In a battle of blockbuster cancer drugs, Bristol-Myers Squibb Co‘s (NYSE:BMY) pain was Merck & Co., Inc.’s (NYSE:MRK) gain, but investors need to be careful about going overboard on MRK stock or abandoning BMY.
Shares in MRK, a component of the Dow Jones Industrial Average, jumped nearly 8% in the first half-hour of trading after rival BMY said a trial for its Opdivo immunotherapy drug failed to meet its primary endpoint. That means it failed.
Predictably, BMY stock gapped down 18% at the opening bell.
The failure of the trial was a shock for pharmaceutical investors, and leaves the field open for Merck’s Keytruda immunotherapy to dominate the market for a particular type of single therapy for newly diagnosed lung cancer patients.
Yes, it is a big deal. With $840 million in second-quarter sales, Opdivo is a blockbuster for BMY. Keytruda generated sales of $314 million in the same quarter. Opdivo is approved to treat other forms of cancer, but it’s clear that Merck’s therapy stands to add a sizable chunk of change to the top line.
MRK & BMY: A Boost for the Bulls and a Buy on the Dip?
In addition to Januvia, Janumet and Keytruda have been growth drivers for MRK. BMY’s trial failure adds a tailwind to the group. But is the addition of perhaps a few hundred million in quarterly sales worth a bump of about $11 billion in market value?
Even at a price-to-sales multiple of 4.4, the move on MRK stock seems a bit over the top. By the same token, BMY lost roughly $29 billion in market capitalization.
The bottom line is that the market almost always moves too far in one direction or the other anytime it has a knee-jerk reaction to anything. When it comes to Merck stock, chasing performance under such circumstance might make sense for a trader, but it’s not the way to build a long-term position.
On the other hand, the steep selloff in BMY makes it worth a second look as an overly beaten-down bargain.
Investors are impressed with MRK’s pipeline and happy with its moves to cut costs. By replenishing its lineup of blockbusters as boomers hit their peak health-care years, MRK is set up for solid if unspectacular market-beating returns for patient investors.
At the same time, the future for BMY isn’t as bleak as Friday’s market action would suggest. True, Opdivo is its most important cancer drug. Analysts expected sales to reach $7 billion on an annual basis. That’s now going to be a stretch.
As shocking as this failure was for BMY, it has other trials in the works. It’s not game over of Opdivo. And although MRK might have this particular niche all to itself for now, the window could close in as little as 12 months.
This is as unreservedly good news for one pharma giant as it is unreservedly bad for the other. However, individual investors will be better served by sticking to their investment plans before Friday’s crazy trading.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
