Aversion to Bristol-Myers Ebbs

The drugmaker certainly doesn't have overwhelming support on Wall Street, but a Plavix deal helps.
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As

Bristol-Myers Squibb

(BMY) - Get Report

approaches Thursday's release of its first-quarter financial report, Wall Street is approaching the company with a different perspective.

The drugmaker still doesn't merit the enthusiasm of Sally Field's "you like me" Oscar award speech, but there's nothing like a fistful of analyst upgrades to make employees and investors feel a little bit better.

The upgrades came in late March after Bristol-Myers and its partner

Sanofi-Aventis

(SNY) - Get Report

signed

a tentative agreement to halt the legal hostilities over the U.S. patent for the anticoagulant Plavix. The drug is Bristol-Myers' best seller.

However, the truce, with Canadian generic-drug company

Apotex

, is a fragile one because the deal still must be approved by the Federal Trade Commission and a federal court judge. The Plavix-makers have already contacted another patent-challenger about a settlement, and they plan to talk to two other generic-drug companies about a deal.

The settlement news sent Bristol-Myers Squibb's stock up 10.5% to $24.95 on March 22, and the stock climbed above $25 for a few days. On Tuesday, it closed at $24.69.

Less Dislike

Still, the multiple upgrades from analysts simply transformed Bristol-Myers from the most hated U.S. Big Pharma stock to the least liked. Before the upgrades, seven analysts had sell recommendations, one had a buy rating and 16 were neutral. Now, there are four buy ratings, four sell recommendations and 18 analysts are sitting on the fence, according to data from Thomson First Call.

Bristol-Myers Squibb has as many sell ratings as

Merck

(MRK) - Get Report

and

Schering-Plough

(SGP)

, but it has far fewer buy ratings ratings than either peer.

On average, analysts surveyed by Thomson Financial expect that Bristol-Myers made 32 cents a share on sales of $4.61 billion for the March quarter.

The Plavix settlement also energized takeover speculation.

"It's cheaper and more expedient for an acquirer to purchase Bristol-Myers Squibb for its mid- to early-phase pipeline than it is for that purchase to recreate a pipeline of comparable value," says Richard Evans of Sanford Bernstein in an April 17 report to clients.

Evans, who has a market-perform rating on the company, counsels potential buyers to wait until the FTC acts. If the FTC challenges the deal, the patent lawsuit may resume, making Bristol-Myers' earnings, sales and dividend uncertain while scrambling any acquisition strategy. Evans predicts the FTC will act by mid-year.

"We have long believed that Bristol-Myers Squibb's

R&D pipeline is undervalued relative to its peers," enhancing its attractiveness as a takeover candidate, he says. Evans doesn't own shares. His firm has a non-investment banking relationship with the company.

Evans didn't speculate on suitors, but George Grofik, of Citigroup, figures they would be limited to big European drugmakers such as

Novartis

(NVS) - Get Report

or

GlaxoSmithKline

(GSK) - Get Report

. Grofik says Bristol-Myers doesn't have much therapeutic overlap with either company.

"A

Plavix settlement could potentially eliminate the primary risk to the Bristol-Myers Squibb story," says Grofik in a research report issued in late March.

If the company lost the patent challenge, the dividend would be cut and the stock would get kicked into the $18 to $20 range, he says. But if the FTC gives its blessing, Bristol-Myers becomes "the most likely acquisition candidate" among U.S. Big Pharma companies.

Grofik raised his 12-month price target to $26 from $21, and he lifted his rating to hold from sell. He doesn't own shares, but his firm has had a recent banking relationship with the company.

Looking Elsewhere

If investors don't have to focus on Plavix patent fights, analysts say they can concentrate on potential products and a resumption of sales growth in 2007 following the hit to revenue from the cholesterol drug Pravachol losing U.S. patent protection. The patent expired last week.

Analysts are counting on strong showings from Orencia, an arthritis treatment approved by the Food and Drug Administration in December, and Dasatinib, which is under FDA review, to augment the performances of Plavix, the schizophrenia drug Abilify and the HIV/AIDS drug Reyataz. The FDA may rule in late June on Dasatinib as a treatment for two types of blood cancer in patients for whom other drugs don't work or cause too many side effects.

Chris Shibutani of JP Morgan raised his rating to overweight from underweight last month, telling clients he expects a stronger first quarter than he had originally predicted due to sales of Plavix, Pravachol, the blood-pressure drug Avapro and Erbitux, a treatment for cancers of the colon, head and neck.

Bristol-Myers collaborates on Erbitux with the drug's developer,

ImClone Systems

(IMCL)

. Last year, Erbitux contributed $413 million in sales for Bristol-Myers. Avapro and a related drug, Avalide, are sold in collaboration with Sanofi-Aventis, and they provided $982 million for Bristol-Myers in 2005.

Plavix accounted for $3.8 billion, or 20% of the company's total sales last year, and Shibutani expects a compounded annual growth rate of 11.5% through 2010. That figure assumes no generic-drug competition and no meaningful competition from anticoagulants being developed by other companies. His forecast also assumes the FDA will approve expanded uses of Plavix.

He doesn't own shares, but his firm has an investment-banking relationship.

Shibutani also counts on Orencia and Dasatinib to begin growing at a healthy pace by the time the company seeks regulatory approval for several other drugs, including a treatment for the skin cancer melanoma and a product for organ-transplant rejection, in about two years.