Pain Relief for Bristol-Myers?


By Amy Tsao Drugmakers, by and large, are facing tough times, as upcoming patent expirations on blockbuster drugs of years past threaten to slash revenue growth. Pharmaceutical stocks as a group are down 2% year to date, while the broader market has advanced about 15%. Sifting through the many decliners among drug companies, some investors have found an unlikely winner in Bristol-Myers Squibb. Its stock has risen 10%.

That recent runup reflects the view that New York City-based Bristol-Myers (BMY) could become a breakout name in the not-so-distant future. It will take patience and a stomach for risk, but experts say it may be worth looking past the company's disappointments and riding out the uncertainties. "They still have some problems ahead in the medium term, but they will have quite a bit of momentum over the next 12 months," says Liu-Er Chen, portfolio manager for Evergreen Healthcare Fund. He thinks the stock could rise to $30, from its current $25. (Chen does not own Bristol-Myers, but the stock is a holding in his fund.)

Chen and others have turned sweet on Bristol because it scores relatively high marks on a key measure of any drug-maker's prospects -- its pipeline. In the near term, there are at least three drugs -- Reyataz for AIDS, Abilify for schizophrenia, and, potentially, Erbitux for cancer -- that analysts think could help offset lost revenues due to expired patents. Drugs due to lose their protection this year include Monopril for high blood pressure, antidepressant Serzone, diabetes treatments Glucophage and Glucovance, and ovarian cancer drug Paraplatin.

OF TWO MINDS. Besides this promising drug trio, Bristol-Myers, which reported $2.9 billion in earnings on $18.8 billion in sales in 2002, also has many drug candidates in earlier stages of human testing. Several are entering Phase III testing now, including epothilone, a cancer drug, and a new kind of diabetes drug called "dual PPAR agonist" that could treat the disease and other metabolic disorders. Tests are also in various stages of human testing for a treatment for hepatitis B, a broad-spectrum antibiotic, a drug that could treat rheumatoid arthritis and multiple sclerosis, and a product to prevent transplanted organs being rejected.

Even though Bernstein Research drug analyst Richard Evans cut his rating on Bristol-Myers to market perform from outperform, citing margin pressure starting as early as next year, he maintains a favorable view of the pipeline. He calls it "40% undervalued" next to that of other drugmakers. Positive news from the pipeline, or perhaps a buyout offer from a competitor, could alleviate what he sees as the market's misevaluation, Evans wrote in a research report. He says either event could occur in late 2004.

For now, Bristol's schizophrenia drug, Abilify, approved last November, is fast proving to be the best of its kind. Analysts expect it to garner $250 million in 2003, and Chen thinks it could become a $3 billion-a-year drug. Abilify has taken market share at the expense of Eli Lilly's (LLY) Zyprexa, says Weidong Huang, vice-president at TimesSquare Asset Management. Abilify "is becoming the drug of choice," showing fewer side effects than similar antipsychotic drugs, Huang says, who owns the stock.)

"BLOCKBUSTER"? Moreover, Erbitux, which Bristol is developing with Imclone (IMCL), is "underappreciated by the market because of all the controversy," says Chen. "This will be a blockbuster." On Aug. 15, the companies resubmitted their application for approval to the U.S. Food & Drug Administration. The filing now includes an additional study that was approved by the FDA, conducted by Imclone's European partner, Merck KGaA.

Chen says analysts are projecting Erbitux to be a $1 billion drug, but he thinks, if approved, it could generate as much as $2.5 billion in annual revenues. Says Chen: "If Erbitux gets approval at the start of next year, Bristol-Myer's pain will be much, much less."

To solidify its rebounding fortunes, Bristol also will need to deliver strong sales of its recently launched Reyataz, a new protease inhibitor for AIDS. That's quite possible. Sales since approval of the drug in June have grown impressively, capturing 10% of new-prescription growth for such antiviral drugs. Analysts see Reyataz adding $50 million to the top line this year.

While the stock's admirers still see a Bristol-Myers comeback in its early stages. 19 of the 26 analysts polled by ratings-tracking service First Call rate the stock neutral or lower. Many have frowned on chief exec Peter Dolan's performance (see BW, 1/13/03, Special Report -- The Best & Worst Managers). In a mid-year update to shareholders, Dolan indicated that his outfit will lose $1 billion in sales annually in the coming years, and that margins will be under pressure. "I don't like the management," notes Huang, "but the drugs are working."

BIG PHARMA'S EXCEPTION? Bristol-Myers recent history has been dogged by controversy, beginning with the high-profile debacle over its botched FDA filing of Erbitux. Not long after, hypertension drug Vanlev failed to get FDA approval. New trials are underway, but expects it to be a "niche" drug if it does receive approval.

In March, Bristol released restated financial results for 1999 through the first two quarters of 2002, to correct some $2.5 billion in sales to wholesalers that were recognized inappropriately. In addition, the company has yet to fully resolve ongoing investigations by the Securities & Exchange Commission and the Justice Dept. related to wholesale inventory issues and accounting. It declined to comment on the status of the investigations. Separately, it said on Aug. 29 that it's discussing safety issues in Canada for its antidepressant Serzone.

These are challenging issues, but a few experts remain optimistic. True, before the benefits of a rebound can be enjoyed, the company must endure a period of sharp losses, as its recent blockbusters lose patent protection and generics grab hefty market shares. Still, while a good pipeline is no guarantee of miracle returns, it's a critical lifeline for any pharmaceutical maker. And it may be Bristol-Myers' saving grace. Tsao covers financial markets for BusinessWeek Online in New York


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