Bristol-Myers Squibb (BMY) is the maker of the blood thinner Plavix, the world's second highest revenue-producing drug behind Lipitor, from Pfizer (PFE). Plavix, used primarily to treat patients with heart disease, tallied worldwide sales of $5.9 billion in 2005. Given the significance of Plavix to Bristol-Myers Squibb's portfolio, the events that led to the departure of its former CEO in early September of this year were quite unexpected and difficult to discern at best.
Bristol-Myers Squibb and their international distributor Sanofi-Aventis (SNY) attempted to strike a deal to protect sales of Plavix against sales of a generic version of the drug from Canadian-based drug maker Apotex. The deal set forth that Bristol-Myers Squibb would pay Apotex to not begin sales of their FDA-approved generic version of Plavix.
The real wonder is why the deal had concessions in place to limit the amount of damages that Bristol-Myers Squibb could seek to a percentage of the generic sales should Apotex violate the agreement.
Another hazy part of the agreement stipulated that Bristol-Myers Squibb could not take legal action against Apotex for 5 days once sales of the generic had begun.
In early August Apotex went ahead and launched sales of its generic without seeking court approval or a finalized agreement with Bristol-Myers Squibb. I'm not sure how a CEO could agree to such a deal, and neither could Bristol Myers Squibb's board of directors.
By the time Bristol-Myers Squibb did seek an injunction, Apotex had sold enough of its generic to keep buyers stocked for 6 months. The loss of sales from Plavix showed up in Bristol-Myers Squibb's 3rd quarter earnings ended September 30, 2006. While Bristol-Myers Squibb's top line revenues of $4.2 billion were only down fractionally from the same period a year ago, net earnings took a significant thumping. Net earnings lost nearly two thirds of its value from a year ago, down to $338 million from $964 million.
Bristol-Myers Squibb also attributed part of the earnings pullback to the loss of patent protection on its cholesterol drug Pravachol earlier in the year. For the first nine months of the year, Bristol-Myers Squibb's net earnings came in at $1.7 billion, down 47% from the same period a year ago.
While Bristol-Myers Squibb does pay an attractive 4.6% annual dividend yield, it has a relatively high 5 year expected PEG (price to earnings growth) ratio of 3.36. Companies with strong forecasts for earnings growth will typically have PEG forecasts closer to 1. Companies with lower PEG ratios include Novartis (NVS), driven by the strength of its heart and cancer drug sales, Johnson & Johnson (JNJ) based on strong sales of schizophrenia drug Risperdal and Eli Lilly (LLY) based on its own schizophrenia drug Zyprexa.
On a good note, Bristol-Myers Squibb's forward P/E ratio of 20.51 is below its trailing P/E ratio of 21.79, suggesting that earnings are expected to increase into 2007. However, management did note that the impacts of the loss of Plavix sales will continue into 2007. Bristol-Myers Squibb's three fastest-growing drugs -- Erbitux for cancer, Reyataz for HIV and Ablify for schizophrenia -- combined to make up approximately 1/3 of its major drug sales.
The overall theme is that big pharma is desperate to hold ground against generic drug makers. Federal Trade Commission reports are stating that pay-for-delay type deals, also known as reverse settlement agreements, such as the one attempted by Bristol-Myers Squibb are on the rise. News of companies signing deals to protect their sales of an existing drug on the market is a protective measure that cannot be avoided.
However, the ace in the hole for the drug industry is the growing demand for drugs by the aging population of the U.S. and countries abroad. Global sales of prescription drugs exceeded $600 billion in 2005, after registering $500 billion in sales for 2003. The five fastest-growing drug sales in the U.S. last year by ailment and company, according to IMS Health, included a cholesterol drug from Merck (MRK), a depression drug from Eli Lilly, a collateral cancer drug from Genentech (DNA), an arthritis pain drug from Boerhinger Ingelheim and a bacterial infection drug from Abbott Labs (ABT).
In just two years time, Bristol-Myers Squibb's Plavix went from the #8 best selling drug in the world to #2. Only Pfizer's mega drug Lipitor, with worldwide sales of $12.9 billion, was superior. Bristol-Myers Squibb clearly knows drug sales and they also know a thing or two about marketing, as evidenced by television ads of Lance Armstrong touting the progress of its cancer drugs. Bristol-Myers Squibb closed on November 13th at $24.41, up just 5% for the year. While all of the statistical fundamentals are not in Bristol-Myers Squibb's favor, it definitely remains a stock to watch, given the favorable demographics of the market is serves.