Celgene vs. Gilead Sciences: Who Reported Better Earnings?

8/7/17

By Todd Campbell, MotleyFool

Celgene Corp. (NASDAQ:CELG) and Gilead Sciences (NASDAQ:GILD) reported second-quarter earnings that were better than industry-watchers' forecasts, but these two giants' circumstances are very different. While Celgene is racking up substantial growth for its top-selling medicines, Gilead Sciences is navigating an increasingly competitive market for its hepatitis C drugs. Are these companies on the right track?

In this episode of the Motley Fool's Industry Focus: Healthcare podcast, Foolish investors Kristine Harjes and Todd Campbell discuss the companies' second-quarter earnings results and what's next for these two big-cap biotech stocks.

Also, Kristine and Todd weigh in on the rapidly evolving market for non-small cell lung cancer treatment, providing insight into the latest quarterly performance for Merck & Co.'s (NYSE:MRK) Keytruda and Bristol-Myers Squibb's (NYSE:BMY) Opdivo.

A full transcript follows the video.

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This video was recorded on August 2, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's August 2, and I'm your Healthcare show host, Kristine Harjes. Calling in to Fool HQ is Todd Campbell. Hello, Todd! How is earnings season treating you? I know it's a busy time to be a Fool.com writer.

Todd Campbell: Wow, Kristine, we're just cranking out article after article, trying to give the best insight into what these companies that are reporting, so that people are going to Fool.com and searching for what to do next. Hopefully they're not overreacting to any of the earnings results that are coming out, because we like to take a longer-term view.

Harjes: Absolutely. That being said, because earnings are so important to investors, both short-term-type investors and long-term investors, we thought today would be a useful time to check in on how some healthcare companies did this earnings season. We're a couple weeks into the middle of it, so we figured now would be a good time to get you all up to speed on some of the important announcements from some of the most highly watched companies.

On today's show, we'll be covering Celgene and Gilead Sciences, and we're also going to take a look at the ongoing battle between cancer blockbusters Keytruda and Opdivo. But, let's start first with Celgene. Todd, this was one of your top stock picks for 2017. How's it doing so far?

Campbell: It might be in my top stock picks until 2020. This company is a dynamo, and honestly, I don't know what's going to slow it from here. There's not a lot of patent expiration risk associated with this stock until we get into the 2020s. If you look at their drugs that they're selling, these drugs are growing well into the double digits year over year.

Harjes: It's pretty incredible; the top three drugs of theirs all experienced sales growth of at least 20% year over year in the second quarter.

Campbell: Yeah. What's fascinating about that, I don't know if fascinating is the right word, but look at Revlimid. This is a drug that's been around and widely used in multiple myeloma for a decade. And sales of that drug were up 19% year over year. That's remarkable -- $2 billion in sales for Revlimid as it continues to win market share in newly diagnosed multiple-myeloma patients. You're seeing, Celgene has always been a big player in that disease indication, and Revlimid is a big reason behind that. One of the greatest things about Celgene, in their R&D [research and development] team, Kristine, you and I have talked about it on the show previously, they know how to expand labels. They get approval for one indication, and then they slowly but surely increase the addressable patient population for that drug, and that's been the case with Revlimid, with approval after approval, expanding the use and the prescription volume.

Harjes: One other thing they've been able to do in the blood-cancer market is get the drug to be used by patients for a longer amount of time. That's something they noted, particularly in the U.S. market with Revlimid, and also with Pomalyst, which had sales increasing 23% year over year as patients were staying on it longer.

Campbell: Yeah. They almost bring in about $2.5 billion a quarter from those two drugs. You get $2 billion or so from Revlimid, you get another $391 million from Pomalyst last quarter. As you mentioned, that's a third-line drug for multiple myeloma, very commonly used. And then, going back to that whole label-expansion thing, they think they might be able to advance Pomalyst over time into the second-line setting, which of course could provide even greater sales growth going forward.

Overall, to back up for a second, the numbers that were reported by Celgene -- $3.27 billion in revenue for the quarter, that's up 19% year over year, that was a beat by about $40 million more than industry watchers were looking for. Adjusted EPS [earnings per share] was $1.82 per share, that was up 26% year over year. That also beat industry watchers by $0.04.

Harjes: Right. We've broken down how they were doing with their blood-cancer drugs. But something that I also find really impressive about this company has been their ability to expand into other indications. For example, the autoimmune space, with their drug Otezla: This one had a growth of 49% year over year, and it's been absolute dynamite. I remember back one quarter ago, they were disappointed with the growth because it was only 14%, or something that was still a very strong growth number. The strategy here that they were looking to do with Otezla is to shift to a lower price in hopes of an increase in volume. This certainly seems to be working, that more and more insurers are being persuaded to cover the drug earlier on in a patient's disease progression.

Campbell: Psoriasis is an important indication, it's a multibillion-dollar indication; a lot of people suffer from it. Otezla is an oral drug, it's a simple and relatively easy drug to prescribe, and for patients to use and stick with. Their market share is already 21.7% of the psoriasis market, which is pretty phenomenal, when you think about the fact that this drug has only been on the market for a couple of years. And with 40% sales growth, and now running at a clip that puts them on pace for $1.5 billion or so in sales this year, it's hard to argue that this drug doesn't have a good shot at achieving $2 billion or greater in sales at its peak.

Harjes: It really does seem like everything is going right for this company. They raised their adjusted earnings guidance to a range of $7.25 to $7.35 per share, this was up from a previous range of $7.15 to $7.30 per share. There was more good news that came out just yesterday (on Tuesday), that the FDA [Food and Drug Administration] approved yet another drug for this company. This one is called Idhifa.

Campbell: What's really interesting about this company, Kristine -- we talk about this a little bit when we talk about companies like Gilead and some of these other large companies and trying to figure out how they're going to fuel growth in the future, will it all be internal, will it be acquisition-driven, will it be collaborations? -- Celgene has been a big fan of collaborations.

Idhifa is a drug that they developed via a collaboration with Agios, and it's a novel mechanism. It's the first drug approved to treat refractory or relapsing acute myeloid leukemia [AML] with IDH2 mutation. It's not a huge patient population that this drug targets, but it's an important step forward to broadening out their revenue stream into other cancer indications, and essentially just crunching the numbers and looking at how much they're going to charge for it, what the average duration is, in the U.S. alone, that should put the market opportunity between $100 million and $200 million per year, which they will share between the two companies. But over time, industry-watchers think that if it can get approved in a front-line center eventually in AML, that you could have another blockbuster drug to Celgene's credit.

Harjes: You mentioned their strategy of having partnerships with a whole host of mostly smaller companies, probably entirely smaller companies. This is absolutely key when you look at this company's pipeline, which of course, we can talk all day long about the products and how they're doing. But, when you turn to the future, it's going to be about how the new products perform. You look at a snapshot of Celgene's pipeline, and it's just absolutely massive because they're able to fund so many different developments due to all of these partnerships. Todd, does anything in the pipeline in particular stand out to you?

Campbell: On the collaboration deals, there were some interesting news on a drug they had been developing with bluebird bio earlier this year. People should check it out. They're working on CAR-T therapies with Juno Therapeutics; that's interesting. They have a deal with Acceleron on some interesting drugs as well. And outside of those collaboration deals, they also took a plunge a couple years ago and for $7 billion bought Receptos so they could get their hands on Ozanimod. That is looking like a pretty smart decision on their part, because they put up positive phase 3 data in relapsing multiple sclerosis, and that's a huge market. They think they're going to be able to file for FDA approval later this year. If they get the go-ahead, this is a drug that could easily be doing $1 billion to $2 billion or more in sales.

Harjes: Right. Lots to watch there. This is a company that's up 16% so far just this year.

But let's pivot to a company that has been a little bit more of a disappointing investment, I know, for a lot of Fools, you and me included. Gilead Sciences has been a painful stock to own. It remains one of the largest healthcare companies, and we do want to make sure we're keeping our listeners updated. This is a company that just reported earnings as well on July 26. What stood out to you?

Campbell: I tell you, if you're an investor in Gilead Sciences, like we are, and you've watched the market soar to new highs, it's so disappointing when you look and see that Gilead Sciences' stock has gone from $120 in 2015 to lows in the mid-$60s earlier this summer. It's been a little disheartening.

The reason for Gilead Sciences' drop-off in share price has been a slowing in revenue from hepatitis C, an indication that they basically reshaped dramatically in 2014 when they launched Sovaldi and Harvoni. They were racking up almost a $20 billion run rate just from those drugs at their peak. However, competition has driven down prices, warehousing of sick patients is now done, so you're really only treating newer cases. It's been tough offsetting the drop in revenue from hepatitis C; as a result, the share price has taken it on the chin. However, all may not be lost, because we've seen the shares pop up recently, they're trading back into the mid-$70s, and I think a lot of that is because people are getting a little more encouraged that perhaps the floor is getting put in, finally, on the hepatitis C business.

Harjes: I wish I had the conference call in front of me right now. There was a fantastic quote in there, by someone in the prepared remarks talking about how there's fantastic surprises to the upside and the downside whenever you're talking about a cure. And that's what you have to remember when you're thinking about this company, and in particular its HCV [hepatitis C virus] drugs, is that it's a functional cure for this disease. You don't get that recurring revenue as you treat more and more people, you're eating your own market. And that's a wonderful thing for the healthcare system as a whole, but those are the driving principles behind why this company has struggled for the past few years or so.

Campbell: Yeah. In the second quarter, we saw that struggle continue. You had revenue of $7.14 billion, that was down 8.2% year over year. And you had EPS of $2.56; that was good relative to what industry watchers were looking for, but again, it was down year over year.

Harjes: Right. And, of course, a lot of that is being driven by hepatitis C sales falling so much. They fell 28% year over year to just under $3 billion. But that actually was almost a good thing, because this was a slowing of the decline, and it did beat some people's expectations.

Campbell: Right. If you take it as a whole pie, you look at the antiviral business that they do with HIV drugs, which is a huge business for them, still, and some of the new product launches they've had there, and then you look at the hepatitis C business and say, maybe we're seeing a little bit of stabilization here in the United States. Perhaps you can start to pull up from this downturn, or at least level off, and then people can start to get more excited about what might be coming in the future.

Harjes: Yeah, and the company was able to increase its revenue guidance from $22.5 billion to $24.5 billion, up to a new range of $24 billion to $25.5 billion, and an important part of that was it upped its HCV sales guidance a little bit within that range. A large part of this is that HCV awareness is growing, and they have this campaign to advocate for Baby Boomers getting tested, because for a long time there wasn't really a functional cure for this disease, people didn't bother getting tested for it, or they didn't know there was a cure out there. As awareness grows that you can actually go get tested for this disease, and if you have it, you can have it be cured, that's expanding the addressable population, beyond what people even knew were out there as far as patient population numbers.

Campbell: Right. There were a lot of people who were carrying the disease but were undiagnosed. When it becomes a problem, it can become a very big problem, and that's why developing a functional cure like the ones that were developed by Gilead were so important. I think, just from using the awareness campaign that you were just mentioning, they increased the number of diagnoses here in the U.S. to 180,000 over the last year, which is up 30,000 to 40,000 from what you would normally see. So, you're trying to fuel some organic growth that way by reaching in and finding more patients that you can treat. But this is still a tough and very competitive marketplace for Gilead Sciences to be competing in. It is, however, good news to see them increase the low end of their guidance for the year by $1.5 billion. That's good news.

Harjes: Especially because they're going to have some things to watch out for in the competitive landscape. Particularly I'm referring to: AbbVie has a drug with an August PDUFA date, which is when the FDA will sign off on it, hopefully give it the green light. This is a drug called Maviret, and it's a pan-genotypic cure, meaning that it can treat any of the different types of hepatitis C. The company is hoping to get an eight-week dosing approval, which would come at an advantage to its main competitor from Gilead Sciences, which is approved for a 12-week dosing schedule.

Campbell: Yeah. You can use Harvoni for eight weeks in genotype 1. I continue to believe that the future of hepatitis C treatment will be going shorter-and-shorter-duration therapies. The European Union just approved Maviret for AbbVie; hard to believe that the U.S. won't follow suit when the PDUFA date hits. Of course, it remains to be seen.

They talked about this in the conference call, too, they talked about what the threat could be from this new drug. It was kind of like, we think we have some advantages. We still have 80% market share despite all the competition we've seen. We think we have advantages over Maviret in certain other genotypes. It remains to be seen. We'll compete. But it's too early to say, from their perspective, that it's not a threat, or how big the threat might be. So, it's something that investors should keep in mind as they're seeing the share price rise, that there could be another battle coming in 2018 over market share in the indication.

Harjes: So, while it certainly seems that the entirety of Gilead Sciences' story is wrapped up in hepatitis C and all of the drama there, there's so much more to this company. We touched a little bit on HIV, that had very strong growth in the quarter. What stands out to you in that section of the business?

Campbell: They've done a great job in launching brand-new combination therapies that work better, pose less of a toxic risk to patients. Because those therapies are taken over the course of a lifetime, patients with HIV, it's now becoming a chronic illness, people living normal lives with treatment. It's providing a stable, consistent flow of revenue and growth thanks to these new safer combination therapies. I think it's a great business for them, and if we were just talking about the HIV business, Gilead Sciences' share price probably would be going gangbuster, if it hadn't been for the drag in hepatitis C over the course of the last two years.

So, you're right, we have to keep investors focused on the fact that there are two different parts to this story, potentially even a third part of the story, depending on if they ever use that mountain of cash they have building up on their balance sheet.

Harjes: Right. This is the other main headline that you see out there in the media about Gilead Sciences -- how much cash they have, and who they're going to buy with that cash. Their stockpile grew to $36.6 billion in this past earnings report. They kicked off cash flow from operations of $3.5 billion in the quarter. So, this company is sitting on a mountain of cash, and it's only coming in stronger and stronger, and yet there's still no real news on the acquisition front.

Of course, when I'm reading this conference call, that's the number-one thing I'm looking for, but I kind of realize it's a lost cause to hope for it to come out in the earnings call. More than anything, I'm always curious as to how the analysts in the Q&A are going to ask the question. There was one guy that, the question was about HCV, and it was about nuances of that market, but he starts this question by saying: "John" (talking to the CEO), "I know if I asked you which company you were going to buy, you would tell me. But I think the market should keep guessing, so I'm going to ask something else." That just made me laugh. These analysts really want to know. Somebody did eventually ask about business development and whether there had been a shift in strategy. But we all know that this is something that the company is working on. They're going to remain locked down on that treasure chest until they're able to actually find the correct means to deploy it. At that point, they'll update us.

Campbell: And we don't want to see them rush in and spend that mountain of cash. It gives them a lot of financial flexibility. They're obviously paying a nice dividend, they're buying back shares. There are reasons why we don't want them to just go out and grab whatever's hot, because you could buy something, and it ends up that it's a dud. There's no guarantees necessarily within biopharma. I think taking a measured approach and having confidence that, in the past, they've identified great companies, and in the future, most likely, they'll also identify great companies. Let's bet on management to do the right thing, and to grow the company over time.

It's not like they're not doing their own internal development, right, Kristine? They have other projects going on in R&D that could fuel new drugs. They're working on drugs to treat NASH, which is [a liver disease] that could be a multibillion-dollar indication. They're also, in collaboration with Galapagos, developing a drug for rheumatoid arthritis that could be a big seller someday, too. So, it's not like they're not doing anything.

Harjes: Yeah, lots of irons in the fire for Gilead. Our final topic for the day is the ongoing showdown between PD-1 inhibitors Keytruda and Opdivo. These drugs are pretty similar -- extremely similar, actually. Keytruda comes from Merck & Co. and Opdivo comes from Bristol-Myers Squibb. These are, as I mentioned, PD-1 inhibitors. The mechanism of action here is that PD-1 is a protein that cancer cells hijack, and it prevents the patient's immune system from attacking their cancer. Both of these drugs won their initial approvals in 2015 in later-line settings, meaning not your first treatment, for NSCLC, which is non-small cell lung cancer.

Campbell: Big indication, probably the largest game-changing drug class launched in cancer over the course of the last decade. These drugs are both already massively successful top-selling drugs. Their indication has been expanding since their initial approvals in 2015, and that has been creating -- I don't know if it's Ali-Frazier -- but this battle for market share between these two companies to dominate what is one of the most common cancer indications. There's 225,000 new cases of lung cancer diagnosis in the U.S. annually. That obviously makes it an extremely important indication to target. Both of these drugs have done a good job of improving outcomes for patients. That's resulted in significant sales for both of them.

Harjes: But yet, there's still this rivalry between them. Let's first walk through the timeline of how things have progressed with this rivalry. Opdivo was approved first in March of 2015, and Keytruda's approval came a few months later in October. Keytruda's first approval was somewhat more restrictive than Opdivo's because it required this additional testing to show that the tumor overexpressed PD-1, which was the target. So, combined with Opdivo's first-mover advantage, Opdivo took an early lead. But it seems like ever since then, Keytruda has had its luck growing stronger and stronger.

Campbell: Yeah. Kristine, you and I talked about this last year, we were talking about how the PD-1 race was shaping up, right?

Harjes: Yeah, in August of 2016.

Campbell: So, listeners, go back and check out that show. One of the things that was very important for this battle last year was Keytruda's success in a trial that was evaluating its use as a first-line treatment for metastatic NSCLC. They built that trial to only be looking at people who highly express PD-1. Sure enough, they delivered the goods in that trial, and that led to an approval last fall for Keytruda in that first-line setting.

Meanwhile, Opdivo was also being studied in that same first-line setting. However, they used a more inclusive study design, where they included people with both high- and low-expressing PD-1, and their trial came up short. It failed. So, following Keytruda's approval for the first-line setting, it's been off to the races. While Opdivo still does more in sales quarterly than Keytruda, and it's still growing its sales, Keytruda's sales growth is far faster than Opdivo's, and it's really closing the gap over the first two quarters of this year.

Harjes: Absolutely. It leapt over Opdivo in October 2016, as far as approvals go, when it got the go-ahead to market itself as a first-line treatment in high-PD-1-expressing patients instead of chemo in that first-line setting. Then, in May of 2017, the FDA approved Keytruda for use alongside chemo in that same first-line setting, regardless of PD-1 expression.

If you look at some of the numbers here -- I'll start with the first quarter of this year: Keytruda sold $584 million worth; that was up 134% year over year. Compare that to Opdivo, which sold more by numbers, $1.1 billion, but that was only up 60% year over year. Then you fast-forward a little bit more to the second quarter that just came out, and Keytruda sold $881 million, and that was growth of 180% year over year. Compare that to Opdivo -- they sold $1.2 billion. Again, it's a larger number, but that was only up $0.1 billion from the last quarter, the Q1, and it was up 42% year over year. So, you can see that Keytruda is really gaining ground on Opdivo here.

Campbell: Right, you had that huge spike in sales in the first quarter, tied to last fall's approval for the high-expressing PD-1 patients. Then, in Q2, you added another $300 million in sales sequentially from Q1 to Q2, thanks for that approval for use alongside chemo, regardless of expression. This is absolutely an important development for patients and doctors and these companies.

I guess the reason that you and I are spending time on this is, we can't ignore the fact that Bristol-Myers, last year -- when they reported that failure, and Merck reported their success -- Bristol-Myers shares took it on the chin. They got hammered. So, how this PD-1 race ends up shaking out is extremely important to investors in figuring out what the future may look like, as far as sales and profit for these companies.

Harjes: Right. You can tell by how much these companies move on news regarding their PD-1 drugs that, they're huge companies, they have so much else going on, but that just tells you how important these drugs are. For another example, AstraZeneca was working on a PD-1 drug called Imfinzi, and on the 27th of July they reported some disappointing trial results, and the share has lost 11%, which I think is the most they've ever lost in market cap in a single day.

Campbell: That's crazy for a company as huge as AstraZeneca. It shows you how important this PD-1 class of drugs is.

Harjes: Right. They're absolutely going to be an important thing to watch for the healthcare space. There are other companies as well working on these. You have Roche in there, and Pfizer, and I'm sure there are others that I'm forgetting as well, but it's definitely a space that investors need to keep their eyes on.

Campbell: Investors are always looking for what that final takeaway is. It's great to see, one's doing better than the other historically, but what's going to happen next? It's very hard, unfortunately, to handicap who may end up coming out on top and dominating this market. I think that Opdivo and Keytruda both could comfortably share this market. It's certainly big enough. You're at $2 billion in quarterly sales between those two drugs alone.

Harjes: Yeah, and that's per quarter.

Campbell: Per quarter, $2 billion. With label expansions and new indications for use in new cancers -- and, by the way, tons of research going on that could allow for combination therapies using PD-1 drugs alongside other drugs that could further expand their use -- there's room for both of these players. So, yes, it's hard to handicap who's going to end up leaving the ultimate winner, but you may not even have to, you may just be able to bet on both of them.

Harjes: Great. Thanks for the takeaways, Todd. That'll do it for today's show. If you like Industry Focus and you want to help us out, we would love for you to take a minute to write a review on iTunes or wherever it is that you listen to podcasts. Reviews are super important to getting our show out in front of new listeners, and we always appreciate the feedback. If you want to contact us in a less public setting, feel free to shoot us an email at industryfocus@fool.com.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!

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