Why Did We Update Our Price Estimate For Bristol-Myers Squibb?

Bristol- Myers Squibb (NYSE: BMY) announced earlier this month that the Phase III trial for the use of its Opdivo as monotherapy for patients with non-small cell lung cancer had failed to produce adequate results, despite its success treating a range of other cancers.  In light of this development, we have reduced our peak sales estimate of Opdivo by $1 billion, resulting in a 5% reduction to our price estimate. Opdivo is very important to BMY but has lost its competitive advantage over Merck’s Keytruda. We previously estimated Opdivo would have nearly $2 billion more in peak sales than Keytruda. However, much of this advantage has eroded now, even as Bristol-Myers Squibb places its hope for first line treatment on combination therapies.

The stock plunged by 20% to the news of Opdivo failed test. However, we believe this may be an overreaction as successful results from Opdivo in future with certain combinations could give boost to drug’s sales.

Opdivo Lost Its Competitive Advantage To Keytruda

Keytruda and Opdivo both belong to the PD-1 category of immunotherapy drugs. Both have been approved as second line treatment for non-small cell lung cancer, which is prevelant among 80% of lung cancer patients. However, Opdivo was approved as a second line treatment for all patients, while Keytruda only for those who have high PD-L1 levels. As a results, doctors prefer Opdivo as it does not require the PD-L1 test.

Both drugs have been competing intensely to get the market share in the  $10-15 billion lung cancer market. Keytruda has shown positive results as a first line treatment for non-small cell lung cancer patients with high PD-L1 levels in comparison to chemotherapy, while Opdivo’s strategy to target all non-small cell lung cancer patients seems to have backfired. Opdivo failed as a first line treatment. However, the company claims that it is testing Opdivo in combination with other drugs such as Yervoy as a first line treatment. But results from such combinations could be delayed and pose more side effects as two drugs are involved. Hence, we believe now both drugs are on level playing field.

Why Opdivo Is Important To BMY?

Opdivo got FDA approval in 2014. As per our previous estimates, peak sales of the drug were $7 billion. It could make an estimated 65% contribution to increase in BMY’s revenue by 2020. As a result it could be the main growth engine for BMY. It could account for 45% of BMY’s oncology revenue by 2020.

BMY estimates are dependent on the success of R&D spending. Its enormous R&D spending, which was 31% of revenue in 2015, needs to justified by successful results. THe importance of its R&D investment is evident in the failure of Opdivo’s clinical trial, which caused its to stock plunge by more than 20%. Hence, it is very important for BMY’s Opdivo to show successful test results.

Sources:

[1] UPDATED: BMS loses its lung cancer lead to Merck as Opdivo data comes up short, Fierce Pharma, August 05,2016

[2] Immunotherapy Drug Opdivo Fails Clinical Trial to Expand Use, NY Times, August 05,2016

[3] Key Takeaways From BMY Q2 Earnings, Trefis, August 01,2016

Have more questions about Bristol-Myers Squibb? See the links below.

• Three Things To Watch Out For Bristol-Myers Squibb This Year
• What’s Bristol-Myers Squibb’s Revenue And Earnings Breakdown?
• What’s Bristol-Myers Squibb’s Fundamental Value Based On Expected 2015 Results?
• How Has Bristol-Myers Squibb’s Revenue Composition Changed Over The Last 5 Years
• By What Percentage Can Bristol-Myers Squibb’s Revenue & EBITDA Grow In The Next 3 Years?
• How Much Revenues Can Bristol-Myers Squibb’s Phase 3 Pipeline Add By 2020?
• Why We Are Bullish On Bristol-Myers Squibb
• Bristol-Myers Squibb Did Well In 2015, And New Drugs Could Keep The Momentum Going

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