Bristol-Myers Squibb's Oncology Opportunity

Although shares of Bristol-Myers (NYSE: BMY  ) moved up over 130% throughout the last 5 years, I believe that investors will be reluctant to bring BMY much higher until the company demonstrates an ability to maintain a clear trend of growth in drug sales.

With a patent expiration on Bristol-Myers' best-selling antipsychotic drug Abilify coming in 2015, and with multiple ongoing investigations over the marketing practices for this drug, it seems likely that revenue from the drug will taper off quickly. The continuous decline of the HIV drug Sustiva (which will go generic in 2015) is also cutting into Bristol's growth.

Investors should also be concerned about Bristol's claim to Baraclude – a top seller in the Hepatitis B space. An ongoing legal battle with Teva Pharmaceuticals might allow the generic drug manufacturer to launch a competitor to Baraclude this year if the courts decide against Bristol's patent claim to Baraclude. This would threaten a quarterly source of roughly $400 million in revenue for Bristol-Myers.

But despite all the challenging facing Bristol-Myers today, I do believe the company is positioned to do well in oncology due to the commercial potential of Sprycel (dasatinib) and Yervoy (ipilimumab). Both drugs have been growing sales rapidly throughout the last year, and have no patent concerns in the short run.

Sprycel currently outsells Yervoy by a hefty margin, but I think that Yervoy's potential to expand into new disease indications makes it a bigger potential value driver. Because the market has big expectations for Yervoy, I think the drug will make a big difference in the long term for the stock.

What's so great About Yervoy/Ipilimumab?
Yervoy is a "sleeper hit" of a cancer drug that was launched in 2011 after great success in phase 3 testing (in skin cancer) and subsequent FDA approval. Although it is toxic, Yervoy showed the medical community that it adds four months of survival to late-stage skin cancer patients.

Yervoy is also the first commercially successful product that is based on a relatively new drug design concept known as immunotherapy. Through various mechanisms of action, immunotherapies are designed to help the immune system's natural response to cancer. What makes Yervoy different from other immunotherapies is its unique mechanism of action, which is based checkpoint inhibition.

Yervoy has substantial growth potential
There are somewhere around 76,000 late-stage melanoma (skin cancer) patients in the United States alone. Based on Bristol-Myers' hefty $120,000 price tag for Yervoy, we know that the drug has the potential to become a multibillion-dollar product just from skin cancer.

But when you also factor in Yervoy's potential expansion into other cancer indications, the opportunity seems a lot less limited.

Bristol is now putting Yervoy through a number of new clinical trials that will provide data for additional drug applications to the FDA to treat kidney, head & neck, and prostate cancer. Many of these trials are combining Yervoy with other drugs that could (potentially) have synergistic effects with the drug's immune-boosting effect.

What's the downside on this gamble?
I think Bristol's biggest concern regarding Yervoy is that the drug will soon be outclassed by next-generation checkpoint inhibitors that target PD-1/L1 (instead of CTLA-4). Although PD-1 drugs (like Merck's MK-3475 and Bristol's own nivolumab) are still a few years from the market, they will affect Yervoy's expansion into new indications like kidney and prostate cancer. They may also threaten Yervoy's market share in metastatic melanoma.

Bristol might be able to keep the product's future revenues afloat by marketing Yervoy as a part of a combined therapy for melanoma (and other types of cancer), but the success of this strategy will be contingent upon the success of combined drug trials. Bristol is currently testing a nivolumab and Yervoy combination against melanoma in the CheckMate 067 trial, which will not yield full results until 2016. 

To continue its effort to expand Yervoy into new cancer indications, Bristol will also have to fund late-stage clinical trials to build new sets of efficacy data. Late-stage cancer trials are expensive, and they will cut into Bristol-Myers' bottom line throughout the next few years. But it might be worth Bristol's effort. Yervoy should be patent-protected until 2023, and 

But in the long run, I do think that Bristol's investment into Yervoy and immunotherapy will play out favorably. Yervoy won't mimic the success it had in melanoma when/if it is introduced to other indications like renal cell carcinoma, but expanded revenue from Yervoy would help the company offset the losses from Abilify, Sustiva, and other dying products.

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