The Bristol-Myers Squibb Drug Bust

| About: Bristol-Myers Squibb (BMY)

Summary

BMY has fallen nearly 20% since its lung cancer drug failed its latest trial.

Market is punishing BMY too much in response to this news.

This pharmaceutical giant may be worth adding to your portfolio.

As the dust starts to settle after the shocking news that Bristol-Myers Squibb's (NYSE:BMY) small-cell lung cancer drug, Opdivo, failed its Phase 3 trial, now is the time to start thinking rationally about the long-term investment opportunities in the stock.

This is undoubtedly bad for the drug manufacturing behemoth. Opdivo was supposed to be a revolutionary immunotherapy drug. Immunotherapy is a relatively new area of research, which tries to utilize the human immune system to fight off cancer. This new field is thought to be incredibly profitable in the future with Opdivo alone generating over 840 million in revenue in the latest quarter; however, this will surely decline in the near future.

Investors had pegged Bristol-Meyers Squibb as the favorite to have the first major breakthrough in the immunotherapy field, so this news took the market by surprise. Panic soon ensued with the stock down over 20% through midday Monday. Even with this major setback, I still believe this seems like too much of a knee-jerk reaction. Here are three reasons why Bristol-Myers Squibb is a stock you should consider putting in your portfolio in the near future.

1. A solid balance sheet and dividend yield

Bristol-Myers Squibb reported 2nd quarter earnings last week with EPS of 69 cents per share and revenue of 4.87 billion, both figures beating expectations. These figures are substantially higher from the same time last year, especially revenue which surged by 17%. Along with the better than expected earnings, it has a healthy balance sheet with a current ratio of 1.6, which compares well with its industry.

Even with the potential for Opdivo revenue loss, Bristol-Myers Squibb is financially stable enough to bounce back and continue to produce profitable lines of drugs. Looking past the recent earnings and balance sheet, Bristol-Myers Squibb just recently continued their streak of increasing dividend payment, and with the recent price drop, you can scoop up shares with a 2.5% yield.

2. This is no one trick pony

Although the recent news is a major setback, a 20% decline on one failed trial is something you see for companies whose entire existence depends on that very drug. To put Bristol-Myers Squibb in this same group is just blatantly not fair. When its earnings were reported last week, we learned that global revenues increased substantially for a number of their other drug lines. In particular, Eliquis and Orencia revenues were 777 and 593 million, increases of 78% and 29% respectively. Drugs like these, along with any new ones that will surely be developed by their incredibly strong research and development program will be the pipeline products that validate a higher valuation in the future.

3. We may not have seen the last of Opdivo

The majority of people won't read past the headline that Opdivo failed its latest trial, but those that do will soon realize that all may not be lost for the one-time revolutionary drug. News has been circulating that the trial failure could possibly be due to the fact that the company selected a very broad sample pool. Also, this is just one of many more studies to be conducted on the effectiveness of the drug, so it may be too early to declare this as the end.

If Opdivo is declared ineffective in treating small-cell lung cancer alone, Opdivo can still be profitable. Analysts are still projecting that Opdivo will generate four billion in sales by 2021 even without treating small-cell lung cancer. In addition to stand-alone sales, Opdivo can also be combined with an older drug, Yervoy. This combination has been approved in both the EU and the U.S. to treat numerous diseases including Hodgkin lymphoma and metastatic melanoma.

It's still too early to declare Opdivo as a complete failure, and even if it proves to be, Bristol-Myers Squibb has a variety of other revenue streams to keep it competitive against its peers. With the recent price decline, shares are now priced at a much more attractive 23 times expected 2016 earnings per share. This along with a variety of other factors make this a great opportunity to pick up shares of an industry leading blue chip stock at a significant discount. ​

Disclosure: I/we 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.