CELG: NEW THALOMID TOXICITY DOES NOT APPEAR TO BE THREAT TO AGENT`S POTENTIAL
07:44am EDT 27-Sep-00 Prudential Vector Healthcare (Toth, Robert J. 415-274-44
Prudential Vector Healthcare Group
Global Equity Research Notes
Robert J. Toth, Jr.
(415) 274-4460
Christopher S. Kim
September 27, 2000 (415) 835-4170
CELG/$59 1/2 CELGENE CORPORATION ACCUMULATE
52-Week Price Range: $76-$8 Previous Rating:
Shares Out. (mm): 65 Debt (mm): $25.3
Estimated Float (mm): 54.8 Debt to Cap.: 0.08
Market Cap. (mm): $3,900 Return on Equity: N/A
Avg. Daily Vol. (000): 956 Proj. 5-Yr. EPS Gwth. Rate: 50%
Book Value/Share: $4.3 Price Target: $67
Cash/Share: $4.5 Fiscal Year Ends: Dec.
Total Cash (mm): $292 Risk: High
1999 2000E 2001E
Actual PREV. Curr. Prev. Curr.
Q1: ($0.13) ($0.05)A
Q2: ($0.12) ($0.01)A
Q3: ($0.12) ($0.06)E
Q4: ($0.05) $0.06E
Year: ($0.43) ($0.04)E $0.43E
P/E: NM NM NM
Consensus Est.: ($0.03) $0.38
Est. Rev. (mm): $26.2 $82 $138
CELG: NEW THALOMID TOXICITY DOES NOT APPEAR TO BE SERIOUS THREAT TO
AGENT'S POTENTIAL
* A prominent medical journal has just published information regarding
a new Thalomid toxicity that has occurred in a small number of multiple
myeloma patients treated in a front-line combination setting.
* While the toxicity is serious, it appears to be reversible and may
be avoided by reducing the Thalomid dose used in combination with
chemotherapy in this patient population.
* We believe that the upside prospects of Thalomid in an upfront
combination setting will ultimately be shown to outweigh its risks, but
will acknowledge that this marketing message may be difficult to deliver
given the off-label restrictions imposed on Celgene's sales force.
* Thalomid's revenue-generating potential from the treatment front-
line myeloma may ultimately be impacted by the dose reduction to roughly
half that used currently to treat refractory patients.
* We have not modeled aggressive usage of Thalomid in front-line
myeloma and are not changing our estimates at this time. However, upside
potential related to this market segment may now be more limited.
* We retain our Accumulate rating and one-year target of $67.
Details
New Thalomid toxicity highlighted in journal. A "Letter to the Editor"
was published in the recent edition of the New England Journal of
Medicine entitled "Life-threatening toxic epidermal necrolysis (TEN) with
thalidomide therapy for myeloma". The article was written by Dr. Vincent
Rajkumar, a clinical investigator at the Mayo Clinic's Division of
Hematology. In this article, newly-diagnosed myeloma patients were
treated with Thalomid (400 mg/day) plus dexamethasone in an ongoing Phase
II clinical trial. Of the first eight patients treated, three (38%)
developed severe skin toxicity, with two of the three hospitalized. All
three patients recovered after Thalomid was discontinued. While Thalomid
usage has historically been associated with skin rashes in 20-25% of
patients, this new toxicity was both unanticipated and more severe, with
only one case previously reported. The article mentioned that
dexamethasone is often used alone or in conjunction with other agents to
treat myeloma and that there is interest in testing its utility in
combination with Thalomid. It further stated that, while the combination
regimen appeared effective, it should only be used in closely monitored
studies and that Thalomid should not be combined with other agents known
to cause skin toxicities.
Background on toxic epidermal necrolysis (TEN). TEN is a disease in which
the outermost layer of the skin peels off in sheets, leaving behind
exposed endodermis (innermost layers of skin). TEN affects the body much
like a second degree burn - loss of skin causes fluids and salts to ooze
from the raw, damaged innermost layers of skin which can easily become
infected. Widespread areas of skin erosion can develop within two days of
the onset of disease. According to the Merck Medical Manual, the cause of
TEN in most cases is unknown. However, 33% of TEN attacks are the result
of adverse reactions to drugs, including antibiotics, non-steroidal anti-
inflammatory drugs (NSAIDs), anticonvulsants, and antituberculosis drugs.
In patients with adverse-reactions initiated by TEN, treatment begins
with immediate removal from the offending drug. Corticosteroids such as
methylprednisone are often prescribed in order to limit the allergic
response seen in severe TEN cases. Because of its rapid onset, TEN can
result in fatality.
Updated information gathered on this study looks to reduce the severity
of the TEN incidence. According to Celgene, further data has been
gathered since the article went into publication that in our view
diminishes the impact of the new toxicity issue. This information was not
included in the New England Journal letter.
* Thalomid dose reductions dropped the TEN incidence to zero. An
additional 20 patients were reportedly enrolled following the first 8
discussed in the letter and were treated with dexamethasone and 200
mg/day Thalomid (reduced from 400 mg/day). There were no more observed
incidences of TEN. An updated report would put the TEN incidence at 3 out
of 28 patients, or 11%. We understand that no additional known incidences
of TEN have been reported to date from the multitude of ongoing Thalomid
studies, particularly in multiple myeloma.
* The study site has increased the size of the Phase II trial to 50
patients from 28. If the issue was more serious, we find it unlikely that
additional patients would have been put at risk by the Mayo Clinic, one
of the world's leading cancer centers.
Thalomid's front-line clinical benefit is still unknown but should be
taken into consideration. We would also point out that the clinical
benefit achieved using the Thalomid/dexamethasone combination regimen was
not reported but should be taken into consideration relative to the new
toxicity from a risk/reward perspective. Multiple myeloma is a deadly
cancer and we are optimistic of the prospects that the combination
modality will prove to be a highly effective front-line treatment.
Further safety and efficacy results are expected out at the Chemotherapy
Foundation conference in November.
Potential impact to current Thalomid estimates is viewed as minimal but
upside could now be more limited. We believe that Thalomid's benefits for
the treatment of a variety of cancers have been well-documented and we
are optimistic that it can generate the 40% annual sales growth that is
modeled in our forecast. We have been rather conservative with respect to
Thalomid's potential for the treatment of front-line myeloma and are not
changing our estimates due to the new toxicity finding at this time.
However, we would note that the upside over and above our current
estimates could now be more limited for the following reasons:
* Thalomid dose reductions in the front-line regimen imply less revenue
per patient. Thalomid monotherapy is typically prescribed at 400 mg/day
to patients with advanced multiple myeloma. If newly-diagnosed patients
are dose-limited to 200 mg/day, the revenue contribution per patient is
reduced by half.
* Clear marketing message addressing the incidence of TEN may be hard to
deliver. Since Thalomid is marketed off-label and Celgene's salesforce is
constrained as to how it discusses the utility of the drug, it may be
more difficult to position the incidence of TEN relative to the benefits
of the agent until the results of the Phase II trial are published in a
peer-reviewed journal.
We maintain an Accumulate rating and one-year target of $67. In our view,
Celgene remains one of the most exciting of the newly emergent biotech
companies and we continue to position it as a core holding in the space.
However, given its current valuation, we see the prospects for strong
market out-performance as more limited in the near-term and we would
recommend that investors build new positions or add to existing positions
on pullbacks. Strong management, a solid commercial franchise, and a
pipeline that offers additional prospects for growth, all speak to the
likelihood of Celgene's future success. We believe that our one-year
target of $67, or 70x 2004 EPS of $1.84 discounted back at 20%, is
certainly attainable, but also feel that investors will need a greater
degree of comfort with our forecasted Thalomid growth curve as well as
the prospects of the Celgene/Novartis Attention Deficit Disorder program
before this multiple expands much higher.
Company Description
Celgene Corporation is a biopharmaceutical company based in Warren, NJ
that is discovering, developing and commercializing small molecule drugs
for cancer and immunological diseases. Its lead product is THALOMID
(thalidomide), which received FDA approval in 1998 for moderate to severe
erythema in leprosy. Celgene has discovered two exciting classes of
pipeline clinical candidates called IMiDs, or thalidomide analogs, and
SelCIDs, or selective cytokine antagonists and its attention deficit
disorder candidate, Attenade, is a chirally pure version of
methlyphenidate that offers the prospects for a superior treatment for
afflicted children.
Prudential Securities Incorporated makes a primary over-the-counter
market in the shares of CELG.
Prudential Securities Incorporated and/or its affiliates or subsidiaries
have managed or co-managed a public offering of securities for CELG.
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