Celgene: Will Revlimid's Patent Protection Hold Up?

Revlimid Patent Litigation Key Issue That Is Clouding Stock

Celgene is facing a similar situation to AbbVie, the last company that I recently wrote on - a significant portion of revenue tied up in one drug, and the potential for upcoming generic competition if the company's patents do not hold up in court. While seemingly similar (with both stocks trading at discounts due to these concerns), they're different in a few important ways. AbbVie's patents are thought to be impregnable in the US, but the company will face biosimilar competition in EU starting in 4Q18. Meanwhile, while Celgene will not face generic pressure in the near-term, their patent protections are not as strong, and are thought to leave the potential for generics to enter the market as soon as in 2020, several years ahead of when their patents expire. Let's look a bit more closely at why the street is concerned about Celgene's patents.

Revlimid is the company's key drug with 63% of sales as of 2017, and the majority of those sales coming from the multiple myeloma indication. While Revlimid's patents protects the company until 2023, the reason the stock is trading at a discount, and the reason investors are closely watching the developments here, are because these patents are being challenged by numerous generic manufacturers.

The first patent challenge actually happened already between 2010-2014, when Actavis (now Teva) and Natco challenged the patents and settled in late 2015. The settlement allows for limited generic entry in 2022, and then unrestricted competition in 2026. 

Recently, a slew of generic manufacturers have begun to challenge the patents again, resurrecting the debate on the patents. Cipla, Dr. Reddy, Zydus, and Alvogen are several of the challengers, with Dr. Reddy in particular recently adding several more patent challenges to its ongoing litigation with the company aimed at the company's method of use patents.

Institutional investors and sellside analysts are closely analyzing the patents to measure the likelihood that a generic could enter the market prior to 2023. The generic manufacturers will either need to let these patents expire, innovate around them, or challenge them in courts. There are four kinds of patents that they will need to get around:

  • Composition of matter patents. These are strong patents that are difficult to overturn, and as a result, they are not often challenged. This has been the case so far for Revlimid's composition of matter patents. The patents protect Revlimid until late 2019 / early 2020 (I have seen some state an October 2019 date, and some state an April 2020 date).
  • REMS patents. These are patents on the risk monitoring program that Celgene has in place for the drug. Note that these patents protect Revlimid until 2020, but Hayward Capital has already challenged one REMS patent and won in IPR. Multiple others are being challenged. These patents are generally viewed by the street as weaker patents that may not stand up in court, but drug manufacturers still must invalidate the 2023 patents in order to enter the market.
  • Dosing patents. These are patents that protect the dosing regimen for each indication. Patents here protect multiple myeloma (MM), myelodysplastic syndrome (MSD), and non-Hodgkin's lymphoma (NHL) until 2023. Note that only one indication must be challenged to enter the market, which is why we're seeing multiple challengers for multiple myeloma (the majority of revlimid's revenue). For generics that aim to have multiple indications on the label, they will need to challenge multiple doses (Dr. Reddy and Alvogen have both pursued this route, challenging MM and MDS). 
  • Polymorph patents. Revlimid's polymorph patents expire in 2024 and protect the polymorph/crystalline structure of the lenalidomide. Note that these are also difficult to challenge in court, as they are seemingly similar to composition of matter patents, but they can be innovated around with a separate structure. It appears that several generic manufacturers have already already attempted to get around Celgene's hemihydrate patents with anhydrous or amorphous formulations.

With the patents listed above, it seems that the dosing patents will be a key focus, just as it was back in 2014 with the Actavis/Natco patent challenges.

There are several other important factors to consider as well when assessing the likelihood of the patents holding up: 1) generics generally have a strategy for attacking the patents given the cost of litigation, 2) branded manufacturers will not settle unless they see some risk (suggesting that Celgene sees some risk with their Revlimid patents).

These two factors combined, along with the analysis of the patents above, suggests that there is a non-trivial chance that a generic can get past Celgene's patents to get to market between 2020 and 2023.

Celgene and Dr. Reddy will be submitting expert testimony in the coming months. Generally, bullish investors are hopeful that Celgene can reach a settlement some time in 1H19 before trial to eliminate the overhang around the stock. Most sell-side analysts begin to model in significant sales deceleration or outright declines in 2022, suggesting that they do see competition entering before patent expiration. However, there could be further downside to consensus and to the stock depending on the settlements/each manufacturer's success at challenging the patents.


Otezla Continues to Drive I&I Segment

Otezla was launched in 2014 for psoriatic arthritis and was the first marketed Inflammation and Immunology (I&I) drug. The company later received approval for plaque psoriasis in late 2016 and now sits at $1.3 billion in sales as of 2017.

The drug is in a crowded market for psoriasis but has found a nice place to separate itself from competitors. The drug is not as efficacious as anti-TNFs or IL17s, but the safety profile and convenience is better, and pricing is favorable. Management often highlights execution here as being underrated by the street.

    Otezla's 2Q results slightly missed consensus expectations, but management claimed the miss was largely due to short term fluctuations in gross/net pricing and inventory. Management importantly kept guidance the same for the year and noted that the fluctuations should stabilize going forward.

    Catalysts to drive continued growth include a label expansion into Behcet's disease (with a regulatory filing in 2H18), a once-daily formulation (with an FDA decision some time later this year), and scalp psoriasis phase 3 readout in 4Q18. Consensus estimates have the drug reaching $2 billion by 2021, but the additional label expansions could drive this number higher.

    Other tidbits

    • CAR-T Programs (JCAR017 and BB2121) - JCAR017 will likely see a TRANSCEND pivotal data at ASCO in June of 2019. Investors expect the drug to receive approval in relapsed-refractory diffuse large B-cell lymphoma in 2019. CELG's other CAR-T program, BB2121, also continues to advance and will begin phase 2 development in MM by the end of 2018.
    • Fedratinib - The JAK-2 inhibitor remains on track for an NDA submission in myelofibrosis in 2018, according to the company. There is some investor concern over this drug given its clinical history (which included a clinical hold due to side effects), but a submission this year could assuage some of those concerns.
    • Ozanimod - Management has guided to $4 billion - $6 billion in peak sales in the past, inclusive of multiple sclerosis, ulcerative colitis, and Crohn's disease. However, management recently backed off the $6 billion guidance, but still believes it has peak potential over $4 billion. Note that the street still holds doubts about the drug given the recent Refusal to File (RTF) earlier this year for multiple sclerosis. The company notes that the RTF was due to the discovery of an active metabolite and that they have made corrections to fix the issue. The company states that they remain on track for a filing in 1Q19.