Leerink Swann estimates that by the year 2025 immuno-oncology drugs will reach a market value of $29 billion, and with the possibility of reaching $34 billion. Over the last year, it has become clear that a staple or backbone of this market will be anti-PD1/PDL1 antibodies, and the company that best capitalizes on this opportunity stands to create many billions of annual revenue. Currently, Bristol-Myers (NYSE:BMY), Merck (NYSE:MRK), Roche (OTCQX:RHHBY) and, most recently, AstraZeneca (NYSE:AZN) are well positioned with products in development. However, following a close look, Bristol-Myers might be the best investment option, both short and long-term.
The Current State of Cancer Therapeutics
In the early 2000s it was Dendreon's (NASDAQ:DNDN) Provenge that was apparently steps above other cancer therapeutics in development. But turns out it was a drug from Bristol-Myers, called Yervoy, that was leaps ahead of its time.
Yervoy is an anti-CTLA4 monoclonal antibody, meaning its sole purpose is to block the receptor CTLA4, which is a negative regulator of T cell activation. However, it not only helps to regulate this negative function, but also inhibits positive T cell activity.
Yervoy was FDA approved based on two large Phase III trials where it produced significant improvements in patients with advanced melanoma. The drug was tested on previously treated and untreated patients and both response rates and overall survival was better than in control groups. But what's most impressive, and a true testament to this effectiveness of the drug, was a meta-analysis of 4,846 patients showing three-year survival rates in more than 20% of patients treated with Yervoy.
Essentially, Yervoy might have been the first step in changing how we treat cancer, straying from the old approach of delaying the inevitable to actually lifting the survival curve. Then, we had the release of data from anti-PD1/PDLI antibodies that set a new standard, and was unprecedented compared to anything that we've seen thus far. As all know, anti-PD1/PDL1 data was presented last year at ASCO, and since then we've received bits and pieces of additional data.
Anti-PD1/PDL1s are antibodies that target PD1 and PDL1, which act as cloaking devices, and targeting them allows the immune system to then identify tumors. Bristol-Myers and Merck are both developing anti-PD1s while Roche is testing an anti-PDL1. However, there's no question that Bristol-Myers' nivolumab and Merck's MK-3475 have been most glorified.
Bristol-Myer' drug is closest to being on market with FDA fast track designations in treating melanoma, kidney, and lung cancer. Merck has a breakthrough designation and recently submitted a Biologics License Application (BLA) for the treatment of advanced melanoma. Hence, where should investors put their money to benefit from this development? Personally, I think there are six reasons why Bristol-Myers is the best selection.
1. Bristol Already Has a Strong Footprint in Treating Melanoma
Currently, the most robust data seen with these antibodies is in treating melanoma; it was data from Roche, Merck, and Bristol-Myers in treating melanoma that created so much excitement at last year's ASCO.
Notably, all three agents produced response rates greater than 30% in treating this disease, which is far greater than the 10%-15% seen with Yervoy. Furthermore, with (Bristol-Myers) nivolumab and (Merck) MK-3475 response rates reached 40%-50% when optimally dosed. Granted, data from MK-3475 was marginally better than with nivolumab, and this has led many to believe that Merck will one day own the late-stage melanoma space, using the theory that the best will thrive. However, this assumption might very well be false.
Yes, Merck has "marginally" better results using its single agent against nivolumab, but Bristol-Myers also owns Yervoy, and is successfully testing nivolumab with Yervoy. Hence, with Yervoy sales expected to top more than $1 billion in 2013, Bristol-Myers already has a large network of Yervoy prescribers and a more efficient drug when it's combined with nivolumab. The success of Bristol's nivolumab + Yervoy regimen has competitors scratching their heads, realizing that the fantastic results seen with anti-PD1/PDL1s can get even better by blocking two checkpoints, and by possibly combining other agents.
Not to mention (and to make the first point of six reasons to buy Bristol-Myers) Bristol's nivolumab will be FDA approved before Merck's or Roche's drug, giving it a first-to-the-scene advantage. Therefore, with it already having the network in place, it shouldn't be hard for Bristol to incorporate nivolumab with its Yervoy sales force.
2. A Competitive Landscape, But A Niche Market For Bristol
Bristol-Myers might very well get a first-to-market advantage, but more importantly is the niche market it could earn by being ahead of the curve with combination therapies.
As previously stated, Bristol has both Yervoy and nivolumab, and part of what determines which anti-PD1/PDL1s will be successful will rely on each company's ability to find a niche market where its drug(s) work best. For example, nivolumab + Yervoy have proven to be most effective in early combination trials, but Yervoy alone has been known as a relatively toxic drug.
In particular, 60% of patients treated report immune-related adverse events while 10%-15% of patients report severe or life-threatening toxicity. Still, this toxicity hasn't stopped physicians from using Yervoy as a treatment, due to the fact that Yervoy does save lives, with 20% of patients surviving longer than three years with a metastatic disease. Nonetheless, other companies might develop anti-PD1/PDL1 with less toxic (and less effective) agents; but by combining two highly effective antibodies, Bristol might find a niche market in patients with the most severe cases of the disease.
Notably, in this late-stage patient population, nivolumab + Yervoy produced 80% tumor reduction in 31% of patients following 12 weeks of treatment. This 31% of patients result compares favorably to the 3% who saw 80% plus tumor shrinkage when tested with anti-PD1s alone, which likely proves that dual checkpoint blockade is superior to the single-agent anti-PD1/PDL1 approach. Yet, because of toxicity the combination might only be used in patients with the most deadly or treatment refractory tumors, those where such shrinkage is needed in order to boost survival. Still, this gives Bristol a niche market where competition will be limited.
3. Lung Cancer Is The Wild Card
Without question, we have more data in treating melanoma than any other disease with anti-PD1/PDLI drugs. While this is true, both Bristol-Myers and Roche are showing significant progress in treating lung cancer with nivolumab and Roche's anti-PDL1, MPDL3280a. Merck has also reported some data in treating the disease.
Impressively, we've seen consistent responses with these agents of 20%-30% in squamous and non- squamous non-small-cell lung carcinoma (NSCLC). This is a very difficult-to-treat patient population where second and third-line treatment options produce response rates in the range of 4% to 11% depending on the mutation.
Like with melanoma, nivolumab is the most advanced drug in development to treat this NSCLC patient population. At ASCO last year, Bristol-Myers reported one and two-year survival rates of 42% and 24% respectively with patients treated with nivolumab, which is far better than the 30% survival at 12 months seen with standard of care. Furthermore, it's important to note that nivolumab produced these results at different doses, making the data that much more impressive, and leads us to believe that more controlled settings could result in even better survival.
Given this data, nivolumab should have no problem earning an FDA approval in this indication, making it many months to years ahead of its peers, and giving it yet another first-to-market advantage.
4. Kidney Cancer Might Have A Competitive Advantage
In treating melanoma and lung cancer, the data has been pretty consistent for all anti-PD1/PDL1 drugs. So far, all have shown relatively similar response rates, and Bristol's advantage is that the company will likely enter the market with its drug ahead of its peers.
However, in treating kidney cancer we begin to see a disconnect between the programs, thus implying that maybe one will emerge as the leader. To date, nivolumab is the only anti-PD1/PDL1 to produce a response rate greater than 15% in treating kidney cancer. Granted, only 34 patients were tested, by far its smallest trial, which means we must entertain the notion that data will not be replicated.
Fortunately, it doesn't appear that Roche or Merck are pursuing kidney cancer to the same degree as melanoma or lung cancer, meaning it's a space for Bristol-Myers to control depending on the outcome of larger studies. And at the very least, it's a space where Bristol-Myers can explore combination therapies with second-line treatments or anti-angiogenesis tyrosine kinase inhibitors, which are most regularly used to treat the disease.
5. Bristol-Myers = Catalysts
So far, we've discussed the data and the advantage of Bristol-Myers in terms of reaching the market first in treating melanoma, lung cancer, and the fact that it already has a footprint in the melanoma space. However, looking ahead to the next 12 months, Bristol-Myers also has far more catalysts.
Take a look at a summary of catalysts and note that AstraZeneca, although mentioned, has not been discussed as thoroughly due to its early stage in the development process.
Trial initiation - P1 in multiple tumors
Ph2 data in mesothelioma
Ph2 data in melanoma
Ph1 data in NSCLC
Ph3 NSCLC trial begins
Ph1 2nd/3rd line solid tumors
Ph1 data melanoma
Ph2 data in NSCLC
Potential Ph3 NSCLC
Ph1 data 1st line RCC
Ph2 3rd line Squamous response rates
Potential filing for 3rd line Squamous
Complete data for 3rd line Squamous
Ph3 2nd line Sq. NSCLC
Ph2 2nd line non-Sq. NSCLC
The bottom line: The chart says it all!
Bristol-Myers is loaded with catalysts for 2014. And while 2013 was the year of melanoma data, in 2014 we will really get an idea of how these drugs treat other diseases. With that said, investors are already fully aware of the likelihood that Bristol-Myers' nivolumab for melanoma will earn a meeting with the FDA; data from these other studies might also create some pleasant surprises.
Bristol expects to complete two studies in NSCLC, and report a Phase II third-line study at this year's ASCO. This particular study is on 100 third-line squamous NSCLC patients, a population with absolutely no quality treatment options. Given nivolumab's early data (discussed above), and historical response rates for Tarceva (erlotinib), if nivolumab -- being just 4% in this patient population -- produces anything close to a 15% response rate then investors can almost guarantee an accelerated FDA filing. Then, if you estimate a six to eight month priority review, nivolumab could possibly be FDA approved for this salvage setting of lung cancer, not only melanoma.
In the second half of the year, Bristol-Myers will report data on a Phase III trial of nivolumab in the treatment of second-line squamous NSCLC compared against docetaxel. When tested prior, this is an indication where nivolumab showed a 42% and 24% survival rate at one and two years respectively -- versus 5%-10% for docetaxel. Thus, conventional wisdom suggests that nivolumab will prove superior to docetaxel.
Finally, we will receive data on nivolumab + Yervoy. This will provide clarification on the immediate future of combination therapies, which are estimated by many analysts to be the future of treating cancer. Not only will Bristol report data on NSCLC and kidney cancer-- it'll be interesting to compare nivolumab alone and in conjunction at treating these diseases -- but also a 220 patient trial tested across 13 different treatment arms. The data presented at last year's ASCO was a partial of this trial, approximately three arms; therefore this trial's completion will be closely watched on Wall Street. Clearly, these studies will dictate large and hopefully accelerated Phase 3 trials in treating NSCLC, kidney cancer, and of course melanoma.
No doubt, these combined studies and the transition from focusing solely on melanoma data to kidney cancer and NSCLC will prove to be a great catalyst for Bristol-Myers in 2014. Combined, these catalysts all suggest that Bristol-Myers could trade considerably higher in the 12 months ahead.
6. Upside & Conclusion
Bristol-Myers will almost certainly have nivolumab on the market far before Merck and Roche bring their products. If Merck's and Roche's drugs prove to be more effective then nivolumab, Bristol might still have an advantage due to being on the market first and with the difference in data being marginal. Yet, what makes this battle interesting is that once Roche and Merck start earning FDA approvals and are directly competing with nivolumab, Bristol-Myers will likely be seeking FDA approval for its combination therapy, which most believe will be a superior treatment for advanced stages of cancer. This gives Bristol-Myers an excellent shot at long-term success. In fact, the only wildcard might be Roche's combination studies, as it will be interesting to see how Avastin, Zelboraf, and Roche's leading oncology pipeline combines with its anti-PDL1 and other programs to treat various cancers. Yet, without solid data to date, Bristol-Myers looks like the best bet to benefit from its anti-PD1 pipeline.
Finally, this brings up the very last reason to be bullish Bristol-Myers, and it is likely the most obvious reason of all: Valuation relative to peers.
In Goldman Sachs' list of eight disruptive technologies, anti-PD1/PDL1 was unsurprisingly included with the firm estimating that FDA approvals over the next three to four years could result in sales potential of up to $7 billion per drug. While Goldman Sachs references the early leaders Bristol-Myers, Roche, and Merck, I think it is rather known that when the data is all collected, and drugs are approved, certain products will perform better than others based on data and the effectiveness of combinations.
But, for the sake of argument, let's just assume that all three of these drugs do create $7 billion annually from being used alone and in combination. The question then becomes, "Which stock will benefit most from these fundamental gains, and where should you put your money?"
2014 Revenue Expectations
% Impact of $7 billion
Looking at the chart above, is it any secret as to which company will benefit the most from anti-PD1/PDL1s? Clearly, the FDA approval of nivolumab for Bristol-Myers is going to be company changing, and when you consider the $4.1 billion it recently gained from AstraZeneca for its diabetes holdings, Bristol-Myers has many billions to spend on developing its place atop the immuno-oncology drug market. Overall, all signs point that Bristol-Myers will benefit greatly from nivolumab, and perhaps the best of any peer with the most to gain, which is sure to create very large stock gains for many years to come.