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by Brian Tracz

As it heads through a transition stage, Bristol-Myers Squibb (NYSE:BMY) nevertheless has many admirable, and long-standing, qualities. The diversity of its major money-makers, its assortment of different research prospects, and its stable management practices make Bristol-Myers Squibb shares a sound investment.

Present valuation for the company is about average, but the company is making strides to speed up its development pipeline and is presently seeing decent earnings on its present holdings. With its present valuation, I think Bristol-Myers Squibb is a weak buy for the 18-month investor but a strong buy for the 3-year or long-term investor. A price target over 12-months of $40 is justified by the valuation comparison with its peers and its emerging set of new drugs.

Valuation

Bristol-Myers Squibb shares are presently trading at around $35, which is near their 52-week high. Though its P/E ratio of 15 is near the sector average of 13, analysts are expecting a two-year depression of earnings as the Plavix patent expires. Despite this depression of earnings, Bristol-Myers Squibb seems fairly valued in respect to the rest of the market. Its price/sales ratio of 2.7 is within the inner three quartiles of the health care sector, and its price/book is around the same value as Merck (NYSE:MRK) at 12 and below that of Amgen (NASDAQ:AMGN), giving Bristol-Myers Squibb a competitive valuation considering that these two companies are, with Bristol-Myers Squibb, among the largest pharmaceutical companies by market capitalization in the NYSE.

Drug Development

Bristol-Myers Squibb, considering its relatively high P/E, needs to deliver considerable growth in order to be a competitive buy. There are many reasons to think that the company will, indeed, deliver this growth.

In the next four years, Plavix, Avapro, Sustiva, and Abilify will be coming off of patent. Abilify, one of its biggest earners, comes off patent in 2015. In May 2012, Plavix went off patent-a challenge for Bristol-Myer Squibb considering that the company received $6.6 billion in revenue in 2011 alone. Indeed, the projected 60% drop in sales of this drug will lead to an overall decrease in sales of around 15% for the company in 2012 from the company's revenue of $21 billion in 2012.

There are number of drugs that are expected to step in to fill the gaps left by these drugs. Eliquis, a drug that studies suggest is better than aspirin at reducing the risk of stroke in certain patients, is presently under review by the FDA. The drug is being co-developed with Pfizer (NYSE:PFE) and could boast sales of up to $3.5 billion by the end of 2016. Bristol-Myers Squibb is also actively acquiring other companies and maintaining joint-ventures. Earlier this year, for instance, the company acquired Inhibitex for $2.5 billion, which is known for its drug INX-189, a major clinical-stage therapy for hepatitis C.

Big Earners for the Short Term

Of course, Bristol-Myers maintains an impressive number of high earners, regardless of patent issues. A leukemia therapy, Sprycel is already upping sales for Bristol-Myers Squibb and is expected to bring in $1.05 billion in sales for 2012. A drug used for rheumatoid arthritis, Orencia, is expected to net $1.1 billion in sales for 2012. Additionally, Reyataz, an HIV treatment, will likely have net sales of $1.6 billion for 2012, making it one of the highest present earners for the company that is also not going off of patent. A type-II diabetes medication, Onglyza is one of the fastest growing medications at Bristol-Myers Squibb, with overall sales of the drug increasing 99% year-over-year; sales of this drug are growing even faster than the new Bristol-Myers Squibb star Yervoy, which is used for metastatic melanoma. Thus, Orencia, Sprycel, Yervoy, and Onglyza are excellent drugs on the market for the company, and with present growth rates, there is quite a bit to be optimistic about even if other development ventures hit a few bumps.

Abilify, though it is preparing to go off patent in the short term, is still an incredible source of revenue and is projected to maintain sales of $2.9 billion for 2012.

Finances and Risks

The first quarter 2012 went pretty well for Bristol-Myers Squibb, with earnings per share of $0.64, which was one cent ahead of the consensus estimate. This was up 10% year-over-year, though down 14% from the fourth quarter 2011. With the expiration of the Plavix patent, Bristol-Myers Squibb will likely undergo a tightening of cash flow. Nevertheless, it will likely be able to continue paying out its attractive 4.2% dividend through this time, and at least through 2013. As any value investor would note, I like dividends in cyclical stocks like pharmaceuticals.

Like other large drugmakers, Bristol-Myers Squibb faces the constant competition from generic drugs as patents expire. However, the robust portfolio of the company contains both drugs in development and currently on the market that stand to create solid profitability for the foreseeable future. Indeed, Standard & Poors recently raised the company's long-term and short-term debt ratings to A-1+ from A-1, reflecting its assessment that Bristol-Myers Squibb will maintain cash flow through patent expiration and has sustained strong operating performance. Management for the company is rather strong. CEO Lamberto Andreotti, who took office in 2010 after being the company's COO, holds $12 million in the company's shares and is very investor-conscious.

A Dynamic Transition

Management, above all, is making moves to ensure that it remains a competitor in the worldwide pharmaceutical market. On June 14, the company announced plans to partner with the Scripps Research Institute in La Jolla, California. This is one of the world's most prestigious centers of organic chemical synthesis and biochemistry, and a partnership that fosters novel synthetic approaches to new drugs is just what Bristol-Myers Squibb needs. It is ventures like this that set this large market-cap company off from the rest.

Source: Bristol-Myers: A Strong Value Buy Now