In an earlier article here, I argued that Bristol-Myers Squibb was undervalued, despite the negative commentary elsewhere. Since the piece was published, the stock outperformed the competition and appreciated by 10% while the S&P 500 (SPY) fell by 3.2%. Despite favorable results in drug tests, I believe that the company is now fairly valued. A more attractive investment can be found in Gilead Sciences (GILD), given significant upside in its HIV treatments.
From a multiples perspective, Gilead is the cheaper of the two. It trades at a respective 11.3x and 9.3x past and forward earnings while Bristol trades at a respective 18.2x and 17.5x past and forward earnings. The latter, however, offers an attractive dividend yield of 3.9%. Both biotech companies have strong gross margins above 70% and have little downside due to the inelasticity of market demand.
At the third quarter earnings call, Gilead Sciences' CEO, John Martin, noted favorable developments.
I'm very pleased with our progress during the third quarter. First in August, U.S. FDA approved Complera, the second single tablet regimen for the treatment of HIV, combining Truvada with Tibotec's Rilpivirine. Product was shipped to wholesalers and pharmacies within 24 hours of approval. In Europe, this product is called Eviplera, and has received a positive opinion from the CHMP. Before the end of the year, the European Commission is expected to give final approval and launches of Eviplera in various European countries will follow in 2012.
At the September ICAAC conference in Chicago, Complera was the focus of a late-breaker poster, which featured results from study 111, a study designed to assess whether patients can safely switch from Atripla to Complera. The data demonstrated that all 49 patients in the study maintained biologic suppression, 12 weeks after the switch to Complera.
In addition to Complera, I am particularly optimistic about the company's Elvitegravir product, which is a part of GILD's HIV drug QUAD. In Study-145, Elvitegravir demonstrated non-inferiority to Merck & Co.'s (MRK) Raltegravir. The only difference is that Elvitegravir only needs to be taken once per day versus two times per day for the competition. This will inevitably take away share from Isenstress and provide a sustainable stream of cash flow. Although the monthly HIV market was flat quarter-over-quarter, any concerns about long-term HIV treatment stagnation are offset by all of the optimism surrounding 7977. One issue for 7977, however, is that the company is overly focused on the ELECTRON GT1 readout in April 2012 as a way to de-risk. Credit Suisse downgraded Gilead to the equivalent of "hold" when the biotech company purchased Pharmasset (VRUS) for $11B in cash.
Consensus estimates for Gilead's EPS are that it will grow by 5% to $3.93 in 2011 and then by 6.4% and 18.9% more in the following two years. Assuming a multiple of 13x and a conservative 2012 EPS of $4.12, the rough intrinsic value of the stock is $53.67, implying 37.9% upside. Even if the multiple were to decline to 10x and 2012 EPS turns out to be 6.9% below the consensus would the company be fairly valued right now?
While Gilead is waiting for the market to appreciate its upside, Bristol Myers, in my view, is currently trading at intrinsic value. The major drug developer had third-quarter results amidst significant R&D that signals confidence. Sales grew by 11% year-over-year to $5.3B and EPS came out at $0.61. The YERVOY treatment for metastatic melanoma is a blockbuster and had $121M worth of global revenue with only two quarters on the market. In addition, Phase III results for ELIQUIS indicated statistical superiority to warfarin, reducing risk of stroke and bleeding. The FDA signaled support when it granted the drug priority review, which should shorten time-to-commercialization by 6 months. Peak sales are estimated at around $2.5B. On the otherhand, apixaban has thus far been disappointed: although it reduced CV events, it did not achieve the primary endpoint, as there was increased bleeding.
Consensus estimates for Bristol's EPS are that it will grow by 6.5% to $2.30 in 2011, decline by 12.6% in 2012, and then hold flat in 2013. Assuming a multiple of 18.2x and a conservative 2012 EPS of $1.98, the company is roughly at intrinsic value.