In an industry that is arguably in some turmoil, Bristol-Myers Squibb (NYSE:BMY) is the sick man, and it feels like it keeps getting sicker. While in the near term this may be true, the pharmaceutical outfit is taking steps to nurse itself back to health.

Bristol-Myers posted second-quarter sales of $5.4 billion, up 6% over last year's second quarter, although currency exchange contributed 3% of the gain. Earnings declined 42% to $527 million vs. $902 million in 2003, in part because of a $455 million increase in reserves for liabilities. Perhaps most damning, though, was the company's forecast for the future: Earnings for 2005 and 2006 are expected to be "somewhat below" current consensus estimates.

Lower-than-anticipated profits for two full years are enough to put a fright into most investors. Bristol-Myers also ticked off a list of drugs that are facing or soon will face generic competition, including its 2003 sales leader, the cholesterol medication Pravachol.

Nevertheless, the company does have some newcomers that are enjoying nice gains. Abilify, the firm's schizophrenia drug, racked $122 million in sales in the quarter, a 88% jump, and Erbitux, the cancer drug it markets with ImClone Systems (NASDAQ:IMCL), brought in $72 million in sales.

More importantly, though, by guiding lower for the next two years, Bristol-Myers may have helped itself start with a clean slate. The company's priorities seem to be in the right place. Research and development spending climbed 19% in the quarter and is expected to stay up the rest of the year. The extra spending will go toward Bristol-Myers' plan to submit paperwork for regulatory approval of three new drugs in the next six months, as well as efforts to usher more compounds into full development.

The most promising of these treatments may be a new diabetes treatment, muraglitazar, part of a class known as dual PPAR agonists. Although this class of medicine has drawn some controversy for potential side effects, Bristol-Myers' partnership with Merck (NYSE:MRK) to co-promote the medicine suggests chances of approval are good.

Because of poor portfolio management, Bristol-Myers has dug itself into a hole. But it has come clean, and over the long term, its chances of digging itself out look promising.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.