What 2015 Will Bring For Bristol-Myers Squibb

We believe that year 2015 is going to be a mixed one for Bristol-Myers Squibb (NYSE:BMY). Like other big pharmaceutical firms, Bristol-Myers Squibb is facing the impact decline in R&D productivity and loss of patent protection of some key drugs. This will continue to be the case in 2015 when one of its biggest drugs Abilify loses its patent. However, the expected ramp up of Daklinza and Eliquis, as well as the expected approval of immuno-oncology drug Nivolumab, present a silver lining. There may be some impact of the recent slowdown in the EU’s economy and the possible exit of Greece from the European Union. The fear of deflation may encourage authorities to launch quantitative easing and buy sovereign debt. This may help negate the impact of economic uncertainty to some extent.

Our current price estimate for Bristol-Myers Squibb stands at $52.69, implying a discount of more than 10% to the market.

See our complete analysis for Bristol-Myers Squibb

Europe Slowdown May Slightly Impact Bristol-Myers Squibb’s International Sales

After a brief period of recovery, the Euro Zone is again showing signs of faltering. Government debt as a percentage of GDP has increased in several countries including Greece, Portugal, Italy, Ireland and France. This figure has gone up for the United Kingdom as well. Additionally, fiscal pressure has increased sharply for Greece. Declining oil prices and possibility of Greece exiting Euro has disturbed investor sentiment. The decline in European stocks is manifestation of these events along with the fear of deflation. Overall, 2015 is not looking too good for the region and the possibility of certain austerity measure can weigh on the sales of pharmaceutical products.

A high percentage of healthcare spending in Europe is funded by the government. The faltering economy may pressure the public sector to take strict measures and cut financial corners. While healthcare spending is largely fixed, European governments may try to optimize the variable part of the expenditure which is largely related to drugs. This can take form of strict pricing policies and promotion of cheaper generic versions. Evidence suggests that while pharmaceutical spending growth has remained above GDP growth in the EU, this phenomenon changed during the financial crisis of 2009. ^[1] It won’t be surprising if it happens in 2015 also.

Also, governments use IRP tool (or international reference pricing) to benchmark prices across geographies. For instance, Deloitte’s report suggests that a host of countries in Europe and other regions of the world reference their pharmaceutical pricing to Greece. If Greece exits Euro currency, its own currency is likely to depreciate which will make its Euro-denominated debt even more expensive, thus resulting in further austerity measures and economic slowdown. The pricing and sales of pharmaceuticals could be impacted too, and this effect can spread to other countries.

In 2013, approximately 24% of Bristol-Myers Squibb’s revenues came from Europe. This figure has been increasing over the past few years, making the region an increasingly important market.

Daklinza & Eliquis Ramp Up Will Offset The Decline In Legacy Drug Revenues To Some Extent

Daklinza and Eqliuis are relatively newly launched drugs  and we expect to see a ramp up in their sales in 2015, which will partially offset the impact of declining revenues resulting from patent expiry of certain products.

Eliquis continued its strong growth in the third quarter of 2014, with revenues totaling $216 million as compared to just $41 million during the same period a year ago. ^[2] The drug’s adoption among healthcare specialists has been impressive and the approval for conditions beyond atrial fibrillation has certainly helped. At the end of July 2014, the European Commission approved the drug for the treatment of Deep Vein Thrombosis (DVT) and Pulmonary Embolism (PE), as well as for the prevention of recurrence of these conditions. Eliquis’ sales for the first nine months of 2014 stood at $493 million, a year-over-year jump of 557%. It could become a blockbuster drug for the company in 2015. We estimate that cardiovascular division accounts for more than 20% of Bristol-Myers Squibb’s value as per our estimates.

Out of $49 million in revenues that came from Hepatitis C drugs in Q3 2014, $38 million came from Daklinza alone. The company has stated that initial response has been good and the drug’s approval in Europe and Japan is going to be a key contributor to the franchise’s growth going forward. Daklinza is effective across several genotypes of diseases and has shown cure rates of up to 100% when used in combination with Gilead Sciences’ blockbuster drug Sovaldi. The encouraging data of Daklinza-Sovaldi therapy could influence healthcare providers to go for this combination. Bristol-Myers Squibb could add significant incremental revenues by targeting roughly 9 million HCV  (i.e., Hepatitis C Virus) patients in Europe and 1.2 million patients in Japan. Nevertheless, considering its relatively late market entry and no significant distinguishing feature over Sovaldi, Bristol-Myers Squibb may have a hard time competing effectively against Gilead Sciences. Also, the FDA recently denied the company’s application for approval of Daklinza (daclatasvir) in the U.S., which suggests that at least in the domestic market, Gilead Sciences will continue to rule.

Nivolumab Will Be Approved, Abilify Will Lose Patent

The FDA in the U.S. has granted breakthrough status to Nivolumab, which is meant for the treatment of advanced melanoma, and has agreed to review the license application on priority basis. The review is likely to be completed by the end of March 2015. Additionally, the EMA (European Medicines Agency) is going to accelerate the review and assessment of nivolumab for treatment of advanced melanoma as well. These developments are encouraging for Bristol-Myers Squibb, which earlier had fast tracked clinical trials of nivolumab due to successful results. Merck has already launched a similar drug this year and has first-mover advantage in the market. However, we believe that the market is big enough to accommodate more players, considering that the price for the drug is going to be high. According to some estimates, the market for immuno-oncology drugs could be as big as $35 billion. There is a huge opportunity to profit from successful drugs given that small-molecule R&D productivity has declined during the last decade.

While Nivolumab offers a silver lining for Bristol-Myers Squibb’s product portfolio, the company will have to brace for the impact of expiry of Abilify’s patent. Abilify is the biggest selling anti-depressant in the U.S. and accounted for about $1.54 billion of Bristol-Myers Squibb’s revenues in the first nine months of 2014. The company has already lost the marketing rights in EU which has resulted in a slight decline in Abilify’s sales in 2014. However, the good news is that the patent expiration date for Sustiva, which is the company’s biggest anti-viral drug as of now, has been extended from 2015 to 2017.

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1. Impact of austerity on European pharmaceutical policy and pricing, report by Deloitte [↩]
2. Bristol-Myers Squibb’s SEC Filings [↩]