Bristol-Myers Squibb Company (BMY) recently reported second-quarter results, the highlights of which were the planned acquisition of biotech company Amylin Pharmaceuticals, Inc. (AMLN), as well as the presentation of clinical data on Bristol-Myers' pipeline of immuno-oncology drugs.
The results reflected on the impact of the U.S. patent expiration of Avapro/Avalide in March 2012 and Plavix in May 2012, as sales declined 18% to $4.4 billion from $5.4 billion on a year-on-year basis. GAAP EPS for the quarter was $.38 per share, compared to $.52 per share in the same quarter of 2011. Net earnings were $645 million, compared to $902 million in the same quarter of 2011. U.S. net sales decreased 27% to $2.6 billion, while international net sales decreased 1% to $1.9 billion. Cash and cash equivalents were $8.8 billion, with a net cash position of $3.3 billion as of June 30, 2012. The company is adjusting its guidance for 2012 GAAP EPS from the $1.90-$2.00 range downwards to $1.78-$1.88. This does not include the impact of the planned acquisition.
The company has recently had problems with its pipeline when it voluntarily decided to stop a Phase II study of its hepatitis C treatment BMS-986094 (formerly known as INX-189) due to a safety related issue. It is not yet known whether Bristol-Myer Squibb's treatment was responsible for the safety issue - but the safety of all patients is being reassessed, after which the company will decide the future course of action. BMS-986094 was added to its pipeline after its acquisition of Inhibitex earlier this year. The company is deciding whether to write down the value of BMS-986094, which it acquired when it paid $2.5 billion for Inhibitex, which it is carrying at a value of $1.8 billion as of June 30. The company's new group of promising hepatitis C medicines, called nucleotide polymerase inhibitors, target polymerase, an enzyme essential for the hepatitis C virus to replicate.
In July 2012, brivanib displayed a disappointing performance in a Phase III study in the hepatocellular carcinoma indication. Meanwhile, the FDA has declined to approve the drug being jointly developed with Pfizer (PFE) on the basis of the data submitted, and is seeking further clarification. This anti-clotting drug, called Eliquis (apixaban), was submitted for approval in the U.S. The drug prevents strokes and systemic embolism in patients suffering from nonvalvular atrial fibrillation (AF), a cardiac rhythm disorder characterized by an erratic heartbeat. These problems will slow Bristol-Myers Squibb's efforts to regroup its business following the loss of patent protection on its blockbuster drugs, most notably Plavix.
Bristol-Myers Squibb paid a 160% premium to gain access to BMS-986094 and a foothold in the potentially lucrative hepatitis C virus (HCV) market. The stoppage of the trial is good news for its competitors because it was thought to be a close second in the race to market. The biggest beneficiary is thought to be Gilead Sciences (GILD), which has a rival nucleotide known as GS-7977 in Phase III testing at the moment. Last year, Gilead paid $11 billion for the developer of the drug Pharmasset to expand its own HCV drug pipeline. Both products have the advantage of being administered orally, whereas current HCV treatments are either injectable drugs or administered intravenously.
Other companies developing HCV treatments include Vertex Pharmaceuticals (VRTX), Achillion Pharmaceuticals (ACHN), and Idenix Pharmaceuticals (IDIX), though Vertex remains at least two years behind. I consider it is extremely unlikely that Bristol-Myers Squibb will make another multi-billion-dollar acquisition to acquire an HCV drug.
Bristol-Myers Squibb has a reasonably diversified business portfolio and the financial strength to cope with the setbacks. It is looking to compensate with new partnering deals, as well as the acquisition of Amylin. To bolster its position in the profitable diabetes market, it is paying $31 per share for a total of $5.3 billion in cash to acquire Amylin. It has also announced an expanded partnership with AstraZeneca (AZN) to develop and market the diabetes drugs that will be produced by Amylin.
Bristol-Myers Squibb has been a traditional leader in the pharmaceutical industry, and its portfolio still includes profitable drugs in the cardiovascular area, while new cancer drugs such as Yernoy and Sprycel are showing strong sales potential. But problems with Plavix indicate the gravity of the patent cliff problem, and the struggle to replace these lost revenues has not been particularly successful to date. Even though I consider the company to be well-managed and profitable, it is going to have plenty on its plate in terms of needed business growth, and glitches are sure to occur as it tries to digest Amylin. The forward P/E multiple looks reasonable and the dividend yield of well over 3% is also attractive. But, if you consider alternative health care investments, you should consider Eli Lilly (LLY), which trades at roughly the same multiple and has a dividend yield of roughly 4.5%. Another big pharma, AstraZeneca, trades at a low multiple and offers a superior dividend yield in the region of 6%.
Bristol-Myers Squibb's earnings are going to be under pressure until the new initiatives pay off, and even sustainability of the dividend may be affected. I see no positive catalyst or factors that would indicate any kind of appreciation for Bristol-Myers Squibb stock in the short term. I recommend holding onto any existing investment in the company. Should there be more unfavorable developments, I would urge investors to consider selling and switching to more promising healthcare stocks.