Squibb Kick

Words are so cheap but they can turn out expensive
Words like conviction can turn into a sentence
--General Public

Each May/June the American Society of Clinical Oncology (ASCO) holds a meeting for docs, producers, analysts, and other interested parties. Primarily, the ASCO event is an avenue to showcase and discuss latest cancer treatment technologies. If there's something big brewing in this sector, then ASCO is often where it goes public.

In advance of this year's ASCO, I read a BW article on Bristol Myers Squibb's (BMY) experimental medicine ipilimumab. 'Ipi' has been making a splash for its reported efficacy in reducing tumor size and frequency in some advanced melanoma patients. What interested me is ipi's focus on freeing up the body's immune system to do its thing on cancer cells--reminiscent of the old monoclonal antibody (MAB) approach of first gen immunity motivators.

Post ASCO, sharp cookie David Miller has presented the limitations of ipi, and there are many. He also notes concerns with BMY's trial design and potential for a limited indication should the medicine ultimately pass FDA muster.

You can see from the chart that the ASCO buzz was enough to pop BMY stock a few percent, which is not an uncommon short term effect of a successful ASCO presentation.

If you've followed this company for a while, you know that BMY has hit one pothole after another which has shaved more than 50% off the stock's value over the past decade. Promising candidates like ipi, however, suggest that perhaps Bristol's innovation engine may be getting into gear, kick started perhaps by recent acquisitions in the biotech space from which ipi came. In ipi's case in particular, I'm hopeful that it revives focus on immune system enhancers as I sense value in treatments that empower the human body's natural cancer killing capacity.

Valuation-wise, there are some things to like. BMY's free cash flow has been increasing--in FY 2009 it amounted to about $3.3 billion. Using a '$15 billion in mkt value for every $1 billion in FCF' rule of thumb implies a 'fair value' of about $49 billion for the company. Current enterprise value = $41.5 billion mkt cap + $6.4 billion debt = about $48 billion, suggesting that the current price is at or slightly below 'fair value.' BMY has been building cash; currently it stands at $6.8 billion, meaning that it is holding more cash than debt. The stock yields more than 5% as well.

It is easy to list issues populating Boo's side of the ledger including: potential downside surprises in a developmental medicine that has been getting lots of hype; a looming patent cliff--blockbusters Plavix and Abilify go off patent in the next coupla yrs; BMY's prolonged slump, which could be indicative of lack of managerial capacity; and overall macro economic issues which threaten to depress stock values across the board.

Nonetheless, I sense enough positives to initiate a small position in BMY at these levels. Nothing crazy, but having some skin in the game will help me follow the story. Plus, the 5% coupon provides margin for error.

position in BMY, SPX