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In partnership with AstraZeneca (AZN), Bristol-Myers Squibb' (BMY) developed the type 2 diabetes drug, Onglyza, which was approved by the FDA in July 2009. Further, the companies ran the Phase 4 SAVOR trial of their drug to test its effects on cardiac patients. The SAVOR trial demonstrates the safety and efficacy of Onglyza in treating type 2 diabetes patients who are at high risk for cardiovascular events. On September 2, 2013, the companies declared the complete results of the phase 4 SAVOR cardiovascular outcomes trial of Onglyza. Type 2 diabetes is characterized by insulin resistance and dysfunction of the pancreas, resulting in elevated blood glucose levels. Type 2 patients frequently die from cardiovascular diseases.

It performed the SAVOR trial on 16,492 adult type 2 diabetes patients, where Onglyza fails to meet the primary efficacy endpoint of superiority compared to placebo. However, it was able to meet the composite safety objective and didn't increase any risk related to cardiovascular death, heart attack or stroke. Additionally, patients also experienced improved glycemic control.

In 2012, there were around 370 million people affected by diabetes globally, and it is expected to reach 550 million by 2030. It is also expected that type 2 diabetes will account for nearly 90%-95% of all the diabetes cases in adults and more than 80% of type 2 diabetes patients will die from cardiovascular events. With the success in attaining the safety objective, we expect the company to gain higher success in treating these patients efficiently. As of September 2013, this drug is approved in 86 countries including some in the European Union, the U.S., Canada, Mexico, India and China, and its further success is expected to grab additional markets in the future.

In second quarter 2013, Onglyza generated revenue of $240 million for Bristol-Myers with year-over-year revenue growth of 40% for Bristol-Myers and $102 million in revenue for AstraZeneca with year-over-year growth of 28%. If Onglyza is able to meet both the safety and efficacy endpoints in treating type 2 diabetes combined with reducing death related to the cardiovascular event, then Onglyza can add an additional $1 billion to its peak sales, and it can reach revenue of $3 billion by 2020. With such a strong growth opportunity and the company's constant efforts to gain dual benefits, we expect this will help it achieve much higher revenue in the future.

The competition

In January 2013, Takeda Pharmaceutical (TKPHF.PK) also received FDA approval for its "Alogliptin," trade name "Nesina," type 2 diabetes drug. To promote this drug, the company entered a co-promotional agreement with Sanofi (SNY) in April 2013 to market Nesina in China. This co-promotional agreement will help it reach Chinese physicians treating type 2 diabetes patients. With the company's sincere efforts, it received marketing authorization from the China Food and Drugs Administration, or CFDA, on July 31, 2013.

Further, as per the International Diabetes Federation, the global spending on diabetes was around $471.6 billion in 2012 and is expected to exceed $595 billion by 2030. There are around 92.3 million adults suffering from diabetes in China, and 93%-95% of them have type 2 diabetes.

In September 2013, Takeda ran the trial of Alogliptin, or Nesina, to check its effects on cardiac patients. It ran the trial for a period of 18 months on almost 5,400 diabetic patients who had suffered with cardiovascular risks like heart attack, chest pain and stroke. Nesina also met the composite safety endpoint, demonstrating no increase in cardiovascular risks like heart attack and stroke. In the "EXAMINE" trial, Takeda successfully adhered to the recommended FDA guidance for evaluating Nesina in treating cardiovascular safety in type 2 diabetes patients. We expect the company has a good chance of tapping the diabetes market, particularly in China, with its co-marketing partner Sanofi.

Fundamental Valuation

Bristol-Myers

2010

2011

2012

Revenue

$19.5 billion

$21.25 billion

$17.62 billion

FCF from operations

$4.5 billion

$4.84 billion

$6.94 billion

Dividend per share

$1.28

$1.33

$1.37

Price-to-sales, or PSR

2.3

2.8

3.1

Sales per share

$11.47

$12.61

$10.81

Bristol-Myers generated revenue of $7.9 billion in the first half of 2013. Its price-to-sales is trailing at 4.95, and it is expected to generate revenue of $16.5 billion in 2013. We expect it will able to attain its target. The approval of Onglyza and its other drugs like Eliquis may boost its revenue further, even exceeding the expected revenue target. Its sales per share in 2012 were around $10.81, and we expect sales per share of more than $10 in 2013 due to the expected revenue and the current outstanding shares of 1.650 billion.

The company is currently trailing at a price-to-sales ratio of 4.87, which makes the stock attractive at this level, and it has the potential to reach around $49 per share by the end of this year. Additionally, Bristol-Myers increased its dividend by around 3% annually in the last three years. With its strong cash flow with a dividend payout of 170%, we can predict the same growth in its future dividend coupled with price appreciation in the future.

Source: Bristol-Myers: Interesting Investing Opportunity With Onglyza

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.