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Expert Financial Analysis and Reporting

New Product Potential is Outstanding But Patent Cliff is Looming (BMY, $29.28)

Investment Position

My position on BMY is that patient investors can buy the stock for the dividend yield and wait for the projected resurgence in growth in 2013. I don’t own the stock yet, but I might be a buyer at some point. A potential catalyst for my decision is the anticipated release of full phase III data on apixiban the European Society of Cardiology Congress on August 28, 2011. So far, we have only heard that the trial achieved its endpoint of non-inferiority to warfarin in efficacy and that it reached superiority in safety and the secondary endpoint of superiority. We have yet to see the data or dissection of the data. If the published data confirms what we have heard, it might be enough to move me to buy the stock.


Second Quarter Overview

In the second quarter of 2011, Bristol-Myers Squibb (BMY) reported that worldwide sales increased 14% to $10.4 billion. This increase was based on a 5% increase in unit volume, 5% increase in price and a favorable impact of 4% from foreign exchange. Healthcare reform in both the US and Europe reduced worldwide sales by about 1%.

The current quarter results are relatively meaningless for investors. BMY is facing a patent cliff as their leading product Plavix comes off patent in May 2012 and a second major product Avapro is also facing an imminent patent expiration. In 2011, I estimate that Plavix will account for $7.1 billion or 34% of worldwide sales and Avapro will account for $1.1 billion or 5.3%. I project that Plavix sales will crash to $570 million in 2013 and Avapro will drop to $300 million. For what it is worth, the company has raised 2011 guidance for GAAP EPS to $2.08 to $2.18 and increased non-GAAP guidance to $2.20 to $2.30.

Yervoy Is Off to a Blazing Start

Yervoy achieved US sales of $95 million in the second quarter which compared to my initial estimate back in March of $25 million. About $25 million came from a warehousing/ bolus effect and $15 million from inventory stocking. New patient sales were about $55 million. Management expects continued warehousing/ bolus effects in the 3Q. My 2011 worldwide sales estimate for Yervoy published in March was $50 million. It is now $292 million based on these very good results. My 2015 sales estimate has been raised only slightly to $1.106 billion from $957 million. My assumption is that the product is ramping more quickly than I expected but the opportunity in 2015 is not that much larger than expected. I could be conservative on this.

Much of the physician created demand came from only 600 physicians who were familiar with the drug from its clinical trials. BMY will be working to widen physician and patient awareness. About 40% of patient usage in the US was in the front line setting and 60% in second line. Yervoy is just being launched in Germany, Switzerland and The Netherlands and other European markets will follow.


The investment thesis for BMY is based on the potential for new products to begin to offset the effects of this patent cliff beyond 2013. I project that corporate sales will drop from $20.7 billion in 2011 to $15.7 billion in 2013. After 2013, I see sales increasing at 6% in 2014 and 3% in 2015 as loss of sales of another major product, Abilify, weighs down results. Beyond 2015, I would anticipate acceleration in the rate of sales growth. My sales projections for major products through 2015 are shown below.

(millions) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Worldwide In-Line Sales
Plavix $6,146 $6,666 $7,085 $3,171 $570 $150 $75
Avapro/Avalide 1,283 1,176 $1,125 569 300 225 100
Abilify 2,592 2,565 $2,620 2,330 2,038 1,775 450
Reyatax 1,401 1,479 $1,554 1,653 1,736 1,815 1,887
Sustiva Franchise 1,405 1,368 $1,462 1,353 1,369 1,304 1,252
Baraclude 734 931 $1,117 1,171 1,272 1,382 1,502
Orencia 602 733 $854 913 1,013 1,125 1,248
Erbitux 683 662 $677 701 716 731 746
Spycel 421 573 $744 860 1,015 1,162 1,334
Ixempra 109 117 $0 169 203 238 281
Onglyza/ Kombigluze 24 158 $401 651 1,128 1,536 1,919
Mature Prodicts and Other 3,536 3,056 $2,887 2,767 2,725 2,685 2,645
Total In-Line Worldwide Sales $18,808 $19,484 20,525 16,308 14,086 14,128 13,439
New Products Worldwide
apixiban $0 $0 $10 $130 $340 $625 $1,255
Yelvoy (ipilumumab) 0 0 292 518 794 1,024 1,106
belatacept (LEA-29Y) 0 0 40 101 181 279 356
brivinib 0 0 0 45 95 176 290
dapagliflozin 0 0 0 80 140 211 279
neciltumumab 0 0 0 0 10 105 210
Recothrom 0 0 65 81 98 112 129
Total New Products Worldwide $0 $0 407 955 1,658 2,532 3,625
Worldwide Sales $18,808 $19,484 $20,932 $17,262 $15,744 $16,660 $17,064

I am looking at 2013 as being the nadir for sales and EPS. A key question that investors have to ask is what we can expect for EPS in 2013. Management is guiding to non-GAAP EPS of at least $1.95 in 2013. Based on this, BMY is selling at 14.7 times 2013 EPS. I believe that BMY can maintain its current annual dividend of $1.32 which results in a dividend yield of 4.61%.

New Product Potential Is Outstanding

Eliquis (apixiban) is approved in Europe to prevent deep vein thrombosis in patients receiving hip and knee replacements. This is a relatively small market. The big opportunity is in stroke prevention in atrial fibrillation and approval in the US and Europe is a year or more away for this key indication. Nulogix was recently approved and launched in the US and Europe to prevent rejection in kidney transplants. Orencia’s sub-cutaneous formulation should receive approval following next week’s PDUFA date. Orencia is currently sold as an intravenous formulation but about two-thirds of its addressable market uses the sub-cutaneous formulation. This could be a sizable opportunity.

I think that there is the potential for new products to do better than I am showing in my projections, but I prefer to remain on the conservative side. I would much rather be in the position of having to raise my projections than to lower them. There is potential for my Yervoy sales estimates to be increased. My projections are based only on use in stage III/IV metastatic melanoma. However, the company is in phase III trials investigating Yervoy in earlier stages of melanoma and hormone resistant prostate cancer. It should begin phase III trials later this year in non-small cell lung cancer and small cell lung cancer. Success in one or more of these trials could result in substantial increases in my estimates beyond 2013.

Eliquis (apixiban) is the second important new product in my projections. I discussed the anti-coagulant market in a recent piece and you may want to refer to that article for background. Analysts are debating the size of this potential market and how sales will be divided among Pradaxa, Xarelto and Eliquis. Pradaxa is already on the market and Xarelto was just approved. Eliquis is about year to a year and one-half from approval in the US. Some analysts think that Eliquis may be the best of the three. In a phase III trial it met its primary endpoint of non-inferiority to warfarin and more importantly in a secondary endpoint showed superiority to warfarin. Apixiban may be the only drug to be able to claim superiority to warfarin. Pradaxa’s label states that it is non-inferior to warfarin. Xarelto hit its primary endpoint of non-inferiority to warfarin. However, it did not show superiority in the secondary endpoint of superiority to warfarin on an intent to treat basis, although it did show superiority in patients who completed the trial. We will have to see how all this shakes out.

I am also not including any sales for earlier stage pipeline products. This could be conservative as PEG- lambda interferon could potentially replace alpha interferon in hepatitis C therapy. I am also interested in the company’s oral NS5A inhibitor for hepatitis C. It could emerge as a part of combination, all oral therapy for hepatitis C. As a long shot, the company just reported good safety data on its gamma secratase inhibitor for Alzheimers. I have also removed all sales estimates for dapagliflozin from my model following the negative advisory recommendation. However, I think that there is a very good chance that it will gain approval in the 2013 time frame. BMY management has stated that it is committed to the product and believes that it will ultimately gain approval. I would not be surprised to see other drugs emerge and there is also the potential for acquiring new products outright.

Disclosure: The author of this article owned shares of Dendreon at the time this note was written. This should be taken into account as it may introduce bias into the conclusions and interpretations that are made. In reading this note, you acknowledge that you have not used it as the sole basis of your decision making and that all investment decisions are based on your own analysis. An investment in Dendreon carries substantial risk and investors could potentially lose much of their investment. The reader acknowledges that he/she has carefully read the Investment Approach, Terms/Conditions and Disclosures sections in the About Us section of the website. The reader acknowledges that he/she will not hold SmithOnStocks accountable for any investment loss that may be incurred if a decision is made to invest in Dendreon.


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