Shares of Bristol-Myers Squibb (NYSE:BMY) hit a 52-week high on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast for this big pharmaceutical company.
How it got here
For Bristol-Myers, it's not so much "what have you done for me lately," so much as it's "what will you do for more three years from now."
Last year, Bristol-Myers lost patent exclusivity on blood pressure drug Avapro and blockbuster blood-thinner Plavix, paving the way for generic competition to enter the market. Unsurprisingly, Bristol-Myers' fourth-quarter results, released on Thursday, highlighted a 23% decline in total revenue as non-GAAP EPS dropped by 11%. Avapro sales dipped 86% in the U.S., and Plavix sales were eviscerated, down 99% within the U.S., to just $20 million from nearly $1.6 billion in the year-ago period.
Yet, for all the negatives, which included sales and non-GAAP EPS guidance that would signal a second straight year of declines in 2013, Bristol-Myers' management provided a few points that invigorated investor enthusiasm that the company is well on its way to replacing Plavix's lost sales.
To begin with, Bristol-Myers received two very big approvals during the fourth quarter: for blood-thinning stroke prevention drug Eliquis, and Forxiga, an SGLT-2 inhibitor for Type-2 diabetes.
Eliquis, which Bristol developed with Pfizer (NYSE:PFE), has all the makings of a monster drug on the surface. In trials, Eliquis mopped the floor with the current standard of treatment, Warfarin, when pitted in side-by-side tests, showing improvements in both safety and efficacy. Having gained approval in the U.S., Europe, Japan, and Canada in a matter of weeks, Eliquis sales look well on their way to a potential $3 billion to $5 billion in peak sales.
Forxiga is another key drug that's generally flying under the radar. Developed with AstraZeneca (NASDAQ:AZN), this once-a-day oral SGLT-2 inhibitor has not only demonstrated improved glycemic control without the need for insulin, but it's actually improved blood pressure and reduced users' weight in trials. It's currently only approved in Europe, but this could be yet another blockbuster in the making.
Other newly launched and young FDA-approved drugs performed well during the quarter, including Yervoy, Orencia, and Sprycel, which saw sales improve 47%, 26%, and 24%, respectively, over the prior year.
What could derail Bristol-Myers Squibb?
There are two key factors that could easily derail Bristol-Myers: its CEO's foolish decision-making and its valuation.
I don't expect perfection from any CEO, but Bristol-Myers' Lamberto Andreotti deserves his very own hand-stitched dunce cap after his many gaffes in 2012. The worst gaffe of all was Bristol-Myers' $2.5 billion purchase of Inhibitex in order to get a hold of an early stage hepatitis-C compound, which later became known as BMS-986094. In August, trials utilizing this drug were stopped after serious health issues arose in some patients. Eventually the drug was shelved, Bristol agreed to pay $80 million in settlement costs, and Bristol's "string-of-pearls" theory wound up looking like a dud.
Valuation is also a concern for Bristol-Myers considering that it's valued at 20 times this year's earnings based on the midpoint of its profit forecast. Most big pharmaceutical companies are valued in the high single digits, so on-the-edge investors may choose to dump Bristol-Myers for peers that appear cheaper.
What's an investor to do?
There are a lot of other variables for Bristol-Myers that have yet to play out.
Bristol's in the midst of advancing yet another hepatitis-C treatment combination through trials, but it could find itself too far behind in the game to make a difference.
Gilead Sciences' (NASDAQ:GILD) Sofosbuvir has been phenomenal in trials, completely removing all detectable levels of the hep-C virus in 25 of 25 patients following their dosing regimen. AbbVie (NYSE:ABBV), the recent spin-off of Abbott Laboratories, reported equally impressive results when its drug trio was combined with a ribavirin to induce a sustained virologic response in 77 of 79 patients. It remains to be seen if either of these two can advance their treatments to the marketing stage, or, if Bristol-Myers can still claim part of the market by combining daclatasvir with an experimental treatment. For instance, in trials, Gilead's Sofosbuvir, when combined with daclatasvir, also had a 100% success rate in eliminating detectable levels of the virus.
It'll also be interesting to see how quickly Gilead's four-in-one HIV treatment, Stribild, which is composed of all in-house drugs, strips sales away from Atripla, a three-in-one HIV treatment that includes a compound supplied by Bristol-Myers and another by Johnson & Johnson.
Another wild card is Lamberto Andreotti. Clearly, if the Bristol board can keep focused on acquiring late-stage or already approved drugs, and avoid early stage nightmares like what shareholders experienced with Inhibitex, it could move higher.
Overall, I remain decidedly bearish on Bristol at these levels and will be keeping my CAPScall of underperform on the company. It's extremely pricey relative to its peers, sales and profit growth are shrinking, at least in 2013, and I have very little faith in its CEO at the moment.
What's your take on Bristol-Myers? Share your take in the comments section below.