Is It Finally OK to Buy Bristol-Myers Squibb?

After reporting disappointing news for its immunotherapy cancer drug Opdivo in lung cancer, Bristol-Myers Squibb's (BMY 1.21%) shares have lost one-third of their value. Are they a bargain-basement buy? Read on to learn more about the challenges, and the opportunities, facing this company in 2017.

Image source: Bristol-Myers Squibb.

Game-changing therapies

Non-small-cell lung cancer (NSCLC) remains one of the most common and deadliest cancers. Roughly one-quarter of a million patients are diagnosed with lung cancer in the U.S. annually, and 85% of those cases are NSCLC. According to the National Cancer Institute, lung cancer is responsible for 26.5% of all cancer deaths.

However, researchers have recently been making big advances in NSCLC. Perhaps, the most significant advance is the development of checkpoint inhibitors that help battle lung cancer in a new way.

These checkpoint inhibitors improve a patient's immune system's ability to identify and destroy cancerous cells by disrupting their use of proteins that can fool T-cells into thinking they're not a threat. 

So far, the FDA has approved Bristol-Myers' Opdivo, the market-share leader, Merck & Co.'s (MRK 0.47%) Keytruda, and Roche's Tecentriq for use in lung cancer treatment. All three target the use of the PD-1/PD-L1 protein to evade the immune system.

Facing off

Initially, PD-1 drugs were approved for use in advanced patients who had seen their disease return or advance despite prior treatments.

However, last summer Merck reported data showing Keytruda can help patients who haven't received any other therapy yet. Specifically, in patients with PD-L1 expression equal to or greater than 50%, Keytruda improved progression-free survival, overall survival, and objective response rate, while providing a 50% lower risk of death or cancer progression.

Since Keytruda and Opdivo work similarly, it was believed that Opdivo might prove similarly effective in these treatment-naive patients. However, Bristol-Myers Squibb's Opdivo trial included patients expressing PD-1 at far lower levels (5%) than Keytruda, and that led Opdivo to fail to outperform the control arm of its study. 

As a result, Keytruda, which won FDA approval for first-line use in patients in October, could close the gap between it and Opdivo. Keytruda chances to catch-up to Opdivo were further strengthened last week, when Bristol-Myers' announced it won't pursue accelerated approval of a combination therapy consisting of Opdivo plus Yervoy, another one of its drugs, in the first-line indication.

Additional data from the Opdivo plus Yervoy trial could be reported later this year, but until then, investors are left thinking Keytruda has the most to gain and Opdivo has the most to lose in 2017. 

Time to buy?

Bristol-Myers Squibb's shares have tumbled since Opdivo's stumble, but investors might not want to under-estimate the chance that shares recover lost ground.

Opdivo is still a top-selling, fast-growing blockbuster with annualized sales of $3.6 billion exiting the third quarter. Furthermore, while Opdivo has had some setbacks recently, the company's conducting dozens of trials that could still pan out, and spark investor optimism. 

Bristol-Myers Squibb will also benefit somewhat from Keytruda's success. This week, Merck agreed to settle a patent infringement lawsuit filed by Bristol-Myers Squibb. As part of that settlement, Merck is giving Bristol-Myers Squibb $625 million upfront, plus royalties on Keytruda's global sales of 6.5% from Jan. 1, 2017, through Dec. 31, 2023, and 2.5% from Jan. 1, 2024, through Dec. 31, 2026.

Opdivo isn't Bristol-Myers Squibb's only fast-growing drug, either. For example, its anticoagulant Eliquis posted sales of $884 million in Q3, up 90% from last year, and Eliquis sales could continue marching higher because Warfarin, a decades-old drug, still maintains market share north of 40%.

Overall, with $9 billion in cash and equivalents on the books, and an opportunity to continue growing, I think it could be worth buying Bristol-Myers Squibb's shares on sale, especially since they're yielding an attractive 3.17% now.