Bristol-Myers: A Long March Back?


By Amy Tsao The investigations and lawsuits that have hung over Bristol-Myers Squibb (BMY) for the last several years are largely behind it. On July 31, the drugmaker agreed to a $300 million settlement in a shareholder lawsuit. And on Aug. 4, it said it would pay $150 million to settle with the Securities & Exchange Commission in a suit alleging accounting fraud. True, a criminal probe involving executives is still pending, but that isn't expected to result in the kind of financial penalty that ended those other matters.

So, are troubles behind it? Like the rest of the drug sector, Bristol-Myers has seen better days. A slew of its big-selling products are losing patent protection, and in the near term, there won't be any replacements to bring in the kind of revenues that will be lost when the older, highly profitable drugs go generic. Standard & Poor's analyst Herman Saftlas estimates that Bristol-Myers will lose between $1.1 billion and $1.3 billion in revenues annually through 2007 as a result of patent expirations. In 2003, Bristol-Myers reported $20.7 billion in revenues. (Saftlas doesn't own the stock personally, and S&P has no banking business.)

BIG POTENTIAL. Still, the New York City-based outfit is in better shape than many of its industry rivals. With the worst of the financial impact from investigations likely behind it, some analysts are suggesting that longer-term investors take a second look. "Just getting the litigation done with helps alleviate some of the pulldown on the stock," says Elizabeth Bernstein, an analyst at Morningstar. "I believe that will help bring it up." She rates Bristol-Myers 4 STARS stars out of 5 and figures it can hit $28, up 22% on its current price of $23. (Morningstar does not perform investment banking, and Bernstein does not personally own the stock.)

Also, Bristol-Myers has a healthy pipeline that will likely help improve the financial picture, albeit not until 2007 or 2008. Between now and the end of 2005, the company will file applications to the Food & Drug Administration for three major drugs: a pill for rheumatoid arthritis, a new diabetes treatment, and an antiviral drug for human papillomavirus (HPV) infection.

The diabetes and rheumatoid arthritis drugs have huge potential, says Shao Jing Tong, an analyst at New York City-based pharmaceutical research firm Mehta Partners. "We should hear positive news [on drugs in the pipeline] for the next 12 to 18 months," he says. Tong figures there is little risk of the stock falling below the mid-$20 range. Another reason he likes it: a dividend yield of 5%, far better than banks, Tong observes. (Tong doesn't own the stock and neither does Mehta's hedge fund.)

There are obstacles to be overcome, however. An upcoming dent in Bristol-Myers's existing revenues seems a certainty. In 2004, it will lose patent protection on diabetes drugs Glucophage XR and Glucovance, which formed an $819 million franchise last year, as well as on cancer drug Paraplatin, which brought in $905 million in 2003. Even more damaging will be the loss of patent protection in 2006 on cholesterol drug Pravachol -- Bristol-Myers' biggest-selling drug, which last year, brought in $2.8 billion.

BEATEN DOWN. Although several new drugs recently have been approved for sale by the FDA -- cancer drug Erbitux, which it shares with ImClone Systems (IMCL), antipsychotic Abilify, and Reyataz for HIV -- their combined sales won't be enough to make up for the loss of even one of Bristol-Myers' blockbusters, Tong points out.

The disappearance of top-selling drugs will certainly pressure revenue growth, though perhaps not as severely as S&P predicts. Morningstar's Bernstein is looking for 3% revenue growth in 2004 -- and with help from new drugs, it should be about 11% in 2007. Bernstein sees an average annual revenue increase of 6% over the next five years and annual earnings-per-share growth of 7%. "It's not going to be an easy time with major patents ending, but the stock has been beaten down beyond that," says Bernstein.

Bristol-Meyers may be on the road to recovery -- and while it could be a long trip, patient investors can contemplate the potentially handsome rewards for seeing the journey through. Tsao covers the markets for BusinessWeek Online


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