Bristol-Myers Squibb's Motivation Behind CytomX Deal

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Bristol-Myers Squibb ( BMY ) recently extended its collaboration with U.S. biotech firm CytomX. The two companies entered the original contract in 2014 when Bristol-Myers Squibb endorsed CytomX's probody platform and made a bet on four oncology candidates. Under the new agreement, Bristol-Myers Squibb will get commercialization rights for up to 6 additional oncology targets, along with two others. So why did the company make this bet?

There are a few likely reasons behind the move for Bristol-Myers Squibb. First, some of the recent events surrounding its blockbuster drug cancer Opdivo haven't gone down well with investors, and the company has lost a significant chunk of its market value. Considering that nearly 60% of its valuation can be attributed to cancer drugs (according to our estimates), Bristol-Myers Squibb appears committed to strengthening this segment and compensating for Opdivo's shortfall. Second, there have been reports portraying Bristol-Myers Squibb as a potential acquisition target. However, the stock is trading nearly 30% below its highest value in 2016, so the company will be motivated to not sell itself cheap. Investing in somewhat promising cancer research could make it a more appealing acquisition target. CytomX's platform could meaningfully improve immuno-oncology therapies on key drug parameters - side effects and efficacy - resulting in better quality of life for cancer patients. So does this move make sense? Spending $200 million upfront is a reasonable risk to take considering that the potential rewards, as discussed above, can be significant.

In essence, it is all about renewing investor confidence following the expected slowdown in Opdivo's sales growth . This slowdown can be attributed primarily to a couple of factors. First, Opdivo's Phase 3 clinical trials, which aimed to test its application in the first-line treatment of lung cancer, failed. The first such failure occurred in early August and recently, the company announced that it has stopped pursuing combination therapy involving Opdivo and Yervoy for FDA approval considering the test data. This reduces the drug's target market and expected peak sales, as first-line treatment of lung cancer is a huge market. Furthermore, as far as lung cancer is concerned, Opdivo is used in previously treated patients. This domain is expected to see greater competition from Roche and Merck in 2017.

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This article appears in: Investing , Stocks , US Markets , Investing Ideas
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