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Celgene Gets Swatted With FDA Warning About Off-Label Thalidomide Sales

One short-seller says the biotech firm could see sales growth stunted.

Celgene

(CELG) - Get Celgene Corporation Report

shares fell as much as 16% Monday on worries that regulatory concerns could strangle sales growth.

The

Food and Drug Administration

Friday slapped the Warren, N.J., company with a strongly worded warning letter that alleged Celgene illegally promoted its biggest drug, thalidomide. According to some estimates, Celgene derived some 90% of its revenue in 1999 from sales to cancer patients, a use that regulators haven't approved for the drug.

A hedge fund manager who is short Celgene and asked to remain anonymous said the warning letter could force Celgene to severely curtail its promotion of the drug until it is approved for other uses, which could hamper sales growth and trim the stock's $2 billion valuation.

"This is the first indication that we have that the company has been generating sales through off-label promotion," said the hedge fund manager, who believes the stock is overvalued. "It may not be sustainable."

Celgene representatives didn't immediately return calls seeking comment.

Celgene shares dropped 4, or 11%, Monday to close at 32, well off their early March high of 62 5/16 but still comfortably above the 4 1/2 they traded at last August. Celgene was among the scores of biotech stocks that rode a wave of investor optimism, beginning last summer, to sky-high valuations that have since steadily eroded.

Up and Down at Celgene
Once-hot biotech stock now taking lumps with the Nasdaq

Source: BigCharts

Thalidomide, the morning-sickness drug that caused severe birth defects some 40 years ago in Europe, is sold by Celgene as a treatment for complications of leprosy under the brand name

Thalomid

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. Because very few people have leprosy in the developed world, it's a tough market for drug companies under intense pressure to grow revenue and earnings.

According to the FDA, Celgene salespeople promoted the drug as a treatment for various cancers, including multiple myeloma, a blood cancer, and even as a drug that could improve patients' moods.

One salesperson told a cancer specialist that the drug was "good for weight loss," that it could be used as "an appetite stimulant," and that it is "a great drug for feelings of general well-being," the FDA charged in its warning letter to the company.

Though the drug is being tested for use in treating various cancers, Celgene is proscribed from selling it for any use other than leprosy. In general, it's legal for doctors to prescribe drugs for such off-label uses, but improper for drug companies to actively promote them that way.

Given thalidomide's notorious history, one would think Celgene would be very careful about how it markets the drug, particularly because the FDA can delay drug approvals for companies that it views as violators. But Friday wasn't the first time the FDA cited Celgene for infractions. In 1998, it warned Celgene several times for off-label promotion of Thalomid and failing to properly disclose its "severe risks."

"Perhaps more than any other available drug, the need to provide and distribute thalidomide responsibly is essential to the public health," the FDA said in its warning letter, dated April 21.

Thalomid was Celgene's first product and now makes up the vast majority of its 1999 revenue of $26.2 million, which rose from $3.8 million in 1998.

But some sell-side analysts said the impact is likely to be small. Oncologists are just as willing to try new treatments with their severely ill patients as drug companies are willing to sell them new drugs, they said.

"The FDA issues these warnings all the time," said Michael King, analyst with

Robertson Stephens

, which has a buy rating on the stock and hasn't done underwriting for it. He said there are 180 different studies of thalidomide in recent years and that off-label use is common.

U.S. Bancorp Piper Jaffray

analyst Peter Ginsburg estimated that 90% of Thalomid's sales are for cancer. Monday, Ginsburg reiterated a strong buy rating on the stock, based on the view that the FDA warning will have little impact on the stock.