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Expert Financial Analysis and Reporting

Initiating With Buy: Weighing an Excellent New Product Outlook Against the Pending Patent Cliff (BMY, $25

I think that Bristol-Myers Squibb has one of the most attractive drug pipelines of the big pharma companies. Although it faces a steep patent cliff that by my projections will results in a sales decline until 2014, the stock is attractive because of the highly promising drug pipeline and the dividend yield of 5.2%. I would emphasize that sales are not likely to increase from current levels until 2014.


Bristol-Myers Squibb at a Glance

Compared to the other major US pharmaceutical firms-Abbott Laboratories (ABT), Eli Lilly (LLY), Johnson & Johnson (JNJ), Merck (MRK) and Pfizer (PFE)-I believe that Bristol-Myers Squibb (BMY) has by far the best long term investment potential. Like LLY, JNJ, MRK and PFE, Bristol-Myers faces very serious short term concerns due to patent expirations in the 2012-2014 period for Plavix ($6.7 billion or 34.2% of 2010 worldwide sales), Abilify ($2.6 billion or 13.2%) and Avapro/ Avalide ($1.2 billion or 6.0%). In 2010, combined sales of these three drugs were $10.4 billion or 53.4% of sales. My projections are that combined sales could decline to $625 million in 2015.


The staggering potential loss of sales from these three drugs presents a formidable challenge to overcome. Hopes lie with five fast growing in-line drugs, Reyataz (HIV), Baraclude (hepatitis B), Orencia (rheumatoid arthritis), Sprycel (chronic myeloid leukemia) and Onglyza (type II diabetes). Combined sales of these drugs in 2010 were $3.9 billion and in 2015, I am projecting $7.8 billion. These drugs may be able make up $3.9 billion or 40% of the $9.8 billion of lost sales from Plavix, Avapro/Avalide and Abilify.


In addition, I believe that BMY has the best new product outlook of any major drug company in both absolute sales potential and relative to its current size. I think that apixiban (for deep vein thrombosis, acute coronary syndrome and atrial fibrillation), ipilimumab (metastatic melanoma and other tumors), belatacept (kidney transplant rejection), brivinib (hepatocellular cancer), dapagliflozin (type-II diabetes) and others may be able to add $3.5 billion of incremental sales over the 2010-2015 time frame and make up for another 36% of the $9.8 billion gap. There is also an impressive lineup of new drugs beyond these.


A summary of projections for key in-line products and new products is shown in the following table. I would caution that long term forecasts are extremely difficult to make. While these numbers give the appearance of precision, in reality they are very imprecise. I am just trying to paint a picture of what might happen.


Sales Model for Bristol-Myers Squibb, 2009-2015 E
(millions) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Worldwide In-Line Sales              
Plavix $6,146 $6,666 $6,943 $3,567 $570 $150 $75
Avapro/Avalide 1,283 1,176 1,151 569 300 225 100
Abilify 2,592 2,565 2,548 2,330 2,038 1,775 450
Reyatax 1,401 1,479 1,538 1,653 1,736 1,815 1,887
Sustiva Franchise 1,405 1,368 1,444 1,353 1,369 1,304 1,252
Baraclude 734 931 1,078 1,171 1,272 1,382 1,502
Orencia 602 733 822 913 1,013 1,125 1,248
Erbitux 683 662 684 701 716 731 746
Spycel 421 573 724 860 1,015 1,162 1,334
Ixempra 109 117 104 169 203 238 281
Onglyza/ Kombigluze 24 158 367 651 1,128 1,536 1,919
Mature Products and Other


3,056 2,810 2,767 2,725 2,685 2,645
Total In-Line Worldwide Sales $18,808 $19,484 $20,333 $17,603 $15,212 $15,457 $15,354
New Products Worldwide              
apixiban $0 $0 $10 $130 $340 $625 $1,255
Yelvoy (ipilumumab) 0 0 50 200 365 648 957
belatacept (LEA-29Y) 0 0 40 101 181 279 356
brivinib 0 0 0 45 95 176 290
dapagliflozin 0 0 0 80 140 211 279
neciltumumab 0 0 0 0 10 105 210
Recothrom 0 0 65 81 98 112 129
Total New Products Worldwide $0 $0 $165 $637 $1,229 $2,156 $3,476
Worldwide Sales $18,808 $19,484 $20,498 $18,240 $16,441 $17,613 $18,830



Source: Bristol-Myers Squibb financial reports and SmithOnStocks estimates


Investment Opinion

What about earnings? Bristol-Myers has issued guidance that it will achieve minimum EPS of $1.95 in 2013 so that the P/E based on this guidance is 13.0. As can be seen in the above table sales may reach their low point in 2013 and could begin to increase in 2014 and 2015 and with it, earnings should also begin to grow. The year 2013 should be the trough year for EPS. Supporting the investment merits of BMY is a current dividend of $1.32 that translates into a 5.2% dividend yield. This dividend should be sustainable.


The pipeline for Bristol-Myers Squibb is simply outstanding and there will be a cascade of approvals and clinical news in 2011 that could overcome the concern with the patent cliff. I am intrigued by Bristol-Myers Squibb, but haven’t bought the stock as of yet. There are still significant clinical, regulatory and commercialization risks with all of the new products. It is hard to imagine that there will not be some road bumps along the way for some or all of these products. Hence, I am not actively recommending the stock at this time although of the major pharmaceutical firms, it would be my first choice.


The Pipeline Is Outstanding

The pipeline story for Bristol-Myers should begin to unfold in 2011. There are three key PDUFA dates: ipilimumab (March 26), belatacept (June 15) and the subcutaneous dosage form of Orencia SQ (August 4). I think each of these will be approved. I think that it is probable that dapagliflozin and apixaban also gain approval in 2011 along with new indications for Erbitux.


There will be important data on apixaban presented from two clinical trials this year. The AVERROSE trial compares apixaban to aspirin in the prevention of stroke and the ARISTOTLE trial compares apixaban to Coumadin in preventing atrial fibrillation. I think that apixaban will be approved for both indications. In an earlier trial, apixaban failed to hit its primary endpoint in venous thromboembolism, however, it might still gain approval for this indication. It will be the third oral factor Xa product in the market, but the market is huge. It will be co-promoted with Pfizer.


In March of 2010, an FDA advisory committee voted 13 to 5 for approval of belatacept to prevent acute rejection in newly transplanted kidney patients. The FDA next issued a complete response letter and BMY has addressed the issues raised. I expect approval in June.


The subcutaneous formulation, Orencia SQ, should provide major advantages over its current intravenous form. The AQUIRE trial compared the two dosage forms and showed therapeutic equivalence. Orencia is the preferred drug for TNF non-responders in rheumatoid arthritis patients who have failed methotrexate. I expect approval in August.


I think that dapagliflozin also has a chance for approval in late 2011. It is a new drug for type II diabetes that has the unique mode of action of preventing the kidney from resorbing glucose from urine. There has been concern about urinary tract infections associated with this drug, but I think they have been resolved. It will be an add on therapy to the mainstay sulfonylurea agents and metformin. It has the very attractive feature of causing weight loss.


There may also be meaningful phase IIb data on BMY’s gamma secratase inhibitor, BMS-708163. This is likely to be the best of the gamma secratase inhibitors, a new class of drugs for Alzheimers’ disease.


With the Zymogenetics acquisition, BMY acquired Rethrombon and also PEG-INF-Lambda, which some experts believe could become the preferred interferon in the treatment of hepatitis C. It appears to dramatically reduce flu-like symptoms and to have a lesser effect on neutrophils and platelets. There could be additional data in late 2011.


Ipilimumab is First Up on the News Front

The March 26 PDUFA date is imminent for ipilimumab and I have chosen to focus on it for that reason. It is a new immunological therapy following on the trail of Provenge although the two drugs work quite differently. It has the potential to be a multi-billion product. Ipilimumab has demonstrated a survival advantage in second line metastatic melanoma is and the first ever drug to show a survival benefit in any stage of metastatic cancer...


Ipilimumab is a monoclonal antibody that acts on the CTLA-4 receptor that is found on T-cells and activates them. This is different from other targeted therapies and the recently approved cancer vaccine Provenge which target antigens on the cancer cell. The mechanisms of action of both Provenge and ipilimumab are intended to increase T-cell activity against a tumor.


The Addressable Market for Ipilimumab in Metastatic Melanoma

Metastatic melanoma is estimated to affect 40,000 patients each year in the US and 60,000 in the rest of the world. Half of the patients are younger than 59 years of age and many die in less than a year. There is currently no effective therapy. Although ipilimumab will initially be approved in a second line setting, this disease progresses so rapidly that most metastatic cancer patients will see it during the course of their disease. A trial in first line metastatic melanoma should report results in the near term. I believe it will be successful and lead to approval in the first line setting as well.


What will the price be? Some have speculated that it might be priced at $93,000 per year like Provenge. I don’t think so. Provenge can get way with this price because it does not require supportive care which in the case of some therapies can be as much as the cost of the drug. Ipilimumab has some serious side effect issues that will require extensive supportive care and it will also be used in combination with other expensive treatments unlike Provenge which is used alone.


I am guessing that ipilimumab will be priced at $50,000 per course of therapy. This makes for an addressable market for metastatic melanoma of $2 billion in the US and $3 billion in the rest of the world. I think that ipilimumab will capture a very significant share of this market and conservatively see it as having $1 to $2 billion of peak sales potential in metastatic melanoma. These estimates assume acute use of the drug, but there may be a role in maintenance which would substantially increase sales potential. It may potentially also be used in other types of tumors and this could create additional sales potential


Ipilimumab in Metastatic Melanoma

The company reported encouraging results in its study 020 of metastatic melanoma at the June 2010 ASCO meeting; this trial was started in 2003. The study involved ipilimumab in combination with an experimental cancer vaccine targeted at gp 100, a protein present on melanoma cells. It was a double blinded 3 to1 to 1 randomization which means that for every five patients that went into the study, three went to the combination of ipilimumab and gp 100, one to ipilimumab alone and one to the gp 100 vaccine alone. There were 403 patients in the ipilimumab plus gp 100 group, 137 in the ipilimumab only group and 136 in the gp 100 group.


The study population in the 020 trial was called a second-line population, but in reality many patients had received multiple lines of therapy and were in fact third line or refractory. They were very sick patients with poor prognosis. This population is truly representative of patients who have received multiple drug treatments and have not responded.


After two years of treatment, 24% of patients treated with ipilimumab were still alive compared to 22% in the ipilimumab combined with gp 100 group and 14% in the gp 100 only group. These comparisons were highly statistically significant and provide robust evidence of effect. Basically, the vaccine did not add to the therapeutic effect of ipilimumab, nor detract based on this data. Importantly, the number of deaths in the trial after two years seemed to plateau for the ipilimumab arms Optimists would say that this is suggestive that as many as 20% of patients may have benefited from something approximating a cure. As of the ASCO meeting there were 94 patients who had survived two years or more.


There are significant safety issues with ipilimumab and it caused deaths in the 020 trial. The mechanism by which this drug induces activity, the proliferation of T-cells, also leads to serious side effects. In terms of deaths related to the mode of action of the drug, the total number of deaths in the study was seven; five in the combination arm and two in the ipilimumab alone arm. As investigators learned how to detect the symptoms of immuno-related adverse reactions sooner, management could be introduced earlier, and there was a better chance of averting severe side effects. The incidence of toxicity diminished as more was learned about detecting adverse events at an early stage and preventing or managing them.


BMY is covering all aspects of melanoma. A second study, 024, is a being done in first-line treatment of metastatic disease. The study has already completed accrual, and BMY is awaiting results based in events. The primary end point is overall survival. Results from this trial could come at any time. It was originally thought that the 024 study would report out in late 2010. However, the required number of deaths required to stop the trial and analyze the data has not yet occurred. This study compares the standard of care (decarbizine) in combination with ipilimumab to standard of care alone.


Ipilimumab in Other Tumors

Ipilimumab has also shown encouraging results metastatic, non small cell lung cancer patients who had not received prior therapy. It is being studied as an add on to the standard chemotherapy regimen of carboplatin and Taxol. A phase III trial should start this year. Based on data in Phase II, it appears that ipilimumab will work across all non small cell lung cancer histologies, squamous and non-squamous. The initial thinking is that it can complement chemotherapy across the board and across all patients. There is reason to believe that the drug will be effective in the entire non small cell lung cancer population. This would be a multi-billion addressable market


BMY has also started a Phase III trial in prostate cancer in a population that is receiving radiation therapy on bone lesions. They will be randomized to placebo or ipilimumab. As with chemotherapy in the non small cell lung cancer setting, the necrotizing of the tumor by radiation may potentiate an immunological response with ipilimumab. BMY is also planning, a second Phase III trial in prostate cancer in a much earlier stage of the disease, hormone resistant patients. This is the same patient population targeted by Provenge. This would also be a multi-billion addressable market

Disclosure: The author of this article owned shares of Dendreon at the time this note was written. This should be taken into account as it may introduce bias into the conclusions and interpretations that are made. In reading this note, you acknowledge that you have not used it as the sole basis of your decision making and that all investment decisions are based on your own analysis. An investment in Dendreon carries substantial risk and investors could potentially lose much of their investment. The reader acknowledges that he/she has carefully read the Investment Approach, Terms/Conditions and Disclosures sections in the About Us section of the website. The reader acknowledges that he/she will not hold SmithOnStocks accountable for any investment loss that may be incurred if a decision is made to invest in Dendreon.


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