Shares of Bristol-Myers Squibb (NYSE: BMY) have slipped about 30% since the company announced a surprising setback for its lead growth driver, Opdivo, last August. More recent missteps in skin and brain cancer trials have analysts scrambling to adjust their peak sales targets for the blockbuster cancer drug, while the big pharma's stock price languishes.
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Opdivo's misfortune should raise concerns, but the market's reaction seems out of proportion to the potential financial impact. In terms of market capitalization, Bristol-Myers Squibb is worth about $39 billion less at recent prices than it was at the beginning of last August.
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The depressed stock has piqued the interest of legendary activist investor Carl Icahn. Rather than just follow him blindly, let's take a closer look at the source of pessimism to see if the big pharma stock is a buy on the dip.
Fall from grace
Since earning the drug's first approval at the end of 2014, Bristol has deftly expanded Opdivo's addressable population to include patients with head and neck, skin, lung, kidney, and bladder cancers, plus Hodgkin lymphoma. In its second full year post-approval, the drug generated a stunning $3.77 billion in sales, and hasn't slowed down yet. Fourth-quarter sales suggest a $5.24 billion annual run rate.
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Lung cancer isn't the most common malignancy, but it is the deadliest. It's also ripe for better therapies, which explains why the market hammered Bristol's stock in response to Opdivo's failure to outperform age-old chemotherapy among newly diagnosed, untreated patients with the most common form of lung cancer. Merck & Co. rubbed salt into Bristol's wounds by announcing an FDA approval for its drug of the same class in the first-line lung cancer setting.
Merck's Keytruda isn't the only drug of the same class that Opdivo will need to contend with in the future. More recently launched Tecentriq, from Roche, and Bavencio, from Pfizer(NYSE: PFE), also prevent tumor cells from exploiting the same checkpoint to evade immune system attacks.
Pfizer's Bavencio recently entered the commercial stage as the only drug approved for Merkel cell skin cancer, and Tecentriq has launched into two of Opdivo's indications. Bristol's checkpoint inhibitor now competes with Roche's for lung and bladder cancer patients with disease progression on or after standard chemotherapy.
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Now the good news
Opdivo isn't the only drug driving growth for Bristol-Myers Squibb. Eliquis is an oral blood thinner that's rapidly gaining popularity. Bristol markets it in partnership with Pfizer, and its share of sales last year bounded 80% higher than the previous year to $3.34 billion.
Although emerging competition probably won't allow Opdivo sales to continue along their current trajectory, they're not about to slide either. In fact, the average Wall Street analyst following Bristol-Myers expects its bottom line to expand at an 11.8% annual rate over the next five years.
You would expect shares of a company growing this quickly to command an above-average price-to-earnings ratio, but that just isn't the case. At recent prices Bristol-Myers shares can be purchased for just 20.2 times trailing earnings, while the average stock in the benchmark S&P 500 currently trades at around 24.5 times trailing earnings.
Cautious investors who are after a steady dividend income will appreciate a juicy 2.9% yield at recent prices. Last year the company used only 57% of profits to make those payments, which should allow the payout to rise in step with bottom-line growth. With long-term double-digit growth on the horizon, and a big yield to begin with, this may be one of the best dividend-paying pharmaceutical stocks you can buy right now.
Icahn see a merger on the horizon
While you shouldn't follow billionaires blindly, the recent addition of Carl Icahn to the company's list of activist shareholders bodes well for the stock's price going forward. The octogenarian has a long history of making big bets on drugmakers, then pestering management to increase shareholder value.
Icahn won't be alone in this endeavor. Jana Partners LLC already set some important wheels in motion. Following discussions with the activist investor group this February, Bristol-Myers added three independent directors to its board and initiated a $2 billion accelerated share-buyback program.
If Icahn stays true to form, though, he won't be satisfied with buybacks and dividends. Years ago he was instrumental in the sale of Imclone Systems to Eli Lilly, and Sanofi's acquisition of Genzyme. Genzyme and Imclone shareholders benefited from the premiums paid by their current owners, and with a bit of luck Bristol could be next.
At a recent market cap of about $88.1 million, there aren't many potential suitors to choose from. Even if Icahn doesn't succeed in steering the company toward a sale, increased focus on shareholder benefits is a big plus. Factor improved corporate governance in with a nice dividend and expectations of double-digit growth in the years ahead, and it sure looks like Bristol-Myers Squibb stock is a buy at recent prices.
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