Bristol-Myers Squibb's Takeover Premium May Be Building

| About: Bristol-Myers Squibb (BMY)

Summary

Shares of Bristol-Myers Squibb Co. have surged from its February low and are about to break out.

Key cancer drug Opdivo has increased revenues each quarter but the trend of its high growth rate can’t continue and may be unsustainable.

Pricing pressures may be put on the growing hepatitis C portfolio of Bristol-Myers from fierce competition.

The BMY forward PE multiple seems to be stretched but taking out an acquisition premium, it would come down to the level of its peers.

Shares of Bristol-Myers Squibb Co. (NYSE:BMY) have surged 25.71% from the February low, along with the S&P 500 Healthcare sector, up about 14.35% despite the political dark cloud hanging over prescription drug prices. Presumptive nominees from both parties have continued to ramp up their rhetoric against the pharmaceutical and biotechnology industries, with Congress also jumping into the debate and holding a series of hearings on the issue of drug prices. Speculators have been using the political noise as a backdrop to take short positions against the sector.

Bristol-Myers Tehnical Chart Click to enlarge

Since late April, Bristol-Myers stock has been bumping into the upper trendline resistance of the ascending wedge chart pattern and is about to break out after the company reported better-than-expected earnings for the first-quarter 2016 and raised its outlook for the year. Strong revenue and earnings growth are driven by key drugs, including the anti-PD-1 (programmed death receptor-1) immuno-oncology drug Opdivo (nivolumab), anticoagulant drug Eliquis (apixaban) and hepatitis C drug Daklinza (daclatasvir).

According to the company's financial statement, Opdivo's revenue now accounts for over 50% of the company's oncology product portfolio, compared to just under 5% a year ago. Eliquis sales more than doubled in the first-quarter 2016. Bristol-Myers reported 62% growth of its hepatitis C franchise, compared to the same quarter last year, with most of the growth coming from sales in the U.S. after the U.S. Food and Drug Administration, or FDA, modified and expanded the Daklinza indications in February 2016 for patients with chronic hepatitis C virus, or HCV, genotype 1 or 3. Sales of hepatitis C drugs outside the U.S. actually declined over 36% on a year-on-year basis.

Gilead Technical Chart Click to enlarge

Last September, Bloomberg Intelligence analyst, Asthika Goonewardene, speculated that Gilead (NASDAQ:GILD) could take over Bristol-Myers, as Gilead's growth has stalled and the market is worried about future growth prospects. Gilead has been working to enter the oncology market with its chronic lymphocytic leukemia drug Zydelig (idelalisib), which generated sales of just $132 million in the entire 2015. The takeover of Bristol-Myers would expand Gilead's portfolio of antiviral and oncology drugs, particularly by gaining treatments for cancer immunotherapy.

Pfizer Technical Chart Click to enlarge

Just last month, John Boris, an analyst with SunTrust, told CNBC's Meg Tirrell that Pfizer (NYSE:PFE) should take a look at Bristol-Myers if they're interested in being No. 1 in oncology. In addition, the tax rate for Bristol-Myers is in the high teens, which is lower than Pfizer's, so it could have a favorable impact on the tax rate going forward. Similar rumors and arguments have been floating around on Wall Street after two failed attempts by Pfizer to takeover AstraZeneca (NYSE:AZN) in 2015 and Allergan (NYSE:AGN) this year. An M&A deal is critical to Pfizer for more than just the purposes of tax savings, as revenues of its blockbuster drugs are shrinking while their strategies for biosimilars are also in question.

Bristol-Myers' forward PE (price-to-earnings) multiple of about 22.43 seems to be stretched, compared to its peers, including Eli Lilly and Co. (NYSE:LLY), Johnson & Johnson (NYSE:JNJ), Merck & Co. (NYSE:MRK), and Pfizer, which have forward PEs of 18.60, 16.68, 14.92 and 13.21 respectively. Taking out an acquisition premium of 30%, which may already be priced into the stock, the forward PE of BMY would come down to 15.70, in line with its peers.

Bristol-Myers is banking on the continuous explosive growth of Opdivo and Eliquis, as well as its hepatitis C franchise, while expecting total revenue growth in the low-double digits range this year. New cancer drug Empliciti (elotuzumab), co-developed with AbbVie (NYSE:ABBV), received FDA approval in November for the treatment of multiple myeloma and could add hundreds of millions of dollars in sales this year. Empliciti is forecasted to achieve peak sales of $4.2 billion in 2022.

Opdivo's High Growth Rate May be Unsustainable

Opdivo, approved by the FDA in November 2015 for treatments of an advanced form of kidney cancer, generated sales of $704 million in the first-quarter 2016. So far, the FDA has also approved Opdivo for treatment of advanced melanoma, lung cancer and metastatic non-small cell lung, or NSCL, cancer. Since the second-quarter of 2015, the revenues from Opdivo alone have increased Bristol-Myers' top line by an average of $100 million to $200 million each quarter. This trend can't continue.

The recent approval by the European Commission of Opdivo, in combination with the Bristol-Myers skin cancer drug Yervoy (ipilimumab), for the treatment of advanced melanoma in adults could help sales of Yervoy, which have been sagging, down 14% last year. Another of the company's cancer drugs, Sprycel (dasatinib) for the treatment of chronic myeloid leukemia, or CML, and acute lymphoblastic leukemia, or ALL, is expected to perform well and could generate close to $2 billion in sales this year.

Merck Techncial Chart Click to enlarge

Merck's Keytruda (pembrolizumab), another anti-PD-1 therapy approved by the FDA for treatment of advanced melanoma in September 2014 and for metastatic NSCL cancer in October 2015, is making big progress. In the first-quarter 2016, Keytruda generated sales of $249 million, up 300% year-on-year. Merck also said the FDA accepted for review a supplemental Biologics License Application, or sBLA, for Keytruda for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma and granted Priority Review, with a PDUFA action date of August 9, 2016.

Hepatitis C Drug Portfolio is a Wild Card as More Competitors Emerge

The hepatitis C franchise of Bristol-Myers Squibb, including Daklinza (daclatasvir), a pan-genotypic non-structural viral protein 5A (NS5A) replication complex inhibitor, and Sunvepra (asunaprevir), a NS3/4A protease inhibitor, generated total sales of about $1.6 billion in 2015, with about 80% of total revenues coming from Japan and Europe. Daklinza was approved by the Japanese Ministry of Health, Labor and Welfare in July 2014 in combination with Sunvepra for the treatment of the HCV genotype 1 infection and by the European Commission in August 2014 in combination with Gilead's Solvadi (sofosbuvir) for the treatment of the HCV genotypes 1, 2, 3, and 4 infections. In December 2013, the FDA approved Solvadi tablets for the treatment of chronic HCV infections as a component of combination antiviral treatment regimens.

Bristol-Myers Squibb decided in October 2014 that it would not pursue FDA approval of the dual regimen of Daklinza and Sunvepra for the treatment of HCV genotype 1b patients in the U.S., due to fierce competition from Gilead's Harvoni (ledipasvir-sofosbuvir) and AbbVie's Viekira Pak, and withdrew its new drug application, or NDA, for Sunvepra. The FDA approved Harvoni in October 2014 for the treatment of chronic HCV genotype 1 infection and two additional supplemental indications in February 2016 for the treatment of chronic HCV genotype 1- or 4 with advanced liver disease.

AbbVie Techncial Chart Click to enlarge

Viekira Pak, approved by the FDA in December 2014, is a multi-pill antiviral, containing a combination of dasabuvir, ombitasvir, paritaprevir and ritonavir, for the treatment of chronic HCV genotype 1 infection, including those with advanced cirrhosis of the liver.

In late November 2014, the FDA rejected the Bristol-Myers application to market Daklinza as a stand-alone hepatitis C drug, but approved the drug in July 2015 for use with Gilead's Solvadi to treat HCV genotype 3 infections. In February 2016, the FDA modified and expanded the Daklinza indications for patients with chronic HCV genotype 1 or 3. In March 2016, the Sunvepra and Daklinza dual regimen was approved as a chronic hepatitis C treatment, genotype 1 or 4, by Health Canada.

The wholesale acquisition cost for a 12-week course of Daklinza is $63,000 and $84,000 for the Solvadi component. Hence, Gilead would benefit the most from the Daklinza/Solvadi dual regimen. Gilead could launch a more powerful hepatitis C drug for the treatment of chronic HCV genotype 1-6 infections as early as June 28, 2016, pending FDA approval, and put more pricing pressure on Bristol-Myers' hepatitis C franchise.

Merck said in the first-quarter 2016, it sold $50 million worth of Zepatier (elbasvir and grazoprevir), a once-daily hepatitis C pill approved by the FDA in late January for the treatment of chronic HCV genotypes 1 and 4 infection, with a price tag of $54,600 for a 12-week course of treatment, far less than the Daklinza/Solvadi dual regimen.

The virology drug portfolio of Bristol-Myers Squibb, which generated total revenues of about $6.43 billion in 2015, could be at risk as top-selling antivirals, including hepatitis B drug Baraclude (entecavir) and HIV drug Reyataz (atazanavir), are facing threats from generic competitors.

Conclusions

Shares of Bristol-Myers Squibb Co. have surged 25.71% from the February low and are about to break out after the company reported better-than-expected earnings for the first-quarter 2016 and raised its outlook for the year.

The company is banking on strong revenue and earnings growth by key drugs Opdivo (nivolumab), Eliquis (apixaban) and hepatitis C drug Daklinza (daclatasvir). Cancer drug Opdivo has increased revenues each quarter but the trend of its high growth rate can't continue and may be unsustainable, just as pricing pressures may be put on the growing hepatitis C portfolio of Bristol-Myers from fierce competition.

Bristol-Myers' forward PE multiple seems to be stretched compared to its peers, LLY, JNJ, MRK and PFE. Taking out an acquisition premium of 30%, which may already be priced into the stock, the forward PE of BMY would come down to the level of the others in that group. A large drug company that is worried about its own future growth prospects, wants a more favorable tax rate, or seeks an expansion of its oncology or antiviral drug portfolio should take a look at Bristol-Myers, and BMY should consider it amid ever growing competition.

Disclosure: I am/we are long AGN, ABBV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.