The Bristol-Myers Squibb Co. Overreaction Highlights The Dependence On Oncology

Immuno-oncology is set to be a huge market, and one that is hugely important to Bristol-Myers' future.

Jan 28, 2014 at 6:30PM

After years of the big pharma industry pushing diversification as the solution to its woes, at least one major player is breaking from the pack. Bristol-Myers Squibb (NYSE:BMY) is prioritizing its oncology and virology assets, and the company has already staked out some attractive real estate in the immuno-oncology space. While the appeal and potential of immuno-oncology is legitimate, the valuation is already generous and the company's lead on Merck and Roche may not be as strong as the bulls hope.

A solid quarter ...
Revenue rose 6% from the year-ago period (or 7% in constant currency), about 3% ahead of the average sell-side estimate and almost 1% ahead of the high end estimate. U.S. sales rose 1%, while Europe was up about 2% in local currency and "Rest of the World" was up 12%. Oddly enough, the beat relative to expectations was pretty even across the board; Abilify was down 22%, while Sustiva was up 11% and Baraclude was up 14%. New cancer drugs like Sprycel and Yervoy were up 30% and 23% from the year-ago period. 

Margins were also strong relative to expectations. Gross margin fell almost three points from last year's level but beat the sell-side estimate by more than half a point. Operating income for the year rose by 24%, a solid beat versus expectations on lower operating expenses.

... but nobody seemed to care
Bristol-Myers' stock didn't react as you might expect with a solid earnings report. The Street was far more concerned with what the company did, and did not, have to say about its immuno-oncology portfolio.

Between the start of a new trial to evaluate nivolumab as a solo first-line therapy in lung cancer and the company's refusal to give a firm timeline for Phase III nivo+Yervoy studies, analysts and investors are now worried about the future of this combo therapy. It may in fact be the case that adding Yervoy to nivo does not meaningfully improve efficacy or may create safety concerns. If so, that would shrink the company's lead over Merck and Roche in new immuno-oncology lung cancer combo therapy.

This strikes me as an overreaction. First-to-market hasn't translated into as much of an advantage in oncology as it has in therapeutic areas like diabetes or CNS. What's more, Bristol-Myers has moved a LAG-3 immuno-oncology drug into trials that may in fact end up as a stronger combo option for PD-1 anyway.

Turning away from diversification
As noted earlier, Bristol-Myers is taking the unconventional step of willingly putting its future eggs in fewer baskets. Bristol-Myers has curtailed its early stage research efforts in areas like hepatitis C, diabetes, and neuroscience in favor of a greater focus on oncology, as well as ongoing work in HIV, hepatitis B, heart failure, and fibrotic disease. Additionally, Bristol-Myers sold its share of its diabetes JV to its partner AstraZeneca, and on very favorable terms.

Bristol-Myers still has potentially worthwhile assets in hepatitis C, but a huge amount of the company's future success now rests with its immuno-oncology franchise. Estimates for the potential of this therapeutic class keep heading higher, as analysts have moved their long-term targets from around $10 billion to over $20 billion and, in a few cases, as high as $40 billion.

Bristol-Myers is certainly going to have competition, as Merck and Roche have immuno-oncology franchises of their own that are quite promising, and AstraZeneca's position in this market is often underrated or overlooked.  What Bristol-Myers has going for it is one of the deepest and broadest collection of assets. From compounds in classes like PD-1, KIR, and LAG-3 that basically "lift off the brake" on the immune system to others like CD137 and IL-21 that hit the gas, Bristol-Myers has a rich portfolio of potential compounds that can be tested as monotherapies or combination therapies. 

The bottom line
I don't have any particular doubts or concerns that cancer immunotherapy is a legitimate "next big thing", nor that Bristol-Myers has high-quality assets for this market. I could easily see nivolumab becoming a drug worth more than $7 billion in annual sales and the star of Bristol-Myers' portfolio. The question is what that's all worth today. Unless Merck, Roche, and/or AstraZeneca encounter serious clinical setbacks (and companies like Amgen, GlaxoSmithKline, and Novartis don't get involved), Bristol-Myers is going to be sharing the market.

I am looking for Bristol-Myers to post long-term revenue growth of over 4% a year (which is actually quite strong for Big Pharma), and FCF growth of double that. Unfortunately, that's not enough to get a fair value out of the $40s.  With that, it's hard for me to get excited about the shares even if the "news" on nivo and Yervoy really wasn't as bad as the Street's reaction would suggest.

More great ideas from The Motley Fool...
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Stephen D. Simpson, CFA owns shares of Roche. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers