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Bristol-Myers Squibb Company’s (BMY - Analyst Report) second quarter 2012 earnings (excluding special items) of 48 cents per share fell short of the Zacks Consensus Estimate of 49 cents by a penny. Second quarter earnings declined 14% from the year-ago period.

Earnings were hurt primarily by the reduced sales of Bristol-Myers/Sanofi’s (SNY - Analyst Report) blockbuster blood-thinner Plavix, which went off-patent in the US on May 17, 2012.

Net sales in the reported quarter declined 18% to $4.44 billion. Revenues were just shy of the Zacks Consensus Estimate of $4.45 billion, mainly due to lower sales of Plavix and Avapro/Avalide. US net sales in the quarter declined 27% to $2.6 billion. Sales in international markets decreased 1% to $1.9 billion.

Quarter in Detail

Global net sales of Plavix, an anti-platelet blood thinner indicated to reduce the risk of heart attack in patients with atherosclerosis (the build-up of plaque and hardening of the arteries), plummeted 60% to $741 million in the quarter. US sales of the drug were down 60% to $701 million. The genericization of the drug in the US was responsible for the massive decline.

Sales of Baraclude, one of the top prescribed therapies for hepatitis B virus, came in at $357 million, up 22%. Worldwide sales of HIV treatment Sustiva climbed 5% to $388 million in the reported quarter.

Global sales of another HIV therapy, Reyataz, climbed 3% to $406 million. Sales of rheumatoid arthritis (RA) drug, Orencia, stood at $290 million, up 27%, while leukemia drug, Sprycel, registered sales of $244 million, up 26%.

Furthermore, Onglyza/Kombiglyze, a type II diabetes treatment, contributed approximately $172 million to sales in the quarter, up 54% from the year-ago period.

Global sales of Abilify, approved for the treatment of schizophrenia and depression, climbed 1% to $711 million. Sales of cancer drug Erbitux increased 3% to $179 million in the second quarter of 2012.

Skin cancer drug Yervoy, approved in the US and EU in 2011, contributed $162 million to total revenues during the reported quarter, up 5.2% sequentially and 71% year over year.

Hypertension treatment Avapro/Avalide recorded a 53% decline in sales which came in at $117 million in the reported quarter. The drug lost patent protection in the US in March this year. 

Adjusted gross margin as a percentage of net sales stood at 75.3% in the reported quarter as against 73.1% in the comparable quarter of 2011. Adjusted marketing, selling and administrative expenses in the reported quarter declined 3% to $999 million. Adjusted research and development expenses for the quarter increased approximately 5.1% to $917 million as Bristol-Myers continues to invest in its pipeline.

2012 Outlook Backed

Apart from announcing financial results, Bristol-Myers maintained its earlier guidance for 2012. The pharma major continues to expect adjusted 2012 earnings in the range of $1.90 - $2.00 per share. The Zacks Consensus Estimate for 2012 is $1.94 per share, well within the guidance provided by the company.

Our Take

Even though the genericization of Plavix and Avapro has resulted in significant loss of revenues for Bristol-Myers, we believe that the company’s diversified business model coupled with its strong financial position will help in tough situations.

Bristol-Myers is looking to combat the generic threat through partnering deals and acquisitions. Towards fulfilling this objective and bolstering its position in the lucrative diabetes market, Bristol-Myers announced in June 2012 that it will acquire Amylin Pharmaceuticals, Inc. , for $31.00 per share or approximately $5.3 billion in cash. 

Bristol-Myers also announced that it will expand its partnership with AstraZeneca (AZN - Analyst Report) on diabetes drugs for developing and marketing Amylin's diabetes candidates/drugs following the closure of the Amylin deal.

The 2012 projection of adjusted earnings assumes that the impending purchase of Amylin and the agreement with AstraZeneca will hurt Bristol-Myers’ 2012 earnings by 3 cents per share. We note that Bristol-Myers reaffirmed its adjusted earnings outlook for 2012 despite the expected negative impact.

Apart from acquisitions and partnership deals, Bristol-Myers is looking to introduce new products to augment its product portfolio to combat the generic threat.  However, Bristol-Myers has also suffered a couple of setbacks over the last few months in its efforts to expand its pipeline/product portfolio.

In July 2012, the company suffered a pipeline setback when its candidate, brivanib, performed disappointingly in a phase III study (BRISK-FL) in the hepatocellular carcinoma indication.

In June 2012, the company suffered a regulatory setback when the FDA declined to approve Bristol-Myers/Pfizer’s (PFE - Analyst Report) anti-clotting drug Eliquis (apixaban) on the basis of the submitted data and issued a complete response letter. Bristol-Myers and Pfizer are looking to get the blood thinner approved in the US for preventing strokes and systemic embolism in patients suffering from nonvalvular atrial fibrillation (AF). AF refers to a cardiac rhythm disorder characterized by an erratic heartbeat.

We currently have a Neutral recommendation on Bristol-Myers. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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