If a Blue Chip stock suddenly drops 16% in one day, what do you do? Do you rush to buy? Do you step aside and wait for the dust to clear? Or do you give up on the stock altogether?
There is no single one-size-fits-all answer. Even in our daily lives, we don’t generally buy something simply because it’s on sale. Still, many of us start our shopping trips with a sales rack and make our decisions on a case-by-case basis.[ad#Google Adsense 336×280-IA]Similar logic applies to the stock market.
Costs matter, but so do the reasons why a stock gets a discount.
In the case of one of the most recent recommendations in my premium newsletter, The Daily Paycheck, I think bargain-shopping is perfectly appropriate motivation.
When shares of Bristol-Myers Squibb (NYSE: BMY) plunged on August 5, there were good reasons why investors suddenly dumped the stock.
On that Friday, the company announced that its leading immuno-oncology drug, Opdivo, had failed in one of its trials.
To see what the news meant for the stock, we need to first put it in context.
Bristol-Myers is a global pharmaceutical company and — just as with many companies in its industry — had faced patent expiration and profit declines in the last few years. Its answer to the challenges it faced was to concentrate research efforts on priority areas.
So the $98 billion powerhouse focused its considerable resources on areas of the highest unmet medical needs where the company thought it could generate the greatest value. These included heart failure, fibrosis, rare genetic diseases, and immuno-oncology.
In immuno-oncology, Bristol-Myers had already become an undisputed leader.
Immuno-oncology, which is widely considered a breakthrough in cancer treatment, addresses cancers from the point of view of the body’s own immune system, allowing and helping it to activate its responses to cancerous cells and destroy them. Further, immuno-oncology is a form of treatment that addresses cancers that conventional medicines could not help. Moreover, side effects of immune-oncology therapies are typically milder and more manageable than the side effects of traditional cancer therapies.
Opdivo, Bristol-Myers immuno-oncology drug, has been designed to treat a wide variety of cancers. Its promise is so significant, in fact, that its original approval for advanced melanoma treatment was given a fast track by the FDA.
In October 2015, Opdivo was approved by the FDA for treatment of advanced lung cancer. It was also found to benefit patients with kidney cancer, and its benefits are likely extending in other areas as well. Analysts are considering this drug a jewel in Bristol-Myers’ crown, with expectations for annual revenue from the drug exceeding $5 billion within a few years. In the first two quarters of this fiscal year alone, sales of Opdivo surpassed $1.5 billion ($704 million in the first quarter, ended March 31, and $840 million in the second quarter).
Now, let’s look at the August sell-off again. On that day, Bristol-Myers said that Opdivo failed to deliver results for advanced lung cancer in a clinical trial.
This is bad news, indeed. New lines of treatment were likely part of future sales projections, and the failure of BMY to expand Opdivo to new patients (so-called first-line patients) — or those who haven’t tried other ways to combat their cancer — is a disappointment.
Peak sales for Opdivo were as estimated as high as $13 billion for 2025. This number will need to be reduced, and the Aug. 5 news will be the source of some valuation and earnings uncertainties going forward.
There are positives, though. First, as I’ve mentioned, Opdivo is already approved for advanced nonsmall-cell lung cancer (albeit not as a first-line therapy). Second, some analysts are now raising questions about the design of the study that failed. This implies that, if they are right, Opdivo’s promise might end up as high as they originally thought.
Another positive is that shares of BMY are significantly cheaper now than they were even a month ago. And keep in mind that Bristol-Myers isn’t just Opdivo. In oncology, Opdivo is joined by its older but still promising peer Yervoy ($241 million in revenue in the last quarter). Yervoy is also an immunotherapy option, and it’s often used in combination with Opdivo or with other medicines. Right now, BMY is performing yet another clinical trial, testing Oldivo in combination with Yervoy for lung cancer.
While oncology has become BMY’s fastest-growing segment, it’s not the largest. The largest segment is virology — the study of viruses — at 33% of total revenue, although the company significantly cut its virology budget in 2015, and the sector also faces patent expirations.
Further, BMY has best-selling drugs for the treatment of hepatitis C (worth $1.6 billion in revenue), Orencia for rheumatoid arthritis ($1.9 billion), anticoagulant Eliquis ($1.9 billion), and more.
From the valuation point of view, the shares have also become much cheaper, now trading at about 22 times expected next year earnings.
The recent price decline also means that BMY’s dividend yield is now more attractive: at the pre-plunge price, shares were yielding only about 2%. They’re now yielding a more respectable 2.6%.
BMY is in a strong financial position, with a dividend payout ratio under 60% this year. While the company has about $6.7 billion in debt, at the end of last quarter it had $7.9 billion in cash and marketable securities, with gives it enough financial flexibility so support the dividend.
— Genia Turanova
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Source: Street Authority