Friday, September 01, 2006

Calls of Note Part 1

Several firms are commenting on Bristol Myers (NYSE:BMY) after the judge granted a preliminary injunction halting future sales of generic Plavix by Apotex:

* Merrill Lynch notes that because several months (possibly more than a year) of generic Plavix are in the channel, BMY's financials are likely to be under significant pressure over at least the next few quarters.

A material step-down in BMY net income and cash flow could cause the company to cut its dividend. The continues to model that the dividend is cut from $1.12 to $0.60, but it is impossible to predict a dividend cut with accuracy.They note that BMY may attempt to maintain the dividend. If the Plavix patent is ultimately upheld in court (trial is slated to start January 22, 2007 and verdict could be in 2H:07) and generic Plavix channel inventory is worked down, the company's financials could step back up.

They firm notes they are awaiting communication from BMY management regarding how the company will deal with ongoing generic Plavix competition. Notes that as of Friday,
August 18, generic Plavix had captured 78% of NRx's (new prescriptions) and they
anticipate further market share erosion in the coming weeks. Firm does not know what BMY/SNY will do with Plavix sales and marketing support.

* Goldman Sachs notes their estimates are under review and they await management guidance, which they would expect in the near term. Firm believes the $1.12/share dividend is at a
lower risk, but earnings could face substantial short-term pressure. They continue to believe that Plavix represents $0.62/share in full-year 2006, or 50% of earnings, using gross profits and no cost cutting. Firm assumes little cost management can be used to offset - maybe a maximum Advertising & Promotion rate of 5% of Plavix sales (group average is 7% in 2006), which would yield $200 million in costs. Direct sales and A&P costs represent around $0.08/share annually. Netting these items and dividing them by four quarters, would show a maximum $0.13-$0.16/quarter impact while generic Plavix is in the channel.

As we now go to court, it is less likely that Bristol cuts the dividend (depending upon the amount of inventory in the channel), and the dividend yield should support the stock, in firm's view. They would expect the shares to trade around the pre-settlement levels of mid-$20s, especially since a preliminary injunction includes the likelihood of Bristol/sanofi succeeding on the merits of the case. Firm believes the uncertainty around the court case would likely cap further share performance in the near term. The trial is set
to begin on January 22, 2007.

Notablecalls: Watch BMY for a potential short after the open. I think it gets faded as there is stil way too much uncertainty: a) possible div cut b) lowered guidance c) possibility that Apotex will ultimately prevail in the case.

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