Is Bristol Myers a good investment today? Like many other large-cap drug manufacturers, Bristol-Myers Squibb (BMY) is faced with patent expiration on key products and risks related to new drug development and regulatory approval. The company is expected to lose its patent protection on a certain number of its key drugs over the next four years. In order to offset the inevitable loss of sales, Bristol-Myers Squibb has been making great efforts to expand its product portfolio. The company has also been restructuring to reduce costs and better focus on its core business.
Bristol-Myers’ best selling drug is Plavix. Sales of the drug totaled $7.1 billion in 2011. Plavix is mainly sold in the United States. Last year, sales in the US totaled $6.6 billion, contributing over 90% of its total sales. However, Plavix’s US patent is going to expire in mid-May this year, which will largely hurt the company’s overall revenues. Bristol-Myers expects Plavix sales to decline by more than 60% in 2012. In addition to Plavix, a few other large selling drugs are also faced with patent expiration, including its patent on Abilify, its second-largest selling drug with total sales of $2.8 billion last year, which is scheduled to expire in 2015. Avapro (total sales $952 million) and Sustiva (total sales $1.5 billion)’s patents are also going to expire within four years.
Bristol-Myers has been actively developing new products. The company’s research and development spending was about $3.8 billion in 2011, over 18% of its sales. The effort seems to have paid off. The company has about 50 drugs in development. We see strong potential in some of its recently-developed products. For example, Yervoy, a treatment for metastatic melanoma, was approved by FDA in March last year. Sales of this drug are expected to exceed $1.6 billion by 2016. Bristol-Myers also developed anticoagulant Eliquis through its partnership with Pfizer Inc (PFE). The drug is currently under FDA review and it is expected to generate more than $3.5 billion of sales by 2016.
Bristol-Myers has been divesting its non-core operations in recent years. In late 2009, the company split off Mead Johnson Nutrition (MJN), which made Bristol-Myers a pure biopharmaceuticals company. The company also split off its beauty care, orthopedic devices and imaging products businesses over the past few years. These divestitures enabled Bristol-Myers to better focus on its core business. The divestitures also created significant cash inflows for the company, allowing it to make investments and acquisitions to build up its core businesses. In 2009, Bristol-Myers acquired Medarex for $2.3 billion in cash. The acquisition has strengthened Bristol-Myers’s position in biologics treatments for cancer and immune disorders. The company also agreed to purchase Inhibitex for $2.5 billion in January this year. We expect the acquisition to improve Bristol-Myers’s strength in hepatitis C treatments.
Like many other drug stocks, Bristol-Myers also pays an attractive dividend yield. Its current dividend yield is 4.13%, more than double the 2% paid by 10-year Treasury bonds. Plus, the company has been increasing its dividend payouts for three consecutive years. Its stable earnings and its low payout ratio of 60% also indicate that the company has the ability to further raise its dividend payments in the future.
Bristol-Myers seems to be trading at a premium compared with its competitors. Analysts expect the company to make $1.96 per share this year and $1.95 per share next year, versus $2.28 per share for the trailing 12-month. Its forward P/E ratio is around 17. The number is on par with the average of 16.59 of its peers, but we think there are better choices than Bristol-Myers. Pfizer, Eli Lilly & Co (LLY), and Merck & Co Inc (MRK) are all trading at much lower multiples than Bristol-Myers. Eli Lilly’s forward P/E ratio is about 12, and both Pfizer and Merck’s forward P/E ratios are below 10.
Hedge funds also prefer Pfizer and Merck to Bristol-Myers and Eli Lilly. At the end of last year, there were 69 hedge funds with Pfizer in their 13F portfolios and 46 hedge funds with Merck, versus 32 for Eli Lilly and 30 for Bristol-Myers. Ken Fisher was the most bullish money manager about Pfizer. His Fisher Asset Management had $471 million invested in this position as of December 31, 2011. Ric Dillon, Lee Ainslie, Bill Miller, and Rob Citrone were also bullish about Pfizer. We agree with the hedge fund managers and think Pfizer is the best drug stock to invest in at this moment (check out our previous article about Pfizer).