Bristol-Myers Squibb (NYSE:BMY) continues to warn that its outlook looks pretty grim through 2006, and investors continue to bid the stock down. It's hard to see the positives through the gloom, but it's important to note that fortunes in the pharmaceutical world can change fairly quickly.

For the third quarter, Bristol-Myers booked earnings of $0.44 per share, excluding certain charges, down from $0.47 per share in last year's third quarter. The top line was essentially flat at $5.4 billion. Patent losses were chiefly to blame, but increased competition from other branded drugs also took a toll. Notably, the company elected to pump up research and development, as expenses in this area climbed 9% to $615 million.

The company's financial results tell one story, but its research efforts suggest Bristol-Myers is setting the stage for a comeback. The company has several promising medicines in its pipeline, including some in late-stage trials. Abatacept, a compound for the treatment of rheumatoid arthritis, and Muraglitazar, a medicine Bristol-Myers is developing with Merck (NYSE:MRK) for type 2 diabetes, are both in the final phase of clinical testing. Both address large markets and have the potential to bring in substantial sales if approved. Of course, clinical trials are a great unknown, but given their advanced stage of development, these treatments' chances of coming to market are pretty good.

An area of concern is litigation challenging patents on Plavix, a medicine that prevents blood clots. Sales of the drug have been a lifesaver for Bristol-Myers in the midst of other problems. The company's continued turnaround, then, hinges to some extent on Plavix's fate. In any case, the firm expects that even in a worst-case scenario, Plavix won't have generic competition before the second quarter of 2005.

For now, it looks like only time will tell whether Bristol-Myers can find its way out of its doldrums. The case of Elan (NYSE:ELN), though, shows just how quickly a pharmaceutical company can recover if it makes the right moves. The bad news has been coming for so long now that the first signs of good news are likely to put new life into Bristol-Myers' stock.

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