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BMY AT A GLANCE

P/E ► 9.23 LOW EV/EBITDA ► 9.00 AVG ROA ► 14.4% AVG ROE ► 30.2% AVG Debt to Equity ► 1.13 AVG Current Ratio ► 1.81 AVG Interest Coverage Ratio ► 54.9 AVG

 

 

 

 

 

 

This article is about Bristol-Myers Squibb. For the article on the company with ticker BMS, see Bemis Company (BMS).

Bristol-Myers Squibb (NYSE:BMY) is one of the top ten largest pharmaceutical companies by total sales in the world with 2008 revenues of $20.6B. In 2008, sales of pharmaceuticals accounted for 81% of net sales, with the rest coming in roughly equal parts from BMY's Mead Johnson nutritionals and ConvaTec segments.

Bristol-Myers Squibb has recently been plagued by losses of market exclusivity, both expected and unexpected. This has caused a substantial drop in sales in two key drugs, Plavix, a blood thinner, and Pravachol, a cholesterol lowering drug. However, sales of other drugs have remained strong, and no other losses of market exclusivity are expected until 2011.

Meanwhile BMY continues to develop its strong late-stage pipeline of 6 solid-performing drugs, as well as various other products in earlier stages of development. It also continues to increase R&D spending to levels closer to that of similar-sized competitors like Eli Lilly and Merck, even as it seeks to improve the productivity efficiency of its development processes. 2008 R&D spending was $3.59B, an increase of 11.1% from 2007. Both of these developments will be of central importance to BMY remaining competitive in the market well into the future.

Finally, BMY has sought to strengthen its pipeline and increase revenues through acquisitions. The most recent of these is the company's purchase of Medarex (MEDX) in July, 2009. The move is designed to enhance BMY's pipeline, particularly within cancer treatments. ^[1]

Corporate Overview

Bristol-Myers Squibb is a large New York-based pharmaceutical company founded in 1989 with the merger of the Bristol-Myers and Squibb corporations. Since then BMY has developed into a leading developer, licenser and marketer of pharmaceutical and related health care products for the treatment of a wide range of diseases including cancer, cardiovascular disease, hepatitis, HIV/AIDS, and rheumatoid arthritis.

Business Segments

BMY's sales revenue is divided amongst two business segments: Pharmaceuticals and Nutritionals. The Pharmaceuticals segment consists of the global pharmaceutical/biotechnology and international consumer medicines business, which accounted for approximately 86% of the Company’s 2008 net sales. The Nutritionals segment consists of Mead Johnson Nutrition Company (Mead Johnson), primarily an infant formula and children’s nutritionals business, which accounted for approximately 14% of the Company’s 2008 net sales. ^[2]

^[3]

Pharmaceuticals

Bristol-Myers Squibb is primarily a pharmaceuticals company, offering treatments for cardiovascular disease, HIV/AIDS, hepatitis, cancer, and rheumatoid arthritis. Cancer treatments especially represent a major portion of the long-term growth potential of the company, and have historically been a strong suit of Bristol-Myers Squibb.

However, a quick glance at sales figures make it clear that revenues from the pharmaceutical business dropped substantially last year. This was driven largely by the loss of market exclusivity on BMY' key Pravochol medication, as well as a significant loss of market share for BMY' biggest selling drug, Plavix, as a result of generic competition. The resulting drop in sales was in turn tempered by strong sales growth in a number of other key products. Meanwhile BMY continues to introduce new drugs to the market from its hefty development pipeline: last year BMY launched rheumatoid arthritis medication Orencia, as well as Gleevec alternative Sprycel for the treatment of chronic myelogenous leukemia. Both of these new products were internally developed and expected to do well in the coming years, reflecting the strength of BMY' pipeline and strategic foresight in R&D spending.

BMY's biggest earners in the pharmaceutical segment in 2008 were:^[4]

• Plavix: a cardiovascular drug with $5.6B in revenue, up 17.8% from 2007, Plavix is designed to prevent blood clots due to heart disease. The drug's patent expires in 2011.
• Abiligy: a psychiatric drug with $2.2B in revenue, up 29.7% from 2007, Abilify is a treatment for schizophrenia and depression. The drug's patent expires in 2014.
• Avapro/Avalide: a cardiovascular drug with $1.3B in revenue, up 7.4% from 2007, Avapro/Avalide is a treatment for high blood pressure and kidney problems. The drug's patent expires in 2012.
• Reyataz: a viral drug with $1.3B in revenue, up 14.9% from 2007, Reyataz is a drug that battles HIV. The drug's patent expires in 2017.
• Sustiva: a viral drug with $1.1B in revenue, up 20.2% from 2007, Sustiva is also an HIV treatment. The drug's patent expires in 2013.

Nutritionals

The nutritionals segment consists entirely of children's formulas, mainly for infants but also for children and toddlers. There is not as much new development in this segment, but it is a steady revenue generator. ^[5]

• Infant formula: $1.9B in 2008 revenue, up 8.2% from 2007. The best known product in this line is Enfamil.
• Children's/Toddler formula: $856 million in 2008 revenue, up 23.5% from 2007.

Business Growth

Bristol-Myers Squibb reported that Q2 earnings rose 29% to $983 million from $764 million a year earlier. The main source of higher earnings was cost cuts, as revenues rose only 3% to $5.38 billion from Q2 2008 (8% when controlling for adverse foreign exchange rates). Notable increases in drug sales include Abilify (up 22%) and Sustiva (up 11%). ^[6]

In July 2009, the company announced its intent to buy partner company Medarex (MEDX) for $2.1B. The initial tender offer was completed in August, giving the company a controlling interest of 88% ownership in Medarex. The acquisition gave BMY control of ipilimumab, a Phase III immunotherapy designed to treat metastatic cancer. ^[7][8]

In September of 2008, Bristol made a bid to take over the rest of ImClone in a deal worth $4.7 billion at $62 per share, but was rejected by ImClone's chairman and billionaire financer Carl Icahn. ImClone said it received a $70 per share offer from an unnamed suiter. Bristol-Myers already owns 17 percent of ImClone.^[9]

In Q3 of 2009, BMY reported net sales of $5.49 billion, a growth of 4% over the same quarter of the previous year. Revenues were largely driven by growth in sales from BMY's blockbuster products, Plavix and Abilify (8% and 16% growth, respectively).^[10] BMY reported a net income of $966 million, a growth of 64% over the previous year, representing $0.52 per share, beating analyst estimates of $0.51 per share. Much of the profit increase resulted from cost cutting, driving sales and marketing costs down by 8% and G&A costs down from 29% of sales to 26%.^[11]

Restructuring

The company announced plans in December 2008 to cut an additional 10% of its workforce, on top of an already announced 10% reduction the year before which includes the closing of half of its manufacturing plants. The cuts will save the company approximately $2.5 billion each year. This downsizing is consistent with the cost-cutting measures of many other big pharmaceuticals recently, such as Pfizer and Merck, which also slashed their workforce by more than 10%. ^[12]

Drug Market Exclusivity and Generic Competition

In the pharmaceuticals business, the majority of the revenues that a company will derive from an innovative new product comes during the period when the product has exclusivity over the market, usually as a result of patent protection. If the product is successful (like Plavix) it can earn billions of dollars in revenue each year during this period. However, once the patent runs out or some other factor allows the introduction of generic competition, market share of that product is drastically reduced as generic competition undercuts the branded product.

Nowhere is this better illustrated than what happened in 2006 with two of BMY's biggest-selling drugs, Pravochol and Plavix. Pravachol's patent ran out in April 2006 and the results were immediately apparent: after only two quarters, total sales of Pravochol were barely half their levels in 2005.

Meanwhile the company is just recovering from a debacle that saw Canadian competitor Apotex introduce a generic competitor to its hugely successful Plavix brand, wresting away majority market share within months despite the fact that BMY's patent on that drug does not expire until 2011. The result was a 9% drop in pharmaceutical revenues from 2005, even though all of the company's other key growth drugs experienced double-digit sales growth in the same period.

That said, BMY and partner Sanofi-Aventis succeeded in obtaining a temporary injunction on further sale of the generic product from a US federal court pending a final ruling on the situation in the second half of 2007. Annual sales increased to $4.7 billion, compared to $3.2 billion in 2006.

With the resolution of the Plavix situation, BMY has some breathing room with regards to market exclusivity: the loss of exclusivity on Pravochol is hopefully the last in a string of patent expirations that BMY has had to deal with in the past few years. Barring an unexpected ruling on Plavix, or similar problems arising with its other products, the company does not face any significant exclusivity losses until at least 2011.

Research and Development

Research and development is of the utmost importance for pharmaceutical companies like Bristol-Myers Squibb. As explained in the above section on market exclusivity, the vast majority of a new drug's commercial potential is met during the stage in which a single company has exclusive rights to it, i.e. when the company holds a patent. As such, BMY's revenues are fundamentally tied to the ability of its internal research and development teams to produce the big revenue-earners that BMY can claim exclusivity for: drugs like Plavix, Pravochol, or Reyataz.

BMY, like other pharmaceutical companies, continues to invest heavily in R&D for new treatments and products, spending $3.6 billion on R&D in 2008, up 11% from 2007. The company now has a strong and varied late-stage pipeline consisting of six drugs in phase III of development which are expected to launch at around the 2010 mark. These include:

• 3 treatments for cancer: ixabepilone, vinflunine and ipilimumab. Oncology is an area of historical strength for BMY and a key source of its long-term growth potential.
• The biologic belatacept, for solid-organ transplant rejection, is in clinical trials.
• Saxagliptin for the treatment of type II diabetes.

Despite the strength of its pipeline, many of its new product introductions are entering markets in which they have to compete with other products that have already been introduced, which carries certain disadvantages. The company is, however, pursuing a strategy of investing in the development of products which address areas of unmet medical need.

Other important areas of development include the nascent field of protein-based treatments (biologics), of which Orencia is amongst the first: BMY recently committed nearly a billion dollars to enhance its production capabilities in the area of biologics.

In any case, pricing pressures on pharmaceuticals (see below section) as well as escalating costs for advanced research make the development of any and all kinds of drugs less lucrative, and riskier, than before. Strategic management of the pipeline is thus key.

Pricing Pressures

For all pharmaceutical companies, government-imposed regulations on prices have substantial impact on sales. Government regulations are especially relevant in the realm of government health programs like Medicare and Medicaid in the U.S. For example, Medicaid has recently imposed access and reimbursement restrictions in some states due to budget constraints, applying a downward pressure on prices. Internationally, greater government involvement in the provision of healthcare means that the government has even greater power to exert downward pressure on pricing (e.g. profit control plans in the UK). Other sources of downward pressure on prices include the prevalence and consolidation of Managed Care Organizations, and the importing of drugs from cheaper international sources (Canada, for example).

Comparison to Competitors

The business of pharmaceuticals is highly dynamic and extremely competitive. Close competitors for Bristol-Myers Squibb include Merck (NYSE:MRK), Pfizer(NYSE:PFE), Eli Lilly & Company (NYSE:LLY), AstraZeneca (NYSE:AZN), Sanofi-Aventis (NYSE: SNY) and GlaxoSmithKline (NYSE:GSK). It is important to note that BMY is substantially smaller than all of these competitors in both sales and market capitalization.

As such, the key to success for BMY is a strong, well-funded R&D program that has been strategically positioned to maximize efficiency, and produce the drugs that are most likely to generate huge success for the company. In this sense, BMY compares quite favourably to its competitors for a few reasons:

• BMY's R&D spending in 2008 amounts to 17.4% of its total sales, a number which stacks up favorably against the industry average of 16.8%.
• BMY has a hefty development pipeline for its size, with 6 products in late-stage development, all of which look to be strong performers when they are eventually launched. It also has another 15 or so products in various middle-stages of development, ensuring continued growth in the long run.
• BMY has positioned itself strategically to perform more research in important areas of future discovery (the area of biologics, for example).

There is a caveat to these facts however:

• Though BMY has an admittedly strong mid-to-late development pipeline, its earlier pipeline is somewhat lacking. This is a disconcerting fact considering the flurry of new drugs currently in pre-clinical development or early trials at competitors GlaxoSmithKline, AstraZeneca, Sanofi-Aventis, and Pfizer.

Overall, Bristol-Myers Squibb's smaller size could play to its advantage, in that it is under far less pressure than its larger competitors to replace the huge blockbuster drugs that have fueled their growth (Pfizer and its immensely successful Lipitor, for example). Its smaller size may also allow it to be more efficient, as is demonstrated by the fact that BMY has one of the highest proportions of sales/employee in the industry.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[13]

References

1. ↑ The Wall Street Journal. "Bristol-Myers Squibb To Acquire Medarex For $2.1B." 22 July 2009
2. ↑ BMY 2008 10-K
3. ↑ BMY 2008 10-K
4. ↑ BMY 2008 10-K Pg. 4
5. ↑ BMY 2008 10-K Pg. 15
6. ↑ The Wall Street Journal. "Bristol-Myers, Wyeth Post Higher 2Q Profits." 23 July 2009
7. ↑ The Wall Street Journal. "Bristol-Myers Squibb To Acquire Medarex For $2.1B." 22 July 2009
8. ↑ [1]
9. ↑ Bristol-Myers raises stakes in bid for ImClone.
10. ↑ Bristol-Myers Squibb Achieves Strong Sales, Earnings Performance in Third Quarter
11. ↑ Bristol profit tops views, helped by cost cuts
12. ↑ Reuters. "Bristol-Myers to cut another 10 pct of workforce." 17 Dec 2008.
13. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction