For Bristol Opdivo gives and it takes away

Something isn’t right with Bristol-Myers Squibb. The company, whose renaissance in the biopharma bull market was driven by immuno-oncology, in particular Opdivo, has now become so dependent on this field that its valuation reflects little else besides – with all the volatility that this entails.

With Opdivo accounting for 70% of Bristol’s market cap, a simple NPV calculation reveals nearly $30bn of value that the market is now refusing to recognise (see table below). Normally this would make a company ripe for acquisition, but in today’s uncertain climate it would take an audacious buyer to strike; and would Bristol even sell?

If one thing is certain it is that Bristol management will do everything possible to prevent a bargain basement-priced takeout. But right now their backs are against the wall: Bristol stock has fallen 30% since last summer, and is back to trading where it was before Opdivo was even approved.

Much of the decline reflects Opdivo’s fast-evaporating opportunity in first-line lung cancer. Still, it is important to remember that it is far from certain whether this is due to real efficacy differences between Opdivo and Merck & Co’s Keytruda, or whether Bristol has just been unlucky with study design.

Chaos

Amid this chaos, it is easy to forget another simple fact: Opdivo is still a fantastic, revolutionary drug, and whatever happens its status as a blockbuster several times over is assured.

But the importance of lung cancer cannot be glossed over: sellside forecasts compiled by EvaluatePharma see 60% of Bristol’s 2022 Opdivo sales being generated in NSCLC. A worst-case scenario would not only have Opdivo fail to get a front-line label, but would also see its approved second-line use marginalised, if first-line patients end up getting a rival anti-PD-1/PD-L1 drug.

Those expected 2022 sales, $9.1bn, less cost assumptions translate into a massive $62bn of NPV accruing to Bristol, whose enterprise value stands at around $90bn. Either the market cares about little beyond Opdivo, or it no longer believes the sellside’s forecasts for the drug.

Still, even in the second scenario, Bristol’s other drugs – and pipeline – might be getting insufficient credit. The other assets include not only a substantial antiviral franchise, but an impressive offering of follow-on immuno-oncology projects; not all will come through, of course, but anyone betting on the next big thing in this field cannot afford to overlook Bristol.

Valuing Bristol-Myers Squibb
Product 2022e sales ($m) Today's NPV
Opdivo 9,133 61,718
Eliquis 6,294 14,970
Yervoy 2,730 10,328
Anti-rheumatics 2,257 11,441
Other cancer 1,315 7,733
Antivirals 1,087 6,236
Others 453 2,915
Phase III assets 138 1,607
Phase II assets 376 2,639
Total 119,587
Bristol-Myers Squibb market cap ($m) 92,660
Bristol-Myers Squibb Q4 net cash ($m) 2,361
Bristol-Myers Squibb enterprise value ($m) 90,299
Market valuation shortfall ($m) 29,288
Source: EvaluatePharma sellside consensus.

Of course, talk that Bristol could fall prey to a takeover is not new, and its stock rose 3% yesterday on the latest rumours; Gilead, for instance, has long been seen as needing a big takeover to prop up its antivirals business, though a Bristol takeout would be a stretch (Buying growth is a tricky choice for Gilead, February 8, 2017).

A hypothetical Astrazeneca/Bristol merger could give rise to a cancer powerhouse, though there might be too many mechanistic overlaps – including PD-1, PD-L1 and CTLA4 – to make this a goer. Perhaps only Pfizer has the right mix of daring, cash and desperation to be in immuno-oncology to strike for Bristol.

Then there are risks: a previous move on Astra, by Pfizer, failed for political reasons, and the new Trump administration would likely take a dim view of an all-US transaction that had cost cutting at its core. Yet taking major “synergies” off the table eliminates the rationale for most big takeovers.

It should be remembered that Bristol is unusual in not even having a poison-pill takeover defence, so in theory it could be bought more easily than most big pharmas. Still, management and shareholders would likely baulk at any low-ball approach, and even a 40% premium would only value the group at where it was trading a year ago.

As such, however much unrealised value there is in Bristol right now, a buyer would likely have to believe that Opdivo will find a place of some sort in first-line lung cancer. That would require someone to bet against the market, and to dig deep.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobPlieth on Twitter

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