Pipeline Problems at Bristol-Myers Squibb


By David Shook Give Bristol-Myers Squibb (BMY) credit for shaking what looked to some like a complacent approach. Since new Chief Executive Officer Peter Dolan agreed to take the helm at the New Jersey pharmaceutical giant early in 2001, Bristol-Myers has done anything but stand still.

The company that gave us Taxol for cancer and Pravachol for high cholesterol has chosen to focus solely on developing more blockbuster drugs -- jettisoning less-profitable and slower-growth businesses unrelated to pharmaceuticals. In May, Bristol cut a deal to sell its Clairol beauty and hair-coloring business to Procter & Gamble (PG) for $5 billion. Bristol also announced plans to spin off medical-devices maker Zimmer Inc. and create a company owned by Bristol shareholders. And on June 7, Bristol said it would buy DuPont's (DD) pharmaceutical division for $7.8 billion.

So far, however, none of these bold moves has bolstered the stock price. Even the company's own aggressive stock-repurchasing plan hasn't done so. On June 5, management authorized an additional $2 billion to the already hefty $12 billion buyback budget. Still, over the past year shares have fallen 28%, to about $56. And Bristol's earnings growth now ranks near the bottom of the pack for large-cap drug companies.

IN A BIND. The cause is an increasingly familiar predicament in the drug industry: Patents are expiring on drugs crucial to the company's revenue growth, leaving them open to competition from generics.

Without enough new products in the pipeline to replace lost revenues, Bristol may be in a bind. The company, it seems, has made all the right moves since it outlined a restructuring in September, 2000. But those plans won't be enough to stir a recovery in the stock this year, some analysts predict. "We're negative on the fundamentals right now," says Richard Evans, pharmaceutical analyst for Bernstein & Co. in New York, who has a neutral rating on the stock.

Ideally, when a company loses patent protection on key drugs, it looks to its development pipeline for something to fill the void. In this case, Bristol's pipe is lacking blockbuster drugs -- even with the addition of 20 promising compounds from DuPont's labs. While analysts don't think Bristol has a long-term problem, they see a lull in production for the next couple of years.

Here's what's coming: It adds Sustiva, a $400 million AIDS drug from DuPont, to its virology franchise. And Bristol has a promising antipsychotic in development that could hit the market late this year and compete against Johnson & Johnson's Risperdal and Pfizer's Zyprexa. Plus, a new AIDS drug could be introduced sometime in 2002. But those drugs aren't expected to assist the bottom line soon enough.

END OF THE RIDE. Dolan and his colleagues have their work cut out for them if they want to prove the analysts wrong in the short term. Bristol will see generic competition batter three of its top-selling drugs -- Taxol, Buspar, and Glucophage. In 2000, the company lost a battle aimed at prolonging Taxol's patent. In the first quarter, that chemotherapy drug's sales plummeted 14%, to $330 million -- signaling the demise of its market share. Buspar, an anti-anxiety drug, may suffer the same fate. While it generated $203 million in the first quarter, a 25% increase over the previous quarter, it will most likely bow to generic competition later in 2001.

Then there's Glucophage, the highest-grossing diabetes drug in the world. Although it generated $519 million in the first quarter for Bristol, it also faces generic competition. But here the company has a trump card: Glucophage XR, a drug with a much younger patent, is a once-a-day formulation that patients are sure to find more convenient, thereby protecting Bristol's market share. Plus, the company has another product in which convenience may win consumers: Glucovance, a combination therapy that combines Glucophage with another diabetes treatment. Together, those drugs should help make up for Glucovage's lost sales.

Most analysts see Bristol's earnings this year growing 11%, compared to 13% in previous years. That's below the industrywide growth rate of 14% to 15% that analysts are expecting for the next three to five years. Some observers are even more bearish. Sanford Bernstein's Richard Evans, for one, expects Bristol's earnings growth to be 8% in 2001. Income growth under 10% for a major pharmaceutical company would likely be punished rather harshly by the markets.

BACK TO THE CLINIC. Meantime, the company should continue trading at a discount to the rest of the industry. That means the stock can be had on the cheap, which could appeal to buy-and-hold investors. Bristol's stock now trades at a 15% discount to its peers, analysts say. This has been the case since the company's announcement last summer that a potential blockbuster hypertension pill, Vanlev, hadn't shown the clinical safety data it needed for Food & Drug Administration approval. So Vanlev went back to the clinic for more studies, and the company embarked on its restructuring in the fall.

Bristol-Myers, not surprisingly, is optimistic about its ability to pull out of the funk. "Our strategy now is to drive our top line by looking at external development opportunities, looking at biologics, and opportunities in Japan and Europe," says new Chief Financial Officer Fred Schiff. "At the same time, we're looking to improve and shorten the [research and development] process and enhance our marketing efforts. Since Peter Dolan became CEO, we've seen a lot of activity take place within the company."

Not all analysts are negative on Bristol's growth prospects, either. "This sentiment of late has been negative for the company, and it's understandable for the Street to have some concerns, but the DuPont acquisition could have a major impact on the company," says Girish Tyagi of ABN Amro. "Suddenly, these two large groups of scientists will have access to new and different sets of chemical entities. If you talk to the scientists, they will tell you this is wonderful. Each side will learn something from the other's strengths."

THE SEARCH IS ON. With long-time Bristol CEO Charles Heimbold no longer running the show, Dolan and his managers are left with the sizable task of maximizing profits from existing drugs while spending just enough on R&D to prime the pipeline for another blockbuster. It's not exactly clear how long it'll take to find, though.

That's why analysts aren't exactly pumped about Bristol's stock. Until the company can meld its drug pipeline with DuPont's and find the right medicines to replace the lost Taxol sales and recover from the Vanlev setback, don't expect any runup in Bristol-Myers Squibb. Shook covers financial markets for BW Online in New York


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