Drug Fails Test, Stock Tanks!


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What's going on?

Shares of Bristol-Myers Squibb, the pharmaceutical company, dropped more than 15% on Friday: one of its key drugs failed a test to approve it for use among a wide swathe of cancer patients.

What does this mean?

The drug in question, called Opdivo, is already in use as a drug for some rare cancers, but Bristol-Myers was hoping that it would be successful at treating cancers that affect a large number of people (specifically, it was targeting the most common form of lung cancer). The company, as well as many investors, had high expectations for the drug and its failure to perform was a big surprise – which is why the share price reacted so violently. Shares of Bristol-Myers’ rival, Merck, jumped 10% on Friday as a similar drug from Merck, which has passed a similar test already, will now face less competition.

Why should I care?

The bigger picture: The pharmaceutical business is inherently risky.
Developing new drugs comes with risks: it’s an expensive endeavor and far from guaranteed to succeed. Bristol-Myers purposefully pursued a riskier strategy than its rival Merck, which involved targeting Opdivo at a broad range of cancer sufferers (rather than at a smaller sub-section, with whom the drug would have more likely been successful). While big pharma companies, such as Bristol-Myers, protect themselves by having a variety of product streams and relatively low debt levels, Friday’s news is a reminder that, even amongst the biggest companies, pharma is a risky business.

For the stock: Opdivo was supposed to drive a lot of Bristol-Myers’ future growth.
It’s not game over for the drug: it’s quite likely that it will find success as part of a combination of therapies for cancer patients. But it probably won’t be used for as many patients as Bristol-Myers had hoped. Analysts are split on the long-term impact for the company, but suffice to say the road ahead isn’t as smooth as investors had hoped.

Originally posted as part of the Finimize daily email.

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