It’s crowded out there on the approach to the patent cliff – where pharmaceutical companies with expiring patents on big-selling drugs teeter – and investors seem to think Bristol-Meyers Squibb (NYSE:BMY) is closer to the edge than most.
Its p/e ratio has been sliding sideways at less than 5, far below other pharmaceutical makers with big patents expiring soon, indicating extreme skepticism that its profits are sustainable.
That has pushed Bristol-Myers’ earnings yield above 20%, a too-good-to-be-true return with 10-year Treasuries yielding about 2.5%.
Bristol-Myers, relatively small among major drug makers with 2009 sales of $18.8 billion, gets about one third of its sales from blood thinner Plavix, and the drug’s U.S. patent protection expires in 2011. The drug is hugely profitable, with a pre-tax profit margin above 80%, a Sanford Bernstein analyst estimated earlier this year. But when generics start selling, Plavix’s sales will probably fall off sharply.
Bristol-Myers has two other $1 billion-plus drugs with patents expiring soon – one in 2012 and one in 2013.
Bristol-Myers isn’t alone. As YCharts has reported in recent weeks, Eli Lilly (NYSE:LLY), Merck (NYSE:MRK) and Pfizer (NYSE:PFE), among others, all face patent expirations on big-selling drugs, and huge uncertainty about whether compounds in their new-drug pipelines will be winners or losers.
Big Pharma spends like crazy on R&D. Bristol-Myers spent $3.6 billion last year and will spend somewhat more than that in 2010. But bringing a new drug to market can cost $1 billion, and few of the molecules being studied prove effective enough to sell.
To scare up more cash for internal R&D, licensing deals with other drug developers and acquisitions of smaller drug companies, Bristol-Myers has been selling off non-pharmaceutical operations, raising billions of dollars. And it's cutting costs, expecting to save about $2.5 billion a year. Even as it made those moves, Bristol-Myers has maintained its dividend, which is yielding about 5%.
And seeking to reassure investors, Bristol-Myers not only projects 2010 earnings of $1.84-to-$1.94 a share. But, in an unusual move, the company also projects 2013 earnings – after the big patent expiration – of $1.95 a share. How will Lamberto Andreotti, CEO, pull that off?
Well, the 2013 projection has a big caveat, in addition to being non-GAAP. It assumes, Bristol-Myers says, “timely regulatory approval of, and significant contributions from, pipeline products.” If Andreotti’s wrong, the long, sideways slide of Bristol-Myers shares, seen below, could be followed by a sharp decline.