Piper Jaffray Upgrades Bristol-Myers Squibb, Sees Valuation As Fair

• With the meaningful decline in the share price since Bristol-Myers Squibb Co. BMY announced its 2Q earnings, the stock is now trading close to its fair value.
• Piper Jaffray’s Richard J. Purkiss has upgraded Bristol-Myers Squibb from Underweight to Neutral, while maintaining the price target at $61.
• Purkiss believes that following the recent pullback, the company’s strong R&D execution, especially in the immune-oncology arena, is “more rationally” priced into the stock.

Although Bristol-Myers Squibb gained the first-mover advantage for Opdivo in the treatment of lung cancer, Purkiss expects Keytruda, developed by Merck & Co., Inc. MRK, and atezolizumab, developed by Roche Holding Ltd. (ADR) RHHBY, to add competition in the near term.

In addition, while the Street consensus implies an earnings CAGR of more than 22 percent during 2015-2019, Purkiss expects the CAGR to come in lower at over 19 percent, largely driven by slower operating margin expansion due to the robust growth of the low-margin product, Eliquis, and the impact of loss of exclusivity (LoE)for several of Bristol-Myers Squibb’s high margin products.

Purkiss explained that the Pfizer, Inc. PFE pay-away, which accounts for half of Eliquis’ total revenue, is booked through COGS, and is therefore likely to put downward pressure on Bristol-Myer Squibb’s gross margin.

“Additionally, the LoE impact from several high margin drugs will be felt across this period: Abilify in 1Q2016 and the HIV brands in 2018,” the Piper Jaffray report added.