Celgene Corporation (CELG): Compelling Risk-Reward Ahead of Otezla Event

Shares of Celgene Corporation (NASDAQ:CELG) are down 13 percent year-to-date, and sentiment has been relatively weak ahead of the FDA's action date for Celgene's Otezla (apremilast).

Otezla, an experimental drug, is a twice daily pill for psoriasis, and psoriatic arthritis. The drug has March 21 action date for psoriatic arthritis and Sept.23 action date for psoriasis. The Europeans will decide by the year end.

Indeed, consensus sales are clearly lower than the 2017 sales target, underscoring the lack of confidence that the Otezla launch can perform. Celgene expects Otezla to generate sales of $250 million to $750 million 2015 and $1.5 billion to $2 billion in 2017 while the consensus is at $376 million for 2015 and $1.13 billion for 2017

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However, the expert feedback generally is consistent with the bull case on Otezla, particularly on Otezla slotting in as a go-to pre-biologic for some prescribers.

Studies show that if apremilast is placed on a preferred tier, 72 percent of dermatologists expect to prescribe this therapy, according to a survey by Decision Resources.

Among the dermatologists who expect to prescribe apremilast, 40 percent would consider prescribing it as a first-line systemic therapy if apremilast is in a similar formulary position as Amgen/Stiefel/Pfizer's Enbrel and AbbVie/Eisai's Humira.

This finding is not surprising, given the drug's benign safety profile in trials reported to date and the convenience of the drug's oral formulation. This, combined with the agent's modest efficacy profile compared with Enbrel, suggests that apremilast's best use is for patients with less severe psoriasis than those who are biologics candidates.

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In addition, more than 70 percent of surveyed payers who plan to cover apremilast would consider reimbursing it on a preferred tier only if the drug is priced at a substantial discount (greater than 40 percent) to Humira.

"Apremilast's oral formulation and its likely lower price compared with biologics would persuade dermatologists to prescribe apremilast," said Decision Resources Analyst Eun-Jin Yang, Ph.D. "However, surveyed dermatologists who indicate a willingness to prescribe the drug anticipate that dissatisfaction with apremilast's efficacy profile and expectation of poor formulary coverage or a high copay will constrain prescribing of the drug."

UBS analyst Matthew Roden says his checks show that there is an unmet medical need for disease-modifying antirheumatic drugs in psoriasis/psoriatic arthritis, and doctors would prescribe Otezla in place of methotrexate because of its better efficacy and safety profile.

Meanwhile, pricing and ease of access is critically important. If prior authorization is not required, then prescribers will likely adopt Otezla as preferable to methotrexate. Doctors see potential off-label use in other dermatological disorders, e.g. steroid-responsive dermatoses, eczema, Behcet's, lupus-associated rash, etc., which collectively represents significant upside to addressable population.

The drug needs only 12k patients (4 percent of the target population) by the end of 2014 to hit the 2015 consensus estimate, and it could meet the low-end of 2017 target with 83k patients on the drug, which represents 20 percent of the target population.

Otezla will primarily compete with J&J's Stelara. Stelara has already been declared as a blockbuster drug as it fetched sales of $393 million in 2010, $1 billion in sales in 2012 and $1.5 billion in 2013.

The market for psoriasis drugs is hot as it will experience substantial growth over the next decade as sales increase from $5.5 billion in 2012 to nearly $9.2 billion in 2022 in the United States, France, Germany, Italy, Spain, the United Kingdom and Japan, according to Decision Resources. Stelara is forecast to achieve sales of $2.2 billion in 2022, accounting for 24 percent of total psoriasis sales.

The number of new patients on Otezla required to beat consensus is not heroic. Not only does 2014 look beatable, the 2017 guidance of $1.5 billion - $2 billion is also achievable. Hence, investors should accumulate a position as Otezla's launch has a favorable risk-reward for CELG shares, which trade 16 times its forward earnings.