Bristol-Myers Trails U.S. Rivals as Promising Drugs Fade

Bristol-Myers Squibb Co. (BMY) is the only U.S. drugmaker among the top 12 to decline in trading this year, and investors and analysts say they don’t expect a comeback in 2012 because of drug pipeline setbacks.

Bristol-Myers has fallen 3.7 percent this year, while the Standard & Poor’s 500 Pharmaceutical Index has surged 15 percent. For the New York-based company, the drop is a stark contrast to 2011, when it rode the promise of new products for cardiovascular disease, hepatitis C and cancer to a 33 percent increase that led the industry.

That promise has failed to materialize. The hepatitis C medicine fell victim to safety issues that caused the company to drop development, and the blood thinner has been slowed by regulatory delays that may open it to unexpected early competition. As a result, the shares, which remain the most expensive among its index peers, may still be overvalued, said Mark Schoenebaum, an analyst with ISI Group in New York.

“Right now, I just don’t see the catalyst in 2012, or even in early 2013, to own Bristol,” Schoenebaum, who has a hold rating on the stock, said in an Oct. 10 webcast. “The price- earnings ratio is at such a premium to the rest of the group.”

Bristol-Myers traded at a 19 percent premium to the S&P pharmaceutical index on a price-to-earnings basis, according to data compiled by Bloomberg. Schoenebaum said investors are staying on the sidelines, and only nine of 24 analysts reporting their ratings suggest buying. The company is scheduled to release third-quarter earnings on Oct. 24.

The company’s shares rose 2.5 percent to $33.93 at the close of New York trading.

Optimism ‘Cooled’

“I’ve definitely cooled on it,” saidMarshall Gordon, whose investment firm ClearBridge Advisors was the company’s 33rd biggest shareholder with 7.6 million shares as of June 30. A backer of the stock, he calls the next few months critical in justifying its current valuation.

Bristol-Myers shares fell 8.6 percent on Aug. 2, when the company suspended a trial of an experimental hepatitis C drug after patients developed heart failure.

The company acquired the therapy in its $2.5 billion purchase of Inhibitex Inc. in February, gambling on estimates that a $20 billion market would be created by next-generation drugs that would replace current treatments that can’t be used by all patients and carry difficult side effects.

The company took a $1.8 billion write-off on the Inhibitex purchase in August.

Two months earlier, in June, U.S regulators delayed approval of the blood thinner Eliquis, a medicine with the potential to generate $1.67 billion in sales by 2015, according to the average of seven analyst estimates compiled by Bloomberg. Originally slated for approval this past March, a decision has been delayed by 12 months.

Eliquis Rival

The delay may enable competitors to close in on Bristol- Myers’s potential market lead, said Seamus Fernandez, an analyst at Leerink Swann & Co. He pointed to an experimental blood thinner from Tokyo-based Daiichi Sankyo Co. that may show results from a clinical trial next year.

“You don’t know how that trial is going to play out, but our concern there is that investors are pretty much all-in on the success of Eliquis,” said Fernandez, who downgraded the stock to “market perform” in August, based on the writedown for the hepatitis C drug and the Eliquis delay. “I don’t think investors are fully considering the risk.”

Bristol-Myers’s challenge will be to prove that 2012 is an aberration, and that the stock’s steady ride higher under current management will resume.

Andreotti’s Naming

From May 4, 2010, when Lamberto Andreotti took over as chief executive officer, to the close of 2011, it gained 39 percent, compared with 13 percent for the S&P’s pharmaceutical index as a whole. The company has been positioning itself over the last five years to prepare for the sales decline of Plavix, an anti-stroke medication that lost patent protection this year and was the company’s top drug.

Investors have rewarded the company’s internal development efforts and its purchases of outside assets meant to diversify its products. Now, they may be shifting money to other pharmaceutical stocks, said Les Funtleyder, who runs an investment fund for Poliwogg in New York.

“Bristol was very successful last year and got a little bit more rich on the valuation basis,” Funtleyder, whose firm doesn’t own the stock, said in a telephone interview. “Then they had a change where the news wasn’t terrible but wasn’t favorable, like the Inhibitex thing, and the rest of the industry saw more positive news flow.”

Risk-Reward

Leerink’s Fernandez downgraded the stock in August, as did Tony Butler, an analyst with Barclays Plc.

“When you take everything together, the risk-reward at these levels isn’t compelling enough for us” to recommend Bristol-Myers to investors, Fernandez said in a telephone interview.

There’s also the possibility the company won’t meet the earnings target for next year it set in 2010, and “might have to guide the street down in 2013,” Fernandez said.

The company set its 2013 goals at a March 2010 investor meeting. Then, Andreotti promised annual earnings per share except for certain items of at least $1.95, “at a minimum.”

Things have changed since then, said Chief Financial Officer Charles Bancroft at an investor conference last month. There have been “been a lot of pulls and pushes” on the drugmaker’s business in the intervening years, he said.

Bancroft cited economic troubles in Europe, price pressure in the U.S., and money spent to acquire companies like Amylin Pharmaceuticals Inc., purchased for $5.3 billion in June, which he said will cut 3 cents from earnings.

‘Disconnect’

“The reason we did that was that we felt that there was a disconnect in how we saw the evolution of Bristol-Myers Squibb and how the market viewed Bristol-Myers Squibb,” Bancroft said. “Our real goal is, yes, we’re focused on 2013 and we’re focused on delivering in the short term, but it’s really how do we grow and really create a sustainable business in the longer term.”

Bristol-Myers had no further comment, said Jennifer Mauer, a company spokeswoman. “We don’t plan to talk about 2013 guidance until January of 2013,” she said in an e-mail.

Plavix, the company’s longtime sales leader, generated $7.09 billion in revenue last year, making up 33 percent of the company’s sales. It lost patent protection in May, and investors have focused on drugs such as the cancer medication Yervoy, the antipsychotic Abilify and diabetes drugs acquired from Amylin.

The company continues to have the best early product development pipeline among drugmakers, making it “a really great long-term story still,” said Gordon of ClearBridge Advisors. He called Bristol-Myers a core holding, though he said he might reduce the number of shares for now.

“As portfolio managers try to weigh the short versus the long term, I would bet you they’re probably at the margin selling, not buying here,” he said.

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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