Is Bristol-Myers Squibb Overvalued?

Jul.14.14 | About: Bristol-Myers Squibb (BMY)

Summary

Bristol-Myers’s stock price has been lowered by analysts but they still expect the future price to be above the current price of the stock.

The company received approval for its HCV combo drug in Japan and has been recommended by the European regulators.

The cancer drug completed its clinical trials ahead of schedule and it is considered the most promising drug for the company.

A brighter full year 2014 outlook is expected on the back of healthy and expanding portfolio and improving margins.

The company is overvalued on the basis of price multiples.

Bristol-Myers Squibb (NYSE:BMY) has been reiterated as "buy" or "hold" by many analysts but the company's stock has recently been lowered by all the analysts to nearly $55. However, this price is still above the stock's current price of $47.92.

The stock is expected to go up as the company has shown a strong performance in the last reported quarter and has a brighter outlook for full year 2014. Moreover, it has received approval for its combo drug in Japan and has completed the clinical trials for its cancer drug ahead of schedule. This drug is expected to considerably expand the company's revenue base in the coming years.

Hepatitis C Combo Receives Approval in Japan

Bristol-Myers gained the Japanese Ministry of Health, Labor and Welfare's approval for its combo drug treatment, Daklinza and Sunvepra. The dual regimen is Japan's first all-oral, interferon and ribavirin-free treatment regimen for patients with genotype 1 chronic hepatitis viral infection, the most common form of the virus. The combo will provide a new treatment for patients in the country where they currently have no treatment options and are in urgent need of care.

The drugs are expected to effectively penetrate the Japanese market as it is the first of its kind in the country and the combination was already awarded breakthrough status by the FDA in February. The new class of treatments is expected to dominate the market which is now ruled by Gilead's (NASDAQ:GILD) top-selling Sovaldi.

The drugs are also anticipated to considerably expand the company's revenue base as Japan has one of the highest prevalence rates of HCV among all the developed nations. The current incidence is 1.2% and it is noted that 1.2 million are living with HCV in Japan and approximately 70% of these cases have become genotype 1b.

Moreover, this hepatitis C drug combo has also been recommended for approval by the European regulators as well. The European Medicines Agency committee has handed down a positive opinion on this pan genotypic NS5A complex inhibitor in concert with other agents to treat chronic Hepatitis C. With this, Bristol-Myers Squibb has become the first of its kind to win any European backing and is now anticipated to receive full approval in the coming months.

This win marks the first approval among the cadre of drug makers working to commercialize all-oral hepatitis C cures around the globe, a group that includes Gilead Sciences, AbbVie (NYSE:ABBV) and Merck (NYSE:MRK).

Earlier Wrapping Up of Nivolumab Trials

Bristol-Myers' anti-PD-1 immuno-oncology drug star Nivolumab has been approved. The drug was approved by the regulatory authorities in Japan but according to a deal with Ono Pharmaceutical, back in 2005, Bristol-Myers handed over the drug's rights to Ono to be distributed within Japan, Korea, and Taiwan.

The company wrapped up its clinical trials earlier than planned on a later-stage study of this immune-oncology drug after the monitoring committee concluded that the drug provides a clear survival benefit over dacarbazine when used as frontline therapy. The drug is considered the most promising drug for Bristol-Myers' due to its superior performance in clinical trials and has even been called "the beginning of the end of cancer" by some of industry experts. Regulators at the FDA have already designated this drug as a "breakthrough" therapy.

Once approved, Nivolumab would bring huge revenue generating ability for the company as the market for immune-oncology is expanding. According to some estimates, Bristol-Myers could open the doors for a $35 billion market through its immune-oncology portfolio.

Strong Financial Performance

Bristol-Myers has shown a strong financial performance in the first quarter of 2014 as the company's year-over-year adjusted revenues (adjusted for divestiture) jumped 5% to $3.6 billion. Its gross margin has improved by 230 basis points from 72.3% in the first quarter of the previous year to 74.6% in this quarter. Moreover, the company reduced its marketing, selling, and administrative expenses by 4% and significantly decreased advertising and promotion spending by 14%.

The company's per share earnings climbed 55.56% to 56 cents per share compared to 37 cents per share in the first quarter of 2014 on the back of top line growth and the cost-cutting techniques adopted by management.

Bristol-Myers' management has a brighter outlook for full year 2014as it expects its GAAP EPS range to be $1.70 to $1.80 compared to $1.54 per share for 2013 indicating a YoY growth of 10% to 17%. The company's revenues are projected to grow with the support of its stronger portfolio while the management is putting more efforts into cutting its marketing, advertising and administrative expenses to further improve its margins.

Valuation

Bristol-Myers is an expensive stock investment opportunity based on its price multiples. The table below shows that the company's stock is overvalued based on all four multiples and all of the growth factors for the company are already priced.

Source: money.msn

Conclusion

The approval of the combo HCV drugs in Japan and the recommendation from European regulators along with early completion of Nivolumab's trials, will significantly increase Bristol-Myers' future profits. Especially since both the drugs have a huge revenue base. Moreover, both drugs have received positive feedback from the FDA and other experts and currently do not have any intense rivalry in the industry.

Although the stock is currently over priced it will still generate profits for investors in the form of dividends. The successful expansion of the company's portfolio, along with the improving margins will definitely amend the company's net profits and eventually increase the shareholders' returns.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.