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TheStreet Open House

Biotech Stock Mailbag: Celgene, IsoRay, Northwest Bio, Bubble Worries

NEW YORK (TheStreet) -- This week's Biotech Stock Mailbag opens with an email from Paul S. about Celgene (CELG):

Why is Celgene down so much? This was a great stock last year but not so this year even though the news from the company has been good. Can you explain what's going on, please?

Let's consult a chart of Celgene's performance relative to the other big-cap biotech stocks:


CELG Chart
CELG data by YCharts

Paul is correct. Celgene has been a dog this year, mainly because investors are worried about the patent life of the multiple myeloma drug Revlimid. Despite successful efforts to diversify, Celgene still relies on Revlimid for a majority of its revenue today (60% of total 2013 revenue) and into the foreseeable future (55-60% of total revenue in 2020, based on consensus estimates cited by Bernstein Research.) Obviously, Celgene needs to keep generic challenges to Revlimid at bay for as long as possible.

Investors are weird (for lack of a better term) because sentiment can and does switch on a dime. In 2013, investors didn't seem bothered much by Revlimid's patents, but in 2014, it's a big issue. To be fair, a key pre-trial hearing concerning the Revlimid patents is scheduled for April 29. Wall Street is very much focused on this "Markman hearing" and the uncertain outcome has investors nervous. Celgene's slumping stock price this year is already discounting a shortening of Revlimid's patent protection.

I have no way of accurately predicting the result of the Markman hearing -- the issues are super complicated. But most of the scenarios I've read about suggest investor fears are overblown and that Celgene will emerge relatively unscathed. If that does happen, investors will have more confidence in Revlimid's long-term revenue outlook and the stock should go higher.

[Forty-eight percent of buyside investors believe the Markman hearing will be positive for Celgene, according to a poll conducted by ISI Group analyst Mark Schoenebaum at the end of March. In the same poll, 33% of buysiders predicted a neutral outcome, 20% negative.]

Just a bit more background: Celgene has composition of matter patents on Revlimid which extend to 2019. After that, the drug is protected by various method of use and "polymorph" formulation patents going out to 2027. Generally speaking, the post-2019 patents are considered weaker or easier to challenge.

Natco Pharma, an India-based subsidiary of Actavis (ACT), is challenging the Revlimid patents. Celgene, in turn, filed suit against Natco and Actavis and the case is proceeding through the courts. Patent challenges take a long time to litigate but in this case, there is a pre-trial Markman hearing coming up on April 29.

Forgive me, patent attorneys, if I totally botch this explanation, but at the Markman hearing, attorneys for Celgene and Natco/Actavis will present evidence to the judge seeking to define the Revlimid patent claims that will be later argued and decided when the case goes to trial. In essence, the Markman hearing sets the ground rules for the later trial. The hearing can also be the spring board for both side to come together and reach a settlement, depending on how the judge rules on the patent claims to be litigated later.

As I said, the legalese is thick here but it is important because the outcome of the Revlimid patent challenge impacts Celgene's long-term earnings growth. Investors and analysts will model scenarios differently, but for illustrative purposes, here is how Bernstein's Geoff Porges sees the situation:

A worst-case scenario for Celgene in which Revlimid patent protection is lost in 2019 results in Revlimid sales decline of 35% in 2020, 70% in 2021 and 85% in 2022 and beyond, Porges forecasts.

If Celgene wins and Revlimid retains patent protection through 2027, Porges models Revlimid growth of 8% year over year from 2020 through 2027.

The difference in Revlimid U.S. sales in the two scenarios is dramatic. If Celgene loses patent protection, Porges models Revlimid sales of $726 million in 2022. If Celgene wins, Revlimid sales in 2022 are $6 billion.

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