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Bristol-Myers to get royalties on Merck's Keytruda, while its Opdivo struggles

Bristol-Myers Squibb Co. and Ono Pharmaceutical Co. Ltd. will benefit from Merck & Co. Inc.'s success with a rival cancer drug, even as the medicine they developed is losing momentum.

Under a global agreement to settle a patent-infringement lawsuit, Merck will make an initial payment of $625 million to the two companies as well as pay royalties on Keytruda sales through Dec. 31, 2026.

The Jan. 20 settlement "came sooner than we had expected, but with terms roughly along the lines of what our legal experts had assumed," Credit Suisse equity analyst Vamil Divan wrote in a Jan. 20 research note. "Given we currently assume global Keytruda sales of $4.6Bn in 2017 increasing to more than $10Bn in 2022, the royalty stream may turn out to be quite meaningful."

Both Keytruda and Bristol-Myers' Opdivo are so-called checkpoint inhibitors that target proteins that normally inhibit the body's immune response. By attaching to the proteins, the drugs strengthen the body's immune response to cancer.

Bristol-Myers' Jan. 19 decision to not seek accelerated approval of a combination of Opdivo and another one of its checkpoint inhibitors as the initial therapy to treat non-small cell lung cancer puts the company further behind competitors, equity analysts said. The company said the decision was based on a review of available data about the combination therapy of its medications — Yervoy, FDA-approved to treat melanoma, and Opdivo, which is approved already to treat non-small cell lung cancer — but only after chemotherapy proves insufficient.

Cowen equity analyst Steve Scala wrote in a Jan. 20 analyst note that Bristol-Myers will probably obtain approval in the second half of 2018, following the completion of the CheckMate 227 trial in January of that year. That would make the company a late entrant into the market for initial, or first-line, therapies to treat non-small cell lung cancer.

Unlike Opdivo, Keytruda already has approval for use as the initial therapy for non-small cell lung cancer, and the FDA recently surprised Wall Street by accepting Merck's filing for a broader indication earlier than expected.

Scala downgraded Bristol-Myers to "market perform," writing "Opdivo sales could be at risk given possible availability of MRK's Keytruda/chemo combo" in first-line therapies in the second quarter. While that is "not a sure thing," it could further hurt Opdivo sales as a second-line treatment as Keytruda patients may be treated with a different type of drug in the next round of treatment, Scala said. The analyst wrote that the company's update did not cause him to change any financial estimates, but gives him "less conviction" in the intermediate term.

AstraZeneca PLC is also developing a first-line checkpoint inhibitor for the disease. The company on Jan. 17 revealed refinements to the candidate's phase 3 clinical trial. Jefferies equity analyst Jeffrey Holford reacted positively to development in an analyst note, writing that the changes eased some of his concerns about the study. Scala wrote that, barring any setbacks, the candidate should receive approval one year prior to Bristol-Myers' combination therapy.

Meanwhile, Leerink equity analyst Seamus Fernandez warned in a note that the "real-world" response rates of the checkpoint inhibitors in approved indications has been "somewhat lower" than those seen in clinical trials, citing interviews with key opinion leaders.