Game Changing CM-026 Miss Leads Us to Downgrade BMY to N, Upgrade MRK to OP
* Bottom Line: We were stunned by BMY's announcement that the
CheckMate-026 (CM-026) Study for Opdivo in 1st line non-small cell lung
cancer (NSCLC) missed its primary endpoint. We had high expectations for
the study not just meeting its primary endpoint but potentially other
important secondary endpoints. The results dramatically impact the way we
see the immuno-oncology (I-O) market evolving, especially for the 2016-
2018 timeframe, with lingering impacts likely to be felt beyond then. We are
downgrading BMY shares to Neutral on the back of these data and
lowering our target price to $63. We are upgrading MRK shares to
Outperform and raising our target price to $73.
* Surprising miss leads to significant shift in near-term expectations.
The results open up the immune-oncology (I-O) opportunity for MRK's
Keytruda to be the dominant first mover into the 1L NSCLC setting, at least
in the 25-30% of patients whose tumors have >50% expression of PD-L1.
We assume there will also be some spillover effect into later lines of
therapy as we assume physicians will likely start to prefer Keytruda in
2L/3L for 1-50% expressers (after chemotherapy) if that is what they are
using in high expressers in 1L. BMY is looking into the data from CM-026
for patients with PD-L1>50% and, if positive, this may keep Opdivo on a
level playing field to Keytruda in terms of consensus guidelines, although
we would expect physicians to still prefer Keytruda in this indication given
cleaner data, an FDA approved indication and less frequent dosing. We
assume PD-1s will not be used in patients with <50% PD-L1 expression for
the time being and that remains open for the taking as further combination
studies read out in the future.
* Longer-term impact less clear, but we expect it will take time to see
upside for BMY. Over time we do expect combination approaches to
become more important, potentially minimizing the impact of today's
monotherapy data. We are most excited by the Opdivo+Yervoy
combination that had promising data at ASCO and where we should get
pivotal data in early 2018 (if not earlier). This could help BMY reestablish
itself in the lung cancer market, but MRK will likely already be a dominant
player by then and there could be further competition from Roche and AZN
as well. AZN's is also pursuing the PD-L1/CTLA-4 combination and positive
data in the MYSTIC Study would raise further questions about BMY's
position in lung cancer. BMY is pursuing numerous other combination
approaches, but the data behind those is more limited at this point and it is
more difficult for us to give the company the benefit of doubt at this point
until we see more.
* Opportunity for Roche and AZN. The disruption of BMY’s current I-O
dominance clearly offers an opportunity for Roche and AZN if their
combination trials show efficacy. We see some enhanced risk for AZN’s
MYSTIC trial with lower chances of a positive all comers PFS readout,
pushing more reliance onto OS which could delay a significant de-risking of
the pipeline out to 2018. In contrast we feel expectations for Roche’s
IMpower 150 Tecentiq/Avastin/chemo combination study in 1L NSCLC, due
in 1H2017, are low, suggesting limited downside on any delay. Roche
remains our preferred EU name in I-O. I-O assets account for 9% of our
NPV for AZN and 8% Roche, with the potential to add another 15% and
13% respectively on full pipeline success with Roche trading on a discount
to NPV and AZN at a premium.