by Doug Ehrman
In news that seems to have not gotten the screaming attention that it deserves, Bristol-Myers Squibb (BMY) presented the results of an early-stage research study to the American Society of Clinical Oncology (ASCO) that showed that one of the company's experimental drugs was successful at shrinking tumors in three types of cancers, specifically melanoma, kidney and non-small cell lung cancers. The drug joins Yervoy, another Bristol-Myers drug, in showing significant promise in battling cancer by harnessing the power of the body's immune system to attack the tumor cells. Where many cancer protocols involve a direct assault on the cancer cells by the drug, the hope of this class of treatments is to unlock the power of the patient's immune system.
The drug, which is expected to enter Phase III trials, has huge potential for the company over the long-term. It is estimated that should it receive full FDA approval, the drug could produce upwards of $5 billion per year in revenue. Analyst Jacob Steinburg, the author of the above article, agrees that the muted response to the news by the market is surprising. He notes that the flat performance of the stock on a sharply down day represents some kind of victory, but with news of this importance, the market's reaction must be seen as anti-climactic. A critical point correctly cited by Mr. Steinburg is the fact that the news puts Bristol-Myers squarely ahead of competitors like Merck (MRK), GlaxoSmithKline (GSK) and Teva Pharmaceuticals (TEVA). Each of these competitors is scrambling to develop similar drugs, but with Bristol-Myers reaching the pivotal phase III ahead of its peers, the lead is solidly owned.
A report issued late last week suggests that the number of global cancer cases may increase by as much as 75% by 2030. Given this information and the progress being demonstrated by Bristol-Myers, the yawn cast by traders on the news is peculiar. When news like this is ignored, it bears further consideration before capital is committed. It can mean that one is missing a critical fact or it can mean that the market is missing something. The third option that is always present, and is really the best source of alpha for true market mavens, is that the market took the information, thought about it, and reached the wrong conclusion; this means that there is no hidden information to discover, just some independent thinking to be done. This seems to fall into the third type, but some discussion is warranted.
The Yawn Heard… Almost Nowhere
When a company with the visibility of Bristol-Myers announced a major advance in cancer treatment for one of the most prevalent and deadly forms of cancer on the planet and the stock fails to react, the inclination is to think the news is less impressive than it sounds. In this case, while the drug is simply at the cusp of phase III trials, the research was presented at one of the premier cancer events of the year. The information was not a footnote is the press release of an obscure start-up; this is news that matters. So why was there such a small reaction? There are two likely factors: one, the information came on one of the worst days the stock market has seen all year; and two, the drug is relatively far from having a direct impact on the company's earnings.
What this means is that the market will either wake up and begin to act on the news when it is done licking its wounds or it will be overlooked. In either case, the muted response is probably a buying opportunity. The second point, that the drug, while further along than those of Bristol-Myer's competitors, still has a long road ahead has some validity, but given the potential impact of this kind of advance, being early seems prudent when constructing the core of one's portfolio. If the company is sufficiently attractive on other fronts (see below for evidence that it is), then adding it as a core portfolio holding is well justified.
On a valuation basis, using the trailing twelve month price-to-earnings (P/E) ratio as a metric, Bristol-Myers is attractive at current levels. The company has a P/E of 15 relative to 16.6 for Merck, 13.7 for Roche Holding AG (RHHBY) and 6.5 for AstraZeneca (AZN). While this metric is more attractive for AstraZeneca, the concern with that company is the negative growth rate; it has a year-over-year quarterly revenue growth figure of -11.4%. While the growth statistics for Bristol-Myers at 4.8%, 1.3% for Merck and -8.5% for Roche are not blistering, they are stronger and when taken in conjunction with the P/E, make Bristol-Myers look like a leader.
In terms of dividend yield, the company is not the standout, but has a solid income component at current levels. Bristol-Myers has a dividend yield of 4.1% relative to 4.5% for Merck, no dividend for Roche and 9.7% for AstraZeneca. On an operating basis, the company has an operating margin of 33.4% relative to 22.3% for Merck, 32.9% for Roche and 37.8% for AstraZeneca. The analysis one can derive from this collection of fundamental metrics is that while Bristol-Myers is not the runaway leader amongst its peers, it stacks up solidly. When the positive news on its experimental drug is considered, the stock looks very appealing at current levels. While it is somewhat unclear what may serve as a significant price catalyst, if one is looking for a good long-term holding, Bristol-Myers is your stock.