Bristol-Myers Squibb: Aches and Pains

The folks at Bristol-Myers Squibb probably wish the drug giant still made Extra Strength Excedrin. They could all use a double dose to cope with the latest unpleasant development to slam the company: The board of directors' September 12 ouster of Bristol-Myers' embattled CEO. Bristol is now arguably the most down-on-its-luck company in a sector that has plenty of industry-wide problems.

To understand drug-company woes, and to see the light at the end of the industry's tunnel, look no further than Bristol-Myers. Some of what makes Bristol the industry poster child are things it brought on itself, but some of its problems afflict nearly all of its rivals. Start with a 2002 accounting scandal, in which the company was found to have been "channel stuffing" -- forcing inventory into its distribution channels to inflate sales. The company paid $800 million and agreed to supervision by a federal monitor. If it kept its nose clean until April 2007, charges would be dropped.

The monitor thought Bristol-Myers crossed the line this summer. Apparently, its dealings with Canadian drug maker Apotex to keep a generic version of Bristol's blockbuster blood-thinning drug, Plavix, off the market weren't kosher. The monitor persuaded the board to sack CEO Peter Dolan and general counsel Richard Willard.

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Some analysts hailed Dolan's ouster as overdue because Bristol shares plummeted during his five-year tenure. The stock (symbol BMY) has fallen from the $70s in 2001 to a September 12 close of $24.32, up 4% on the day. In fact, it's been a tough period for almost all of the big pharmaceutical companies. They have been suffering from a lack of new drugs and intense competition from generics that hit the markets as soon as big pharma's patents expire.

Bristol-Myers is arguably in the worst shape of any of the majors. Profits have been weak, to put it charitably, and the company may have to cut its dividend (now at an annual rate of $1.12 per share). Analysts on average expect Bristol to earn $1.02 per share this year and $1.17 next year, according to Thomson First Call. That's down from a peak of $2.41 per share in 2001. Only three of 23 analysts polled by Thomson First Call rate Bristol-Myers a "buy" or "strong buy."

So, where's the light at the end of the tunnel? A long way off, but it's there. Homestead Value fund owns Bristol-Myers and other big pharma companies, but then, the fund holds stocks for ten years, on average. Co-manager Stuart Teach says you have to look past the noise in the market to find the true value of these companies.

In the late 1990s, Teach says, most analysts suggested that drug stocks could rise steadily forever. And why not? They had the fundamentals on their side: An aging population and the seemingly limitless ability of health-insurance providers to pay for all the drugs the baby boomers would need. Today, the population is still aging and somebody will still have to pay for all the drugs aging boomers will consume. "We fully believe that the underlying fundamentals at Bristol-Myers are intact," says Teach. "The latest news is not going to break the underlying fundamentals." And the strongest of those fundamentals is a track record of developing drugs that people need. The timing of Bristol's recovery is uncertain, but it almost certainly will recover some day.