Cancer treatments can come from the most unlikely of sources.

Thalidomide, a drug that deformed thousands of newborns in the 1950s and 1960s, is now poised to treat even more people with multiple myeloma, the second-most common blood cancer, and

Celgene

(CELG) - Get Report

is at the center of it.

Continuing research by thalidomide's latest developer, Celgene, suggests that the drug and a cousin compound have the potential for treating other cancers.

These studies have attracted Wall Street. According to Thomson First Call, Celgene enjoys 10 buy recommendations and three hold recommendations from analysts, as well as provocative predictions for growth. Celgene earned 16 cents a share last year. The consensus among analysts is for 52 cents this year, $1.17 for next year and $1.92 for 2006.

Celgene will make a presentation at the Needham biotech conference Wednesday.

The transformation of thalidomide from a synonym for tragic side effects to a product of hope is filled with irony for a company that never had a profitable year until 2003.

Celgene's version of thalidomide, called Thalomid, is a popular cancer treatment even though the Food and Drug Administration hasn't approved the drug for cancer. It's perfectly legal: The FDA approved the drug in 1998 for treating serious skin lesions caused by leprosy. But doctors can prescribe a drug for 'off-label' treatments as long as the FDA has endorsed the drug for a single disease. Cancer accounts for most of the drug's -- and the company's -- revenue.

The original thalidomide was invented by a German company. Prohibited from being sold in the U.S., the drug was sold in foreign markets during the late 1950s and 1960s as a sedative and as a treatment for morning sickness. Although it was pulled from the market after some 10,000 cases of horrific birth defects, thalidomide has remained a subject of medical research for decades -- from a variety of cancers to painful mouth sores in AIDS patients.

An Unusual Path

The twists and turns that affected thalidomide are almost matched by the convoluted path taken by Celgene, which is based in Warren, N.J. Spun off from a chemical company in 1987, it focused on bioremediation -- using biotechnology and chemistry to clean up hazardous substances -- and on making chemicals used by other companies in drug development. But the stock languished, rarely breaking above $5 on a split-adjusted basis during Celgene's first 12 years as a public company.

Celgene's new path started in 1994 when the company began testing compounds as possible cancer and immune system disease treatments. The drug that was to become Thalomid was part of the research. In July 1998, the FDA approved Thalomid for treating the leprosy side effect. The drug reached the U.S. market in September 1998. Two years later, the stock hit a peak of $76.

Within another two years, however, the stock lost about 85% of its value. The company missed several quarterly financial targets and some medical research raised questions about Thalomid's side effects. Most important, Celgene announced in March 2002 that it would delay its multiple myeloma application with the FDA by two years (it filed in February 2004). Celgene also became embroiled in a legal dispute with

EntreMed

(ENMD)

over the patent on a molecule with a similar structure to the thalidomide molecule.

In January 2003, the companies settled the patent dispute. Since the settlement, Celgene's stock has more than doubled. Its $54.77 closing price on Wednesday represents a 63% gain in the last 12 months.

Promising Prospects

The next big test comes in late October when the FDA is expected to act on Celgene's multiple myeloma application. FDA approval means Celgene can actively market the drug to oncologists -- something it cannot do now.

Thalomid "is already the most widely used front-line multiple myeloma therapy" in the U.S., said Christopher J. Raymond, of Robert W. Baird, in a recent research report. (Celgene says there are 50,000 multiple myeloma patients in the U.S. and another 150,000 worldwide.)

Ironically, Thalomid's popularity has prompted Raymond to remain neutral on Celgene despite the company's recent unveiling of more favorable test data at a cancer research conference in New Orleans. "We question how much growth is left for Thalomid," Raymond said.

The efficacy data was "impressive," said Raymond, referring to a test that compared patients taking Thalomid plus dexamethasone, a traditional steroid treatment for the disease, against patients receiving just dexamethasone. The Thalomid group had a much better response rate; but Raymond also expressed concern that the Thalomid group had a much higher rate of "deep vein thrombosis," a blood clot usually in the legs, than patients receiving just dexamethasone. (He doesn't own shares; his firm is a market maker.)

But Yaron Werber of Citigroup Smith Barney said there's more room for growth. He told clients recently that FDA approval will enable Celgene to "more effectively" market the drug, leading to sales growth of 10% to 15%.Even if the FDA doesn't act in October, sales shouldn't be affected because Thalomid "has already been established as the standard of care and has been validated in the eyes of the clinical community," Werber said in a June 7 research report. Doctors are dealing with the blood clot risk by premedicating patients with blood thinners, he said. (Werber has a buy recommendation. He doesn't own shares; his firm is a market maker.)

Thalomid faces some challenges. In May 2003, the FDA approved Velcade, made by

Millennium Pharmaceuticals

(MLNM)

, for multiple myeloma patients whose disease had progressed despite having been given at least two other therapies.

Millennium has an advantage because it can market Velcade directly to cancer physicians and because it has a powerful marketing partner in

Johnson & Johnson

(JNJ) - Get Report

. Velcade is being tested as a front-line therapy by itself and in combination with other drugs. Doctors can prescribe it 'off-label' as a front-line therapy.

Werber noted that Velcade has some disadvantages. The drug must be given intravenously, whereas Thalomid and dexamethasone are taken orally. Based on conversations with physicians, Werber predicts that Velcade will be used primarily for the toughest-to-treat patients.

Looking Ahead

As it waits for the FDA's ruling on Thalomid, Celgene keeps testing Revlimid, which is as potent as Thalomid but is less toxic. Many analysts believe Revlimid will reach the U.S. market in mid- to late-2005 based on test results so far.

"Revlimid's large market potential is in myeloma, and there is potential upside here," said Jim Reddoch, of Friedman Billings Ramsey, in a research report last month. (He has an outperform rating on Celgene. He doesn't own shares; his firm is a market maker in the stock.)

Celgene is testing Revlimid for myelodysplastic syndromes (MDS), in which the bone marrow fails to make enough red blood cells. Last month,

Pharmion

(PHRM)

received FDA approval for its MDS drug called Vidaza. That caused Reddoch to reduce his sales estimates for Revlimid as an MDS drug. But even though Vidaza has a head start, he added, Revlimid could pick up some ground because it's a pill and because Vidaza must be injected for seven consecutive days each month.

Celgene also suffered a setback in late April when it halted a late-stage clinical test of Revlimid for advanced melanoma, the most dangerous form of skin cancer. The trial was halted after an independent monitoring committee said the drug wouldn't show a statistically significant treatment effect.

Celgene continues to test Thalomid and Revlimid as single therapies and as part of combination therapies for prostate, kidney, ovarian and lung cancers. It plans to test Revlimid with other drugs for malignant melanoma.

Analysts say the failed melanoma test won't affect the Revlimid research on other cancers. Some, however, wonder how versatile Revlimid and Thalomid can be. Citigroup Smith Barney's Werber said he is cautious because drugs that work well on blood cancers "seldom manifest efficacy in solid tumors." But, perhaps like those researchers who didn't write off thalidomide many years ago, he's leaving the door open for good news. "Success in these efforts would yield further upside to our expectations," he said.