Stronger Than Expected Earnings from Bristol

In Bristol-Myers Squibb's BMY fourth-quarter results, total sales matched our and consensus' expectations while earnings were stronger than expected, but we don't anticipate any major changes to our fair value estimate based on the results. The earnings beat was partly based on lower-than-expected research and development spending. 2019 guidance was largely in line with our expectations. We continue to view the stock as undervalued, with the Celgene deal creating value from strong Revlimid cash flows and by expanding Bristol's pipeline, a core pillar in our wide moat rating.

In the quarter, Bristol's largest drug, Opdivo (30% of sales), posted strong year-over-year growth of 33%, but sequential growth slowed to almost flat, which is probably representative of the drug's growth for 2019. While management is guiding Opdivo to growth in 2019, we expect the drug will post largely flat growth with strength in renal cell cancer and melanoma offsetting declining sales in second-line lung cancer. Beyond 2019, we expect Opdivo to return to growth with continued market share gains in renal cancer and melanoma as well as expanded indications in lung, brain, liver, and gastric cancers. Importantly, Bristol withdrew its first-line lung cancer application with the Food and Drug Administration, as it needs more data to support the filing. We expect supportive lung data from three studies--CheckMate-227 Part 1a in the first half of 2019 (survival data for PDL1+ patients), CheckMate-227 Part 2 in mid-2019 (survival data for all patients), and CheckMate 9LA in 2020 (survival data for all patients)--but strong data from Merck's Keytruda is likely to limit Opdivo's lung cancer share to close to 15% by 2022.

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