Opdivo Isn’t Doing Enough For Bristol-Myers Squibb’s Investors

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Bristol-Myers Squibb (NYSE:BMY) recently reported its Q4 2016 and full year results. We had stated earlier that the company would need to reassure investors when it announced its results, especially considering the recent failures in Opdivo’s clinical trials. We don’t think it really happened. While the overall growth was good, the company lowered its guidance for 2017 and consequently, its stock fell more than 5% in a single day. Bristol-Myers Squibb’s stock price has primarily been influenced by the sales ramp up and potential of its immuno-oncology drug Opdivo. While Opdivo nearly tripled its sales in Q4 2016 compared to the same quarter a year ago, its future growth has become even more questionable. The company has lost a staggering 40% of its market value since mid-July, which has prompted the idea that it may become an attractive acquisition target. Our takeaway: With R&D spending diminishing, and Opdivo’s sales growth expected to slow, it becomes hard to see how the company can revitalize its growth and regain investor confidence. The current market sentiment may be a little extreme, but it is not without its merits. We expect to significantly reduce our price estimate for Bristol-Myers Squibb as we update our model to reflect latest results and expectations.

What’s The Concern Regarding Opdivo? 

The primary concern is that Opdivo’s sales growth is likely to slow down significantly in 2017 and beyond. This can be attributed primarily to a couple of factors. First, Opdivo’s Phase 3 clinical trials , which aimed to test its application in the first-line treatment of lung cancer, failed. First such failure occurred in early August and recently, the company announced that it has stopped pursuing combination therapy involving Opdivo and Yervoy for FDA approval considering the test data. This reduces the drug’s target market and expected peak sales. First-line treatment of lung cancer is a huge market, as lung cancer is the most prevalent type of cancer in the world. Second, as far as lung cancer is concerned, Opdivo is used in previously treated patients. This domain is expected to see greater competition from Roche and Merck in 2017.

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What Can Bristol-Myers Squibb Do? 

Although pursuing lung cancer has turned out to be disappointing for Opdivo, the drug did expand its target market by getting approval for head and neck cancer in the U.S. and for classical Hodgkin’s lymphoma in the EU and Japan. It already has a strong position in melanoma. Apart from this, Eliquis, Sprycel and Orencia are doing well. However, much of this is being offset by dismal performance in Hepatitis C franchise.

It must be noted that Hepatitis C, like immuno-oncology drugs, is another profitable area that big pharma firms have pursued lately. However, Gilead’s strong position in this space and competition from other drugs has spelled troubles for Bristol-Myers Squibb. With issues in both key growth categories, Bristol-Myers Squibb doesn’t have a lot of options to consider. It either has to get a breakthrough in first-line treatment of lung cancer (BMS has stated that it will still pursue this area), or it needs one of its research collaborations to create a new drug in some of the potentially profitable therapeutic areas including rare and autoimmune diseases.

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