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.

John writes:

I have yet to hear a reasonable explanation for the collapse in biotechs. We know it's not related to any single drug. Does the market believe that Congress has the power to dictate prices to the drug companies? I've heard that they don't. The rotation theory doesn't seem to hold water either. Why would anyone rotate out of a high-growth stock into one with lower growth assuming the same P/E? Is this simply stock manipulation by the big hedge funds attempting to shake out the small guy? Is this about leverage causing an avalanche effect? Is this about foreign ownership selling their shares? Please, I need answers to this madness.

Savvy market participants know Congress lacks the power to regulate drug prices -- today. The concern is more about what happens in the future if drug prices continue to climb and our collective ability to pay for drugs (and all healthcare expenses) can't keep pace. Gilead Sciences' (GILD) hepatitis C drug Sovaldi has become the whipping boy for this drug pricing and reimbursement debate recently -- unfairly, in my opinion. I'd like to see Congress bitch about Vanda Pharmaceuticals (VNDA) pricing a year's worth of me-too melatonin Hetlioz at $80,000!

Investors generally don't rotate out of high-growth stocks unless they're worried about the sustainability of that growth i.e. what happens if the "E" in forward-looking P/Es is about to fall. What's frustrating about biotech investing is fickle sentiment. One day, everyone is happy, focused on stellar, near-term growth -- high P/Es! The next day, investors panic about earnings in 2025, lower P/Es.  

Since the end of February, biotech large-cap P/Es have contracted by about 15% to an average of 19, which puts them on par with the P/E for pharma, according to ISI's Schoenebaum. That's remarkable.

March was a bad month for biotech stocks. No doubt. But April has started on a more positive note, so perhaps the correction or mini-bubble burst is played out. We'll see. Just remember fundamentals and valuation matter.

Lawson H. has a complaint:

When are you going to admit you are a pump and dump artist and take the honorable way our after harming so many people?

Pump and dumper? Me? I thought I was a hedge-fund stooge and biotech basher? Make up your mind!

I don't know. Six months is an arbitrary time period for Northwest Bio  (NWBO) because the only fundamental catalyst which matters -- the phase III study of DC-Vax in brain cancer -- is still enrolling patients (slowly) and won't be completed any time soon. I've explained at length already why DC-Vax is a weak cancer vaccine and won't work. It's in Northwest Bio's interest to extend the brain cancer study as long as possible but failure can't be stalled forever.

Northwest Bio is developing a second cancer immunotherapy -- DCVax-Direct -- which is even more farfetched than the "regular" DC-Vax. Here's how the company describes DCVax-Direct:

DCVax-Direct  is designed for situations in which the tumors are inoperable  where it is not feasible or not desirable for patients to have their tumors surgically removed. This includes situations in which patients have multiple metastases, or for other reasons cannot have their tumors removed. Like DCVax-L, DCVax-Direct also incorporates the full set of tumor antigens  but it does so in situ in the patients body rather than at the manufacturing facility. With DCVax Direct, the fresh, new dendritic cells are partially matured in a special (patent-protected) way so as to be ready to pick up antigens directly from tumor tissue in the patients body, and also communicate the information about those antigens to other agents of the immune system, such as T cells. The partially matured dendritic cells are then injected directly into the patients tumor(s). There, the dendritic cells pick up the antigens in situ rather than picking up the antigens from lysate in a lab dish at the manufacturing facility, as is done with DCVax-L.

Can I be blunt? This is a stupid idea. Cancer grows undetected by a person's immune system, in part, because tumor cells have mechanisms to remain invisible to dendritic cells. With DCVax-Direct, Northwest proposes to take additional dendritic cells and inject them into a tumor, hoping they magically pick up a full set of tumor antigens. This is like Spinal Tap's Nigel Tufnel believing his amp is louder because the volume dial goes to 11.

Northwest is conducting a small, open-label, phase I/II study of DCVax-Direct in patients with inoperable cancers. An abstract has been accepted for June's American Society of Clinical Oncology annual meeting. Undoubtedly, Northwest Bio will seek to hype this inconsequential study. The DCVax-Direct data will go largely unnoticed by the thousands of ASCO meeting attendees because they'll all be flocking to standing room only presentations of truly effective cancer immunotherapies like the checkpoint inhibitors.

Patrick J. writes:

Hi Adam,  I love all the work you do and thank you for all your input in the biotech industry.  I just wanted to know your thoughts on a small company that was under the radar until recent positive news on their product.  The company is IsoRay (ISR). Do you think this company is the best of breed when it comes radiation therapy protection? Can you shed some insight on where you can see the stock going?

IsoRay has been selling radioactive "seeds" for use in cancer radiation therapy since 2003. This is what IsoRay's quarterly revenue growth and fully diluted shared count looks like over the past two-plus years:

ISR Revenue (Quarterly) Chart
ISR Revenue (Quarterly) data by YCharts

The blue line represents normalized revenue (percent change), which for IsoRay, has been mostly negative. That's not good.

This is IsoRay's stock chart, year to date:

ISR Chart
ISR data by YCharts

Hmm... This would concern me if I was anyone but a momentum trader.

Whew! Good for you. Sadly, I suspect most of the people who berated me for being bearish on Prana Biotechnology (PRAN) after the failed (but spun) Huntington's data came out in February were not as smart as you. They lost just about everything this week.

I understand the desire to trade around risky biotech stocks but someone always gets left holding the bag, despite repeated warnings about the fundamental risks.

On a related note, Brad writes:

Adam, you are such an insensitive prick! My father has had Alzheimer's for 6 years no and I was hoping there would be some promise with Prana's trial. You seem to almost gloat in the fact that the trial failed. There are no other promising drugs in the marketplace right now. Why don't you find a heart, man. You are a [bleeping] [bleep]-bag.

I'm truly sorrow about your father's illness but as I've explained countless times before, I write about stocks. It's unwise to base you your investment decisions on hope and emotion. The warnings flags were abundant in Prana for anyone willing to see them.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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