In my view, the optimal time to invest in a major research based pharmaceutical company is after a major patent expiration. This event is known as the dreaded patent cliff, where a stable, growing revenue base can literally lose 50% of its sales overnight. As the revenue numbers begin to show year over year declines, Wall Street becomes predictably bearish on the name punishing the offending company with a below market multiple. It is at this exact moment the long term, patient shareholder has the advantage over the "Big Boys". By not having to answer to anyone else except themselves, they can enter into a bargain and await the inevitable turnaround, as the labs will eventually generate new compounds to make up the sales loss.
In October of 2012, the above mentioned conditions were affecting the shares of Bristol-Myers Squibb (BMY). I published an article detailing my bullish position on the shares at a then bargain price of roughly $34, a arguing that the Street is overly pessimistic on the shares. In light of the recent positive events, I have decided to re-evaluate my bullish thesis.
The life blood of all research based companies is the quality and the ability to bring new, novel products to market that will improve patient's lives. Unforeseen by me at the time of my original article, is the stunning results Nivolumab produced in its recent clinical trials. The drug was issued a fast track designation as the compound showed tremendous promise in phase one trials. BMY ran a separate trial combining Nivolumab with its existing approved treatment, Yervoy to generate even better responses. As we can see from that chart above, the shares have rallied quite briskly since the data was presented at the ASCO 2013 meeting in early June of 2013. Nivolumab is BMY most important compound, where any sort of delay would have a negative impact on the share price. I expect the compound will be approved in a timely manner however an investor must be cognizant of the risks posed by a delay in the approval of the medication.
In my original article, I pointed out BMY entrance into the diabetes market with the acquisition of Byetta/Bydureon in a partnership deal with Astra Zeneca (AZN). As part of the partnership, BMY would begin to market Onglyza as part of their push into the diabetes market. BMY has decided to exit the diabetes field to concentrate its resources into its cancer franchise and the anticipated costs needed to market Nivolumab. BMY announced they are selling their portion of the partnership to AZN as detailed in the press release that can be seen here. I would like to highlight one key portion of the release, which can be seen below.
The company expects to receive $3.4 billion in the first quarter of 2014, which includes $2.7 billion in an upfront payment and an additional $700 million assuming regulatory approvals of dapagliflozin. The transaction is expected to be accretive to non-GAAP EPS in the near-term and likely dilutive to non-GAAP EPS toward the latter part of the decade.
The $700 million dollar payment pending approval of dapagliflozin has now been assured, as the FDA has approved the medication. BMY will now collect 3.4 billion which will be used to fund its anticipated marketing and production of Nivolumab and Eliquis.
Eliquis is a novel compound used to prevent clots and strokes in patients who suffer from Atrial Fibrillation. Eliquis is the third entry into the non-warfarin based blood thinner category. The main claim to fame of these products is the lack of food interactions along with less need for monitoring. The new compounds significantly improve the quality of life for patients and have proven to be quite popular and expensive. Eliquis has achieved a rather paltry sales figure of only $41 million in the most recent quarter, far below what BMY and its partner in developing the compound Pfizer (PFE) expected. BMY will look to aggressively market the drug in 2014 as it attempts to radically grow sales.
At the time of the original article, BMY dividend was north of 4% which made the shares in my mind quite compelling. Since then, management has slightly raised the dividend, increasing it a penny to 35 cents per share. I believe the following quote from Charles Bancroft CFO, taken from the most recent earnings release sums up managements view on dividends and share repurchases.
"Before we turn to your questions, I want to make a few comments about capital allocation. Business development continues to be our top priority, and we remain committed to the dividend. Regarding share repurchases, you will recall that overall repurchases slowed significantly in Q2, and this trend continued in the third quarter. Moving forward, we do not anticipate future share repurchases at this time."
Management in my view is taking the prudent action in ceasing the share repurchase program especially at the significantly higher price that the shares are currently quoted at. The best time to repurchase shares is when your shares are undervalued, much as the case was for BMY in 2012. The major priority for the company is to have the capital ready to significantly expand its manufacturing for the anticipated approval of Nivolumab along with the marketing push necessary to allow Eliquis to gain traction in the A -Fib market. The successful marketing of the above two mentioned compounds, should alleviate any revenue shortfall and actually allow BMY to begin to show top line growth in the near future.
After reviewing the above mentioned points, I remain bullish on the shares of BMY. I continue to hold the shares and reinvest all dividends received. I am very comfortable allowing the story to play out. If Nivolumab is approved by the FDA, a case can be made for the shares doubling from here. An investor who enters into a position at the current quote must understand that if Nivolumab is delayed for any reason they will most likely be showing a capital loss on their holdings. The FDA was been proven to be quite picky lately as they have held up novel compounds that were approved and are currently used in Europe and Japan. Recent examples include Novo Nordisk (NVO) Tresiba and Sanofi (SNY) Lemtrada . In perhaps a ray of hope for shareholders of NVO and SNY, Farxiga was initially denied, delaying its launch into the US market. The product was further tested and has recently been given the FDA blessing; perhaps the same will happen with Tresiba and Lemtrada. Thank you for reading and I look forward to your comments.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.