The Psoriatic Arthritis Race: Celgene Vs. Johnson & Johnson

| About: Celgene Corporation (CELG)

Celgene's (NASDAQ:CELG) experimental drug, apremilast (to be be called Otezla upon approval) is a twice daily pill for psoriatic arthritis. It is expected to be approved by the FDA in March 2014.

According to a survey conducted by market research firm Decision Resources, 72 percent of the dermatologists interviewed said that they are willing to prescribe this therapy to their patients once it becomes available.

Stelara from Johnson and Johnson (NYSE:JNJ) is a biological drug. The FDA approved it in September 2013 alone or in combination with methotrexate for the treatment of adult patients with active psoriatic arthritis. Stelara is doing very well in the marketplace, it is already a blockbuster. In the first 9 months of 2013 Stelara has sold $1.08 billion worth of drugs globally, a 44 percent increase from the year before.

If and when apremilast is approved and launched for psoriatic arthritis, Stelara will be a key competitor.

Psoriatic arthritis

Psoriasis is a long-term skin problem that causes skin cells to grow too quickly, resulting in thick, white, silvery, or red patches of skin. In psoriasis, for some unknown reasons, the immune system attacks the body's own skin cells as if they were foreign invaders. It is estimated that among people living with psoriasis, up to 30 percent may develop psoriatic arthritis, which is an inflammation of the joints.

The disability and loss of quality of life from psoriatic arthritis is at least as bad as from rheumatoid arthritis, but psoriatic arthritis is undervalued and undertreated in society. Due to the social stigmata of the typically extensive skin rash, as well as the frequent ophthalmic complications, the response to treatment in psoriatic arthritis has been modest, with only some 15-25 percent of the patients achieving substantial or complete disease control.

Methotrexate is the current standard as a first line therapy in most developed countries. Even though methotrexate has toxic side effects and its efficacy is limited, experts think that it will be hard to displace from the first line role, mainly because it is cheap (a few hundred dollars a year) and because of that firmly favored by payers.

Patients on methotrexate therapy need to be closely monitored: a complete blood count with differential and platelet counts monthly, renal function and liver function check every 1 to 2 months.

When methotrexate fails to work, the more effective but more expensive biologics follow. Biologics are injected. Four biologic drugs dominate: Amgen's (NASDAQ:AMGN) Enbrel, Johnson & Johnson's Stelara and Remicade, and AbbVie's (NYSE:ABBV) Humira.

Apremilast vs Stelara

Both drugs offer novel mechanism of action: apremilast is a PDE inhibitor, Stelara is an anti- IL-12 and IL-23 agent. Both offer convenient dosing: apremilast is a pill; Stelara is injected in every 12 weeks, except for the first two injections which are given 4 weeks apart.

Therefore, the ACR20 response rates are critical to judge the difference. ACR20 is a measure of 20 percent improvement in signs and symptoms according to criteria set by the American College of Rheumatology. The long-term (1 year and 2 year) data for apremilast are important as all the major competitor drugs have presented long-term follow-up data for efficacy and safety.

Measured after 24 weeks, apremilast's response rate was at a lower range compared to the widely used biological drugs. However, the 52-week data showed an improved performance.

Using the ACR20 metric, apremilast 20 mg twice daily pill posted an impressive 63 percent response rate at week 52, which places it at the low end of the range of the anti-TNF biologicals (56 to 69 percent). These results, if confirmed by other studies, would improve the perception of apremilast by physicians and support the long-term usage of the drug.

Compared to Stelara, the 52-Week ACR20 data for apremilast were numerically superior.

At week 24, the ACR20, ACR50, and ACR70 response rates were similar for apremilast and Stelara. At week 52, it appears that apremilast has numerically higher ACR20 response rates compared with Stelara, and the ACR50 and ACR70 response rates were similar between the two drugs.

In addition, apremilast will have a safety advantage over Stelara as well. In Stelara's trial of Psummit 2, there were three patients on Stelara (two on 45 mg, one on 90 mg) who developed myocardial infarctions, as well as several serious infections and at least two malignancies. These serious side effects may lead to a black box warning for Stelara in the psoriatic arthritis indication. If that happens, Stelara may be relegated to a late-line of therapy, leaving the earlier, pre-biologics patients to apremilast.

As a comparison, the most common adverse events for apremilast were gastrointestinal side effects like diarrhea and nausea.

Survey among dermatologists

A survey of dermatologists, conducted by Decision Resources, shows that 40 percent would be willing to prescribe apremilast as a first-line systemic therapy if the drug occupied a similar formulary position to Amgen's Enbrel and AbbVie's Humira.

This preference is based on the drug's benign safety profile in trials and the convenience of the drug's oral formulation. But the drug's modest efficacy profile compared with Enbrel suggests that its best use could be for patients with less severe psoriasis than those who are biologics candidates.

A survey among payers showed that 70 percent of surveyed payers would reimburse apremilast on a preferred tier if the drug is priced at a discount to Humira.


It is estimated that more than two million people in the U.S. are living with psoriatic arthritis, a chronic autoimmune disease characterized by both joint inflammation and psoriasis skin lesions. About 125 million people worldwide suffer from the scaly skin condition psoriasis and about 30 percent of them can develop psoriatic arthritis, a chronic, progressive disease in which joints become swollen and inflamed.

Total direct and indirect health care costs of psoriasis for patients are calculated at $11.25 billion annually, with work loss accounting for 40 percent of the cost burden. Approximately 60 percent of psoriasis patients missed an average of 26 days of work a year due to their illness.

Celgene: pessimists vs optimists

Celgene projects that sales of apremilast could reach $1.5-2.0 billion by 2017. Wall Street analysts' projections have been more modest. Goldman Sachs' analysts put the sales figure to around $750 million in the same time frame, mostly because they believe Johnson & Johnson's Stelara is more effective in treating psoriatic arthritis. According to Goldman, Celgene's management has unrealistically high hopes for the imminent launch and success of apremilast.

Even greater concern is Celgene's reliance on its cancer drug Revlimid, which accounts for roughly two-thirds of the company's sales. Goldman cites the fact that in late October, Bristol-Myers Squibb (NYSE:BMY) announced very positive clinical data for its cancer drug nivolumab, and the FDA has granted a fast-track designation for the drug as a treatment for lung cancer, renal cell carcinoma and advanced melanoma.

Goldman's analysts believe that more promising results in the future could lead Bristol-Myers Squibb to pursue all cancers, including myelomas. This would amount to an existential threat to Celgene. According to Goldman Sachs, Celgene is a company exposed to serious competitive risks and it Goldman rates the company as a sell.

But optimists, and there are plenty of them, think otherwise. It is too early to tell if apremilast's launch will be a flap and the claim that Revlimid's myeloma franchise faces a threat from nivolumab is no more than speculation at this point.

Once direct-to-consumers advertising starts and physician education expands, optimists believe, apremilast will be used before biologics, but in some instances even before methotrexate. Patients and physicians value safety and convenience.

Cost disparity may favor methotrexate, but costs of monitoring tests and physician time doing so would offset cost disparity somewhat. The market is going to be surprised by apremilast's penetration and revenues, and sooner than most think. Apremilast's approval remains on track for March 21, 2014.

Initially, the drug will be approved in the U.S. for psoriatic arthritis and the company's sales force will initially target rheumatologists. Celgene will probably expand the U.S. label into psoriasis in the third quarter of 2014 and start marketing the drug in Canada in the second quarter of 2014 and the European Union in 2015.

Revlimid's applications will be expanded too. Celgene will file for a broad label of Revlimid plus low-dose dexamethasone (a corticosteroid) for the treatment of multiple myeloma in the first quarter of 2014, with approval and launch in this indication expected in the first half of 2015.

Revlimid is also being developed for NHL (non Hodgkin's lymphoma) and CLL (Chronic lymphocytic leukemia) but in those indications sales are not expected to materialize before 2017. To the optimist camp belong, among others, Nomura Securities, Credit Suisse, UBS and Deutsche Bank.

Investors' summary

Celgene's earnings per share estimate for the full 2013 is $5.98, based on a survey of 27 analysts' opinion by Bloomberg, and the estimate for 2014 is $7.25. The company's own guidance for 2013 is $5.96 and for 2014 is $ $7.00-7.20.

Unaudited figures for 2013 show total sales to be around $6.4 billion, up 18 percent year-over-year. The figure includes Revlimid sales amounting to $4.28 billion, up 14 percent, Abraxane at $649 million, up 52 percent and Pomalyst at $305 million.

Adjusted operating margin is expected to come in around 48.4 percent for the full year, up 30 basis points year-over-year and includes the impact of $65 million in collaboration-related payments to partners.

For 2014 the total revenue expected to be approximately $7.5 billion, an increase of 15 percent year-over-year. Revlimid sales are projected in the range of $4.9 billion to $5.0 billion, an increase of 16 percent year-over-year. The company is raising longer term financial targets for 2015 and 2017.

2015 product sales targets are raised to $8.5 to $9.5 billion from $8.0 to $9.0 billion, which would also increase the diluted EPS target to $9.00 to $9.50 from $8.00 to $9.00.

2017 sales targets are raised to $13.0 to $14.0 billion from $12.0 billion. Revlimid sales are expected to rise to $7.0 billion, Pomalyst' to $1.5 billion, Abraxane sales unchanged at $1.5 to $2.0 billion and Otezla also unchanged at $1.5 to $2.0 billion.

By 2017 the company's operating margin expected to be approximately 57 percent. In the past 52 weeks Celgene's share price ranged between $96.30 and $174.66. The price is currently positioned both above the 50 days and 200 days simple moving averages. Celgene followed a steady upward course in the past year as it continues to come out with new drugs or new applications of its older drugs to various types of blood cancers and pancreatic cancer. Investors have responded positively, boosting the shares from $60 in the summer of 2012 to a recent $165.

Which camp is right about future prospects, the pessimists or the optimists? It is difficult to predict. What is certain is that Celgene is a company full of energy that in the past has been capable of producing unpredictable surprises, like the amazing success of Revlimid.

Apremilast, or under its brand name Otezla, could be such a surprise. With the convenience of a pill and its benign side effects profile it could possibly find a much wider acceptance worldwide than the pessimists are willing to agree to.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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