Written by Shailesh Maingi, CEO & Founder, Kineticos

A few months ago, BMS released preliminary data for its immuno-oncology checkpoint inhibitor (Opdivo) for front line treatment of Non Small Cell Lung Cancer (NSCLC). To the surprise of many, Opdivo failed to meet its primary endpoint. In early October, BMS released more data at ESMO 2016. It wasn’t good. Progression Free Survival for Opdivo was 4.2 months compared to 5.9 months for chemotherapy.

Nearly the same time, Merck announced that its competing trial for Keytruda met its primary endpoint for its clinical trial for NSCLC. Also at ESMO, Merck also announced the details: for patients expressing PD-L1 greater than 50%, there was a 50% reduction in disease progression and a 40% reduction in deaths compared to chemotherapy.

Prior to the release of this set up data, BMS’s Opdivo was clearly ahead of Merck’s Keytruda. So what happened?

Well, for one, BMS and Merck developed divergent approaches for their clinical trials. BMS decided to go the traditional route: their inclusion criteria for their clinical trial was PD-L1 expression greater than 5%, which meant that their target patient population was large. For its part, Merck chose a more targeted approach with PD-L1 expression greater than 50%.

Many have been critical of BMS of their decision. However, this criticism is simply a hindsight bias. It’s absolutely true that the results were poor for BMS, but to criticize without understanding the reasons for BMS’ strategy misses a great teaching opportunity.

So why did BMS chose this clinical design? First, Opdivo had proven effective in earlier trials on a broad population. Clearly, BMS felt that the result in this trial would be the same. The benefit to BMS of this approach is pretty simple: the larger the patient population, the larger the market share and higher revenues. In short, BMS chose the traditional pharma model.

Merck, on the other hand, chose a precision medicine approach. They limited their patient size, which meant that their market would be smaller, in theory anyway. With Opdivo’s failure, though, Merck’s opportunity has now increased significantly. The results of the Keytruda trial were simply spectacular.

The market reaction to these trials has been dramatic. Upon announcement of these results, BMS stock plummeted 35%, while Merck stock was up 7% (although it has given up some of those gains as healthcare stocks have declined). This has lead to a $52 billion inversion1 in value.

What can we learn from all this? Well, for one, this is how capital markets are supposed to work! In this case, BMS and Merck made their choices based on their respective science and business goals. It created a natural experiment on the limits of the check point inhibitors. Efficient markets create opportunities, build competition, and encourage risk taking.

Second, I believe there is no going back. Because of these two results, pharma will perceive that the risk/reward ratio has shifted, at least in oncology. The safer choice, both from a business and science perspective, is the precision medicine route.

1A reduction of $40b in market capitalization for BMS and increase of $12b for Merck. Note the asymmetry of success and failure.

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Shailesh Maingi is the Founder and CEO of Kineticos and has a passion for the role R&D plays in improving healthcare outcomes.  Mr. Maingi is also an adjunct professor at the Kenan Flagler School of Business at the University of North Carolina and serves on the board of directors for a number of biopharmaceutical, diagnostic and contract manufacturing companies.

 Contact Shailesh