While some Big Pharma companies can fairly be accused of being too passive in dealing with upcoming patent expirations and relying too much on cost-cutting to boost numbers, that's not really the case for Bristol-Myers Squibb (BMY). Not only has Bristol-Myers continued to invest in the clinic, but the company has also been an active acquirer in the biotech space. Although Bristol-Myers has respectable growth prospects relative to its peer group, this earnings stream seems fairly valued today.
Q2 More Or Less As Expected
Bristol-Myers's results were more or less as expected this time around. Revenue fell 18% from last year (and 16% from the first quarter). The declines were the result of the company absorbing the impact of generic competition to Plavix and Avapro. Even with generic competition, though, Plavix was still the company's largest single product this quarter -- down 60% to over $740 million. Ex-Plavix/Avapro, product sales rose 8%, with Abilify up 1%, Reyataz up 3%, and new cancer drug Yervoy up 3% sequentially.
Given the scale of the revenue decline, it wasn't surprising to see the magnitude of Bristol-Myers' margin pressure. Gross margin actually improved two points from last year and 10bp from the first quarter, while ongoing spending on SG&A and R&D drove sizable (34% YOY/37% q) declines in operating income.
Can The Pipeline Deliver?
Bristol-Myers made the decision years to ago to direct a lot of its clinical development spending towards R&D, and the revenue prospects of the pipeline are heavily weighted towards oncology. That said, I'm not sure the pipeline is quite as robust as the Street thinks.
I believe that the pipeline could add an incremental 40% or so in revenue (that is 40% of 2012's revenue base), but half of that is tied to Eliquis - the company's new anticoagulant that it shares with Pfizer (PFE). While I think the companies will navigate the FDA setbacks and delays (which seem largely procedural as opposed to qualitative), that's a lot of future tied to one drug. Likewise, there are substantial expectations for label extensions for Yervoy, but it seems like every Big Pharma has some potential oncology blockbuster on the way.
To be sure, there's potential in the company's Hep C platform and in its experimental anti-PD-1 cancer drug. But just as Bristol-Myers is going to see competition for Yervoy from Roche's (OTCQX:RHHBY) Zelboraf, so too would I expect other immunotherapies from Roche and Pfizer (PFE) to garner interest as well (assuming they reach the market).
Amylin Has To Deliver
Bristol-Myers, in conjunction with partner AstraZeneca (AZN), won the bidding for Amylin (AMLN) with a total bid over $7 billion. That's an awful lot to spend on a thus far disappointing biotech with a drug (Bydureon) that needs a lot of support. While Bydureon has only achieved about 60% of the prescriptions of Novo Nordisk (NVO) at a comparable point in the launch, Amylin was significantly hamstrung in its sales efforts. Given the size and commitment of these much larger Big Pharma players, there's no reason that Bydureon cannot assume its rightful place in the market but, Bristol-Myers and AstraZeneca both have a lot riding on it.
Who Will They Buy Next Year?
Bristol-Myers has been steadily and consistently acquisitive. The company bought Kosan in 2008, Medarex in 2009, Zymogenetics in 2010, Amira in 2011, and Inhibitex and Amylin in 2012. So who will be on tap for 2013? Mabye an oncology company like Seattle Genetics (SGEN) or Ziopharm (ZIOP), or perhaps a company with a broader therapy platform.
The Bottom Line
I admire Bristol-Myers' management for being somewhat aggressive in addressing the company's revenue growth needs, even though many have criticized it for the premium it's paying for Amylin. That said, Wall Street seems pretty much up to speed with this stock.
With low-to-mid single-digit free cash flow growth likely over the next decade, the growth expectations at Bristol-Myers are broadly in line with most of its peer group. The Street seems too eager to pay up for that cash flow, though, and I see fair value for these shares around $37 today. Unless an investor believes that Bydureon, Yervoy, and/or Eliquis will outperform, it may be prudent to wait for a better price or find a cheaper pharma stock.