Bristol-Myers (NYSE: BMY ) is at a crossroad, a point where biotechnology growth could be produced with successful pipeline development. Yet with a large pharma ecosystem in place, Bristol has what many believe to be a good risk-to-reward ratio. While the stock has very quietly rallied 60% over the last year, one of Bristol's underperforming peers is without question stealing its spotlight.
Two franchises that should worry investors
Over the past year, Bristol-Myers has been driven by strong fundamental growth. Despite patent expirations from blockbusters Plavix and Avapro, Bristol has found growth from the likes of Yervoy and Orencia. Yet still, much of the excitement in shares of Bristol is tied to its future, involving both its cancer and hepatitis C pipeline.
This is where investors should be worried, which might sound crazy given the strong performance from its anti-PD-1 and daclatasvir/asunaprevir combination for melanoma and hep-C, respectively. However, another large pharma competitor, Merck (NYSE: MRK ) , is not only on the heels of Bristol, but surpassing it in data.
For example, Bristol-Myers' anti-PD-1 drug, which turns off a cloaking device that prevents the immune system from recognizing cancer cells, was one of the highlights at this year's ASCO meeting. In particular, it produced response rates of 31% in treating advanced melanoma -- and a whopping 41% at its best dose.
These results sparked optimism among investors, giving hope that its anti-PD-1 (nivolumab) could be used to treat several cancers, including a combination with many of its drugs such as Yervoy. However, Merck reported data on its anti-PD-1 at the same conference, producing an average response rate of 38% and 51% at its best dose. Clearly, this trumps the performance of Bristol.
Then, looking at Bristol's data in treating hep-C, the company recently cured 84.7% of 222 patients in a 24 week phase 3 study using daclatasvir and asunaprevir. Also, very impressive results, but Merck's combination treatment using MK-5172 and MK-8742 in a 65 patient trial cured 100% of patients after just 12 weeks.
Possibly, failing to meet expectations
Now, just for the record, there is a big difference between a 12-week and a 24-week study and in the number of patients. But at the surface, Merck looks to be winning this race as well. Cancer and hep-C are two multibillion-dollar industries that many investors believe Bristol is at the forefront in controlling. Yet, in the end, the best drug will be the most successful commercially, and Bristol doesn't look to have the best drugs.
Moreover, Yervoy's $238 million and 33% year-over-year growth was impressive in Bristol's last quarter, and many believe that Yervoy will be important as the company combines its anti-PD-1 to treat melanoma. However, Merck is also combining its anti-PD-1 to treat melanoma, which is a more effective drug, meaning that it's possible Merck's drug could actually hurt the growth of Yervoy when it comes to the market. Overall, these big catalysts that have Bristol trading higher might never yield the fundamental impact that's expected.
Counting chickens before they hatch -- industrywide
At 27 times earnings and 5.3 times sales, Bristol-Myers looks a little too pricey considering the competition and uncertainty it could face. Now, considering the premium on some biotech/large pharmas, the mere mention of Bristol and "overvalued" might seem irrational. Because after all, Gilead Sciences (NASDAQ: GILD ) has an even larger valuation with about 60% as much annual revenue. However, this statement is an illustration of an industrywide valuation problem, one where investors aren't considering risk.
For example, Gilead's valuation is largely tied to its pipeline and excitement for its HCV drug sofosbuvir. The drug recently received a 15-0 vote in favor of FDA approval, with words such as "game changer" often spoke. The drug also worked well in the treatment of HCV in patients with certain STDs, a favorable safety profile with a shorter treatment duration that is all-oral. Currently, analysts project peak sales of $5 billion for the drug. But after Merck's strong results, some actually believe it could challenge Gilead. Hence, Gilead might have to split peak sales on its blockbuster -- a drug expected to increase total sales by 50% -- which is something its stock is not prepared to encounter.
Unfortunately, stock performance is not always a good indication of risk, nor is the pricing premium placed on companies. Looking throughout the health care space, Merck might have the best overall data combined with the cheapest stock price, at 13 times next years earnings and three times sales. While the company's growth is currently nonexistent, if we look at its pipeline, it's highly likely that the next five years could be positive for the stock.
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