Update September 21. Let’s be clear about what happened to Bristol-Myers Squibb (BMY) and its key immuno-oncology drug Opdivo on Friday, August 8, when the company announced that Opdivo had failed to demonstrate its efficacy in a trial for treating lung cancer.
Opdivo didn’t fail as a drug. A Bristol-Myers go-for-broke marketing strategy suffered a huge blow. In effect the company gambled big that this trial would be able to massively expand Opdivo’s market ahead of tough competition and the gamble went bust.
You can see the go for broke gamble in the design of the drug trial. Merck (MRK) had designed the trials for its Keytruda drug, the main competitor to Opdivo at the moment in the hot market for drugs that fight cancer by enlisting the body’s immune system, to include only patients with a high level of the biomarker PD-L1. That biomarker is thought to predict the response to a drug such as Keytruda or Opdivo. By going down that road, Merck was limiting the pool of patients for Keytruda in the event of a successful trial, but increasing the likelihood of a positive outcome in the trials. Bristol-Myers on the other hand decided to include patients with a much lower level of biomarker PD-L1 for Opdivo in the treatment of lung cancer. If Opdivo could demonstrate its efficacy for the much larger pool of potential patients, Bristol-Myers could steal a march on Merck and on competitors such as AstraZeneca and Roche Holdings that are somewhat further behind in the immune-oncology race to market.
Of course, the downside of including so many more patients (many with low levels of the biomarker that predicts success) was that Opdivo could fail in its trial to demonstrate efficacy in treating lung cancer.
And that is exactly what happened. Opdivo did not meet the goal of the trial, which was to demonstrate that it would lengthen the progression-free survival of patients with previously untreated advanced non-small cell lung cancer in comparison to chemotherapy. Which leaves Opdivo with approval in the treatment in lung cancer but not with approval as a first-line treatment for that cancer. (Opdivo has also been approved for the treatment of other cancers, but none of these offers the kind of market that lung cancer does.)
Bistol-Myers is now back at work devising new trials for Opdivo that involves using the drug in combinations of immune therapies. An example is the combination of Opdivo with another Bristol-Myers cancer therapy Yervoy.
If projections for Opdivo hadn’t been so high before the results of the trial were announced, the results would not have been so painful for Bristol-Myers shares. The stock, which traded at $75.32 on August 4, had tumbled to $58.68 by August 18, a drop of 24.7%. The shares closed at $55.56 on September 20. (I added Bristol-Myers Squibb to my Jubak Picks portfolio on January 22, 2016 at $$63.68 so on September 20 I was looking at a 12.75% loss on the position.)
But projections for Opdivo were sky high. Opdivo sales for the second quarter were $840 million, roughly a six-fold increase over the same quarter in 2015. Total sales in 2015 were just $942 million, well behind the second-quarter run rate of $3.36 billion for 2016. Analyst estimates for future sales ranged from $7.7 billion by 2018 to $14 billion by 2020.
A more restrained estimate after the trial results is the $5.1 billion projection by Credit Suisse for 2017. But that depends very much on the results of clinical trials for Opdivo in combination with Yervoy. If those move the combination to the level of a first line treatment for lung cancer then the Credit Suisse estimate is an easy reach, in my opinion. If not, it would be a major setback for Bristol-Myers and further damage investor confidence in the company’s portfolio of other cancer therapies.
Credit Suisse games the numbers like this. The bull case–successful trial of the combination therapy–results in a share price of $103. The bear case–another unfavorable trial–yields a share price of $55. That’s about where the stock trades today so, at least by the Credit Suisse formula there’s relatively little risk–beyond the risk of dead money–in the stock. If you split the difference between the bull and the bear case, you get a target price of $79. That’s not very far from my target price of $81 a share.