Merck Makes Nice With Bristol-Myers Squibb

By Motley Fool

After Bristol-Myers Squibb (NYSE: BMY) claimed Merck & Co.'s (NYSE: MRK)cancer-fighting Keytruda infringed upon patents protecting Opdivo, Merck & Co. has agreed to pay Bristol-Myers Squibb $625 million up-front, plus future royalties, in exchange for a non-exclusive license to Opdivo's intellectual property. Does this deal make Bristol-Myers Squibb shares a buy?

In this clip from The Motley Fool's Industry Focus: Healthcarepodcast, analyst Kristine Harjes sits down with Todd Campbell to discuss what was behind the deal, and how big the royalty payments may be.

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A full transcript follows the video.

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This podcast was recorded on Jan. 25, 2017.

Kristine Harjes: Let's kick it off with Merck, and also Bristol-Myers.

Todd Campbell:Somevery interesting news here this week, Kristine. Wouldn't you like to be able to add nine figures in revenue with just the stroke of a pen?

Harjes:Yeah, that would be nice. My bank account would love it.

Campbell:That'sessentially what's happened here with Bristol-Myers and Merck. Essentially, these twocompanies have settleda patent dispute,Bristol-Myers coming out on top. Merck has now agreed to give them a pile of money up front tomake up for royalties that they hadn't been paying for infringing on the patent. And,according to the settlement, Merck is going to giveBristol-Myers a healthy 6.5% dividend from here until 2023, and then another 2.5% from 2024 to 2026.

Harjes:And that'sspecifically on one drug named Opdivo and Keytruda.

Campbell:Yes. Both these drugs work inthe same way, theytarget a protein called the PD-1, which is expressed on T-cells, in which cancer cells sneakily use to evade the immune system's detection.

Harjes:Right. This is a completely novel way oftreating cancer, which is whyyou have Bristol-Myers saying here, "Hey, wait,you have infringed upon the patent that we have." So this willeffectually endall of the patent infringement litigationagainst Merck's Keytruda, andas you mentioned, Bristol will get a whole pile of money to make up for the past, and then they'll get royalties going forwards. Thepayments will actually be split 75% toBristol-Myers and 25% to a company calledOno Pharmaceutical, it's aJapanese partner on the drug. This is still a very hefty sum forBristol-Myers.

Campbell:Right. They're getting $625 million right up front. Merry Christmas; here's $625 million! Then,if you look at the potential market opportunity for these checkpoint inhibitors, these PD-1 drugs, it'stremendous, it's huge. These are billions and billions dollar drugs. Justout of the gate,assuming no additional growth on Keytruda, you'd belooking at right around $100 million in royalties stream heading toward Bristol.

Harjes:Right,so this is huge news. Most likely, the drug will continueto expand, making it even bigger and bigger newsgoing forward. And that 6.5% royalty will lastall the way through the end of 2023.

Campbell:Right. Youjust mentioned to the ability to expand. A lot of cancers use this PD-1 toescape detection. What they're finding is,as they do more and more trials indifferent types of cancer, that these drugs are very effective, very high response rates in patients. This was especiallyinteresting, to see them come to this agreement, becausein the last year or so,both drugs, Opdivo and Keytruda, they've diverged in what'shappened in their clinical trials, with Merck havinga lot of success and Bristol-Myers mostly,in my view, because of the way they designed their trials, having less success,especially in lung cancer.

Harjes:Right. This issomething we have talked about on a previous episode ofIndustry Focus, so our long-timelisteners will hopefully remember. Itbasically had to do, as you mentioned, with the trial design, where Opdivo failed its trailin which it was looking at pretty much all levels of PD-1expression 5% or above as opposed to,when they did the Keytruda study, it was 50% PD-1 expression and above. Of course, it's a drug that works on PD-1, so if you'retargeting patients that have a higher expression of it, you'retilting the odds in your favor.

Campbell:Yeah, it's almost like Merck went the safe route, andBristol-Myers tried to jump the shark.

Harjes:Right,and it backfired.

Campbell:Bygoing the safe route, Merck was able to nab an FDA approval for the use of Keytruda in the first line setting for high-expressing PDL patients. What's really interesting is that they also have recently filed for first line use of Keytruda pluschemotherapy in patients who don't express PD-1,after seeing some pretty solid trials. So,if Bristol-Myers had eitherdesigned the trials so that was only high-expressing patients initially, or had combined it withchemotherapy, who knows if Keytruda would have theadvantage in lung cancer heading into 2017 versus Opdivo. Obviously,I think that probably made Bristol-Myers a bit more willing to agree to that royalty stream, because they looked at it and said, "Well,if we can't get the first line, and the first line could be worth up to $1 billion, at least maybe we can share in some of Keytruda's success."

Harjes:Absolutely. It isnot a bad consolation prize.

Campbell:No,and it's all high-margin money. They're not actually producing anything, they already produced the IP for it.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.