3 Reasons Why Bristol-Myers Squibb Could Make an Awesome Comeback

Sometimes the investment world just gets it wrong.

Sure, all of us Fools know this but sometimes it takes a near-disaster to remind us of this fact.

One such near-disaster has been the profit decline that took place at Bristol-Myers Squibb (NYSE: BMY  ) last year when it announced that earnings per share had fallen by 46% versus the prior year.

Loss of exclusivity leads to volatility
The main reason for the fall was the loss of exclusivity on two blockbuster drugs, namely Plavix and Apapro. With generics being available, margins were hit hard on these two drugs and, unsurprisingly, revenue and profits headed south.

While the loss of exclusivity on the two drugs was not unexpected, it brings to the fore the idea that the health care (and particularly pharmaceutical) sector is stable when compared to other sectors on the S&P. Indeed, the consensus seems to view health care as the go-to sector when things look rocky on the Street.

However, the lack of sufficient replacements for drugs that are due to come off patent is one of the major risks that comes with the territory of investing in health care stocks, making it a whole lot less defensive than many (non-Foolish, of course) investors believe.

The flip side of all this is that new drug developments and FDA approval can generate tremendous upside for health care stocks, making it more volatile but potentially even more rewarding than many investors realize.

The pipeline
Furthermore, Bristol-Myers Squibb seems to be on the comeback trail and has in place a pipeline of drugs to counteract the previously mentioned losses.

During a tough 2012, it had a bunch of key regulatory successes, including the European approval of Forxiga (used to treat type 2 diabetes) and multiple approvals of Eliquis (used to treat atrial fibrillation). In addition, it made a number of encouraging clinical advances, particularly with respect to assets including immuno-oncology and hepatitis C.

So, while Bristol-Myers Squibb lost on the one hand, it is building a strong pipeline of drugs in much the same way as sector peer AstraZeneca (NYSE: AZN  ) is doing, with both companies attempting to emulate the impressive pipeline of another sector peer, GlaxoSmithKline (NYSE: GSK  ) .

The competition
Indeed, GlaxoSmithKline continues to experience a substantial amount of positive news flow regarding FDA recommendations and approval of drugs in its pipeline, with the market expecting more to come in 2014. It also seems to be benefiting from a refocused strategy, where brands such as Lucozade and Ribena are being sold off so the company can focus to a greater extent on its research capabilities and pipeline to maintain its strong momentum in this space.

AstraZeneca, meanwhile, is making slow but steady progress in its pipeline recovery, with the business focusing on acquisitions in an effort to speed up the process. Although the market has seemingly not yet given the company the praise it deserves for progress made in 2013, 2014 could see sentiment pickup strongly as further M&A activity takes place. This is an avenue that Bristol-Myers Squibb could choose to go down due to its considerable financial firepower.

Financial muscle
A second reason why Bristol-Myers Squibb could become a Comeback King is that it remains financially sound. Indeed, it has a relatively low level of financial gearing and has not sought to leverage up the balance sheet to too great an extent, with the debt-to-equity ratio currently standing at a healthy 54%.

This gives it the financial muscle to make acquisitions should it wish to further strengthen its drug pipeline.

The speed of recovery
A third reason why investors in Bristol-Myers Squibb may feel optimistic on the medium- to long-term prospects of the business is the speed at which it is mounting its comeback. As mentioned, EPS fell by 46% last year but is forecast to grow by 49% this year and 11% next year.

Of course, if these forecasts are met then EPS will still be more than 11% behind where it was in 2011. However, this could prove to be a "V shaped" recovery rather than a slower comeback, which bodes well for investors who want to see EPS push on to new highs.

The comeback is on
So, while 2012 was undoubtedly a disappointing year for Bristol-Myers Squibb, the medium to long term looks to be highly encouraging, with a far stronger pipeline being put in place and the company having the financial firepower to make significant acquisitions.

Meanwhile, the speed of earnings growth means that investors may not have to wait too long to see a return to pre-2012 levels of EPS. The comeback is on.

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