Saturday, May 16, 2009

Bristol-Myers Squibb Review

bms1This week we are reviewing Bristol-Myers Squibb as a possible stock acquisition. To do so we will use the Buffett four filters we discussed in a previous article.

About the Company

Bristol-Myers Squibb Company (BMS) is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical and nutritional products. The Company had two segments: Pharmaceuticals and Nutritionals. The Pharmaceuticals segment is made up of the global pharmaceutical and international consumer medicines business. The Nutritionals segment consists of Mead Johnson Nutritionals (Mead Johnson), primarily an infant formula and children’s nutritionals business. In January 2008, the Company completed the divestiture of Bristol-Myers Squibb Medical Imaging (Medical Imaging) to Avista Capital Partners L.P. In June 2008, BMS acquired Kosan Biosciences, Inc., a developer of oncology products. In August 2008, the Company completed the divestiture of its ConvaTec business to Cidron Healthcare Limited, an affiliate of Nordic Capital Fund VII and Avista. In December 2008, BMS completed the sale of its brand business in Egypt to GlaxoSmithKline.

Filter 1: Recent Insider Buying

Sigal Elliot EVP, CSO & President R&D
Huet Jean-Marc EVP & CFO

Filter 1 Conclusion

Strong insider buying by key roles in the company- very positive signs.

Filter 2: Graham Fundamental

Metric, Actual
P/E, 12.92
Book Value, 17311.00
Price to Book 3.04
Current Ratio, 2.32
EPS Growth Rate, -0.04 over 5 yrs
Revenue, $5,015M
Consistent Dividend, Yes
Dividend Yield, 6.20%
Earnings in all of last 10 yrs, Yes

Filter 2 Conclusion

Strong on main Graham valuations, EPS Growth Rate is weak meaning they have underperformed in their ability to generate growing earnings over the last 5 years. Compared to the sector that is achieving 5.22% they are not performing well.

Price to book is also inflated meaning we are paying a premium for the value of the company. In comparison to its competition in the sector that is 2.11 they are overpriced.


Filter 3: Sustainable Competitive Advantage

Patents are the main area of advantage for a drug company so it is worth looking at some short hand notes about the largest drugs that Bristol carries, and when the patents expire.

Plavix

Plavix is marketed worldwide in nearly 110 countries, with sales of US$5.9 billion in 2005. It had been the 2nd top selling drug in the world for a few years as of 2007 and was still growing by over 20% in 2007.

In 2006, generic clopidogrel was briefly marketed by Apotex, a Canadian generic pharmaceutical company before a court order halted further production until resolution of a patent infringement case brought by Bristol-Myers Squibb. The court ruled that Bristol-Myers Squibb's patent was valid and provided protection until November 2011.

Generic clopidogrel is also produced by several pharmaceutical companies in India at significantly lower retail prices, up to 1/30th of the price.

Counterfeit Plavix is in circulation, as with many popular medicines.
Wikipedia Link

Abilify

The patent on aripiprazole expires on October 20, 2014; however, due to a pediatric extension, a generic will not become available until at least April 20, 2015. Barr Laboratories initiated a patent challenge under the Hatch-Waxman Act in March 2007. This challenge is still in court as of 11 December 2008.
Wikipedia Link

Reyataz

Patent Expiration Sep 30, 2011
source

Sustiva

Patent Expiration Aug 7, 2012
source

Baraclude

Patent Expiration Feb 21, 2015
source

Filter 3 Conclusion

Diverse solid products. As with many drug companies they sell their product at a premium and once patents expire generics are quick to rush in. 2011 a number of these patents expire so there will likely be an infusion of R&D over the next few years to get new products to the market place to replace older ones.

Filter 4: Able and Trustworthy Managers

James M. Cornelius: Chairman of the Board, Chief Executive Officer

“We’ve recast our business portfolio to focus on medicines for serious disease. We’ve addressed our cost structures to be a leaner, stronger, more effective company, and we’ve accelerated innovation through our string of pearls business development execution”
… “we continue to make headway against our goal of improving our gross margins, pre-tax margins, and net income margins, and again in the quarter, we saw improvement in all three.”

source

Lamberto Andreotti : President, Chief Operating Officer, Director

“We are retaining the scope and resources of a traditional pharmaceutical company and adopting the agility of a biotech company,” says Lamberto. “We are creating an environment that puts a premium on innovation and speed. One of the biggest changes is our shift to a business model that embraces partnerships and opportunities that don’t fit within the traditional pharma model. This means we’re less focused on doing everything on our own. Instead, we’re selecting those things that we need to do ourselves, and doing them better and differently. In the process, we’re accelerating the things that make us very competitive in this changed environment.”

source

Jean-Marc Huet : Chief Financial Officer, Executive Vice President

“We had broad-based growth in the first quarter across the entire portfolio driven by Plavix, Abilify, our virology business, as well as our newer products.”
source

Filter 4 Conclusion

It is tough to get a sense of the management at this point. They do appear to understand the investor/management relationship and do seem to understand how to set a strong corporate direction. Are they trustworthy- hard to say at this point.

Final conclusions- what are your thoughts?

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1 comment:

  1. Final conclusions- what are your thoughts?<<<<

    I agree with your analysis. I currently own BMY for basically those reasons, plus the reasonable chance that they will be bought out. What I would add:

    1. BMY is accumulating cash, which makes them more attractive for a potential buyer. BMY let Lilly top their bid for Imclone, with BMY pocketing cash from the Imclone shares it had owned. A signal that BMY didn't really want Imclone at other than a good price. Plus, BMY's IPO of some shares of its Mead Johnson, resulting in some instant cash, plus attractive for a buyer of BMY since the rest of Mead Johnson shares it owns could be easily converted to cash either by BMY or an acquirer.

    2. Plus, the good dividend, so a buyer knows it could eliminate/cut the dividend to raise extra cash.

    3. BMY is generally doing well on the earnings front, showing a buyer could instantly get some good cash flow, plus the cash I mentioned above.

    The cash does give BMY the option of buying some company if the right deal comes along, so I would say that is BMY's fallback position, a good position to be in since they need not panic into some buyout and overpay.

    4. BMY gives all indications that it is open to a buyout, so a potential buyer knows such a deal would be easy to complete, and merge into their operations.

    Plus, with this financial mess we are in, having lots of cash is just wise thinking, in my opinion. I'd say BMY is very well managed at this point. Plus, from what I read BMY does have some potential products in the pipeline, not necessarily great ones, but they do show the ability of having a decent research department which some other company could use.

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