2 BioPharma Stocks to Buy over Bristol Myers

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

Being successful in the pharmaceutical market requires more than just isolated observations of the pipeline. Investors really need to consider the strengths and weaknesses of pipelines in relation to each other. With this in mind, I review several drug manufacturers below.

Bristol Myers (NYSE: BMY): The Good & The Bad

Bristol has fallen 8.8% for the year to date and is, in my view, a mixed bag. First, the good news: Free cash flow generation has been strong at around $4.4 billion, an 8.3% yield and improving. Positive interim Phase IIb data for a Hepatitis C treatment also makes the pipeline a little bit more appealing. The integration of Amylin, which comes with two anti-diabetic drugs, and key sales growth from Yervoy, Baraclude, and Sprycel represent additional catalysts. In the second quarter alone, Yervoy grew 71% y-o-y while Baraclude and Sprycel's growth exceeded 20%. Earnings erosion related to the Plavix exclusivity loss is also being eased by an aggressive shareholder repurchase program that management increased by $3 billion in mid-2012.

But there are several reasons why I am hesitant about recommending the stock. First, performance has been spotty. In the last five quarters, management missed expectations three times by an average of 5.1%. Bristol has also incurred a $1.8 billion loss from dropping its hepatitis C drug following a death and several hospitalizations during a clinical trial. Heart and kidney issues also resulted from a Phase II trial, so management has also discontinued the 094 development program. Marketing expenses have also run higher than expected--most likely a "new normal" that is indicative of the business becoming less sustainable. Weakness in Russia, Brazil, and the mature brand, is also disconcerting.

All in all, Bristol is a fairly expensive stock at a respective 29.5x and 17.3x past and forward earnings. Only 2% annual EPS growth is forecasted over the next five years. While a strong pipeline may change that story, I would not put any stock in a reversal.

Buy Sanofi (NYSE: SNY) & GlaxoSmithKline (NYSE: GSK) Instead

And why would you buy Bristol when the returns are strong in other large drug manufacturers? Major pharmaceutical producers Sanofi and GSK offer much greater upside. Sanofi trades at only 7.6x forward earnings, offers a 3.9% dividend yield, is coming off of double-digit 5-year annual EPS growth, and is rated a "strong buy" on the Street. It has increased nearly 50% in value from the 52-week low. While GSK offers a 5.5% dividend yield and trades at 10.8x forward earnings, it is forecasted for just 1.8% annual EPS growth over the next five years. Thus, I encourage a longer-term investment in Sanofi and a small stake in GSK for defense.

After acquiring Genzyme for north of $20 billion, Sanofi now has a strong product portfolio. Products target rare diseases and high-growth markets like multiple sclerosis (market size: ~$10 billion). The recent FDA approvals for (1) Aubagio in treating relapsing multiple sclerosis and (2) Auvi-QTM in treating life-threatening allergies showcase management's strong execution. Aubagio is a daily oral treatment and competes against injectables, such as Teva's Copaxone and Biogen's Avonex. Aubagio's cheaper price tag of $45,000 annually, however, is another major selling point.

All in all, Sanofi is everything positive Bristol has to offer and more. It comes with a management team that knows how to use cost cutting measures and acquisitions to hedge against patent cliffs. It comes with a top dividend yield and a pipeline that is growing 22% annually in the multiple sclerosis and rare disease categories. Late-stage studies, such as the Phase III trail for a new glargine formulation and Gaucher disease treatment Eliglustat, will help to offset any uncertainty. In fact, the latter recently met its primary endpoint, so the data speaks for itself.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services recommend GlaxoSmithKline. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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