Could Opdivo worries turn BMS into an M&A target? One analyst thinks so

Bristol-Myers Squibb building
Bristol-Myers cut its 2017 guidance Thursday amid concerns about its lung cancer star Opdivo, which nevertheless brought in a whopping $1.3 billion for Q4.

The ripple effects from Bristol-Myers Squibb’s recent Opdivo setbacks have begun. The drugmaker ratcheted back its 2017 guidance Thursday, a move analysts partly attributed to the immuno-oncology blockbuster’s diminished prospects.

Of course, that diminishment is relative: The drug brought in $3.77 billion for 2016, $1.3 billion of that during the fourth quarter—a huge leap from $475 million in 2015’s fourth quarter. The worry, however, is that Opdvio won’t live up to the sales estimates it originally enjoyed, thanks to recent development setbacks.

What does this augur for the company? To one analyst at least, the combination of solid products and recent disappointments spell M&A target.

“[W]e believe Opdivo, Yervoy, and the burgeoning immuno-oncology pipeline at BMS is a high-value industry asset that cannot be ignored,” Leerink Partners’ Seamus Fernandez wrote in a Thursday note. 

“If history teaches us anything in pharma,” he went on, “it is that companies suffering from short-term missteps or surprises but with great assets are more likely than not to become vulnerable M&A targets over time ... if there isn't either a reversal of fortune or a series of value-added pipeline surprises.”

Indeed, Bristol-Myers shares were faltering pre-market Thursday on the announcement, and shares are already down more than 50% since the company announced that Opdivo had failed a key trial in non-small cell lung cancer, handing the lead in that market to Merck & Co. rival Keytruda. The stock has dropped to $49.25 at Wednesday’s close from $76.77 before those trial results hit, dragging its market cap down to about $81 billion from almost $128 billion.

That would be a big deal to swallow, which means only a few companies could step up. Most drugmakers say they're not in the market for megamergers, and Bristol-Myers may be able to pull off “value-added pipeline surprises” if some of its other immuno-oncology trials play out as hoped.

But for now, the warning signs on Opdivo aren’t limited to that first-line lung cancer failure. Earlier this month, Bristol-Myers said it wouldn’t pursue an accelerated approval for an Opdivo-plus-Yervoy combination in lung cancer—and that was one option the company saw for salvaging the newer drug’s sales growth. Meanwhile, Merck announced that the FDA had accepted its application for a Keytruda-plus-chemo approval in lung cancer, with a decision date of May 10.

That Merck move could push Bristol-Myers guidance down further, Bernstein analyst Tim Anderson said in a Thursday note. The 5% cut to its EPS forecast “[p]resumably has more to go if Merck’s ‘chemo combo’ gets approved” on that decision date.

Present Opdivo numbers were impressive year-over-year. “Opdivo was very strong" in the quarter, Credit Suisse analyst Vimal Divan said in a Thursday note, going on to say, "although the near-term growth potential for that product is in question given recent developments in the lung cancer market.”

And sequential growth wasn't impressive at all, at least in the U.S. In fact, it "came to a screeching halt," Fernandez pointed out. After U.S. growth quarter after quarter, Opdivo just held steady at $715 million in Q4, up only slightly from $713 million the previous quarter.

Its sister immuno-oncology med Yervoy, which Bristol-Myers is studying in combination with Opdivo, saw flat global sales at $264 million year-over-year.

Then again, Opdivo isn’t Bristol-Myers’ only drug posting sales growth. Though a couple of key products didn’t meet street expectations, they did make big leaps: The blood thinner Eliquis, for instance, came in a bit light at $948 million, but that was up 57%. Orencia, the rheumatoid arthritis blockbuster, grew 16% to $625 million on the quarter, and 20% to $2.3 billion for the full year. Both these drugs beat Credit Suisse sales estimates, Divan said.

The company’s overall quarterly revenue of $5.2 billion was a hefty year-over-year boost of 22%, and it came in line with analyst expectations, if not slightly above. The new EPS guidance is now a range of $2.70 to $2.90, a midpoint decline of 5%.