trial data showing that ozanimod was indeed a potent new therapy for relapsing multiple sclerosis, Celgene reportedly allowed the skeleton crew remaining at the Receptos facility in California to handle the drug's regulatory application with the Food and Drug Administration (FDA). At least that's what Celgene said after the drug got nailed with a refusal-to-file letter from the FDA for missing preclinical and clinical pharmacology data last February. Now the drug isn't scheduled to reach the market until perhaps late 2019.
Why is this regulatory delay such a big deal? Analysts believe that this lengthy delay could allow the drug's competitors across its various indications to catch up from a development standpoint. If so, these same analysts think that ozanimod's commercial opportunity could be slashed by a stunning 56% from peak. That's seriously bad news, especially as the company searches for a way to keep growing beyond Revlimid's eventually date with the patent cliff.
So it's not surprising that Celgene's shares dropped by as much as 25% from their 52-week highs in the months following this self-inflicted wound.
Can these biopharmas adapt and overcome?
Although investors were none too pleased with these setbacks, the good news is that both AbbVie and Celgene have vibrant pipelines capable of making up for lost ground. As proof, AbbVie and Celgene have the second and third most valuable clinical pipelines, respectively, across all of biopharma, according to EvaluateGroup.
That's not surprising given that both companies have taken an exceptionally aggressive approach to pipeline development through external licensing deals, as well as mergers and acquisitions over the past few years.
The net result is that the shares of both AbbVie and Celgene are arguably a great bargain here. AbbVie's top line is still forecast to rise at a healthy 4% compound annual growth rate (CAGR) over the next five years, despite losing exclusivity for its top-selling anti-inflammatory drug Humira and Rova-T's implosion. And Celgene is expected to perform even better over this same period with a stately 9% CAGR. Of course, these growth forecasts would have been richer if Rova-T and ozanimod didn't get derailed, but that doesn't mean the sky is falling, either.
The bottom line is that AbbVie and Celgene prepared for the possibility of a serious setback by building out extremely robust pipelines capable of smoothing out the rough spots over the long term.
Interesting enough, though, several other large biopharmas such as GlaxoSmithKline and Sanofi have failed to follow this same prudent course of action during the height of the patent cliff by relying way too heavily on a small set of experimental product candidates to deliver long-term growth. As such, their shares have drastically underperformed the broad biopharma space over the last decade.
AbbVie and Celgene, on the other hand, apparently learned from the follies of their peers by building pipelines with multiple shots on goal, so to speak. And that's the kind of deep value that savvy investors should appreciate.
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