Why Bristol-Myers Squibb Could Break Out This Year
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been a busy few weeks for Bristol-Myers Squibb (NYSE: BMY), and a period that could set the tone for shareholders looking forward over the long term. The New Year had hardly got under way when the company announced that it was to purchase Inhibitex for cash, at a price of $26 per share, valuing Inhibitex at $2.5 billion and paying a premium of 163% over Inhibitex’s closing price prior to the announcement. Inhibitex has several drugs in clinical trials, but Bristol Myers sees the prize as its INX189 anti hepatitis C treatment. In phase 2 trials now, should INX189 move to a fully accepted status by the FDA|, then it could mean that Bristol Myers will be one of the first companies to offer a completely oral treatment cocktail for sufferers of the liver infection.
On January 18, it announced through the New England Medical Journal that phase 2 trials in patients with hepatitis C virus genotype 1 who had not responded to previous therapy had shown a potential for patients to be cured without the use of interferon.
On January 19, the FDA requested that further clinical testing of Dapagliflozin be conducted. This drug is a joint venture between Bristol Myers and Aztra Zeneca (NYSE: AZN), and it is hoped that the detailed letter from the FDA is a stepping stone to full approval of the type 2 diabetes treatment.
On January 26, Bristol Myers announced its fourth quarter results , and gave continued guidance of earnings per share of between $1.90 and $2.00 for the full year 2012 – average analysts forecasts center around $1.98 per share.
These results showed gross margins widening to 74%. For the year, Bristol Myers’ operating margin, of 32.75% and profit margin of 17.45% compare well when measured against Merck’s (NYSE: MRK) 20.77% and 13.05%, respectively. Return on equity is better at Bristol Myers, too, at 32.8% versus 11.18%.
Whilst Bristol Myers will be using some of its cash to purchase Inhibitex, it should still have cash available of over $5 billion post the acquisition.
Shares trade on a trailing price to earnings ratio of 14.84, and a forward multiple of 16.49 This trailing price to earnings ratio is in line with the sector average, though below Merck’s 18.87.
A dividend yield of 4.2% is attractive, and is covered around 1.5 times by earnings.
My analysis of the company's shares reveals a recovery from their 52-week low of $24.97, though they are trading around 10% below their 52-week high of $35.44 set at the end of the last calendar year. Shares have drifted down with the news of Bristol Myers’ Inhibitex purchase and then the results which disappointed at the bottom line.
The mean 12-month price target for the shares is $33.61. With the news of the Inhibitex purchase and good margins on Bristol Myers’ results, I think this may be a little low.
Though the premium paid for Inhibitex seems high, with an estimated market of over 170 million hepatitis sufferers worldwide and, with 90% of these likely to become chronically infected, the discovery of a cure is a potentially huge market. In pharmaceutical terms, this roll of the dice could add up to some great future numbers.
Overall, I think that the shares, at $32, are counting the cost of the acquisition, rather than counting the potential it gives Bristol Myers, a company that already produces fantastic market leading margins. I rate this stock a buy right now.
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