Where's the Growth in Big Pharma?

The theme for the pharmaceutical industry's 2010 third-quarter earnings reports has been officially set: If you can't get it done through sales, just cut costs.

Bristol-Myers Squibb (NYSE: BMY  ) joined Abbott Labs (NYSE: ABT  ) , Eli Lilly (NYSE: LLY  ) , and Johnson & Johnson (NYSE: JNJ  ) in reporting earnings that beat estimates even though top-line revenue fell short.

That's no way to help share price. Investors aren't stupid. They know companies can't cut costs forever and that revenue growth tells you where the company is headed.

That's not to say Bristol-Myers shouldn't have cut the costs; it certainly needs to. The loss of Plavix to generic competition at the end of next year is going to hurt. Cost-cutting is a necessary evil and it might as well start now.

But cost-cutting, in and of itself, isn't going to be enough to get Bristol-Myers to its goal of seeing adjusted EPS in 2013 higher than it was in 2009. Bristol-Myers needs post-Plavix revenue to reaccelerate quickly. That's only going to happen with a few solid hits from the pipeline.

In addition to a couple of potential expansions of drugs that are already on the market this week, Bristol-Myers has a pair of drugs that could make a major impact on revenue. Melanoma treatment ipilimumab is currently up for review at the Food and Drug Administration, with a decision expected near the end of December. Considering the lack of alternatives for skin cancer, the sales ramp-up for ipilimumab could be steep.

Apixaban is a little further back, but no less important. An application to market the anticlotting drug, which is partnered with Pfizer (NYSE: PFE  ) , is expected to be filed by early next year. The market is wide open; doctors aren't fond of the current treatment, warfarin, because it's hard to find the right dose for patients. But apixaban will see competition from Boehringer Ingelheim's Pradaxa, which was recently approved, as well as Bayer and Johnson & Johnson, which are developing Xarelto. Fortunately, preventing strokes is a multibillion-dollar market, so there are plenty of patients to go around.

Investors should give Bristol-Myers a pass on revenue for a few quarters, but if the pipeline can't produce winners soon, the drop off the patent cliff is going to hurt.

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Pfizer is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


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