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We are maintaining our Neutral recommendation on Bristol-Myers Squibb Company (BMY - Analyst Report) with a target price of $35.00. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Bristol-Myers disclosed its second quarter 2012 results in July 2012. The company posted earnings of 48 cents per share, short of the Zacks Consensus Estimate by a penny.

Earnings were hurt primarily by the reduced sales of blockbuster blood-thinner Plavix, co-developed with Sanofi (SNY - Analyst Report), which went off-patent in the US on May 17, 2012. Net sales in the quarter declined 18% to $4.44 billion, just shy of the Zacks Consensus Estimate of $4.45 billion.

Global net sales of Plavix plummeted 60% to $741 million in the second quarter. US sales of the drug were down 60% to $701 million. Moreover, the genericization of hypertension treatment Avapro/Avalide (March 2012) also hurt sales during the second quarter. Avapro/Avalide recorded a 53% decline in sales, which came in at $117 million during the second quarter of 2012.

We believe that Bristol-Myers has entered a challenging period following Plavix’s genericization with revenues from newly launched products not being enough to compensate the massive loss of revenues due to the blockbuster drug going off-patent.

With generic competition affecting the company, Bristol-Myers’ pipeline needs to deliver. However, the company has already witnessed pipeline and regulatory setbacks in the last few quarters. In August 2012, Bristol-Myers discontinued a phase II study evaluating hepatitis-C candidate, BMS-986094, following heart failure of a patient in the trial. The patient subsequently died.

We view the discontinuation of BMS-986094 as a huge pipeline setback for Bristol-Myers. We believe this has put the company on the back foot in its bid to be a top player in the lucrative HCV market.

In July 2012, brivanib performed disappointingly in a phase III study for hepatocellular cancer. In June 2012, the company suffered a regulatory setback when the FDA declined to approve anti-clotting drug Eliquis, co-developed with Pfizer (PFE - Analyst Report), on the basis of the submitted data. Such pipeline/regulatory setbacks pose major challenges as Bristol-Myers aims to recoup from the loss of exclusivity of blockbuster blood-thinner Plavix.

Bristol-Myers is looking to combat the generic threat hanging over its key drugs through partnering deals and acquisitions and introducing new products to augment its product portfolio.

In August 2012, Bristol-Myers acquired Amylin Pharmaceuticals in a bid to diversify its business to combat the generic threat while bolstering its position in the lucrative diabetes market.

Bristol-Myers also expanded its partnership with AstraZeneca (AZN - Analyst Report) on diabetes drugs for developing and marketing Amylin's diabetes candidates/drugs. The Amylin acquisition is a smart strategic move by Bristol-Myers since it already has a presence in the diabetes market.

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