John E. Elicker - Bristol-Myers Squibb Co. Giovanni Caforio - Bristol-Myers Squibb Co. Charles A. Bancroft - Bristol-Myers Squibb Co. Thomas J. Lynch, Jr., M.D. - Bristol-Myers Squibb Co. Christopher S. Boerner - Bristol-Myers Squibb Co. Johanna Mercier - Bristol-Myers Squibb Co..

Gregg Gilbert - Deutsche Bank Securities, Inc. Jami Rubin - Goldman Sachs & Co. LLC Christopher Schott - JPMorgan Securities LLC Olivia Brayer - Barclays Capital, Inc. Jason M. Gerberry - Bank of America Merrill Lynch Andrew S. Baum - Citigroup Global Markets Ltd. Alex Arfaei - BMO Capital Markets (United States) David R. Risinger - Morgan Stanley & Co.

LLC Steve Scala - Cowen & Co. LLC Umer Raffat - Evercore ISI Vamil K. Divan - Credit Suisse Securities (USA) LLC John T. Boris - SunTrust Robinson Humphrey, Inc. Matthew Phipps - William Blair & Co. LLC.

Good day, and welcome to the Bristol-Meyers Squibb 2018 Second Quarter Results Conference Call. Today's call is being recorded. At this time, I'll turn the conference over to Mr. John Elicker, Senior Vice President, Public Affairs and Investor Relations. Please go ahead..

Thanks, Jake, and good morning everybody. Thanks for joining us on the call today to discuss our second quarter results. With me this morning are Giovanni Caforio, our Chairman and CEO; Charlie Bancroft, our Chief Financial Officer; Tom Lynch, our Chief Scientific Officer. We have Johanna Mercier who runs our U.S.

business and Chris Boerner, who runs our international business. Giovanni and Charlie will have prepared remarks, and then Tom, Johanna and Chris will be here for Q&A as well. Before we get started, I'm going to handle the safe harbor language.

During the call we'll make statements about the company's future plans and prospects that constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in our SEC filings.

These forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates as of any future date. We specifically disclaim any obligation to update forward-looking statements even if our estimates change.

We'll also focus our comments today on our non-GAAP financial measures, which are adjusted to exclude certain specified items. Reconciliations to these measures to the most comparable GAAP measures are available on our website.

Giovanni?.

Thank you, John, and good morning everyone. I'm proud to speak to you today about a very good second quarter with outstanding performance across the company. Before I talk further, I want to acknowledge the contributions and leadership of Murdo Gordon, whose departure we announced on Monday.

As you know, Murdo helped build a high-performing commercial organization, developing some incredibly talented teams and leaders, including Chris and Johanna, who are here with us today. We are in a very strong position, and we will be finalizing a successor for the Chief Commercial Officer shortly. Now, let me discuss the quarter.

The results we reported today were driven by strong commercial execution in our key franchises of Opdivo and Eliquis and across our portfolio. As I mentioned, our commercial teams continue to deliver at a superior level in a dynamic and highly competitive environment.

At the beginning of the year, I spoke about a focused set of opportunities with Eliquis and Opdivo that we saw driving future growth for the company. Now, at the end of the first half, I'm very pleased with where we are. With Eliquis, I see considerable room for the market to expand, which we saw during the quarter.

Eliquis delivered exceptional performance, with continued increased adoption based on the clinical benefits that have made it the leading NOAC. Looking forward, Eliquis is poised to overtake warfarin in the broader oral anti-coagulant class, and I'm confident Eliquis will continue to be an important driver of growth for the company.

With Opdivo, earlier this year I described a number of really important opportunities to further establish Opdivo as foundational in multiple lines of therapy and in multiple tumors. We have made good progress in these areas, and I'll focus more on some of these in a moment.

For example, the strong launch in first line renal cell cancer builds on our success in second line and reinforces the important role of Opdivo in earlier lines of therapy. Similarly, we saw continued strong uptake for Opdivo in adjuvant melanoma, which is now standard of care in this setting. The role of the Yervoy continues to be important.

As you know, the combination of Opdivo plus Yervoy is now approved in three tumors, renal, colorectal and melanoma. In fact this quarter we saw a return to growth of Yervoy in the U.S. compared to Q1, driven by the strong uptake of the first line RCC launch. The rapid uptake we are seeing in the U.S.

is a result of strong commercial execution and the compelling overall survival benefit demonstrated in this population by Opdivo plus low dose Yervoy. Knowing the importance of this regimen to patients with RCC, I'm very disappointed to share that we have just learned that we will be receiving a negative opinion from the CHMP in first line renal.

We strongly disagree with this opinion and in the interest of patients, we will pursue a re-examination under the EU regulatory process. Tom can provide more color during the Q&A. Strong increased demand for our medicines and not pricing has driven our results.

Now, we've all seen the developing discussion on pricing and affordability, which is an important topic for us and for the industry. As a company, we welcome the opportunity to improve the system with a focus on patient affordability and on addressing misaligned incentives in the supply chain.

We're following this issue very closely and we are committed to working with the administration. We can answer any specific questions you have later in the call. During the quarter, there was significant scientific advances in immuno-oncology, in particular with the data presented at ASCO.

I was pleased to see the evolution in the discussion of tumor mutation burden or TMB and believe that TMB will play a role in lung cancer and more broadly as we further define its value in treatment with I-O agents. In Europe and the U.S.

our applications for Opdivo plus Yervoy in first line lung cancer were accepted and remain under regulatory review. Going forward, the role of biomarkers in I-O is an important part of our strategy that we continue to investigate across our pipeline. Looking ahead, we had some very important near term catalysts.

For Opdivo, we're looking forward to important data readouts in the next six to 18 months for non-small cell lung cancer, HCC, small cell lung cancer, gastric and head and neck. I'm also excited by the progress with our diversified pipeline and the work we are doing in cardiovascular disease, immunoscience and fibrosis.

As you know, we recently signed a collaboration with Janssen for our Factor XIa compound in thrombosis and that is moving forward. Additionally, I'm particularly encouraged by the profile of our TYK2 compound.

We believe the mechanism for TYK2 is promising not only in psoriasis where we present data in Europe in September, but in a range of other immunologic disease targets. This is an exciting compound and we expect to start registrational studies in the next few weeks.

In closing, we are executing very well and I believe we are focused on the right strategic opportunities for the future. We are investing commercially and in our pipeline to drive growth. And I feel very good about the progress we're making. With that, I'll turn it over to Charlie..

Good morning, everyone. We delivered an outstanding quarter highlighted by strong revenue growth. The sales increase of 26% for our prioritized brands was driven by substantial gains in demand for our two key growth franchises, Eliquis and Opdivo. Let me start with Eliquis, which delivered 40% growth during the quarter.

Eliquis is already the number one NOAC in the U.S. and in many other important top 10 markets around the world including Germany, France and the UK. As Giovanni said, we soon expect Eliquis to overtake warfarin and become the leading OAC in the U.S. We also continue to see prescription trends that signify further expansion of the NOAC class.

For example, in the U.S., we expect significant further decline in warfarin usage as it currently has nearly 40% share of total prescriptions but has only about half of that share of new prescriptions. As NOAC usage expands, we expect Eliquis to maintain its leading position in the class with substantial growth momentum going forward.

I'll now turn to our I-O franchise, where in a highly competitive environment we delivered 36% growth for Opdivo during the quarter. In the U.S., this growth is driven primarily by uptake in our new indications, first line renal cell and adjuvant melanoma. For first line renal cell, we've seen rapid adoption of Opdivo with low dose Yervoy.

Having just launched in April, this regimen already has roughly 30% share of new patients, making it the leading treatment in the U.S. Uptake of Opdivo in adjuvant melanoma in the U.S. has also been very strong, and this indication is an important opportunity for us. We exited the quarter with Opdivo having close to 70% share.

We're also seeing early signs that the compelling efficacy and safety profile, coupled with the four-week dosing option, are driving up treatment rates for early stage melanoma patients.

With respect to lung cancer, we've seen our share of second line I-O eligible patients remain stable, despite some expected contraction in the size of the second line lung I-O market. Outside the U.S., where we expect a longer period of stability for the second line market, execution remains strong across our key markets.

We have also secured reimbursement for most current indications earlier in the year, and we are preparing for the European launch in adjuvant melanoma, given the positive CHMP opinion. With these trends in mind, we continue to view Opdivo as a growth brand, both this year and in 2019.

As Giovanni mentioned, Yervoy has returned to sequential quarterly growth. This is a function of three factors. Firstly, we continue to see leadership for Opdivo/Yervoy in first line melanoma.

Secondly, we have now worked through the shift to Opdivo mono in adjuvant melanoma, and lastly and very importantly, the rapid uptake of the Opdivo/Yervoy regiment in renal cell. We've also been encouraged to see first line renal cell driving an expansion of the Yervoy prescriber base, with about 50% of use in renal coming from new prescribers.

Now I'd like to highlight a number of items from our non-GAAP P&L. Our gross margin was negatively impacted by product mix, offset by favorable FX compared to Q2 last year. Once the FX favorability in the quarter is excluded, gross margin is roughly unchanged from Q1.

As I've described in the past, other income and expense has increased this year, mainly due to diabetes royalties and the recognition of net pension benefits now recorded in other income. Looking forward to the second half of the year, this line will be affected by the loss of the Erbitux royalty in North America at the end of Q3.

Regarding OpEx, we remain disciplined in our spending as we continue to drive efficiencies in our MS&A line to facilitate investment in R&D. And finally, with regard to our tax rate, the favorability in the quarter compared to last year is largely due to the impact of U.S. tax reform.

Turning to capital allocation where we continue to take a balanced approach, business development remains a top priority for use of capital, as does our commitment to our dividend. I'll now provide some comments on guidance. Based on our strong sales trends in the business, we expect to deliver revenue growth in the mid to high-single digit range.

With this in mind and based on strong business performance in the first half of the year, we are increasing our non-GAAP EPS guidance range by $0.20. As always, our guidance assumes current foreign exchange rates. To close, we had a very strong quarter with the Eliquis and Opdivo franchises continuing to drive quality growth.

We remain disciplined in prioritizing our resources to the areas that we believe will deliver the highest value. And lastly, we believe our business continues to be well positioned to take advantage of future opportunities. Now I'll turn it back to John to start the Q&A..

Thanks, Charlie. And, Jake, I think we're ready to go to the Q&A session, please..

We will begin with Gregg Gilbert with Deutsche Bank..

Yes. Thanks. A couple. I'll start with Tom, since it was offered that you could expound on the CHMP disappointing decision. Can you put some more meat on the bones there and talk to any read-through there as it relates to other settings and other situations? And secondly on the TYK2 program, obviously, a high bar in that disease state.

You've made the decision to spend a lot of money and resource going forward in pivotals. Is route of delivery the key hook there? Or is there more to it than that, Tom? Thanks..

Gregg, thank you for your questions. Let me start off with talking about the renal finding. And we just learned about this yesterday actually from the CHMP. And they offered a negative opinion on study 214.

And the basis for their finding or their discussion was really that they did not feel that we had demonstrated the contribution of components sufficiently well to grant this. And they were worried about establishing a precedent in that setting.

We believe strongly that the combination of Opdivo/Yervoy is an extremely important regimen, something doctors are going to want to be able to treat their patients with. And when we designed the study, we seriously considered whether or not a single agent arm would make sense.

And after discussing with key opinion leaders around the world, we felt it did not make sense given the low single agent activity we had seen. Now, our reaction to this is we're going to proceed with asking for a re-examination and we look forward to a discussion with the CHMP regarding this application.

Gregg, I think it's important to note that we don't believe this has any real read-through to other parts of our I-O program.

We believe that we have designed studies which are able to position our compounds within a broad market and I'm not worried that the CHMP opinion here really says anything else about any other tumor types down the road at that point.

So your second question is regarding TYK2 and very excited about TYK2 and what TYK2 can mean for Bristol-Meyers Squibb. And I think, Gregg, one of the things about TYK2 that really excites me is that it's not just a potential compound for psoriasis. And I think that TYK2 reflects some of the best work that's been done at Bristol-Meyers Squibb.

This is really a very clever discovery chemistry picture here, in that what makes TYK2 different from other members of the JAK family inhibitors is that we've gone ahead and we've actually targeted the pseudokinase. And I could not be more proud of what our discovery group has been able to do in targeting the pseudokinase of TYK2.

As you know, we'll be presenting data at the European Society (sic) [Academy] (15:46) of Dermatology and Venereology in September of this year and we look forward to a publication in a journal at the same time.

I'm not going to go into the details of the data except to say that we think that this will be very impressive data that will make a big impact in the market and it certainly has convinced us that moving forward with a Phase 3 program makes sense.

I think, Gregg, it's the oral convenience of a biologic would be a terrific attribute of a drug like this and I think it would make it appealing to patients who are thinking about options in psoriasis. And finally, I think what makes TYK2 particularly exciting is, again, it just doesn't target one pathway.

You get both the IL-12/23 pathways as well as interferon. The possibilities in lupus and inflammatory bowel disease, I think, are extremely exciting. So we have a lot of enthusiasm for TYK2 as we move forward and we look forward to sharing that data with you in Europe this fall..

Gregg, this is Giovanni. Maybe just to go back for a second to the discussion about renal in Europe. Obviously, as Tom said, it's disappointing news that we've received. I think it's important for patients that we go forward. I just want to step back and put this into the context of a significant number of growth opportunities we have.

Charlie stated clearly we see Opdivo as a growing brand next year and this development, which is still happening, does not change our perspective there..

Thanks, Gregg.

Jake, can we go to the next question, please?.

Of course. We'll now hear from Jami Rubin, Goldman Sachs..

Thank you.

Just to follow up on the European decision, maybe, Johanna, from a commercial perspective, how should we think about the commercial opportunity in Europe for renal? Would this or will this still, or I don't know how to think about that, but just in thinking about the sort of opportunity lost, was this about a quarter of the global opportunity for renal? Help us to think about what the revenue opportunity could be, may have been, et cetera.

And also just if you could explain the incredible resilience that we're seeing in Opdivo in the second line lung market. You said, Johanna, at our conference that you expected a 30% decline over the next two years. That is much more moderate than I think what the Street is expecting.

Can you explain why only a 30% decline and really just what kind of feedback are you getting from physicians? Thanks very much..

Jami, thank you. This is Giovanni. So let me just, obviously we're not going to be able to elaborate further on the regulatory front. But let me just ask Chris first to give you his perspective on the dynamics in Europe in renal between second and first line.

And then Johanna can go back to your question about the evolution of the first line lung cancer market..

Jami, thanks for the question. Let me just start by saying we're obviously very happy with the growth that we've seen with Opdivo outside of the U.S. It's really been across markets and across indications. As we think about the Opdivo business going forward, really the way I think about it is in two tranches.

So first, our base business continues to be strong with Opdivo. We expect the second line lung cancer market to stay relatively stable outside of the U.S., with shares at roughly 40% to 50% range.

While we do expect the dynamics of the frontline lung cancer market to impact second line, we won't likely see that until well into 2019 for a number of reasons, notably the timing of regulatory approvals and then access decisions in first line as well as the fact that we didn't see an earlier approval for PD-1 in chemotherapy in first line outside of the U.S.

So the second line lung cancer business remains stable. And then beyond lung cancer, we think there are additional opportunities for growth with Opdivo in our base business, notably renal cell. Metastatic melanoma continues to be strong. We're starting to see some uptake of Opdivo plus Yervoy in the metastatic BRAF mutant population.

And as we continue to see additional access decisions, we'll see growth in other tumors such as head and neck. Obviously, as we look forward for more significant growth outside of the U.S., that will be based on new indications. We're obviously disappointed with the decision on renal cell.

We'll have to await additional regulatory interactions to know what opportunity there will be there. But in the near term, we have opportunities potentially with indications such as adjuvant in melanoma. And then in the longer term, front line lung cancer and have had our cellular opportunities as well.

And then clearly, the gating factor for those growth opportunities will be the timing of approvals and access decisions. But we're still very optimistic for the opportunity to grow Opdivo outside the U.S.

Johanna?.

Good. So, Jami, in regards to second line lung, I think second line lung is absolutely part of our strong base of business in the U.S., and one of the reasons for that is we've been able to maintain our leadership share of about 30%, 35% in a very dynamic market, as you pointed out.

We've seen slow erosion of the patient eligibility, as predicted, as we had planned. And it's important to understand kind of like what we spoke to at the Goldman Conference, it's important to understand that the patients today that are on Opdivo actually were on chemo six, nine months ago and have actually progressed into second line.

So there's a temporal effect to this. So if you assume that that erosion will accelerate in 2019 because your I-O penetration in first line accelerates in 2018, we are assuming about 70%, 75% of the market penetration in I-O towards the end of this year.

That does mean that there's still about 25%, 30% of patients that are actually on chemotherapy in first line that will eventually progress to second line and feed into that second line marketplace.

In addition to those chemo patients, you also have some second line plus EGFR out positive patients as well as some I-O retreatment because they have no other options.

All of that together represents about 40% to 50% of that patient eligibility, which is the drop from about 80% today and towards end of 2019, which is still a substantial market in second line. And obviously, we get more than our fair share in light of the fact we are market leaders in second line..

Thanks, Jami, for the questions.

Jake, can we go to the next one, please?.

Yes. The next question will come from Chris Schott with JPMorgan..

Great. Thanks very much for the questions. Just two here. Maybe first on just a little bit more color on OpEx trends for Bristol over time. In the past, you've commented I think flat OpEx in 2020 relative to the 2017 baseline.

Are we still on track for that type of spend? And I guess, when we think about PD-1, and more broadly, I-O investment in R&D, when do we think about that? Is that starting to peak or at least plateau over the next year or two? Or should we continue to see a ramp in spend on that piece of the business? My second quick question was just can you run through Opdivo sales by indication at this point, both U.S.

and ex-U.S.? And just specifically, where does lung stand as a percent of your sales at this point? Thanks so much..

Yeah, so Chris, how are you doing? So regarding OpEx, we've been pretty consistent in how we have really driven resource allocation across the company, and really as you saw in last year and as you saw in our guidance this year, really managing MS&A and improving that year over year and also then increasing what we feel is the lifeblood of our industry and particularly our company in R&D.

Since we gave the original guidance back in 2016 regarding flat OpEx, it assumed no additional BD opportunities and no enlargement of our oncology portfolio. In addition, where we were at with our earlier assets. So as you know, between Halozyme and Nektar and the expansion of our initiation of earlier and mid-stage trials, we have increased our OpEx.

But we continue to manage it in those areas where we feel will drive the highest value for BMS..

Johanna?.

Yes. So, Chris, in regards to the business mix, let me start with the U.S. and then Chris will cover international.

Across our I-O franchise, our lung business is about 35%, so that's kind of diminished a little bit and that's because our melanoma and renal business are increasing in light of some of the launches such as adjuvant in melanoma and also in renal.

And what's interesting here is that if you look at Opdivo and Yervoy together you're looking at about 35% of our mix is melanoma, so in line with what our lung mix is. And then about 20% for renal, 5% for head and neck and a little bit of all others in the bottom five, ten parts. Chris..

Yeah. Chris, let me just take the allocation of business outside of the U.S. It's a little bit different than in the U.S. Approximately 50% of our business ex-U.S. is in lung cancer. That reflects a couple of things.

First, the timing off of our approval and access decisions as being later than what we had in the U.S., but also the strength of our business in lung cancer vis-a-vis competition, resulting from the timing of our approval in second line and the success that we've had on the access side.

So it's about 50% of our business is lung cancer, 15% to 20% of our business is in renal cell and approximately 20% of our business in is melanoma. And that piece, as you will note, a bit lower than what we see in the U.S. and that's reflective of the fact that we don't yet have adjuvant melanoma in our label outside of the U.S..

So I think that's a good summary from U.S. and international, Chris, that confirms that we are effectively diversifying the revenue base within Opdivo and Yervoy across tumor types.

And we have a very balanced set of opportunities now with some of the franchises for Opdivo and Yervoy growing very rapidly, driven by new indications, and it's become a very diversified franchise, which is important obviously..

Thanks, Chris.

Can we go to the next question, please, Jake?.

Of course. We'll hear from Geoff Meacham with Barclays..

Hey, guys. This is Olivia Brayer on for Geoff. Thanks for taking the questions. I just have a couple.

With regards to Eliquis expansion, are expectations still that Eliquis should experience continued growth until warfarin's declining share hits around 10%? Do you continue to see a linear relationship on TRx trends? And where is NRx relative to that? Just curious how you're thinking about that market.

And then turning back to lung, with the upcoming PDUFA date in first line early next year, can you provide us some sort of color on ongoing launch preparations and where your expectations lie after AACR and ASCO? Thanks..

Thank you. So both questions, I would say let me just give you my perspective. I'm very pleased with where we are with Eliquis as both Charlie and I mentioned. We are continuing to see Eliquis having significant potential incremental growth opportunity.

There is more in terms of growth coming from the cannibalization of warfarin and that is now happening around the world. But most importantly, all of that, most of that growth really is enabling us as the leading brand in the NOAC segment to grow very rapidly. So Johanna, why don't you comment on Eliquis..

Sure. Thanks, Giovanni. So thanks, Olivia, for your question. I think Eliquis, as Giovanni mentioned, just incredible growth story. We're still growing at between, anywhere between 35%, 40% growth year on year after six years of launch, and we are now closing the gap to overtake warfarin as the number one NOAC.

And that should happen within the coming weeks. So the opportunity as you think about the TRx and the NBRx, you still have about 36% of TRx for warfarin in the U.S. NBRx is about 22%. I think what's important here is actually look at cardiologists. Cardiologists are actually the leading indicator for us of what's going to happen.

And where you see the TRx and NBRx with cardiology for warfarin, about 20 points. And so there's still a big opportunity today to really continue to erode the market share for warfarin and of course, Eliquis being number one gets more than its fair share. I think that's one piece of the puzzle from a market opportunity.

I also think we're thinking about market expansion opportunities as well. As you think about, there's still 30% of those TRx patients on warfarin that are actually uncontrolled. There is about 1 million patients that are diagnosed and not treated and then there's about another 1 million that are actually just undiagnosed.

And so I think important market opportunities for the future as well. So I do believe that we will continue to grow this brand, and we are currently on that linear trend that you referred to..

I think what's good also there is that what you heard from Johanna is very consistent with what's happening internationally. You look at France, you look at Germany, the key markets for this brand, we are in a leading position across the board.

The access environment in France has actually improved significantly now, and we have opportunity because Eliquis will be able to be used in the first line setting now with the evolution of the reimbursement situation there. So I think the future is very positive there consistently across the board.

With respect to your question on launch readiness for lung, I would just probably say that we've demonstrated with every one of our launches the strong commercial execution of our organization. And every one of the launches we've executed has been very successful. So I'm very confident in the capabilities of our commercial organization.

I'm actually really happy that we are seeing a strong penetration of renal because that is an Opdivo plus low dose Yervoy indication. And you've heard about the good uptake in renal in the U.S. What's important there is that about 50% of the prescribers are prescribers that did not have experience with Yervoy in melanoma.

So that will broaden significantly the experience base and the adoption of the combination of Opdivo and Yervoy has been quite good..

Thanks, Olivia.

Jake, can we go to the next question, please?.

Yes. We will now hear from Jason Gerberry with Bank of America..

Hey. Good morning. Thanks for taking my questions. Just wanted to come back to in the U.S., the first line, second line lung dynamics.

We've done some survey work that suggested, I actually kind of confirmed what you guys were saying that it seems like community oncologists still plan on using chemotherapy only in the front line setting in about 20% to 30% of their patients within two years from now.

And so I'm just wanting to get a better sense, why is that? Do you feel like that's just community oncologists being slow to change? Do you think that that's likely to reverse after two years? Just trying to get your general sense how sticky that is and how that's going to ultimately alter the first line, second line dynamics in lung. Thanks..

So, Jason, let me give that a stab as a oncologist, as someone who practiced oncology for a long time. I think that when you have new therapies, uptake is variable, depending upon different groups of oncologists. I do think there will still be patients who won't get I-O first line for a number of reasons.

And if you look at the penetration of any new therapy, it rarely gets to above 70% to 80% right away. So I'm actually not surprised that there are doctors who still continue to go with first line treatment with chemotherapy. And the other key thing is a lot of physicians like to keep in reserve a great second line therapy as well.

And that's been something that we've seen over the years with Taxol/Taxotere and even EGFR inhibitors where people have held back on using them altogether. So I'm actually not surprised by seeing that, by the behavior of physicians in this setting. And I think it's something that accounts for some of the dynamics that's you're seeing..

And maybe just to add to that, what we're seeing when you think about all of the other tumors that I-O has penetrated, you're looking at a penetration rate of I-O anywhere between 60% and 70%. So even if you take second line lung as a proxy, there's no more than 70% penetration after a couple of years on the marketplace.

And so that's just within the I-O marketplace. And what we were just referring to just a little bit earlier, if you go outside of oncology, you look at warfarin and you look at the products that are available on the marketplace that their profiles are so much stronger, you still have 40% TRx of warfarin..

Thanks, Johanna. Thanks, Tom..

Thanks, Jason, for the question..

Thank you..

Jake, can we go to the next one, please?.

We will now hear from Andrew Baum with Citi. Go ahead, please..

Thank you. A couple of questions, please. Firstly, could you tell us the last time you had a look at the 568 dataset and when we should expect the presentation of that data? I understand competitive issues, but my initial sense was it's going to be before the end of this year. But that seems to have moved. The second question is to Giovanni.

Given the President's, the proposal that's been sent to the President in relation to either negating or amending rebates, could you share with us your understanding of the extent of the proposal, as much as you have any additional information, whether it is just within federal plans, whether you think PBMs would extend any change to federal plans to commercial book of business? Any sense on potential timing of impact? And I appreciate the uncertainty here.

Thank you..

Thank you, Andrew. Tom, why don't you start on 568..

Andrew, thank you for the question on 568. So let's just think about what is 568 and why do we do 568. So 568 was a study that was initially a practice-informing study, a study that looked at Opdivo/Yervoy in patients with non-small cell lung cancer.

It enabled us to get some translational data that we were able to use to help support the development of TMB as a biomarker. We then amended that study to add an important safety lead-in on 568. And so we were able to amend it to look at the two cycles of chemotherapy along with Opdivo/Yervoy, which became the basis for study 9LA.

And as you know, study 9LA is our study which will be done in front line non-small cell lung cancer and we hope to have data by the end of the next year on study 9LA, large randomized trial looking at the potential advantage of two cycles of chemotherapy given with Opdivo/Yervoy in that setting.

The safety lead-in that was done suggested the safety profile was compatible with something which would be acceptable in this patient population. And then when one looks at the data so far, we have accrued approximately 500 patients in 9LA and we have not seen any untoward safety readouts yet that have changed our opinion about this.

So we think 568 has been a very helpful study to us in the development of these other indications. Andrew, in terms of presentation of that data, we have not yet decided upon the appropriate venue for presenting that. We will continue to watch the data mature and we look forward to presenting it at a future medical meeting..

Thanks, Tom. Andrew, so very important question here. I'd like to make maybe three points. So the first one that I'd like to make is that we agree with the need for change. If you look at dynamics in the market today at a time in which rebates continue to increase, net price of medicines in many cases are not growing versus prior years.

There is increased out-of-pocket cost for patients and affordability for patients is an issue. So it's clearly important to look at that issue. It's important to look at the fact that incentives in the supply chain have become misaligned with the interest of patients and so we agree that there is a need to change there.

The second point that I would like to make is that we are working with the administration. We are really looking to continue to work with the administration on these topics. I think it's very early to speculate what changes will be. There definitely is a need to look at rebates and the comments I made before.

Looking at the past, in some cases changes in the Medicare space have over time translated into a change in dynamics in the commercial space, but again, I think at this point it's very early. It would be speculation. I think what we want to see is a system that evolves and looks at three priorities.

The first one is we want innovation to be rewarded and the market to be driven by market forces. We want patient affordability to be the driver of any change, and we definitely support that incentives are realigned.

And these are all elements where there is a potential to cooperate with the administration and work together and really think about what changes are needed in the system.

The third point that I'd like to make is that as an innovation company with very innovative differentiated medicines in areas of high unmet medical need, we are very well positioned.

And when you look at our growth in the first half of this year, significant growth across our prioritized brands, it's all volume because net prices were flat for the first six months of the year and the growth that we are experiencing net in the U.S. was really driven by volume. I would say we have made a decision.

We are not going to take price increases in the second part of this year. I think this is an important time when we're working through some really important potential changes to the market.

I believe there will be the need for transition periods and in the interest of patients, I'm pretty sure that all parties will be working through the right transition time. But I believe that we at BMS are very well positioned because of our medicines and you see that reflected in our performance..

Andrew, thanks for the question.

Jake, can we go to the next one, please?.

We'll hear now from Alex Arfaei with BMO Capital Markets..

Great. Thank you very much and good morning. A couple of questions on I-O, if I may. Tom, how do you think about the competitive horizon in first line RCC? We've seen some encouraging data from PD-1 plus TKIs. I think that there's sets of pivotal data out next year. And even Keytruda monotherapy had some interesting data with 38% response rates at ASCO.

So wondering if you think the early impressive launch in RCC will be sustainable? And then I'm wondering if you could provide your latest comments on the NKTR-214 data, now that the dust has settled after ASCO. There was some confusion around that data that I think still persists. Thank you..

Thank you, Alex. So starting off, let's talk about renal cell. I could not be happier with the way that the community physicians, academic physicians have reacted to the study 214. We think this is an extremely important trial that demonstrated really for the first time that there was a therapy that could beat Sutent.

It's a very active TKI in renal cell carcinoma. So I'm delighted with the launch of Opdivo/Yervoy. It's low-dose Yervoy in this setting and it's being well accepted by doctors and patients and we're delighted to so that. However, I think, Alex, as you point out, this is not the end of the evolution of therapy in renal cell carcinoma.

When I think of my own practice and I think back when to when I first treated renal cell carcinoma 30 years ago, we were using single agent, Velban. So we've come remarkably far in this time in how we approach this. I am impressed with some of the data with the PD-1s and the TKIs. Obviously, this is early data.

We have a trial that we're doing with cabo and Opdivo that we look forward to pursuing, our study 9ER, which will be looking at a PD-1 plus a TKI. I think there may turn out to be a population of patients where a PD-1 plus a TKI will be important.

But I think Opdivo/Yervoy will continue to play a very important role in renal cell carcinoma moving forward.

And I think a lot like you're seeing in lung cancer, I think you will see the market continue to segment where different patients may be treated with different approaches depending upon the characteristics molecularly and the characteristics of the patient as we move forward.

So again, look forward to more data in renal cell carcinoma as we move forward. Now, another place we might get some data in renal cell carcinoma is with NKTR-214, which is your second question, and where do we stand with NKTR-214.

So, let me just start off by saying that I am extremely enthusiastic about NKTR-214 because of the fact that it's one of the proven mechanisms in I-O. There really are only three drugs that have been shown to improve outcome in I-O and that's the PD-1 class, that's the CTLA-4 class, and that's IL2.

With the NKTR compound, the pegylation process, we have the ability to still deliver the T-cell stimulation which is crucial within the tumor, at the same time possibly increasing the Treg population in the periphery which has the ability to potentially ameliorate side effects.

So mechanistically, I think there's a lot of reasons to pursue this agent and pursue the development of this agent. So what have we seen so far? We've seen some encouraging data in melanoma that's led to the design of a Phase 3 trial which you will see soon on clinicaltrials.gov. And we hope that that trial will start accruing very soon.

You'll also see by the end of the year the design of a study in renal cell and the design of a study in bladder cancer based on our initial evaluation of the Phase 2 data in PIVOT-02, a study that's being run by Nektar but which we are working very closely with them in as we move forward. So I think that NKTR has terrific promise.

I look forward to seeing the evolution of other tumor types. As you know, we have an agreement with Nektar to look at up to nine different tumor types in this setting. So I look forward to seeing how this evolves and seeing where this makes a difference.

But just to put your two questions together, it may well be that NKTR-214 plus Opdivo eventually one day plays a role in renal cell carcinoma..

Thanks, Alex for the questions.

Jake, can we go to the next one, please?.

Yes, now we will hear from Dave Risinger with Morgan Stanley..

Thanks very much. I have two questions, please. First, you provided an update on 9LA, mentioning that you continue to expect the timing for readout to be late 2019. Just wondering if you have any additional comments on the 227 readouts ahead for TMB overall survival and PDL-1 positive overall survival.

And then my second question is could you please comment on the evolution of gross margin going forward? Obviously it depends upon mix but it's difficult to assess whether one should be forecasting gross margin improvement in any future years. Thanks so much..

So, Dave, thank you for your question. I'll answer the first part of it since I tend to probably contribute to the decay of gross margin in the company rather than the growth of gross margin in the company. So first, to your question on 9LA. So on 9LA, again, this is something we're very enthusiastic about as a approach.

As you know, it's two cycles of chemotherapy along with Opdivo/Yervoy, so combining what we believe to be perhaps the most potentially effective regimen in this setting. We have decided to increase the accrual slightly of this study. It was accruing extremely well, and so the accrual has gone from about 500 patients to about 700 patients.

Again as you know, Dave, these are event-driven occurrences, and so we think the readout's going to be in late 2019. But again, if the events happen quicker or slower, that could certainly impact when that readout would occur at this point. Regarding 227, there are a couple of places where 227's going to produce some data.

So the first would be overall survival in 227 in the PD-L1 positive group from part 1A of this trial – from part 1 of this trial – part 1A of this trial. We expect that data, again, we haven't seen any survival data from that. That's been looked at by our data safety monitoring committee. It's event driven.

As we've been saying, we think that's probably early 2019. But again, it could be sooner. It could be a little bit later than that. And then finally, the other part of your question would be the overall survival from part 2 of 227, which again is chemotherapy. It's our Opdivo chemotherapy regimen versus chemo.

We expect that to be early 2019, again, Dave, with the caveat that this is an event-driven process, could be a little bit sooner, could be a little bit later..

Hey, Dave. This is Charlie. Regarding your question, gross margin, you're right. Mix will always play a big part of our gross margin evolution. As I mentioned in my comments, the sequential gross margin from first quarter to second quarter was benefited by FX.

We don't expect that same impact to happen for the back half of this year and will remain within our guidance of roughly 70% for gross margin. Moving forward, as I mentioned in the last quarter, we're predicting now that our gross margin going forward, we're sort of at the trough now of gross margin.

So as you've seen over the last several years, we've had, primarily because of mix, the strong growth of Eliquis, we've had margin degradation, but we feel that we're now bottoming out on that gross margin..

Thanks, Dave, for the questions.

Can we go to the next question please, Jake?.

You'll now hear from Steve Scala with Cowen..

Thank you. I'd like to follow up on Chris's question on operating expenses and apologies if I didn't catch the answer.

But given the new needs on which to spend, what would be the new guidance versus the prior guidance of flat operating expenses in 2016 through 2020? So for instance, should we look for low-single-digit growth in operating expenses? And second, why do you think the first line lung Opdivo plus Yervoy filing using TMB based on CheckMate-227 did not get a priority review from the FDA? And did Bristol ask for one? It seems that TMB offers a differentiated approach, a very useful approach, and I'm just wondering why the FDA didn't see it that way.

Thank you..

Steve, so I'll ask Charlie to comment. But broadly speaking, we are not providing new guidance. We're not really changing guidance with respect to OpEx. We've always said we saw that roughly flat in the period. We also discussed the fact that we would fund incremental opportunities as needed, and we feel we are executing against that..

Yeah. I think you may have heard most of my comments earlier where we are continuing to decrease in MS&A, and we've continued to invest in R&D. And when we gave guidance, we excluded BD, and we've had a number of different BD opportunities, the most notable ones of size were Halozyme and Nektar as we think about it going forward.

But broadly Steve, I would look at it that we will leverage our business though going forward. So we will be growing our sales at a higher rate than we will be growing our OpEx..

Difficult to speculate on interactions with regulatory authorities. Steve, obviously the lung cancer market is a very dynamic market. We do agree with you on the potential value of TMB and the fact that it is important to really be thinking about different approaches in segmenting the lung cancer market.

But ultimately, the decision on submissions stays with the FDA, and as Tom mentioned, we are working with regulatory authorities around the world..

Steve, thanks for the questions.

Jake, can we go to the next one, please?.

You'll now hear from Umer Raffat with Evercore..

Hi. Thanks so much for taking my questions. I had two on CheckMate-227 if I may. First, did you contemplate filing I-O chemo from the Part 1b of CheckMate-227s in the PD-L1 low? And I ask because I wonder if regulators could potentially be open to the idea despite the staff plan change. Just wanted to get your thoughts on that first.

Secondly, now that 227 has been filed for the I-O, I-O and TMB high, and we've seen CHMP be extremely rigorous and stringent with the extent to which they've drilled down biomarkers by subgroups, my question is have you looked at data on 227 by more onerous TMB cutoffs? Like TMB above 20 versus TMB 10 to 19? Because what I'm trying to get as is do you foresee any risk to CHMP limiting the indication to a more narrow one in first line lung? Thank you..

Tom..

So let's take both of these. So, Umer, thanks for your questions on 227. So the first part is, and again, we're not going to comment on our discussions with the regulators, except to announce major decisions that they reach.

What I will say about 227 Part 1b, we were very happy at ASCO to present that data and that gave us the opportunity to really share some important findings in the evolution of the treatment of lung cancer.

And I've said, one of the things we've said, Umer, from the very beginning of this process, is that the treatment of lung cancer will continue to segment and that we think that there are multiple approaches that are going to be important for patients. And we learned in, as you point out in Part 1b of 227 some important things.

We learned that Opdivo chemo has a benefit in PD-L1 negative patients, which is we think as good, if not better, than what other groups have produced in a similar patient population. We also learned if you're TMB high PD-L1 negative, you may actually do better with Opdivo/Yervoy in that setting. That was another part of the ASCO presentation.

And then finally, a finding that I think is going to be important to see evolve in the marketplace is if you're PD-L1 negative TMB negative, it doesn't appear that you learn a heck of a lot, that you benefit a heck of a lot from being treated with I-O in that setting.

So I share your enthusiasm for the data from 227 Part 1b and we look forward to seeing how that evolves. Regarding your second question on the cut-offs for TMB, as you know, we use a number of sources.

We use patients from study 568 as well as patients from study 026 to be able to generate the curves that suggested that a TMB of 10 was the appropriate cutoff for patients being treated with I-O, I-O therapy in that setting. And again, we look forward to the discussions with regulatory authorities around that.

As you know, we don't discuss the nature of how those discussions are evolving at this time..

Thanks, Umer, for the questions.

Can we go to the next one please, Jake?.

Yes, you'll now hear from Vamil Divan with Credit Suisse..

Great. Thanks so much for taking the questions. So just two slightly different topics from what's been covered. One, you recently got approval for Opdivo in China. And I'm just wondering how you think about pricing there, especially as we see more PD-1s enter that market including some from potential Chinese companies.

So curious how you think pricing might hold up there in that large market. And then the second one more on the Eliquis side. You recently announced a collaboration with J&J on the Phase 2 Factor XI inhibitor.

And I'm just curious, the thinking there given how well the collaboration with Pfizer seems to be going now on Eliquis, the decision to shift gears and move to a different partner for the Factor XI. Thanks..

Chris, do you want to discuss China?.

Sure, I'd be happy to. So thanks for the question. We're obviously very happy with the approval of Opdivo in second line lung cancer in China earlier this quarter. Lung cancer, as you may know, is a significant public health issue in China and this is an exciting opportunity.

Unfortunately, many of the patients who are diagnosed with lung cancer in China are diagnosed very late in the disease and so there's a real need for drugs like Opdivo that improve overall survival in that setting. We're obviously not going to comment on price at this point. We are in the process of submitting pricing materials to health authorities.

We can't comment on the specifics. However, as is true in other markets, we would think about price here to reflect the value of Opdivo in this market and recognize the high unmet need in China. Price is one of the complexities of this market. It's obviously a potentially large opportunity.

However, I think it is important to recognize some of the realities of the China health care system. This is a very large and highly fragmented market in China where basic availability to care is still somewhat of an issue. While the access environment has improved over time, this continues to be an evolving landscape.

Opdivo will launch into a cash pay market before we secure, ultimately, provincial and national reimbursement. And as you point out, there's going to be competition in this space, both from multinationals as well as from local competitors.

All of that notwithstanding, we're excited about the potential opportunity for Opdivo in this space and very much look forward to working with Chinese health authorities to make the product available later this year..

Thank you, Chris. Vamil, just on the Factor XIa agreement, obviously we believe that has the potential to be a first-in-class and a best-in-class program. It's early days. It's going into Phase 2, and we're quite excited about partnership with Johnson. If you think about it, the two companies together today have great experience in thrombosis.

And obviously, for any program, this was a partnership we discussed with many companies. We're just very happy that we were able to sign an agreement with Johnson because of the combined experience of the two companies in cardiovascular. So we look forward to advancing this.

This is a great opportunity we have to expand our presence in cardiovascular disease over a longer period of time. And I think it's an important program for us..

Thanks. Jake, I think we have time for two more questions, please..

Now we'll move to John Boris with SunTrust..

Thanks for taking the questions. First couple for Tom just on the NKTR-214 program, clearly, nine indications.

When you think through the indications that you go into first, Tom, in terms of probability of success, how are you thinking about the tumor types? And have they changed or evolved over time? On the Factor XIa, can you give some commentary about how you plan on differentiating the product relative to current standard of care within the class? And then last question, just on the commercial side of the U.S.

Appreciate the color you gave on the U.S. market breakdown by tumor type. But can you discuss the academic centers and how they're using Opdivo/Yervoy, in particular, in the academic centers and how that might be over time influencing community centers? Thanks..

So, John, thank you. Just with NKTR, I think we'd just emphasize what I said earlier about NKTR. I think we've decided to proceed in melanoma, renal and bladder. And we're going to follow the data where it emerges in these other areas as well.

So I think it's difficult to know until we see where the data emerges which of the other tumor types are going to be most likely to benefit in that setting. But we keep a very open mind to that. Second question regarding Factor XIa, our initial work with Factor XIa will be in the area of secondary stroke prevention.

And we look forward to working with our partners at Janssen to be able to develop this compound. As you know, the field of anti-coagulation is quite broad. There are many areas where there's unmet medical need. And we will continue to look for that.

There are reasons to believe that Factor XIa may actually have a superior profile to the Factor X inhibitors. We don't know this yet. But we have to see how the data emerges with time. And secondary stroke prevention will be our first place of looking at that..

Johanna, on academic centers..

Yeah. So to your question, John, I think it's important to look at is actually metastatic melanoma in our combination with O plus Yervoy, as well as in first line renal in the recent launch that we've just had.

I think what's been interesting to see is metastatic melanoma, you're seeing definitely a little bit more from a academic standpoint than community. We were assuming the same thing in first line renal. We've been pleasantly surprised.

And I think that supports the strong uptake that you've heard about in how we're already the number one treatment for first line renal. And that is that we've seen a real mix between both academia and community. So a lot of these folks are trying it.

And I think for the first time, as mentioned by Giovanni earlier, about 50% are new users of the combination of Opdivo and low dose Yervoy. I think that's really interesting because the overlap of the treaters, the targets, the target treaters, is actually 80% when you think about renal to lung.

And as you think about lung and potential future indication of Opdivo/low dose Yervoy, I think that's an interesting piece in just making sure that we build that experience across academia as well as community..

Thanks, Johanna. Great.

Jake, can we go to our last question, please?.

Yes. And our final question will come from Matt Phipps with William Blair..

Great. Thanks for squeezing me in. Two kind of earlier clinical questions for Tom. Obviously, we've seen a little bit of a return to growth of Yervoy from the new indications, but you do have two kind of slightly different CTLA-4 compounds in earlier stages, fairly large trials.

When do you think we see some results from that? And are those large enough where, once you have a confidence signal, you can really advance that straightforward, almost supplanting Yervoy with combinations of Opdivo? Or is there room for multiple of those compounds to move forward? And then also, an interesting orphan drug designation for your fixed-dose combination of the LAG-3 antibody with lirilumab with nivolumab in gastric cancer.

Can you comment at all on the strategy for a fixed-dose combination there?.

So, Matt, thank you. So a couple questions. So as you may have picked up from prior calls, I'm very enthusiastic about CTLA-4 as a target.

I think it's a very important target in cancer, and I think we have the opportunity with both the CytomX Probody compound of CTLA-4 and the non-fucosylated CTLA-4 that we have to really expand upon the therapeutic index of our anti-CTLA-4 program. So I share your enthusiasm for them. Both of these drugs are in early phase trials.

They're still in Phase 1 trials at this point. So we really don't know what the promise of these drugs will be until we sort of see what the profile is coming out of Phase 1. But I would imagine that you can look at this as potentially expanding the role of what CTLA-4 can do in cancer. The second question is about LAG-3.

We think LAG-3 is a potentially very interesting compound. It addresses the concept of T-cell exhaustion, and we presented some data last year in melanoma with Opdivo and LAG-3 in patients with previously-treated melanoma. We look forward to seeing that data emerge. But we also think that gastric cancer might be a place where LAG-3 could have a role.

And the ability to have a fixed-dose combination of Opdivo plus our LAG-3 lirilumab compound offers a very interesting therapeutic approach in that setting, and we look forward to getting that Phase 2 trial up and running..

Thank you, Matt, and thanks everyone. Again, this was a quarter that pointed to very, very strong execution in the first half of the year. There is good momentum in the business going into the second half. We have a number of important catalysts that we're looking forward with, and I am feeling pretty good about where the company is today.

Thanks everyone for participating in the call..

And with that, ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation, and you may now disconnect..