Bristol-Myers Squibb: (BMY: $50, down 10% yesterday)
Trial Data Disappoints Again; Double Down On This Blue Chip
The stock dropped to its lowest level in almost two years after presentations at the European Society for Medical Oncology, also known as ESMO. The presentations revealed data that was a worst case scenario for Bristol and a major win for competitor Merck.
Both companies have been battling head to head over who will win an emerging opportunity in lung cancer treatment. Back in early August, Bristol announced failed trials, which sent the stock from $75 to $60. While the stock drop back then was substantial, it more so reflected a delayed timeline for participating in the lung cancer opportunity, not the business running off the tracks of eventually getting there.
At the ESMO conference, the specific details of the failed trial data were released. It now comes to light that the Checkmate-026 trail represented a worst case scenario for Bristol’s lung cancer drug Opdivo. While it was known that the trial failed, most investors at least expected to see a trend towards efficacy. Investors didn’t expect Opdivo to be a complete failure or facing setbacks. However, what we now learn is that the drug was not effective at all. There are all sorts of theoretical explanations circulating to explain the variance between the Bristol and Merck trials, but the only hard evidence at this point is that Bristol has a completely ineffective lung cancer drug in contrast to Merck’s successful drug.
What does this mean? Investors now expect Merck to completely own the segment of lung cancer patients, leaving Bristol with no part of the lung cancer opportunity whatsoever. Very disappointing. While this was a smaller part of the earnings built into expectations for Bristol, the contribution accounted for most of the assumed growth. Ouch.
This was a painful turn of events for us. We too were expecting Bristol to recover in the lung cancer opportunity. However, we believe the market is overly punishing Bristol for the hiccup, in turn creating a buying opportunity. This is a blue chip name in Healthcare with a diverse lineup of drugs. Opdivo may not be available to meet the lung cancer opportunity, but analysts still see revenue for this drug alone of $3.4 billion this year, $5.0 billion next year, and $7.6 billion by 2020, as the drug can still be used in multiple other types of tumors just not lung cancer. Plus, there is still the slight chance that Opdivo does end up working for lung cancer, as the theoretical explanations circulating about the recent disappointment do include some credible opinions.
BMR Take: We see absolutely no risk to the dividend due to this event, which is running at $1.52 annually or comfortably below EPS of nearly $3.00. The current dividend yield is a very attractive 3%. We think this is an excellent opportunity to buy more of this blue chip name in Healthcare, for a patient investor who can wait for the breadth and depth of this best-in-class franchise to work its way out of the near term hole.
Mazor Robotics (MZOR: $26, up 16% yesterday), a pioneer and a leader in the field of surgical guidance systems, today announced that it received purchase orders for 25 systems during the third quarter ended September 30th including pre-launch orders for the recently unveiled Mazor X, a transformative guidance platform for spine surgeries. The Mazor X will be commercially launched at the North American Spine Society annual meeting in Boston, October 26-29.
“The market’s response to the Mazor X is exceptional, exceeding our early expectations,” commented Ori Hadomi, Chief Executive Officer. “Customers who first experience the Mazor X at our training centers are quickly realizing the increased benefits of the system and they have already placed pre-launch orders. Mazor’s expanded portfolio of products, which now includes both the Mazor X and Renaissance systems, is responsible for the record number of purchase orders we received in the third quarter. As we move into the fourth quarter, we expect to build our momentum in the market as the Mazor X is launched, maximize our presence at the North American Spine Society, and our strategic partnership with Medtronic continues to be implemented.”
Mazor Robotics ended the third quarter with an installed base of 130 Renaissance systems globally, including 80 in the U.S., the Company’s primary growth market. The Company currently intends to report its complete financial results for 3Q16 in November and will issue a press release with the date, time and dial in and webcast details soon.
BMR Take: The company spoke; the markets listened. We maintain our Target of $29 and expect to raise it before long.