Why Bristol-Myers is a Screaming Buy

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is not often that an investment opportunity presents itself such that one wonders if the rest of the investing world has simply fallen asleep, but Bristol-Myers Squibb (NYSE: BMY) seems to be just such a case. The stock was seriously punished for pulling its hepatitis C drug from phase II trials, but a few months ago, the market yawned as the company announced positive results that will likely serve as a gateway to phase III trials of a promising new cancer treatment. The juxtaposition of these two events leads one to wonder if pharmaceutical investors are just cynical, or if there is real value here. A careful investigation of each of these events, and the corresponding stock action, should lead to the inexorable conclusion that Bristol-Myers is a screaming buy at current levels.

The Hep C Meltdown

On Aug. 1, Bristol-Myers announced that it was suspending its trial of a hepatitis study that involved a combined protocol of the company’s NS5a inhibitor with its recently acquired nucleotide polymerase, dubbed BMS-986094. During the study, one patient developed a congenital heart failure and died in such a way as to suggest that the treatment protocol was likely a contributing factor. While the latter drug is not known to be the culprit, the suspension of the trial is likely to cause a catastrophic delay in an area that is being hotly contested and includes a much coveted finish line. Acquisition of the drug was a primary driver of Bristol-Myers purchase of Inhibitex for $2.9 billion, so investors were rightly upset. The stock dropped over eight percent on the news and has traded lower since.

Fortunately, or unfortunately depending on one’s perspective, it now appears that the entire class of drugs may have problems. Late last week, the FDA placed a partial clinical hold on the phase IIb trial being conducted on a NS5 class inhibitor by Idenix Pharmaceuticals (NASDAQ: IDIX). The reason cited was the recent toxicity issue experienced in the Bristol-Myers trial, leading to the conclusion that it may be the entire class of drug that is under safety investigation. Idenix shares dropped by forty percent on the news.

A Cure for Cancer?

Two months ago, Bristol-Myers announced the results of an early-stage research study to the American Society of Clinical Oncology (ASCO). The company’s new drug, which seeks to harness the power of the patient’s immune system, has shown success in shrinking tumors, specifically in three types of cancers: melanoma, kidney and non-small cell lung cancers. While the research is still in early stages, full FDA approval is expected to result in annual revenue of as much as $5 billion. Furthermore, the announcement places Bristol-Myers well ahead of competitors like Merck & Co. (NYSE: MRK), GlaxoSmithKline (NYSE: GSK) and Teva Pharmaceuticals (NYSE: TEVA). While each of these competitors is scrambling to develop similar drugs, entering Phase III trials first solidifies a significant lead for Bristol-Myers.

Despite the fact that the news for Bristol-Myers came on one of the worst days for the stock market all year, there was practically no reaction to the auspicious announcement. This might lead one to assume that there is more to the story, if one chooses to believe that the market always accurately digests this type of news. Another option is that investors concluded that the time it would take to monetize the advance was too long to justify buying the stock. An alternate scenario is that the market simply drew the wrong conclusion. Many wealthy institutional investors will admit that such mistakes are often the best sources of alpha available if and when they can be identified.

The Inequality of it All

To review in the simplest of terms, the market made no move when Bristol-Myers announced that it was ahead in the race to cure cancer, having achieved positive results that would likely lead to phase III trials on the treatment. Two months later, on news that a drug that was even further from being brought to market was being suspended in phase II trial, the stock got hammered for eight percent. There is simply no reasonable way to solve this paradox other than to accept that the market got one of the two calls wrong. Regardless of which reaction was flawed, the stock remains depressed relative to its peers and ripe to be purchased at a very favorable level. While there is no doubt that monetizing any of this news is in the unknown future, Bristol-Myers is a solid, high-dividend stock that belongs in any investor’s core portfolio.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services recommend GlaxoSmithKline and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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