Bristol Myers cuts guidance on cancer drug issues; shareholders scanning skies for vultures with deep pockets

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The News:

Bristol-Myers Squibb Co. (New York City) cut its earnings guidance for the year as the drugmaker contends with dimmed prospects for its top cancer drug after major setbacks last year. For 2017, the company now expects adjusted earnings of $2.70 to $2.90 a share, down from its previous guidance of $2.85 to $3.05.

@BMSnews cut its earnings guidance for the year as the drugmaker suffers major setbacks last year Click To Tweet

Bristol pioneered cancer immunotherapy, says, a type of treatment that aims to fight cancer by harnessing the body’s immune system, but it has been struggling in recent months to cope with competition from Merck & Co.’s (Whitehouse Station NJ) Keytruda and most recently Tecentriq from Roche Holding AG (Basel CHE).

After Bristol announced in August that its immunotherapy Opdivo failed to meet the main goal of a critical study exploring the drug’s use in advanced lung cancer patients who hadn’t previously been treated, the company sought to persuade investors it still had bright prospects treating such patients, known as “first-line” lung-cancer patients, by combining Opdivo with Bristol’s other immunotherapy, Yervoy. The combination is under study.

Analysts also viewed the move as a boost for Merck, whose Keytruda was cleared by the FDA last October for the first-line treatment of advanced NSCLC, while the agency also recently accepted a filing seeking approval of the anti-PD-1 therapy plus chemotherapy for the first-line treatment of patients with metastatic or advanced NSCLC.

However, earlier in January, Bristol-Myers and partner Ono Pharmaceutical reached an agreement with Merck to settle a patent infringement lawsuit regarding Keytruda, under which the latter will make an upfront payment of $625 million and sales royalties through 2026.

During the fourth quarter, Opdivo sales rose to $1.3 billion, up from $475 million during the period a year earlier. Yervoy sales edged 0.4% lower to $264 million world-wide. Revenue from another key Bristol product, the blood thinner Eliquis, jumped 57% to $948 million globally.

For other products, revenue from rheumatoid arthritis treatment Orencia rose 16% to $625 million, ahead of analysts’ expectations of $607 million. And sales of leukemia medicine Sprycel climbed 15% to $494 million, besting expectations of $474 million.

“We do believe we have a meaningful role to play in lung cancer in the future,” Bristol CEO Giovanni Caforio said.

He also pointed to Bristol’s pipeline of new kinds of immunotherapies in development.

“I remain confident in our significant long-term opportunity in immuno-oncology,” Caforio said.

Regarding Bristol-Myers Squibb’s virology portfolio, sales of Baraclude dropped by 4% to $296 million, while revenue from the Sustiva franchise was down 21% versus the year-ago quarter to $246 million. Moreover, revenue from the company’s hepatitis C franchise plunged 51% to $226 million, missing analyst forecasts of $256 million, with sales from the Reyataz franchise declining by 24% to $206 million.

In all for the fourth quarter, Bristol-Myers posted earnings of $894 million, or 53 cents a share, compared with a loss of $197 million, or 12 cents a share, a year earlier.

Steve’s Take:

Fall from dizzying heights all the way to takeover target? It certainly looks that way for the 130-year old pharma bellwether. But tragic? Not for BMS shareholders.

It wasn’t that long ago, actually less than a year, that Bristol-Myers was the largest big pharma in the US with a legacy cancer drug asset. And let’s not forget how good it feels to be able to shop for and a “buy just about anything,” as Max Nisen at Bloomberg aptly puts it.

But after setbacks to its immune-boosting cancer drug Opdivo that have drastically limited its growth potential, the company on Thursday was forced to cut its 2017 earnings guidance and now expects sluggish growth in the year to come.

Still, shares of Bristol-Myers closed off only 3% last week after Jefferies reiterated its “buy” rating on the stock. The firm placed a $69 price target on Bristol–a 45% premium to its closing price Friday–and is bullish on the success of its new lung cancer treatment, a combination of the drugs Opdivo and Yervoy.

Furthermore, Jefferies says the “worst-case” scenario yields a $44 price target, says TheStreet, at which point the stock becomes an attractive takeover target.

“I understand the call, I agree with the call,” co-founder of Najarian Family and Advisors Office Pete Najarian said on CNBC’s “Halftime Report” Jan. 23. “When you really look at what they have got in the portfolio right now, I think that is very strong. You look at the pipeline; I think that is extremely robust.”

Moreover, Najarian particularly likes the cardiovascular partnership Bristol has with Pfizer.

However, Short Hills Capital CIO Stephen Weiss told viewers that he would not be a buyer of the NYC-based pharmaceutical company off the call at Jefferies.

“This is definitely a fallen angel,” Weiss said. “It went from a company that had promise, that it was going to be acquired at some point and could do no wrong, to not being able to get anything past the FDA. So, I’m not sure the market is misinterpreting it as Jeffries said.”

“The market has over-interpreted Bristol’s combo filing update into a significant de-rating of the opportunity and the company,” Jefferies wrote.

Weiss stated he is “avoiding” the stock, doesn’t see the value and is “staying away” from the space.

Taking the other side of the argument, Ritholtz Wealth Management CEO Josh Brown explained why he would be a buyer.

“This would be a double bottom from the last time right here at these levels,” Brown noted. “I agree, a stock that’s gotten crushed already, down 40-50%, expected returns go up, and potential risk goes down. So long as the business is still intact.”

He added that he “understands” what the challenges are and that those are being “way overpriced” by the market. “That’s why there is a market. That’s why there’s an opportunity to buy.”

After a $50 billion plunge in market cap, Bristol-Myers is looking less like a potential mega-acquirer and more like an increasingly vulnerable mega-target, says FirstWord Pharma.

Bristol-Myers has gone from the fourth most valuable biopharma company in the US to the ninth.

Bristol’s shares are understandably down. Just about everything that could go wrong, has for Bristol-Myers and Opdivo. It failed to get the drug approved for patients with newly diagnosed lung cancer, one of the largest markets available, because of overly aggressive clinical trial design. Merck’s competing Keytruda is already on the market for those patients.

Bristol’s big hope for catching up was combining Opdivo with a second immune-boosting drug, Yervoy. But Merck’s competing combination of chemotherapy and Keytruda looks potentially cheaper, safer and ahead of schedule.

Bristol responded to the news of Merck’s likely early approval by announcing it would not seek a rapid FDA approval for its combo, suggesting it’s seeing something ominous in the data or commercial environment.

And it’s not just the future that’s in doubt, but the present. Sixty percent of the company’s US Opdivo sales in the fourth quarter were for previously treated lung cancer. Roche Holding and Merck are set to capture a big portion of that in 2017. Analysts’ expectations for the drug’s sales this year have been cut by $1.2 billion over the past six months and may still be too rich.

Bristol’s response to these issues and to increasingly testy analysts–Goldman Sachs analyst Jami Rubin (pdf) said on the conference call that the company was “squandering what was otherwise an extraordinary and enviable market position”–seems to be to hold steady.

Despite scrapping its rush-to-market plan for Opdivo and Yervoy in lung cancer for reasons it refuses to disclose, Bristol executives said they were committed to finding a role for the drugs in patients with newly diagnosed lung cancer and to this combination approach. The company has a dozen trials exploring Opdivo and Yervoy scheduled to reveal data over the next three years.

Another ghastly commercial or grave scientific surprise–which seems all but inevitable given how rapidly the company has fallen from grace–could send its stock even lower. The company’s shares fetched more than 25 times forward earnings at its height last year; they’re now trading at closer to 16 times. That’s far more affordable.

If shares continue to fall, competitors in need of an oncology shot in the arm and with fat wallets may come a calling.

Bottom Line:

Bristol-Myers is starting to resemble a far more affordable prize after a series of major, stunning setbacks.

Steve's Take: Fat wallets may come a calling for @BMSnews after a series of major setbacks Click To Tweet

There’s still enough upside to make the company’s story compelling. Its blood thinner Eliquis is projected to add an additional $2 billion in revenue through 2020. And though Opdivo is down and out in lung cancer, it’s in a stronger position in melanoma, a type of kidney cancer and head and neck cancer. Any buyer would become an instant stakes player in immune-oncology.

Jefferies analyst Jeffrey Holford mentioned in a note that Sanofi, Johnson & Johnson, Pfizer and Novartis are possible suitors. Big biotechs Amgen and Gilead Sciences are less likely courters but have enough cash supply to be mentioned.

The one clear barrier, and it’s a biggie, is still going to be asking price, says Nisen. Even in its weakened condition, Bristol would not be inexpensive, let alone gotten at a cut-rate price. A 30% premium on the company’s current $77.1 billion enterprise value would yield a price of more than $100 billion.

Considering the company’s market cap exceeded that just a few weeks ago and that Opdivo is still the world’s best-selling drug in its class, Bristol’s management is likely to take a severe bargaining stance in any price negotiations.

Still, Bristol investors hope someone out there is feeling nervy. Someone who sees an underrated, undervalued fallen angel. At the moment, buyout rumors may be the only cause for hope about BMY’s share price; at least in the near term. Stay tuned.

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