Immuno-oncology Race Heats Up

False Start for Bristol Myers; Merck Gains the Lead

We covered in some detail the fascinating world of immuno-oncology back in our inaugural edition last December. We reviewed the current state of research and how big pharma companies like Bristol Myers Squibb and Merck were at the top of a very competitive race. The drugs they developed were checkpoint inhibitors—they allowed our immune system, which cancer can disarm, to fight tumors. At the time, Bristol’s Opdivo and Yervoy were amassing phenomenal uptake in the oncology community. Merck’s Keytruda was also winning favor among doctors. The rest of the pharmaceutical companies like Novartis and Roche were playing catch up in the check point inhibitor space.

Even more promising was that all three drugs showed promise in other types of cancer, and if they obtained approval for lung cancer (up until now they were approved for a few cancers like late stage melanoma and some other cancers), the benefit to Merck and Bristol would be extraordinary.

In that same issue we pointed out the pros and cons of both companies. One concern we had regarding Bristol Myers was that its P.E. was sky high. Merck’s was much more reasonable. Bristol also had a smaller dividend yield while Merck was sporting a yield over 3 percent—not a bad deal in a zero-interest-rate environment! Overall, we commented that if there should be any disappointment, the higher P.E. stock would likely get trounced, relative to the lower P.E. stock with a solid dividend. History proves this over and over again.

Well on August 4th, Bristol dropped a bombshell on the market and on the oncology world at large. It announced that Opdivo failed in a late stage trial for indications in lung cancer. The market reacted swiftly and eviscerated Bristol’s stock. It fell nearly 17% in mere moments from $77 per share down to $63 per share. Merck’s stock, on the other hand, rose significantly as Keytruda (Merck’s immuno-oncology drug) successfully achieved its endpoints in lung cancer trials. By sticking to the stock with the lower P.E. ratio and higher dividend, we ended up on the brighter side of this situation. Bristol was just too dependent on their immune-oncology portfolio and analysts always warned that Opdivo would constitute nearly 40% of Bristol’s revenue by 2020. Such concentration of revenues is always a risky bet. Hence, we went with Merck.

So now what? We will hold Merck for the time being. It should do well and pay a nice dividend while we wait for further price appreciation. In fact, Keytruda achieved a second victory this week as the FDA approved it for cancers of the head and neck that fail to respond to platinum-based chemotherapy. As for Bristol Myers, should it decline into the mid-to-low 50s, we would seriously consider adding some, depending on the general landscape in immuno-oncology. After all, other entrants are catching up and providing a good amount of competition.

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