Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Celgene Corp.'s public vision of the future has consistently featured unrelenting optimism and rapidly expanding sales growth.

Now it's reaping the rewards of over-promising.

Celgene on Thursday reported third-quarter revenue that fell short of analysts' estimates and cut its 2020 revenue targets, hurt by a slowdown for key medicines and a drug-trial failure. Shares fell nearly 20 percent. 

It's a reminder that long-term forecasts  -- those 2020 revenue targets were set back in 2015 -- are something of a dart-throw for any company. And biopharma firms do it blindfolded. 

Guided Down
A drug-trial failure and guidance cut are sinking high-flying Celgene shares
Source: Bloomberg

Celgene is far from the only drug company to be embarrassed by ambitious guidance, and it won't be the last. Novo Nordisk A/S lost billions in market cap last year after diabetes-drug pricing pressures forced it to slash its long-term growth estimates. Back in 2014, AstraZeneca PLC targeted $45 billion in 2023 revenue. Its annual run-rate is currently closer to $20 billion, and Wall Street's consensus sales estimate for 2023 is $32 billion; and even that lower target is at risk. Valeant Pharmaceuticals International Inc. has turned slashing guidance into an art form

Celgene cut guidance for a couple of different drug franchises, suggesting its over-optimism was widespread: 

Across the Board
Higher expectations for its lead medicine couldn't save Celgene from a guidance cut
Source: Bloomberg

Setting unrealistic expectations can lead to both big share-price drops and bad behavior. One of the only reasons Celgene isn't cutting its guidance more is that it expects its core hematology franchise to grow more rapidly than it did three years ago. One way it's pushing for that growth is by aggressively hiking the price of its best-selling medicine Revlimid. That may not be sustainable, and it opens the company up to criticism.

Hiking
Celgene has aggressively raised the price of its best-selling medicine
Source: First Data Bank/Gadfly Calculation

High expectations can also lead to overpaying for assets, as Celgene clearly did for its failed Crohn's disease drug mongersen.  

Long-term forecasts aren't especially reliable in any business. But they are particularly speculative in biopharma. Long-term drug sales are incredibly difficult to predict as competitors arrive, pricing power shifts, side effects emerge, and companies work to extend their medicines to new patients. A single clinical trial result or FDA decision can shave billions of dollars from a medicine's prospects.

And forecasts for drugs still in development are even more of a dice-roll. All of the factors mentioned above are compounded by an even longer timeline, and drug trials unexpectedly fail on a regular basis. 

Investors and analysts like long-term guidance because it gives a sense of surety and a handy measuring stick. Hopefully Celgene has learned its lesson about giving them exactly what they want. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net