Bristol-Myers Eyes Turnaround -- in 2007

Adjusted EPS of 31 cents in the fourth quarter beats estimates.
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Updated from 7:39 a.m. EST

Bristol-Myers Squibb

(BMY) - Get Report

said Wednesday that this year will likely represent the trough in a string of disappointing earnings stretching back to 2002.

The company's guidance for 2006 was no shock, given the assortment of

financial problems and patent expirations in recent years.

For 2006, Bristol-Myers Squibb predicts earnings of $1.15 to $1.25 a share excluding most one-time items but including the expensing of stock options worth 3 cents a share. Wall Street's consensus is an EPS of $1.24, according to Thomson First Call, whose calculations exclude one-time items and stock-options expensing.

Because one-time gains and losses are expected to offset each other, the company said earnings calculated using generally accepted accounting principles for 2006 also should be in the range of $1.15 to $1.25.

For the most recent fourth quarter, the company's adjusted earnings totaled 31 cents, topping the Thomson First Call consensus of 28 cents. For the full year, the $1.43 EPS, excluding items, beat the average estimate by 3 cents.

On a GAAP basis, Bristol-Myers had a fourth-quarter profit was $499 million, or 26 cents a share, compared with $139 million, or 7 cents a share, for the year-ago period. Last year's results included a tax charge of $575 million related to the repatriation of earnings from foreign subsidiaries thanks to a special tax holiday. The company has repatriated around $9 billion at a sharply reduced tax rate thanks to the law.

Fourth-quarter sales fell 3% to $5.02 billion. Analysts were expecting $5.11 billion. Full-year sales dropped to $19.21 billion from $19.38 billion in 2004 and missed the consensus target of $19.32 billion.

Peter R. Dolan, the chief executive, told analysts and investors that 2006 represents a transition year in which Bristol-Myers Squibb will continue to feel the effects of generic competition for major products.

"We're working to reset and lower our cost base to prepare the company for a period of sustainable growth, beginning in 2007," he said.

By early afternoon, the company's stock was up 35 cents, or 1.6%, to $21.68.

Patent Predicament

In a few months, the cholesterol drug Pravachol loses U.S. patent protection, marking it the last of the expected big-name patent expirations in recent years. Pravachol is the company's second-biggest drug, having produced $2.26 billion in sales last year.

However, the biggest drug, the anticoagulant Plavix, is providing anxiety to executives and investors because its patent is in jeopardy. On Tuesday, the Food and Drug Administration

granted approval to Canada's

Apotex

to make a generic copy. The developer of Plavix, France's

Sanofi-Aventis

(SNY) - Get Report

, has sued Apotex for patent infringement. The case goes to trial in April.

Dolan declined to embellish on its marketing partner's comment Tuesday that it believes the Plavix patent is valid through its expiration date in 2011 and that it will fight the Apotex challenge.

Although Apotex could try to sell Plavix now, many analysts doubt the company would try to make what industry experts call an "at-risk" launch. If Apotex markets the drug and then loses the court case, it could be tagged with significant damages.

Still, Apotex is spooking Bristol-Myers Squibb investors because Plavix accounted for $3.82 billion in sales, or about 20% of corporate revenue, last year. If Apotex wins, Bristol-Myers Squibb's stock would be punished and its dividend would be pulverized.

"Apotex may be posturing to extract a settlement from Sanofi-Aventis, but the prospect of an at-risk launch adds an overhang for shares of Bristol-Myers Squibb," says Steve Scala of S.G. Cowen in a Wednesday research report. Like many other analysts, Scala predicts Apotex will be defeated in court.

He doesn't own shares of Bristol-Myers. His firm, which doesn't provide stock ratings, says it does and seeks to do business with companies mentioned in research reports.

ImClone Inquiry

Bristol-Myers Squibb also must decide if it wants to make a bid for

ImClone Systems

(IMCL)

, which said Tuesday it had hired an investment banking firm to explore strategic alternatives that could include a merger, sale or alliance.

At first glance, Bristol-Myers appears to a logical candidate. It's the North America marketing partner for the colorectal cancer drug Erbitux, and it owns just above 17% of ImClone's stock. Plus, the company has spent many years (and dollars) helping ImClone develop Erbitux, and it pays ImClone a 39% royalty on the drug's sales.

However, given its financial condition and the Plavix uncertainty, Bristol-Myers Squibb might not want to pay the sticker price for ImClone, whose Erbitux sales may come under pressure from an experimental compound being developed by

Amgen

(AMGN) - Get Report

and

Abgenix

(ABGX)

. Amgen is buying Abgenix.

Dolan declined to comment on ImClone Wednesday, saying it would be inappropriate to do so. Andrew Bonfield, the Bristol-Myers Squibb CFO, said there would be "no change" in the Erbitux agreement if ImClone were acquired by another company.

Analysts aren't sure who might be a suitable suitor for ImClone.

"While Bristol-Myers Squibb may be first in line as a potential acquirer ... it is more likely to be a passive shareholder than an aggressive acquirer," says Hanzhong Li, of SunTrust Robinson Humphrey.

Li said in a research note that ImClone might attract foreign companies seeking to create or expand their cancer-drug presence in the U.S. One candidate, Li says, could be the German chemical and drug conglomerate

Merck KGaA

which markets Erbitux in Europe. Li, who doesn't own shares, has a buy rating on ImClone.

Although Bristol-Myers Squibb may be "the most logical buyer," there are other potential candidates, says Michael G. King Jr. of Rodman & Renshaw. He cites companies with existing cancer treatments, such as

AstraZeneca

(AZN) - Get Report

and

Novartis

(NVS) - Get Report

.

King, who has a buy rating on ImClone but doesn't own its shares, also speculates that New Jersey's

Merck

(MRK) - Get Report

might be interested in the company.