Opdivo knocks Bristol-Myers Squibb (NYSE:BMY) for a loop
Mr. Market may have it wrong based on his reaction to the failure of Opdivo in lung cancer.
Opdivo, the young blockbuster that has been powering the resurgent growth of the venerable Bristol-Myers Squibb , was the subject of a terse, relatively uninformative press release by BMY as follows:
Opdivo did not meet trial primary endpoint of progression-free survival in patients expressing PD-L1 = 5%
This news has clobbered the stock. Before getting to analysis of the market's reaction to BMY and its competitors, first, more detail from the press release:
Giovanni Caforio, M.D., chief executive officer, Bristol-Myers Squibb, commented, "Opdivo has become a foundational treatment that is transforming cancer care across multiple tumor types. While we are disappointed CheckMate -026 did not meet its primary endpoint in this broad patient population, we remain committed to improving patient outcomes through our comprehensive development program, including the ongoing Phase 3 CheckMate -227 study exploring the potential of the combination of Opdivo plus Yervoy for PD-L1 positive patients, and Opdivo plus Yervoy, or Opdivo plus chemotherapy in PD-L1 negative patients."
The release goes on to explain:
About CheckMate -026
CheckMate -026 is a Phase 3, open-label, randomized study of Opdivo as monotherapy versus investigator's choice chemotherapy in patients with advanced non-small cell lung cancer (NSCLC). Patients enrolled in the trial had received no prior systemic treatment for advanced disease and tested positive for PD-L1 expression...
There's more worth reading, but that provides enough info.
Yervoy (ipilimumab) is another BMY immunotherapy aimed at a different antigen.
PD-L1 is a protein expressed, or over-expressed, by a number of cancer cells. Opdivo is a monoclonal antibody to the programmed-death receptor type 1 (the receptor is a ligand, which explains the "L1" terminology).
The goal is for certain types of white blood cells to gain or regain control of the tumor microenvironment. To quote from a recent article on the PD-1 and PD-L1, which provides a summary of the topic (bolded emphasis added):
Although ipilimumab (Yervoy) can produce durable long-term responses in patients with advanced melanoma, it is associated with significant immune-related toxicities. By contrast, antibodies targeting either PD-1 or PD-L1 have produced significant anti-tumor activity with considerably less toxicity. Activity was seen in patients with melanoma and renal cancer, as well as those with non-small-cell lung, bladder and head and neck cancers, tumors not previously felt to be sensitive to immunotherapy. The tolerability of PD-1-pathway blockers and their unique mechanism of action have made them ideal backbones for combination regimen development. Combination approaches... are currently under clinical investigation. Current efforts focus on registration trials of single agents and combinations in various diseases and disease settings and identifying predictive biomarkers of response.
Basically, this is saying that Yervoy has more side effects than Opdivo and its direct competitors, and it's early days in this entire field.
Next, a discussion of the stock price of BMY, which the market is marking down, then other checkpoint inhibitor stocks.
Rights and wrongs of BMY stock now
I reviewed BMY in April with a negative attitude on the stock based solely on valuation in an article titled Bristol-Myers Squibb Earnings Overview. The points I made there are relevant to how I look at the stock now. The concluding remarks included this:
At BMY's pre-open price of $71.50, I think there are somewhat more attractive stocks in the biotech/biopharma field, simply for valuation and pipeline reasons. The chart is constructive. If you like to buy breakouts from a consolidation pattern with a cup and handle pattern, this may be your stock. But as truly great as Opdivo and Eliquis are, I just do not like to pay more than 25X current year projected EPS for a large company with lots of moving parts.
Using a generous $2.60 EPS (I always use GAAP unless otherwise stated) for 2016 results, which may be a little high based on the latest BMY guidance, 25X brought me to a buy-at or buy-below price of $65. At the time I wrote the article, the stock was in the $70s, and except for a dip or two slightly below $70, that's where it has been. It indeed has acted constructively, exactly as I noted. And now, with no warning, uh oh.
Now that there's been this major setback in bringing Opdivo to frontline use in a major cancer, the fundamental weakness at BMY that I noted in the May article comes into play along with valuation issues. A section of the article began with this heading and included the following detail:
BMY's pipeline - not much in Phase 3
Except for marketed products for which an additional indication is being sought, there is only one Phase 3 project, and it's an in-licensed IO candidate called Prostvac.
The lack of any internally-developed Phase 3 projects in conjunction with the presence of only one in-licensed Phase 3 project appears to leave Opdivo and Eliquis for the most part to carry the valuation load for some time to come.
So, the problem for BMY is the same as for so many high P/E, high price:book stocks. Live by one or two product lines, die by them if they fail to meet expectations.
So I have to lower my acceptable P/E for BMY. I think that there's no internally-generated product coming any time this decade to supplement Opdivo and Eliquis, an anticoagulant whose profits are shared with Pfizer (NYSE:PFE), plus the smaller-selling Yervoy. So I'm thinking 20X may be fairer, putting a buy-at/below target into the $50-55 range. Though, to be fair, I haven't fine-tuned that number.
That the market took BMY down from the $75 range to the low $60s means Mr. Market is getting sensible. But I still think he's a bit high.
The reaction of Mr. Market to checkpoint inhibitor competitor Merck (NYSE:MRK) and may also have been a bit misguided. Basically I think these types of stocks are now under more of a cloud than they were and that the entire highly-competitive segment needs to be revalued by investors who are looking to do more than ride a hot momentum sector.
The MRK PD-1 story - Keytruda in comparison to Opdivo
MRK markets Keytruda, a competitor to Opdivo. Opdivo has been selling more than MRK, due in part to a broader-brush approach to its trials, not requiring clinicians to measure PD-L1 levels.
Just a little more now on these drugs, to keep the science from getting too intense in any one section, from a Johns Hopkins web page:
The pathway includes two proteins called programmed death-1 (PD-1), which is expressed on the surface of immune cells, and programmed death ligand-1 (PD-L1), which is expressed on cancer cells. When PD-1 and PD-L1 join together, they form a biochemical "shield" protecting tumor cells from being destroyed by the immune system. Another protein involved in the pathway and also expressed by cells in the immune system, programmed death ligand -2 (PD-L2), was originally discovered by Johns Hopkins investigators in 2001.
"Tumors can co-opt PD-1 to their own advantage to fly below the radar of the immune system," explains Suzanne Topalian, M.D., director of the melanoma program at Johns Hopkins, and a professor of surgery and oncology. "By using a blocking agent against PD-1, we can interrupt that shield protecting the tumor from immune destruction."
Let's look at MRK's approach to checkpoint inhibition via Keytruda's recent success in lung cancer.
Keytruda shines in a more narrowly-defined form of lung cancer
Merck & Co. just scored a point in its immuno-oncology rivalry against Bristol-Myers Squibb. The PD-1 checkpoint inhibitor Keytruda hit its goals in a new trial in previously untreated non-small cell lung cancer patients, beating chemo at staving off cancer progression and extending patients' lives.
Beating chemo is great, and MRK's chief scientist exulted:
Merck R&D chief Roger Perlmutter said his company believes the Keynote-024 results "have the potential to change the therapeutic paradigm in first-line treatment of non-small-cell lung cancer."
Here's what I think is the key difference between the Keytruda and Opdivo studies, again from FP:
The new study tested Keytruda as a standalone treatment, rather than as part of a combination of meds. Patients in the trial had advanced NSCLC, and their tumors tested positive for PD-L1 levels of 50% or more.
Whereas, the Opdivo trial discussed above only required a 5% PD-L1 level.
As said, MRK has been pursuing a personalized, precision-medicine approach in lung cancer treatment, whereas BMY has so far been pursuing a broader approach requiring simpler, faster diagnosis and then straight on to treatment.
Assuming there's nothing unusually wonderful about MRK's particular antibody, then the question is why it should now trade at 34X TTM EPS. Note MRK is guiding for very roughly $2/share EPS for 2016. So at $62+, the stock is richly-valued.
The deeper question is whether the overall market for this sort of drug is smaller than hoped for. The narrower the inclusion criteria, the smaller the revenue will be over time. So, can one wonder if the Opdivo failure lowers the potential for Keytruda to broaden its indications?
More time will provide answers, and more questions. The only certainty, I expect, is more competition. I think of the hepatitis C market and the effects of growing competition on pricing. Can this happen in immuno-oncology? I think it might. So how much growth assumptions leaves MRK or BMY actually attractive for new money looking for a home?
I think these are difficult questions to answer.
Another, historically-oriented way to think of this is to think of the statins. The analogy is not perfect, but as one statin after another began to push the envelope, virtually always having successful CV outcomes trials, the entire class got stronger.
Next I just want to discuss a few additional oncology and checkpoint competitors.
AstraZeneca (NYSE:AZN) and durvalumab
AZN, through its MedImmune subsidiary, is developing this PD-L1 antibody. Thus it's extremely similar to Opdivo. AZN hit a 12-month high Friday morning on the Opdivo news, which I found strange because of this from December 2015:
As Fierce Pharma went on to say in the lede:
Anyone harboring any last shred of hope in seeing AstraZeneca gain an accelerated approval on its marquee drug program for durvalumab should be prepared to be disappointed. The pharma giant says its latest read on a single-arm study of durvalumab, a PD-L1 checkpoint inhibitor, indicates that investigators won't come out with the data needed to win over regulators--virtually ruling out any move to gain a fast approval to use it as a solo therapy to fight lung cancer as the leaders in the field continue to consolidate their positions.
This drug is going to come to market, based on (at least) positive data for second-line use in bladder cancer. See Pipeline (Oncology) for the extensive studies underway for this drug. I assume it will put pressure on both MRK and BMY.
Then there's the Genentech checkpoint inhibitor. Genentech is a wholly-owned subsidiary of Roche (OTCQX:RHHBY).
Don't forget about the Big Dog
As Fierce Pharma headlined it in May:
Roche's Tecentriq bursts onto immuno-oncology scene, with Merck and BMS in its sights
Roche's atezolizumab has joined the immuno-oncology party. Now dubbed Tecentriq, the PD-L1 drug won FDA approval to treat advanced bladder cancer in patients who've failed on platinum-based chemotherapy.
That puts Tecentriq among the few options for bladder cancer patients--and makes it the third PD-1/PD-L1 inhibitor to hit the market, behind Bristol-Myers Squibb's Opdivo and Merck & Co.'s Keytruda.
Tecentriq's list price will be $12,500, on par with its rivals.
That's just a start, as FP continues:
For now, Tecentriq won't be competing directly with Opdivo or Keytruda, because the Roche therapy is not yet approved for any of the same indications. But that could change soon: The FDA granted Tecentriq its "breakthrough" designation in lung cancer last month, putting it in line for a quick approval.
Importantly, this somewhat different mechanism of action (targeting a protein on the tumor cell rather than on the white blood cell) may (or may not) matter (bolded emphasis added):
Roche sees a marketing edge for Tecentriq in its obvious benefits to patients who test positive for the PD-L1 biomarker. The drug specifically targets PD-L1, rather than PD-1 as Opdivo and Keytruda do, and Roche sees the PD-L1 target as a more significant driver of disease. The company figures it has a good chance of proving that Tecentriq can have a more durable effect on cancer than its rivals, with a lower likelihood of toxicity, FierceBiotech reported last year.
Never bet against Genentech, the most successful biotech company ever.
Among an undetermined number of others, Regeneron (NASDAQ:REGN) in partnership with Sanofi (NYSE:SNY), is moving REGN2810, an anti-PD-1 antibody, into a potentially pivotal trial in squamous cell carcinoma, a skin cancer. Other targets are likely to be explored. Whether REGN2810 has any advantages such as less frequent administration over the MRK and BMY immunotherapies is not known yet, but it's typical of REGN to try to have a product that's superior in some manner to the established candidates.
All the above companies have competition from other companies, academia,etc. There's no certainty that today's star won't be tomorrow's obsolete, forgotten drug, looked at just as a stepping-stone to something better. In statins, first there was Mevacor, then Pravachol. Then both were made semi-obsolete by Zocor. Then Zocor was surpassed by Lipitor. Etc.
That's just within the same field, say for cancer, the PD-acting drugs discussed above.
But then, just going back to REGN, its website also discloses it's working on these targets:
Beyond PD-1, pre-clinical targets being explored include antibodies to other checkpoints such as lymphocyte-activation gene 3 (LAG3), as well as activation molecules that may augment an antigen specific immune response, such as glucocorticoid-induced tumor-necrosis-factor-receptor-related protein (GITR).
And that's just one company based near Sleepy Hollow, New York.
A different conceptual approach that I'm watching is typified by Gilead (NASDAQ:GILD). It has commented that since these checkpoint inhibitors are only in the range of 20% effective, GILD wants to focus on the other 80% that aren't being helped by them.
Maybe it's not the optimal company to enlarge that market, but maybe investors have been too hot on the whole PD-acting field.
How to play the immuno-oncology field?
As many readers know, based on price, my favorite stock focusing on I/O is Celgene (NASDAQ:CELG), but I'm valuation-sensitive on that, just as I am on BMY. So my general feeling is that most of these stocks are too risky and unpredictable even for me, and I'm in a financial position to take significant risks. I had a conversation a couple of years ago with an oncologist who heads a department in a tertiary care medical center, and who's interested in using his knowledge to make money in stocks. His comment was that the field has run away from his ability to follow it. I agree from my perspective, as well.
A simpler approach I have taken to Big Pharma/Big Biotech is to trade, or trade around a core position, but in areas that are not so competitive or so "hot." For example, I turned bullish on PFE in May when I initiated coverage with Pfizer Finally Beats And Raises Cleanly Enough To Generate Alpha. The stock has done very well since then, though Q2 results were confusing (so I didn't write an article about them). I looked at PFE as a bond substitute, and that's been appropriate. The company is much larger than BMY, and larger than MRK, and more diversified.
In conclusion, the market's reaction to the disappointing news on Opdivo was appropriate with regard to BMY, and I have mentally lowered my "buy at" $65 price to something much lower - though I hate to be precise so soon after breaking news. However, the run-up in MRK to challenge last year's high, and approach a 10+ year high in price, poses in my view a bit of a valuation challenge. MRK is a very large company, with about $40 B in sales. While I do not write about it, I follow it, and am not thrilled with its pipeline relative to its large size. I've just seen, over and over, how these mega-cap pharma stocks get investors excited over one drug - think Entresto for Novartis (NYSE:NVS) a year or two ago - and then even when they're successful, their success proves to have been priced in.
As I write this, the SPY is at a TTM P/E of 25.2 per Multpl.com and the Shiller P/E is above 27X. This could well be 1999 or something like that, and Mr. Market may make us cautious sorts look like fools or old fuddy-duddies. However, investors have just seen BMY depreciate in one day by a number of years of dividends to come. We expect that can happen with junior biotechs or small stocks, but BMY? It's not supposed to happen.
Thus I'm watching immuno-oncology stocks, but trying to wait for a fatter pitch with which to commit to one or more of them.
Disclosure: I am/we are long REGN,GILD.
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.
Additional disclosure: Not investment advice. I am not an investment advice.
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