Celgene's Safety Dance

Concerns about early competition and a steep patent cliff for a best-selling drug are put to rest.

In biotech, an industry prone to volatility and overnight collapses, investors appreciate a bit of safety now and then. That certainly seemed to be the case Wednesday when it came to Celgene.

Shares of the biopharamceutical giant surged about 10 percent after Celgene late Tuesday announced a smart and unusual settlement of a patent dispute with a generic drug maker that turns looming worries about its blockbuster blood cancer drug Revlimid into something of a strength. The deal puts concerns about early competition and a steep patent cliff to rest, and means Revlimid will be on the market for Celgene and selling for longer and in larger amounts than previously expected. 

Flight to Safety

Investors are happy with the resolution of Celgene's patent fight over blockbuster drug Revlimid

Source: Bloomberg

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Like other blockbuster drugs, Revlimid is protected by a complicated web of patents intended to keep the drug exclusive to Celgene for as long as legally possible. The main patent expires in 2019. Another two expire in 2023 and 2024. A longer, more uncertain patent expires in 2027, and was being challenged in the lawsuit that was settled. The expectation was that the 2027 patent probably wouldn't hold up, but that the earlier ones had at least a decent chance to survive, according to Bloomberg Intelligence. 

The settlement will let Natco, an Indian maker of generic drugs, start selling a copy of Revlimid in the U.S. in 2022, earlier than previously expected. But the deal significantly limits the volume of the drug the company can offer at first. In 2022, for instance, Natco can only sell a "mid-single digit" percentage of Revlimid capsules in the U.S.; that percentage will grow slowly year by year to as much as one-third by 2025. All restrictions are off starting in 2026. 

Instead of taking the approach of other drugmakers and fighting tooth and nail for the longest possible exclusivity, Celgene by settling values safety and clarity over keeping its fingers crossed in the face of litigation. The company weighed its chances of exclusivity through 2027 against the possibility of losing a massive hunk of sales all at once as early as 2023, and managed to split the difference in an appealing way. According to a Bloomberg Intelligence  analysis, the drug's growth potential means that Celgene should continue to increase revenue even with the deal in place and a generic on the market through 2024.  

Settling Down

Celgene's Revlimid settlement makes the drug's estimated growth prospects crystal clear

Source: Bloomberg Intelligence

With sales of Revlimid  projected to pass $10 billion a year by 2021 and keep climbing, Celgene is now free of a downside risk that might have caused some to discount it. That's a big deal for a drug that is expected to provide 62 percent of Celgene's revenue in 2015, and be its biggest seller for years to come. Celgene isn't the only firm out there that relies heavily on one drug, but is among the most dependent.

Gilead, for example is expected to get 58 percent of its sales this year from Hepatitis drugs Sovaldi and Harvoni. AbbVie is projected to get 61 percent from Humira. Both of those companies are dogged by constant questions on exactly how long the company's respective gravy trains will last, and where revenue will come from in the future.

The deal also lets Celgene put renewed emphasis on a promising pipeline and set of new products. The company has been an active, if arguably sometimes spendthrift, acquirer of earlier stage companies with promising medicines. Celgene is also a favored partner for other firms to co-develop drugs, having made a series of more than 30 deals with companies including Juno, AstraZeneca, and Bluebird Bio that if successful, could pay off in a big way. Newer drugs like Abraxane, Otezla, and Pomalyst are already on the market.  

Weighed against a backdrop of lawsuits surrounding the most profitable drugs and recent efforts by hedge fund manager Kyle Bass's efforts to invalidate pharma patents (including Celgene's), the company's move  -- and the thumbs-up it got from investors --  may convince other drugmakers to start picking certainty over a scrap.

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