Markets

BMS Sales Increase Masks Looming Patent Cliff Disaster

By Jim Edwards

Updated on: January 28, 2009 / 1:22 PM EST / MoneyWatch

Bristol-Myers Squibb is dependent for half its revenues on just three drugs, and those brands will all be generic by 2012, the NYT reports. The article asks whether BMS can survive on its own or be acquired, possibly by Sanofi Aventis:

Of Bristol-Myers's $4.5 billion in drug sales for the fourth quarter, more than half that came from three drugs: the blood thinner Plavix at $1.47 billion; the schizophrenia drug Abilify, $606 million, and Avapro, a blood pressure and kidney medicine, $316 million. The patents on Plavix and Avapro will expire by 2011, inviting competition from cheap generics. The rights to market Abilify will expire in 2012.

On top of that, the FDA just said it wants to study whether Plavix becomes less effective in patients using heartburn drugs or with genetic variations.

To solve its problems, the company has adopted a "string of pearls" strategy of acquiring small but promising companies and molecules in the hopes that collectively they can plug the patent cliff.

But the trouble for BMS does not end there. Check out its Q4 earnings report. The revenue yield on its sales/marketing dollars is down to $3.03, the lowest since Q3 2007. It got a healthy $3.58 in Q1 2008.

To put that in perspective, BMS only has to become a little bit more inefficient before it starts looking less like a large-cap Big Pharma company and more like a midsize firm like Medicis or Allergan -- companies with healthy businesses that are restricted by lack of scale and a struggle to sustain with sales and marketing spend. Their yields are in the $2 range.

What about the other half of BMS's portfolio? The other drugs aren't helping. Here's the sales results for Q4:

Avapro down 4 percent
Pravachol down 70 percent
Reyetaz down 1 percent
Erbitux down 2 percent
Taxol down 13 percent.

The drugs that did have big sales increases were coming off small initial bases. At the same time, BMS is having to spend more just to get those results. The company reported:

Marketing, selling and administrative expenses increased by 2%, or 7% excluding foreign exchange impact, to $1.3 billion in the fourth quarter of 2008 compared to the same period in 2007.
Advertising and product promotion spending decreased by 3%, or was flat excluding foreign exchange impact, to $449 million in the fourth quarter of 2008, compared to the same period in 2007.

Bottom line: You can't keep raising sales expenses when you have declining revenues. BMS better hope its oysters start hatching soon.