Patent Expiry, Competition Will Continue To Weigh On Bristol-Myers Squibb’s Virology Portfolio

Bristol-Myers Squibb’s (NYSE:BMY) virology segment, which primarily consists of Reyataz, Sustiva, Baraclude and Hepatitis C franchise, accounts for around 10% of the company’s value, according to our estimates. The company derives most of its value from oncology drugs, which we believe will also be the key growth drivers in the coming years. Looking at the virology segment, we expect sales from the above drugs to significantly decline over the next few years, primarily due to patent expiry and competition from generic drugs as well as other drug manufacturers. A switch to generics causes net sales of patented drugs to fall significantly and often sharply, which is likely to be the case with Bristol-Myers Squibb’s virology portfolio. In this note we look at the performance of the virology drugs and our estimates for the same.

Reyataz is an anti-retroviral (ARV) drug and there are currently a host of approved ARV drugs in the U.S. and Europe. Major competitors include Abbott’s Kaletra, Merck’s Crixivan and GSK’s Lexiva. Reyataz sales peaked at $1.5 billion in 2013 and have been on a decline since then. The significant market competition will likely put pressure on the drug sales. The market exclusivity for the drug ends in U.S., Canada and China in 2017 and in major EU countries and Japan in 2019. Accordingly, we expect the annual sales to decline to around $100 million by the end of our forecast period.

Sustiva is used for the treatment of HIV. It is also sold in a package called Sustiva Franchise, which is a combination of Sustiva and Gilead Sciences’  Truvada drug. Such fixed dose combinations help simplify HIV therapy for patients and providers. For Bristol-Myers Squibb, Sustiva saw peak sales of $1.6 billion in 2013. The drug lost its EU patent in 2013, and will lose its patent protection in the U.S. by the end of this year. We expect the drug sales to decline to $200 million by the end of our forecast period, given that the generic competition will intensify going forward.

Baraclude, which is used in the treatment of chronic hepatitis B infection, lost its market exclusivity in Canada and EU between 2011 and 2016, and the drug also lost patent protection in the U.S. in 2014. Its sales peaked in 2013 at $1.5 billion and given the patent expiration, we now expect the drug sales to be under $500 million by the end of our forecast period.

Hepatitis C is a blood-born diseases which affects an estimated 3.9 million people in the U.S., most of who will or have developed chronic infection. We expect the overall market for Hepatitis C to grow at a rapid pace, but we believe that Gilead Sciences will continue to be the leader. Gilead got FDA approval for Epclusa in June 2016, which is giving stiff competition to Bristol-Myers Squibb’s Hepatitis-C franchise, including Daklinza and Sunvepra. As Epclusa gets adopted in other markets, it will likely further dent Bristol-Myers Squibb’s Hepatitis C revenue growth rate.

It should be noted that there are certain risks to our estimates. Daklinza is effective across several genotypes of diseases and has shown very high cure rates when used in combination with Gilead Sciences’ blockbuster drug Sovaldi. The encouraging data of Daklinza-Sovaldi therapy is encouraging many healthcare providers to choose 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. The pricing is likely to remain high considering that the drug helps in reducing the treatment window and potentially mitigates patients’ risk of developing liver complications. Liver transplants resulting from these complications can be extremely expensive.

The chart below shows the historical and projected revenue trajectory for Bristol-Myers Squibb’s Virology drugs.

Our current price estimate for Bristol-Myers Squibb stands at $54, implying a discount of around 10% to the current market price.

See our complete analysis for Bristol-Myers Squibb

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