Dissecting Bristol-Myers Squibb's 4th Quarter Earnings Call

Bristol-Myers Squibb (NYSE: BMY  ) reported earnings results on Friday for the 4th quarter and full year. Overall earnings were slightly better than expected, with solid gains from Sprycel, Orencia, Yervoy & Eliquis contributing. Additionally, the company guided to GAAP EPS range of $1.75 to $1.90 for 2014, which would signify a nearly 28 times forward earnings P/E ratio at today's price of $50.94. Of course, all eyes are on the immuno-oncology franchise and how this will develop over the coming year. Nivolumab and Yervoy are the big guns, with their LAG-3 and anti-KIR products further behind. Let's dive into some of the details.

First, the good news

Bristol's drugs Sprycel, Yervoy, Orencia, Eliquis and Baraclude all performed very well last quarter. Sprycel continues its large ramp, with growth of 26% YoY and 30% quarter over quarter. Sprycel directly competes against Gleevec and Tasigna in patients with Ph+ CML and has been steadily gaining market share in this space. Gleevec is on pace to achieve about $4.6bn in sales this year even as it steadily loses market share (generic Gleevec did enter the space this year). Sprycel was the fastest growing agent in the US in this population though and it continues to be a leader in both 1st line and 2nd line usage. Recently, Sprycel had been subject to patent litigation with generic drug maker Apotex. While Bristol's previous 10-K suggested basic exclusivity in the US ended in 2020, John Elicker (SVP, Public Affairs) was quoted as saying that there was "at least 10 more years of market exclusivity for Sprycel in the US." Consensus peak sales for Sprycel at $1.8bn could be significantly undervaluing this product. I think it could reach $2.5 to $3bn given its current trajectory.

Second, Eliquis finally had a nice quarter. This launch has gone very poorly so far, but it seems like Pfizer & Bristol have finally gotten their act together on this drug, achieving $71m in revenues. I do think its data, even with the Chinese fraud issue, are best-in-class for preventing stroke and blood clots in people with atrial fibrillation. Peak consensus of $3bn in sales is still achievable, but they need to keep the momentum going. It will also be important to follow the developments of the drugs that can reverse the effects of Eliquis, as patients taking the drug risk serious bleeding complications should emergency surgery be needed. Current standard Warfarin is more cumbersome to take, but its effects can be reversed relatively easily. Should an antidote be approved, this could help boost Eliquis sales even further. I know that Portola Pharmaceuticals is developing an antidote currently that is in Phase 2 trials. There may be others developing these drugs that I am not aware of as well.

Finally, we come to Bristol's immuno-oncology platform. The stock was up early on Friday but once the conference call started it was all down hill, with the stock finishing the day down 5.58% significantly under performing the S&P 500, which was down 2.09%. I attribute the decline partially to the following statement in their conference call:

"And finally, as many of you seen, we recently posted on clinicaltrials.gov a first line Phase III trial with Nivolumab monotherapy in lung cancer that will start soon. With regard to the Phase I combination trial of nivolumab and ipilimumab, its worth noting that this is a Phase I trial that's still ongoing in multiple cohorts of patients and with several dose combinations being evaluated to determine how we could move forward with a combination regimen for lung cancer. Based on our assessment of the preliminary data that we now have in-house, we will continue to cohort patients with lung cancer treated with Ipilimumab and Nivolumab combinations before beginning a registrational study. Our next steps include waiting more mature data from additional cohorts in the study and potentially exploring different doses and regimens and specific patient populations."

Here is the link to the study. There are a few ways to interpret this statement. The worst case scenario is that Bristol is seeing the Yervoy/nivolumab combo as too toxic in early stages and does not think the efficacy will be able to overcome the side effects. As a result, it has started the nivolumab monotherapy trial in its place. Yervoy certainly has a number of immune-related side effects that can be quite dangerous, just see the list here. Does adding a second checkpoint inhibitor increase these risks? That answer isn't known quite yet, but I think it is a fair question to ask. If so, this combination may not be viable at all. 

Another interpretation, and more bullish one, is that the issue is actually related to a regulatory/approval issue. A note from Barclays suggested that since neither Yervoy or nivolumab had been approved yet in lung cancer, it was imperative that the 1st registrational trial be run with a single agent. That was the path that GSK took with dabrafenib (BRAF) and trametinib (MEK) in melanoma, getting both approved as single agents before running a trial under the accelerated approval pathway that just gained approval for the combination on January 8 of this year. I am skeptical that Yervoy could be approved as a single agent in lung cancer, even though it is already approved in Melanoma. However, the phase 1 data from nivolumab on lung cancer patients was certainly promising enough to warrant undertaking a phase 3 pivotal trial. If approved, it could be potentially easier to get the Yervoy combo approved as well.

There has also been a lot of talk about relevant biomarkers and how they will affect clinical outcomes. Roche, Merck, AstraZeneca and Bristol are all taking slightly different approaches with regards to PD-L1 expression. Does high PD-L1 expression correlate to efficacy? Can combination therapy be effective in all patients, even those that do not express PD-L1? Are there other biomarkers or sub-populations that are relevant? There simply has not been enough information released yet to answer these questions. Should combination therapies be effective, Bristol definitely has the competitive advantage here. If not, Bristol's lead in this race may shrink considerably.

Lastly, even though the stock sold off on Friday, I think it presents a buying opportunity. Immuno-oncology is here to stay and Bristol has one of the richest pipelines in this space. With potential upside surprises in Hepatitis C and a resurgence in sales of Eliquis, Sprycel, Orencia and Baraclude, the future looks bright. Of course, Investors will have to be patient with regards to Nivolumab and its development, but all indications are that it will play an important role moving forward. The warm weather of June and results at ASCO cannot come quick enough.

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