Bristol-Myers Squibb Price Estimate Revised to $65, Here’s Why

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We recently increased our price estimate for Bristol-Myers Squibb‘s (NYSE:BMY) stock to $65 as a result of new clinical trial data pertaining to nivolumab. We expect that the current and possible upcoming approval in lung cancer will significantly expand the drug’s addressable market and fuel the company’s revenue growth in 2016. This rebound could be a significant event as it will help Bristol-Myers Squib gain some operating leverage, pushing its research and development expenses as well as selling, general and administrative costs down as a percentage of revenues. Here are some more details around why we made this change.

Our current price estimate for Bristol-Myers Squibb stands at $65, roughly in line with the market.

See our complete analysis for Bristol-Myers Squibb

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Growth In Cancer Drugs Will Help Gain Operating Leverage

The sales of Bristol-Myers Squibb’s cancer drugs have grown rapidly in recent quarters, particularly Yervoy and Opdivo (Nivolumab). We currently forecast the revenues from key cancer drugs Yervoy and Opdivo to increase from $1.3 billion in 2014 to nearly $6.9 billion by 2021. Most of this will be attributed to Opdivo. This forecast is based on our assumption that Opdivo will get additional approvals, but the competition from other companies will also increase as we are likely to see a string of approvals in the immuno-oncology segment. The recent data shared during ASCO suggests a higher survival rate for patients with non-squamous non-small-cell lung cancer (assuming they don’t have low amount of PD-L1).

Opdivo was initially approved for melanoma, but was granted approval in early March for the treatment of patients who have been previously treated for metastatic squamous non-small cell lung cancer. The recent trial data suggests that the company may get approval for non-squamous NSCLC in the near term. Lung cancer is one of the most common cancers in the world, accounting for nearly 13% of all diagnosed cases and 20% of cancer-related deaths each year. [1] Also, NSCLC constitutes roughly 85% of all lung cancers, which is what Bristol-Myers Squibb is targeting. [1] About 25% to 30% of NSCLC is squamous, with remaining being non-squamous. [1] Opdivo is currently approved for squamous NSCLC, which means that with an approval for non-squamous NSCLC, the drug will expand its usage by almost threefold.

While we expect Opdivo and other cancer drugs to drive gross profit growth, we also believe that SG&A expenses and R&D costs will not increase at the same rate. Thus, we expect these figures to decline as a percentage of revenues. This gain in operating leverage is a significant part of our price upgrade.

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Notes:
  1. Cancer Research Institute [] [] []