After Bristol-Myers Squibb (NYSE:BMY) claimed Merck & Co.'s (NYSE:MRK) cancer-fighting Keytruda infringed upon patents protecting Opdivo, Merck & Co. has agreed to pay Bristol-Myers Squibb $625 million up-front, plus future royalties, in exchange for a non-exclusive license to Opdivo's intellectual property. Does this deal make Bristol-Myers Squibb shares a buy?
In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes sits down with Todd Campbell to discuss what was behind the deal, and how big the royalty payments may be.
A full transcript follows the video.
This podcast was recorded on Jan. 25, 2017.
Kristine Harjes: Let's kick it off with Merck, and also Bristol-Myers.
Todd Campbell: Some very interesting news here this week, Kristine. Wouldn't you like to be able to add nine figures in revenue with just the stroke of a pen?
Harjes: Yeah, that would be nice. My bank account would love it.
Campbell: That's essentially what's happened here with Bristol-Myers and Merck. Essentially, these two companies have settled a patent dispute, Bristol-Myers coming out on top. Merck has now agreed to give them a pile of money up front to make up for royalties that they hadn't been paying for infringing on the patent. And, according to the settlement, Merck is going to give Bristol-Myers a healthy 6.5% dividend from here until 2023, and then another 2.5% from 2024 to 2026.
Harjes: And that's specifically on one drug named Opdivo and Keytruda.
Campbell: Yes. Both these drugs work in the same way, they target a protein called the PD-1, which is expressed on T-cells, in which cancer cells sneakily use to evade the immune system's detection.
Harjes: Right. This is a completely novel way of treating cancer, which is why you have Bristol-Myers saying here, "Hey, wait, you have infringed upon the patent that we have." So this will effectually end all of the patent infringement litigation against Merck's Keytruda, and as you mentioned, Bristol will get a whole pile of money to make up for the past, and then they'll get royalties going forwards. The payments will actually be split 75% to Bristol-Myers and 25% to a company called Ono Pharmaceutical, it's a Japanese partner on the drug. This is still a very hefty sum for Bristol-Myers.
Campbell: Right. They're getting $625 million right up front. Merry Christmas; here's $625 million! Then, if you look at the potential market opportunity for these checkpoint inhibitors, these PD-1 drugs, it's tremendous, it's huge. These are billions and billions dollar drugs. Just out of the gate, assuming no additional growth on Keytruda, you'd be looking at right around $100 million in royalties stream heading toward Bristol.
Harjes: Right, so this is huge news. Most likely, the drug will continue to expand, making it even bigger and bigger news going forward. And that 6.5% royalty will last all the way through the end of 2023.
Campbell: Right. You just mentioned to the ability to expand. A lot of cancers use this PD-1 to escape detection. What they're finding is, as they do more and more trials in different types of cancer, that these drugs are very effective, very high response rates in patients. This was especially interesting, to see them come to this agreement, because in the last year or so, both drugs, Opdivo and Keytruda, they've diverged in what's happened in their clinical trials, with Merck having a lot of success and Bristol-Myers mostly, in my view, because of the way they designed their trials, having less success, especially in lung cancer.
Harjes: Right. This is something we have talked about on a previous episode of Industry Focus, so our long-time listeners will hopefully remember. It basically had to do, as you mentioned, with the trial design, where Opdivo failed its trail in which it was looking at pretty much all levels of PD-1 expression 5% or above as opposed to, when they did the Keytruda study, it was 50% PD-1 expression and above. Of course, it's a drug that works on PD-1, so if you're targeting patients that have a higher expression of it, you're tilting the odds in your favor.
Campbell: Yeah, it's almost like Merck went the safe route, and Bristol-Myers tried to jump the shark.
Harjes: Right, and it backfired.
Campbell: By going the safe route, Merck was able to nab an FDA approval for the use of Keytruda in the first line setting for high-expressing PDL patients. What's really interesting is that they also have recently filed for first line use of Keytruda plus chemotherapy in patients who don't express PD-1, after seeing some pretty solid trials. So, if Bristol-Myers had either designed the trials so that was only high-expressing patients initially, or had combined it with chemotherapy, who knows if Keytruda would have the advantage in lung cancer heading into 2017 versus Opdivo. Obviously, I think that probably made Bristol-Myers a bit more willing to agree to that royalty stream, because they looked at it and said, "Well, if we can't get the first line, and the first line could be worth up to $1 billion, at least maybe we can share in some of Keytruda's success."
Harjes: Absolutely. It is not a bad consolation prize.
Campbell: No, and it's all high-margin money. They're not actually producing anything, they already produced the IP for it.