2 for Tuesday: Bristol-Myers Deserves Some Buyers

This market may be suffering a brutal hangover, but investors aren't plundering the medicine cabinet to seek relief. Earnings concerns stemming from big negative issues have turned the drug group into the patient this year. Through the third week of November, the pharmaceutical index declined 13.7%, compared with just a 7.7% drop for the Dow Jones Industrial Average and a 12.9% slide in the S&P 500.

While earnings worries in the pharma sector may continue to affect the growth rates of the big drugmakers over the next year or two, some names are now selling at such attractive valuation levels that I think their risk/reward ratio is too compelling to pass up. Bristol-Myers Squibb(BMY) is one example. The stock has underperformed even the lackluster Dow Jones pharmaceuticals index, declining 22.1% year to date, and now sells at a price-to-earnings ratio that is a 10% discount to the group.

The investment community has focused on a lot of negative information about this stock, including patent expirations for some of the company's blockbuster drugs (BuSpar, Taxol, Glucophage ) and product holdups (Vanlev, a hypertension drug, was delayed by the Food and Drug Administration and now many investors doubt its effectiveness).

It's also true that Bristol's near-term growth rate has slowed from the midteens to less than 12% this year and just 8% or less for 2002. But thanks to moves Bristol is making now, its earnings growth could reaccelerate to the midteens beginning in 2003.

Check Out These Moves

Here's why I like this stock, against all odds:

• Bristol has re-energized its top management, with new Chairman and CEO Peter Dolan and CFO Fred Schiff. These two guys have gained credibility in the investment community by moving aggressively to fill the gap in Bristol's growth rate.

  The Stock Bristol-Myers Squibb (BMY:NYSE)
  Recent Stock Price:	$55.80
  52-Week Range:	$50.25-$74.88
  P/E Ratio:	23.69
  Market Capitalization:	$108.0 billion
  Float:	1.92 billion shares
  Short Interest Ratio:	1.26
  Institutional Ownership:	61%
  Source: Yahoo! Finance

  For example, Bristol has disposed of nondrug assets such as its Zimmer medical products division and Clairol personal-care lines, the latter of which should raise $5 billion. There are more potential asset dispositions to come as well. Bristol is, in turn, using these proceeds to beef up its pharmaceutical business through acquisitions (e.g., the company's purchase of DuPont's pharmaceutical division, a deal that closed in the third quarter of this year).

• Bristol recently forged a strategic agreement with ImClone (IMCL) to co-develop and co-promote IMC-C225 (Erbitux), a new therapy for refractory colorectal cancer that could get FDA approval in the first half of 2002.

• The company has a very strong balance sheet, with a debt-to-capital ratio of just 14%, so it has not nearly exhausted its ability to make more acquisitions to fill out its product pipeline.

• Bristol has one of the best and broadest late-stage product pipelines in the industry and plans to file applications for or get new applications approved for five agents over the next 12 months. These include Vanlev, atazanavir for HIV/AIDS, des-quinolone for infections, Erbitux for cancer and aripiprazole for schizophrenia. Some of these may hit the market as early as next year.

  The Stats
  Year	Revenue	EPS
  1999	$20.222 billion	$2.06
  2000	21.331	2.36
  2001*	19.364	2.41
  2002*	21.160	2.60
  *Thomson Financial/First Call estimates. Source: Company reports

• Some analysts believe that because of the FDA's tough stance on Bristol regarding its patents for Taxol and BuSpar, the company may have more bargaining power when it comes to approval on Vanlev and an extension on its Glucophage patent. This is not to be expected, but would be a positive surprise that could drive the stock higher.

Does Bristol face a tough 2002? No question about it. But the stock's relatively low price-to-earnings ratio of 21 fully reflects that. Instead, I'm focused on 2003 earnings, when several new products have the potential to contribute enough new sales to drive earnings growth of 15% plus. With Bristol's shares selling for $55, that is worth waiting for.

>To order reprints of this article, click here: Reprints