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Some Inconvenient Facts About Yervoy, Bristol-Myers' New "Holy Grail" Cancer Drug

After Bristol-Myers Squibb (BMY)'s new "Holy Grail" cancer drug Yervoy was approved by the FDA on Friday, CEO Lamberto Andreotti told the Wall Street Journal, "R&D pays ... It pays not only because we have results, but because we invest our money very carefully." The remark was a jab at companies like Pfizer (PFE), which recently reduced its commitment to R&D spending in the belief that massive corporate outlays are inefficient compared to smaller, nimbler operations.

But Yervoy -- a fascinating new drug that boosts the body's own immune system to attack cancer cells -- wasn't developed at BMS, as Andreotti implied. It was developed by a small company named Medarex that BMS acquired for $2.1 billion in 2009, which would suggest the opposite -- that large corporations' R&D budgets are less significant than their M&A budgets.

That's not the only inconvenient fact about Yervoy (also known as ipilimumab). The drug -- once hailed by its researchers as the "Holy Grail" of cancer -- costs $120,000 for a four-dose course of injections, and taxpayers will pick up a large chunk of the cost of that. That's because Yervoy is an injectable drug, and thus falls into the nonsensical legal loophole that requires federal programs such as Medicare and Medicaid to pay the full cost of the drug, without negotiating its price, simply because it's a series of injections rather than pills.

That price is one reason why Wall Street analysts expect Yervoy to make $1.7 billion a year in revenues. If that comes to pass, it will make BMS's 2009 deal for Medarex look like one of the smartest drug development acquisitions ever made.

Cheap at the price
The move looks doubly smart when you factor in Yervoy's development costs, which may have been as low as $400 million in total. It is taken as read in the pharmaceutical industry that, on average, a new drug costs about $1.3 billion over about 10 years to develop. How the industry calculates that number is a matter of debate. But because Medarex was unusually detailed about its R&D costs we can see how much money was actually spent to research and develop Yervoy. Here are Yervoy's historic development costs (in thousands) from the inception of Medarex through 2009, when BMS acquired the company:

  • 2009: $20,308
  • 2008: $40,230
  • 2007: $47,442
  • 2006: $49,252
  • 2005: $31,496
  • 2004: $28,292
  • 2003: $21,955
  • 2002: $19,003
  • Inception through 2001: ~$32,569
  • Plus $25 million in a BMS downpayment.
  • Total: $315,547
    Source: SEC filings*
We lose sight of Yervoy's costs after 2009 because the drug disappeared into BMS's less detailed financial statements. But we know that BMS filed for FDA approval in Q2 2010, so unless it managed to spend several hundred million dollars between its Q2 2009 buyout of Medarex and its FDA filing a year later, Yervoy must have cost less than $400 million to develop.

The bottom line here is that the major cost of "R&D" cost of Yervoy was nothing to do with the drug itself. It was the amount BMS paid to acquire the drug -- $2.1 billion.

*Note to readers: My numbers contain some back-of-the-envelope assumptions. The number for 2009 was developed by doubling the amount BMS gave Medarex in development costs in the first half of 2009 and adding the portion Medarex spent under the terms of the deal. The numbers from inception through 2005 -- when Medarex did not break out its ipilimumab spending -- were calculated by taking the average portion of its total R&D budget (23 percent) that it spent on ipilimumab after 2005. As later spending in drug development tends to be greater than earlier spending, this is probably overstates ipilimumab's costs. Lastly, from 1999 through 2001 the Danish kroner was trading at a multiple of 8.4 to the dollar, per Medarex's numbers, and during that period Medarex disclosed its financials in kroner.

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