Future Looks Grim for Bristol-Myers

Updated from 11:57 a.m. EDT

A Canadian company has started shipping a generic version of Bristol-Myers Squibb's ( BMY) biggest product, placing the New York drugmaker's sales, profit and dividend at risk of being substantially lowered.

Apotex, a privately held company, said Tuesday that it began selling copies of the anticoagulant Plavix even though it's being sued for patent infringement by Bristol-Myers, which holds the U.S. marketing rights to the drug, and Sanofi-Aventis ( SNY), its developer.

"We are confident that the patent will be held invalid," said Barry Sherman, chief executive of Apotex. Bristol-Myers and Sanofi-Aventis said they will "vigorously pursue enforcement" of their patent rights.

Shares of Bristol dropped $1.56, or 6.9%, to $21.21. The stock sank as low as $20.85. Volume exceeded 64 million shares, or more than eight times the daily average for the past three months. Sanofi-Aventis was down 41 cents, or 0.9%, to $44.45 on volume that was triple the average.

"At this point, it is too early to determine what effect this action by Apotex could have on the Plavix business," said Peter Dolan, CEO of Bristol-Myers, in a message to employees. "You should know, however, that we have contingency plans in place to mitigate the impact."

Still, Dolan added that he's concerned "about the negative implications the Apotex action will have for patients. Bristol-Myers Squibb and Sanofi-Aventis have a long-term R&D plan for Plavix that cannot be sustained if we no longer have exclusivity for this product."

Plavix accounted for $3.8 billion of Bristol's sales last year, or 20% of the total. France's Sanofi-Aventis collected sales of $2.45 billion from the drug, or 7.4% of its total revenue.

At least two investment banking firms cut their ratings on Bristol to sell, including A.G. Edwards. Analyst Albert Rauch, who had been neutral on the stock, told clients that he expects Bristol-Myers' dividend to be sliced in half.

Rauch predicts Bristol's 2006 earnings will fall to $1.10 a share from his previous estimate of $1.23. Next year could be even worse, and he believes Bristol's profits could sink to 70 cents from his earlier forecast of $1.28.

That said, if the Plavix sellers win a patent infringement suit against Apotex, it "would in essence reverse our thesis and be positive to Bristol-Myers Squibb." Rauch doesn't own shares, but his firm has had a noninvestment banking relationship with Bristol-Myers.

Barbara Ryan of Deutsche Banc Securities also fears a 50%-dividend cut from Bristol-Myers. She wrote in a research note that Bristol's stock might be hit hard enough that the company becomes a takeover target.

She figures Plavix is worth 40 cents a share to her 2006 profit estimate of $1.19 and her next year's projection of $1.33. Ryan, who has a hold rating, doesn't own shares. Her firm does or seeks to do business with companies covered in research reports.

Bristol-Myers said in a quarterly financial report filed with the Securities and Exchange Commission that it expected Apotex to enter the market with a generic form of Plavix.

Apotex received approval from the Food and Drug Administration in January to begin selling generic Plavix. However, Apotex refrained from selling the drug because it wanted to wait for the outcome of a patent infringement suit filed by Sanofi-Aventis and Bristol-Myers.

Then in March, the brand-name companies agreed to suspend the litigation, and Apotex said it would postpone selling generic Plavix in the U.S. until 2011.

Among the details of the deal, Apotex received a royalty-bearing license, exclusive for six months, to sell generic Plavix after the deadline. The brand-name companies promised they wouldn't sell their own reduced-price versions of Plavix during this time, but that provision was deleted when the deal was modified due to objections from the Federal Trade Commission.

Because Bristol-Myers has a consent decree with the FTC for another generic-drug matter dating back to 2003, the Apotex deal had to be cleared by both the FTC and the attorneys-general of all the states.

Late last month, the attorneys-general rejected the deal. Even though the FTC hasn't made a formal ruling, the arrangement was canceled. Additionally, the Justice Department initiated a criminal investigation of Bristol-Myers and Sanofi-Aventis for the Apotex pact.

According to the agreement, if the deal was rejected, Apotex could launch the generic drug five days after giving notice to the brand-name companies. Apotex delivered its notice July 31. Sanofi-Aventis, which holds the Plavix patent in dispute, said on Aug. 2 that it would resume suing Apotex.

Medco Health Systems ( MHS) added to the drama Friday when CEO David Snow said he expected Apotex to begin selling generic Plavix soon.

In theory, the biggest impediment to Apotex while litigation continues is the threat it could eventually lose in court and face triple damages, based on the brand-name companies' lost sales. This is called an "at-risk" launch.

However, information released Tuesday by Bristol-Myers and Sanofi-Aventis reveals that the companies waived their right to seek triple damages. If Apotex made an at-risk launch and lost in court, the brand-name companies originally "agreed their damages would be limited based on varying percentages of Apotex's net sales of generic Plavix but in any event would not exceed 70% of such net sales," says the Bristol-Myers SEC filing.

When the original agreement was later modified, the potential penalty was cut to 40% to 50% of Apotex's net sales, depending on certain conditions. Bristol-Myers and Sanofi-Aventis said they're "evaluating their legal and commercial options, as well as possible remedies under the agreement with Apotex," the SEC document says.

Were they to get a preliminary injunction blocking the sale of generic Plavix, they might be required to post a bond to compensate Apotex for any potential losses it incurs as a result. Bristol-Myers couldn't estimate the size of the bond, but said "the amount could be material." In addition, "there can be no assurance that such a preliminary injunction ruling will be sought or can be obtained."

Apotex isn't the only Plavix-related problem for Bristol-Myers and Sanofi-Aventis. They've filed patent infringements suits against Teva Pharmaceutical Industries ( TEVA), Dr. Reddy's Laboratories ( RDY) and Cobalt Pharmaceuticals covering the same patent in the Apotex case.

Another suit has been filed against generic-drug maker Watson Pharmaceuticals ( WPI) for infringing on a separate Plavix patent.

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