Why Bristol-Myers Squibb Is Not Overvalued

| About: Bristol-Myers Squibb (BMY)

Sanford C. Bernstein recently reaffirmed a "hold" rating on Bristol-Myers Squibb (BMY), but I find this rating to undervalue the stock. I do agree with the Jeffries Group buy rating and price target in the $38 range, however. As of January 21st, Bristol-Myers Squibb was trading only about 5.2% off its 52 week high and 11.1% above its low for the 52 week low. An entry point of around $33.50 would be ideal, and I would suggest awaiting the Q4 2012 results before any entry into this stock.

The current P/E of 31.49 may be higher than the other large cap pharma companies, and would tend to make others believe that this stock is currently "expensive", but this is not my opinion. I strongly believe the high P/E is only temporary as earnings were down heavily during Q3 due to the patent expiry of Avapro and Plavix (December 2011, P/E was 16.3). These earnings should be replaced in the near future by several potential blockbusters including Eliquis, Forxiga, and Yervov. The high P/E also shows that investors are not willing to sell this stock with the temporary dip in earnings.

This small range should mean that any position will not put you at a high risk of loss of capital, while collecting an annual dividend of 4.09%. The dividend return is similar to that of Merck & Co. (MRK) which offers an annual dividend of 4.00%, and slightly higher than that of Pfizer Inc (PFE) about 3.65% and Eli Lilly (LLY) 3.65%. While GlaxoSmithKline (GSK) offers, a 5.28% annual return, I foresee much higher growth potential for Bristol-Myers Squibb than other large cap pharmas such as GSK, Pfizer, or Eli Lilly. Believe that BMY offers more potential for growth due to its quality management, currently licensed drugs, and its robust pipeline.

Management at BMY has done an excellent job to maintain stockholder value this year even as the organization's highest grossing drugs lost their patent exclusivity (Plavix and Avapro). Through the first nine months of the year, sales for Plavix and Avapro declined 54% and 45% respectively on a year to year basis. Management has continued with its follow through with its dividend increase (3% increase for 2013 expected from 2012) and their share buyback program, which will total $6 billion dollars by its end. The continued share buyback shows confidence in the company's future and expected share price increase. Management has also increased the dividend annually for four years running now, and this should continue for at least several more years. This also shows that they are serious about investor returns and want to become a highly valued large cap company.

The loss of patent exclusivity has been a big problem with many of the established large cap pharmaceutical companies and has also hit the likes of AstraZeneca plc (AZN) and Eli Lilly extremely hard. AstraZeneca's Seroquel went off patent exclusivity in early 2012 and Symbicort went off exclusivity in late 2012, which has heavily affected the company's earnings (3Q EPS down 53% YOY). Furthermore, their second best selling product behind Crestor is Nexium, which is also coming off patient exclusivity in May 2014. While the current sales and earnings numbers were not much better for Bristol Myers in 3Q 2012, (EPS was down 33% YOY) AstraZeneca's pipeline has much less potential. AstraZeneca's potential for growth will be driven almost singlehandedly by Forxiga, a diabetes drug, on which the revenues are split 50/50 with BMY.

Forxiga, a first-in-class SGLT2 inhibitor that works independently of insulin should be a blockbuster drug that will help drive the growth in metabolics for BMY in the future. YOY, metabolics sales have increased 73% for BMY, due mainly to the acquisition of Amylin. Forxiga is licensed on a 50/50 basis with AstraZeneca. It should provide revenues of about $2.5 billion dollars annually for each company if it is approved in the USA. The FDA did not approve Forxiga initially due to worries about cancer, but new trials have been ongoing and BMY is due to meet with the FDA in the middle of 2013. The drug should be approved following additional trials, but revenues for the drug will be negligible in the US, if there is any at all in 2013.

Forxiga stands out from other type II diabetes drugs due to the fact that it not just lowers serum blood glucose levels, but can help reduce weight more effectively than type II diabetes drugs. The drug was also found to have low occurrence rates of adverse events seen in patients who take other type II diabetes drugs (3.5% hypoglycemia, .4% increased serum creatinine levels, and increased UTI rates). Where it does excel towards other drugs is in the weight loss, where a >5% body weight loss compared to sulfonylurea was found (3.2 kg loss towards 1.2 kg gain). In Europe alone, approximately 55 million people suffer from type II diabetes, which means the approval of Forxiga in Europe should not just generate much needed revenue from the EU, but also awareness, in turn helping market the product in the US market if approved.

Eliquis, a factor Xa inhibitor is 1/3rd of the new generation of anticoagulants that have now hit the market in the EU, USA, Canada, and Japan. These drugs have been created to replace warfarin as the anticoagulant of choice. Currently Pradaxa, licensed and manufactured by Boehringer Ingelhein GnBH (BIPI), Xarelto (Bayer/Johnson and Johnson), and now Eliquis (Bristol-Myers Squibb/Pfizer) are approved in the USA for the use of anticoagulation in non-valvular atrial fibrillation patients.

According to BMY"s CEO, Lamberto Anddreotti during his presentation at the recent JP Morgan Helathcare Conference, "Eliquis has the potential to become a major growth driver in the years to come". I agree with him on this sentiment as the anti-coagulant market is a multi-billion dollar space, which could see worldwide Eliquis sales hit $5 billion by 2020. This would be split 50/50 with Pfizer, thus creating $2.5 billion in annual sales for BMY (~80% margins estimated). While Pradaxa was first to hit the market and is expected to generate revenues of greater than $1 billion for BIPI, Xarelto and Eliquis are expected to overtake Pradaxa in this market due to their mechanism of action (Both Factor Xa inhibitors), which in clinical trials (ARISTOTLE, RE-LY, and ROCKET-AF) showed a lower risk of coronary attacks and myocardial infarctions.

With regards to Xarelto, Bayer CEO Marijn Dekkers expects worldwide sales to bring in about $2.6 billion dollars at its peak. This would mean that Johnson and Johnson would also bring in about $2.6 billion dollars, thus pushing overall sales above $5 billion dollars annually. A similar figure should be expected for Eliquis by 2020. Bristol Myers should be able to easily utilize their cardiovascular and primary care sales teams already in place, since this product is also a form of "blood thinner". This means that the marketing and promotion period should be short and they should be able to generate revenues just as quickly as BIPI did with Pradaxa, which was approved in 2011.

Where Eliquis does have the edge on Pradaxa is in the promotion of the drug and potentially the safety profile. Pradaxa has been the subject of number "bad drug" claims already and several national law firms have begun to promote this via commercials on cable and network TV. This will undoubtedly affect the number of doctors and patients willing to prescribe and take the product. I plan to describe the new generation of anti-coagulants in more depth in a future article.

Another excellent reason for investing in Bristol-Myers Squibb is their phase II/II pipeline. In Immuno-Oncology, Anti-PD1 is currently in a broad Phase-III program for renal, lung, and skin cancers. Anti-PD-1 is a fully-human antibody that targets the inhibitory receptor expressed on activated T-cells called PD-1 or programmed death-1. Objective response rates (ORs) across dose cohorts, as measured by standard RECIST criteria, ranged from 6% to 32% in NSCLC, 19% to 41% in metastatic melanoma and 24% to 31% in RCC in BMY's Phase-I studies. Serious Adverse Events (SAE's) occurred at a rate of 11% in the Phase-I trials, which is not abnormal in an oncology trial.

The broad range of uses of this drug could make it an excellent revenue driver in the future in BMY's ever expanding Immuno-Oncology portfolio. While BMY's HCV pipeline took a serious hit with the failure of the compound BMS-986094, BMS still has an all oral regiment expected to hit Japan by the end of 2013 and Phase III trials in the USA by 2014. The all-oral regiment would be the first potential all oral therapy available in Japan, which will separate BMY from other manufacturers in this space. Several exciting oncology molecules are in the early to mid phases of clinical trials, which include the JAK 2 inhibitor, IGF-1R Antagonist, IL-21, and several Anti-IL-23 molecules.

The acquisition of Amylin has also helped strengthen not just BMY's marketed diabetes products, but also their pipeline, which now includes an Antidiabetic Peptide, PEG-FGF21, an 11BetaHSD Inhibitor, and several GFR119 Agonists. Since these molecules are still in early stages of development, I would not expect any revenues before 2015, even if their use were to be approved. It also would not be advantageous to try to guess what each molecule's potential market cap is due to the fact that this will be dictated by the late phase clinical trials.

While BMY may have seen two of their top grossing drugs lose exclusivity in 2012, they have several drugs with large YOY and qtr. vs. qtr growth. Yervov, which targets CTLA-4 in late-stage melanoma, hit the USA in mid to late 2011 and world markets in 2012, and has since seen 48% growth in Q3 2012 compared to Q3 2011. It is expected to easily gross over $1 billion a year for BMY in the future, with potential indication in prostate and lung cancer. Onglyza, a diabetes drug acquired in the purchase of Amylin has also propelled growth with a Q3 2012 YOY growth of 60%.

Sprycel, an oral multi-BCR/ABL and SRC family tyrosine kinase inhibitor approved for use in patients with chronic myelogenous leukemia (NYSE:CML) after imatinib treatment and in Philadelphia chromosome-positive acute lymphoblastic leukemia (Ph+ ALL) was approved in 2010, and has seen YOY growth after Q3 2012 of 28% from 2011. Sprycel will see competition from the market leader, Gleevec by Novartis (NYSE:NVS) and now Iclusig by Ariad Pharmaceuticals (NYSE:ARIA), should see steady growth in the years to come. Furthermore, Orencia, BMY's Rheumatoid Arthritis drug has seen 29% Q3 YOY growth from 2011 even though it only holds a small share of this market.

Overall, excluding the sales of Avapro and Plavix, Q3 2012 sales increased 7% YOY compared to 2011. While this may not seem to be much growth, many of BMY's current compounds are at the beginning of their marketing lifecycle and should see increased revenues YOY. This growth will be partially due to BMY's expansion into China and Japan, which were previously untapped markets for their products.

I would like to reiterate the fact that BMY is not currently an expensive stock and should be purchased in the $33.50 range due to the reliable and experienced management, expanding pipeline, and steady growth of their currently licensed products. I believe that the launch of Forxiga and Eliquis will help stabile revenues through 2013 and help expand overall sales and revenues through 2020. As with all other pharma/biotech companies, the overall direction of earnings and share price will be driven by FDA and ex-US approvals. BMY currently is well positioned to have the best chance of driving growth from within, whereas many other companies (AZN, PFE, GSK, LLY) will depend almost exclusively on expensive acquisitions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Business Relationship Disclosure: I have worked as a contractor with Boehringer Ingelheim in the past but will not gain financially from any information published in this article.