Big Pharma's battle with the patent cliff has led to drastic changes across the healthcare sector. Companies have slashed workforces, changed the focus of their product and clinical portfolios, and even moved abroad to lower their effective tax rates. 

Bristol-Myers Squibb (NYSE:BMY) fell hard off the patent cliff following the loss of exclusivity for its top-selling blood thinner Plavix. Over the past few years, the company has reorganized to cut costs and has started developing immuno-oncology and hepatitis C therapies. The result has been a steadily rising share price without a concomitant increase in diluted earnings per share, as shown by the chart below. 

BMY Chart

This apparent dichotomy might finally have caught up with the pharma giant, as its share price has actually fallen by about 3% year to date. Given this recent weakness in Bristol's share price and its rapidly developing late-stage clinical pipeline, I think it's a good time to consider if the stock is now a compelling long-term buy. Here is a look at Bristol's valuation and growth prospects in comparison to its Big Pharma peers.

Should investors buy Bristol ahead of new product launches?
Bristol could launch a handful of intriguing new hepatitis C and immuno-oncology products within the next eight to 12 months. How does this top pharma name stack up against competitors that are also closing in on new product launches?

As shown above, there is a mismatch between the performance of Bristol's share price and its underlying growth in terms of EPS. Subsequently, shares are trading at a price-to-earnings ratio of 31, easily beating the sector average of 24. On a forward-looking basis, this ratio is expected to only drop to 29, despite the potential introduction of new products. 

One key problem is that Bristol's most promising new therapy would enter the highly competitive hepatitis C market, currently dominated by Gilead Sciences (NASDAQ:GILD) and its blockbuster drug Sovaldi. Even after a near 40% jump in Gilead's share price this year, Sovaldi sales are projected to lower the company's forward P/E to a mere 11 -- well below Bristol's and the overall sector's forward-looking P/E ratios.

AbbVie (NYSE:ABBV) is also expected to launch its triple-combo hepatitis C therapy before year's end, and might ultimately be Bristol's main competitor in the fight to gain market share among the second wave of drugs for this disease. Moreover, AbbVie's shares are trading with a forward P/E of 15, offering a deep discount to Bristol. 

Overall, the Street expects Bristol's new products to merely help dampen the increasing revenue losses from Plavix and other patent cliff victims. In other words, top and bottom-line growth won't be enough to drive shares higher based on fundamentals. 

Foolish wrap-up
The strong performance of Bristol's share price over the past few years, despite falling revenue, makes me believe this stock has been propelled higher simply by the rising tide of the overall market. The sector's average P/E of 24 is already starting to generate fear that valuations are becoming "stretched." Bristol looks to me like it would be among the first to be hit by a marketwide correction.

Perhaps Bristol's biggest issue is that it simply doesn't offer the strong growth prospects of fellow biopharmas AbbVie and Gilead, among others. Even with potential growth drivers like immuno-oncology and hepatitis C, I just don't like the stock's upside nearly as much as other potential investments right now. Simply put, I would delay taking a position until this stock pulls back from these lofty highs and Bristol's pipeline develops further. 


George Budwell has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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. The Motley Fool has a disclosure policy.