2 Reasons to Watch Bristol-Myers Squibb Co

Like many drug majors Bristol-Myers Squibb (NYSE: BMY  ) will face heavy losses to generic competition in the years ahead. In an effort to maximize efficiency the company has narrowed its focus to areas with unmet need rather than making incremental improvements for conditions with effective therapies. With private and public payers encouraging drug makers to demonstrate value for their products, it's a sound strategy. Bristol-Myers has two therapies that fit the bill, let's look at how they could make its transition a profitable one.

Opportunity in Japan
Earlier this month Bristol's dual regimen of Sunvepra and Daklinza won approval from Japanese regulators for treatment of patients with genotype 1 chronic hepatitis C virus (HCV) infection. This effectively makes the combo the world's first approved regimen entirely free of side-effect laden interferon and ribavirin.

Winning in Japan hardly guarantees approvals in other major markets, but an earlier development makes marketing half the combo in the EU likely. Late last month the first component, Daklinza received a positive opinion from the European Medicines Agency's review committee. The European Commission isn't required to follow the recommendation, but it's about the most positive indication you could hope for.

While Japan and the EU are certainly important, the US market holds the therapy's most quickly lucrative opportunity. In its first full quarter following FDA approval Gilead Sciences (NASDAQ: GILD  ) recorded $2.3 billion in sales of HCV therapy Sovaldi. Currently many physicians avoid the nasty side effects associated with interferon by combining Sovaldi with Johnson & Johnson's Olysio, but the expense makes the pills hard to swallow. Combined the treatments carry a whopping $150,000 price tag. Both Bristol-Myers and Gilead have interferon and ribavirin free combinations under review at the FDA with announcements expected before the end of the year.

Another first
Bristol's moves into the red hot HCV market are exciting on their own, but its cancer immunotherapy program continues to gain the most attention. Lead candidate nivolumab -- recently dubbed with the trade name Opdivo -- prevents tumor cells from shutting down a local immune system attack rather than fighting them directly. Japanese regulators gave it a stamp of approval earlier this month, making it the first of its kind to reach a major market.

Just prior to winning Japanese approval, the experimental therapy ticked another critical box. In a comparison study with standard therapy dacarbazine, nivolumab became the first of its kind to demonstrate a significant survival benefit. The breakthrough therapy was effective enough that independent monitors were able to confirm a significant benefit early. While interim analysis of cancer therapies is fairly standard, significant overall survival improvements are rare. Hitting the mark early doesn't guarantee US or EU approval, but it's about the most positive sign you could ask for at this stage.

Opdivo might be the first of its kind to demonstrate overall survival benefit, but you'll want to keep an eye on similar programs from both Merck (NYSE: MRK  ) and Roche. Merck has been pushing the development of pembrolizumab -- formerly MK-3475 -- at breakneck speed, and as a result is well ahead of Bristol in the US. The FDA has already accepted an application for treatment of advanced melanoma with pembrolizumab and is expected to make a decision by late October. Bristol surprised the industry last week when it announced plans to file during the present quarter, months ahead of expectations.

If approved, Merck's pembrolizumab will likely reach melanoma patients well ahead of Opdivo, but the race for a lung cancer indication is where investors will want to focus their attention over the coming quarters. At this year's American Society of Clinical Oncology meeting, Bristol-Myers presented some impressive long-term survival data. Patients receiving nivolumab reached the two-year mark several times more frequently than they could expect taking currently available therapies. Lung cancer patients have relatively few options for treating the deadly disease, and an approval for the indication is worth many times more than melanoma.

The risks
The potential for these two programs is immense, but not without risk. Over the next few years Bristol-Myers will face significant losses to generic competition for Abilify, Baraclude, and Sustiva. Combined the drugs accounted for about $5.4 billion, or nearly one-third of the company's total revenue last year. Luckily both programs above have the potential to carry Bristol over its patent cliff and on to new heights.

Unfortunately success is far from guaranteed, even in this late stage. With a price-to-earnings ratio hovering around 28, reaching blockbuster status seems priced in to the company's shares. Should one of them fail unexpectedly -- especially Opdivo -- investors could quickly suffer heavy losses.

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