Bristol-Myers Squibb - There Is Life After Plavix

| About: Bristol-Myers Squibb (BMY)

Bristol-Myers Squibb (NYSE:BMY) saw a very modest correction on Wednesday after the biopharmaceutical company released its third quarter results.

After the large impact of the expiration of Plavix, Bristol-Myers is seeing prospects for growth again. Yet after a 50% run-up so far this year, shares are expensive on current metrics. To support the valuation and further prospects for a share price increase, Bristol-Myers requires success of recently introduced Eliquis, and favorable developments from nivolumab to justify these levels.

I remain on the sidelines.

Third Quarter Results

Bristol-Myers Squibb generated third quarter revenues of $4.06 billion, up 8.8% on the year before, and ahead of consensus estimates of $4.00 billion.

Non-GAAP earnings came in at $768 million, or $0.46 per share. This is up five cents compared to a year earlier, and ahead of consensus estimates at $0.44 per share.

GAAP earnings came in at $0.42 per share which compares to a loss of $0.43 per share last year. Note that actual GAAP earnings totaled $692 million.

CEO Lamberto Andreotti commented on the performance during the quarter, "In the third quarter, we demonstrated solid financial performance and presented new clinical data further characterizing key brands from our immuno-oncology and diabetes franchises."

Looking Into The Results

Growth was driven by the international operations of Bristol-Myers. Sales in the US rose by 1% to $2.0 billion, while international revenues rose by 18% to a similar revenue level.

Growth was mostly driven by the oncology corner as sales of Sprycel and Yervoy rose by 20% and 33%, to $316 million and $238 million, respectively. Metabolic's drug Byetta saw its sales nearly double to $106 million, while debuting drug Eliquis generated $41 million in quarterly sales.

Sales of Abilify, Bristol-Myers best selling drug, fell by 16% to $569 million.

Despite the modest revenue growth, gross margins were under pressure and fell by 250 basis points to 71.1% of total revenues. Bristol-Myers managed to offset this by cutting marketing, selling and administrative expenses which fell by 4.5 percent point to 24.1% of total revenues.

A modest cut in research & development expenses and a lack of impairment charges resulted in a solid return to profitability on a GAAP basis.

Outlook

Bristol-Myers is re-confirming both its GAAP and non-GAAP full year earnings outlook. GAAP earnings are seen between $1.41 and $1.49 per share as non-GAAP earnings are seen between $1.70 and $1.78 per share.

Valuation

Bristol-Myers Squibb ended the quarter with $6.3 billion in cash, equivalents and marketable securities. Total debt stands at $7.2 billion, for a net debt position of nearly $900 million.

Revenues for the first nine months of the year came in at $11.9 billion, down 11.1% on the year before. Net earnings rose by 77.5% to $1.84 billion, coming in at $1.11 per share. Note that in 2012, the company took an $1.83 billion impairment charge for the comparable time period. At this pace, annual revenues could come in around $16 billion.

Trading around $49 per share, the market values Bristol-Myers at $81 billion. This values operations of the firm at 5.1 times annual revenues and 33-34 times annual GAAP earnings.

Bristol-Myers Squibb currently pays a quarterly dividend of $0.35 per share, for an annual dividend yield of 2.8%.

Some Historical Perspective

For most of the past decade, shares of Bristol Myers have traded in a $20-$30 trading range. Through 2011, shares have risen to all-time highs around $50 at the moment.

Between 2009 and 2012, Bristol-Myers has seen its revenues fall by a cumulative 6% to $17.6 billion. Earnings have been on the decline for years, coming just below the $2 billion mark last year. Note that the company retired roughly 15% of its shares outstanding over the time period.

Investment Thesis

Investors are cautious after the earnings report has been released. While sales of Yervoy, on which Bristol-Myers has pinned its hopes were solid and rose by 33%, the sales of debuting drug Eliquis with sales of just $41 million were a little light.

This is specially the case given comments from Bristol-Myers that the drug could end up generating billions in annual sales. The twice-daily pill is being sold in a partnership with Pfizer (NYSE:PFE).

Note that Eliquis competes with Xarelto from Johnson & Johnson (NYSE:JNJ) and Bayer AG which brought in some $425 million in sales in the first half of 2013. Eliquis is deemed to be superior as it has shown the ability to prolong lives of people, not seen with Xarelto or Pradaxa, which has been developed by Boehringer Ingelheim. Pradaxa generated $811 million in revenues for the first half of this year.

Apparently demand for the blood clot medicine is not that strong although some attributed the poor sales to questions about reimbursements. Yet it is still too early after the launch to determine its true potential.

But so far this year, shares have already risen some 50% as Bristol-Myers can finally show revenue growth again. Note that revenues rose by nearly 9% in the third quarter, but they remain down 11% so far this year. All of this has to do with the loss of exclusivity on Plavix which generated sales of just $177 million so far this year, compared to $2.5 billion last year, with sales being down 93%.

Besides the potential success of Eliquis, Yervoy contributed as well nicely, while nivolumab is still in the pipeline. If approved, the drug which fights tumors for lung cancer, could fetch nearly $11 billion in annual sales by 2023, according to analysts at BMO Capital Markets.

It is partially these good prospects and the lack of the negative drawback of Plavix which has pushed momentum this year. Furthermore, Bristol Myers has been focusing on cancer drugs, one of the hotter areas within the wider biotechnology and biopharmaceutical sector.

As such, the current annual run rate of revenues of $16 billion, could rather quickly approach $20 billion as well. This is especially true if Eliquis picks up, providing a huge boost to earnings given the much leaner operations at the moment, while nivolumab remains in the pipeline.

At the end of October last year, I last took a look at the prospects for Bristol-Myers Squibb. I concluded that investors could focus on the future after the Plavix expiration has removed a lot of negativity from the stock. Back in 2011, Plavix reported revenues of $7.1 billion, but sales have now imploded after generic competition entered the market in May of 2012.

To combat the decline, Bristol-Myers bought Amylin Pharmaceuticals for $5.3 billion, getting a hold of Byetta and Bydureon. Note that sales of Byetta rose by 93% to $106 million for the quarter, while sales of Bydureon quadrupled to $87 million.

At the time, shares traded in their mid-thirties as I concluded Bristol-Myers was well-capitalized, paid out a 4% dividend at the time, while the acquisition of Amylin provided some growth prospects. These prospects are still there, but after a 50% run-up over the past year, I am much more cautious. A structural higher share price depends on the success of Eliquis and the development of nivolumab.

I remain on the sidelines.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.