Bristol-Myers Investors Feel the Harsh Downside of Cancer Bet

  • Stock drops 16 percent after Opdivo fails in lung cancer trial
  • CEO says immunooncology remains ‘central pillar’ of strategy

For almost four years, Bristol-Myers Squibb Co. investors have profited handsomely thanks to the company’s sharp focus on cancer. On Friday, they felt the other side of that concentrated bet.

The drop in the shares Friday -- the worst in more than 16 years -- had as much to do with the failure of Bristol-Myers’s drug Opdivo in a clinical trial for lung cancer as it did with investors’ now-shaken confidence in the New York-based company’s ability to be the breakaway leader in the field. It’s also a stark reminder of the risks of drug development.

No other large pharmaceutical company has recently focused on one disease area like Bristol-Myers has, in this case by targeting drugs that leverage the immune system to attack tumors. The trial results, which showed that Opdivo failed to do better than chemotherapy at keeping previously untreated patients’ cancer from progressing, have left the door open for competitors like Merck & Co., AstraZeneca Plc and Roche Holding AG.

Bristol-Myers shares were down 16 percent to $63.28 at the close in New York. Merck gained 10 percent to $63.86.

Massive Market

Immunotherapy is a market potentially worth billions of dollars a year -- Opdivo is predicted by analysts to bring in $10.7 billion in 2020, and the immune-system drugs are projected to make up almost half of Bristol-Myers’s sales by that time. Lung cancer is the biggest killer in oncology, according to the American Cancer Society, and the drugs have thus far been largely approved for cancers that affect fewer patients.

“Given that we expect lung cancer to be the largest immuno-oncology indication, this is a seismic event in terms of market share implications,” Alex Arfaei, an analysts with BMO Capital Markets, said in a note to clients about the Opdivo trial results. He has a market perform rating on the shares.

Even with the drop, Bristol-Myers is an expensive stock to own. The 11-member Standard & Poor’s 500 Pharmaceuticals Index, which includes Johnson & Johnson, Pfizer Inc., Merck, along with Bristol-Myers, has a price-to-earnings ratio of 24. Before Friday’s drop, Bristol-Myers was trading at a ratio of 36. It’s been more expensive than the rest of the index since 2013.

Bristol-Myers doesn’t have any plans to alter its focus just yet or diversify away from cancer.

‘Expectations Are High’

“It is clear, because of our track record of success, the expectations are high,” Chief Executive Officer Giovanni Caforio said in a phone interview Friday. “It does really not change our focus and it does not change the long-term potential of Opdivo; it does not impact our commitment to making immuno-oncology the central pillar of our strategy.”

That’s not necessarily the approach everyone would like to see the company take, especially with a highly-valued stock that could have been used for deals.

“They could’ve made acquisitions,” SunTrust Robinson Humphrey Inc. analyst John Boris said in a phone interview. The company has acted slowly even as a falling biotech stock market meant some targets might have been available at a discount, he said. “They should’ve been considering how to diversity that revenue stream.” He has a neutral rating on the stock.

Different R&D Strategies

Friday’s results also expose the difference between the development strategies at Bristol-Myers and Merck, which has a competing drug in the same class, called Keytruda. Unlike Bristol-Myers, Merck designed its study to exclude patients with lower levels of a key biomarker thought to predict response to the drug. While that meant a smaller market, it meant a higher probability of success -- and the trial reported positive results in June. Bristol-Myers’ trial included patients with lower levels of the biomarker.

CEO Caforio said Bristol-Myers is still pushing ahead in studying previously untreated patients, but with combination drugs that could help more patients respond to the treatments, rather than just the ones with the highest levels of biomarkers in their tumors. Those results may not be ready until 2018, however.

“Our strategy continues to be the best strategy,” Caforio said. The expectation is “not that every single trial will work, and it’s not about who wins every time one trial is completed.”

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