Bristol Myers Squibb Company (NYSE:BMY) announced its fourth quarter earnings on Friday, January 24th. Following the earnings release the stock price of the company plummeted. This article discusses the year-on-year changes in the earnings of the company, the reasons why the price of the stock slipped, and the company's future potential to generate profits and returns to the investors.
Fourth Quarter Earnings
The revenue base of the company shows a decelerating trend on an annual basis since year end 2011. In quarterly terms, the revenues of the company have risen at a CAGR of 3.5% since September 2012. For the fourth quarter that ended December 2013, the company reported sales of $4.44 billion compared to analysts' expectations of $4.31 billion. The reported revenue translates into a 6% YoY increase when compared to the same quarter last year. The key driver of this growth was an 11% rise in the overseas sales coupled with a significant global growth experienced by some of the most successful drugs introduced by the company, the surge in each of which is shown in the table below:
Source: Fourth Quarter Earnings Release
Even though Yervoy's sales escalated by 23% with a $260 million sales figure achieved in the fourth quarter, the sales of the company remained short of analysts' expectations by about $3 million.
With regards to the EPS reported by the company, over the past four quarters the company's EPS has shown a rising trend with $0.44 per share reported on Friday in its fourth quarter earnings report. Compared to the last year, the EPS of the company shows a 21% decline. However, it does not indicate a weakening performance on the part of the company as in 2012 Bristol Myers enjoyed a $411 million tax benefit due to an unsuccessful drug during its testing phase. Adjusting the profits of the company by eliminating the impact of this non-recurring event, the company showed a higher than expected ($0.43) earnings per share of $0.51.
The company is aggressively restructuring its business operations by divesting its non-drug faculties and bringing the focus of the company towards the next big break. It is investing significantly in the treatments of less common diseases like HIV and various types of cancers. As part of this revamping, Bristol Myers cut down its research and development costs by 12% by putting an end to its clinical trials and related projects.
Stock Market Performance
The data over the past twelve months shows that the stock price swelled by approximately 50% from $36.69 per share in January 2013 to $55.03 per share in January 2014. However, the price of Bristol Myers stock plunged by more than 5% after January 24th even though the company beat analysts' expectations. The price slip is anticipated to be a function of the announcement by the company that it did not plan to move its cancer fighting drug, Nivolumab, up the pipeline until next year thus indicating the disappointment of investors. Investors seem to be disappointed by the news since they expected the drug to enter the next stage by the end of the fourth quarter. They are eagerly awaiting the final outcome of the two high profile drugs, Nivolumab and Yervoy, the combined use of which is expected to be the most potent treatment to fight different types of cancers. Presently, the drugs are in Phase II, involved in the testing of lung, skin, kidney, and other types of cancers. The historical price performance of the company is indicated in the graph below:
In my opinion, the investors reacted irrationally to the news. Even if the formal entry of the drugs in to the market is a little later than expected, the promising top line boost from them is still evident as indicated by the demand for immunotherapeutic treatments. However, the failure to stick to the scheduled timeline does give an edge to Merck & Company (NYSE:MRK) that is expected to introduce a direct competitor to Bristol Myers' Nivolumab this year.
The company plans to heavily invest in its R&D and focus on the clinical trials of its immunotherapeutic cancer fighter, Nivolumab, with four clinical trials of this drug scheduled for this year. Bristol Myers is the founder of immunotherapy studies wherein the goal is to induce the immune system of the patients to attack tumors and cure them of cancer. The company hopes to apply for FDA approval for this particular drug by next year.
As part of its overhaul procedure, the company plans to sell its ownership stake of a diabetes related joint venture to its other partner AstraZeneca Plc (NYSE:AZN) for as much as $4.1 billion. The joint venture includes a range of medicines like Onglyza, Kombiglyze and Forxiga, Bydureon and Byetta. In addition to that, Bristol Myers plans to quit further research programs related to diabetes, Hepatitis C, and neurological disorders. The company is slowly narrowing its focus towards a niche: a smaller patient group with higher profit margins. Any savings or the royalties received from the divestiture enhances the funds of the company for further investment in cancer treatments.
Lastly, the cardiovascular system related drug, Eliquis that was approved by FDA towards the end of 2012 indicated a QoQ growth of 73%. Despite this spectacular growth it fell short of analysts' expectations because they anticipated Eliquis' sales to reach about $3-5 billion. The slow growth is primarily because of the risks or patient sentiment associated with switching to a new pill. However, the popularity of the drug is gradually gaining momentum and is expected to reach the $5 billion mark by the end of this year.
Analysts expect the company's bottom line to elevate from its current level and reveal per share earnings of $1.78 next year compared to $1.16 this year thus marking a 53% YoY increase. The EPS range forecasted by the company ($1.65 to $1.80) is not far from what analysts expect. This strengthens the notion that the company is expected to show a strong performance in the upcoming future.
The years 2014-2015 seem to be a promising period for Bristol Myers with a significant boost anticipated in the top and bottom lines of the company. The future outlook discussed above backs this profit swell forecast. A recent drop in price due to negative investor sentiment is nothing more than a buying opportunity for other investors. The price is expected to appreciate as the investors' disappointment cools off. I would recommend Bristol Myers as a strong buy.
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.