Two things are hurting the near-term prospects of Bristol-Myers (NYSE:BMY). First, drug plan companies like UnitedHealth Group (NYSE:UNH) issued a quarterly revenue warning, scaring investors from the drug sector. Second, Bristol-Myers is about to acquire Celgene (NASDAQ:CELG). And as the firm doing the acquiring, markets typically get cautious on short-term risks related to the acquisition.

Are these two headwinds enough of a reason to justify BMY stock trading this low?

Drug Prices Under Pressure

Washington is still looking for deterrents to a drug company’s ability to raise prices. Any politically driven rules that limit a company’s effectiveness to adjust prices will hurt not just Bristol-Myers but most companies in the pharmaceutical space. Companies often need to make adjustments to increase profits. It may then use those profits to pay for research and development, make acquisitions or return profits to shareholders. If this cycle is disrupted, investors will be less inclined to invest in the sector.

At 15 times earnings, BMY stock is relatively inexpensive compared to its peers. Merck & Co. (NYSE:MRK) fell by around 11% but its shares still trade at 31 times. Pfizer Inc. (NYSE:PFE), which is widely held by investors, trades at 23 times. Markets discounted Bristol-Myers stock because the firm’s inability to adjust prices higher will limit the options it has to help pay down the Celgene acquisition.

Quarterly Earnings Ahead for BMY Stock

BMY will report its quarterly results for the quarter ended March 2019 on April 25. First-quarter 2019 earnings are expected to come in at $1.09, up from 94 cents last year. According to Tipranks, analysts are still bullish on BMY stock and have an average price target that is around 33% higher than its $45.52 recent closing price.

In the upcoming quarter, the firm may shed some light on the progress of Opdivo. Currently, Opdivo has indications for nine different tumors. Management forecasts growth opportunities for Opdivo in the U.S. and outside the U.S., due to its treatment option for two of the tumors. Specifically, the treatment is for adjuvant melanoma and first-line renal cell. BMY launched these indications early last year. Opdivo plus Yervoy will play an important role in first-line renal, so investors should expect a good opportunity for the drug.

Regarding Opdivo for cancer treatment, the prospects are more challenging. The company is facing a decline in eligible patients, dropping to the 35%-40% range. Fortunately, Bristol-Myers has a 30% market share.

Merits of Celgene Deal for Bristol-Myers Explained

At face value, the Celgene buyout will come at a hefty price of $74 billion. Fundamentally though, the two firms coming together will benefit shareholders as a stronger firm. The timing for the deal is good because BMY is strong right now. The strong cash flow will facilitate the management of the debt level. In the long-term, it gets a complementary product line that strengthens its prospects.

Revlimid’s IP, in particular, has strong prospects ahead. Fortunately, Bristol-Myers forecast a downside and minimal outlook for Revlimid during the negotiation phase. And by preparing for weaker cash flow from it, management may plan out what it needs to do to make the most from the product.

Fedratinib, luspatercept and ozanimod have strong commercial viability whose product launch will lead to strong cash flow growth from Celgene. In short, Celgene’s specializing in making drugs to treat myeloma will complement BMY’s drugs that treat inflammatory diseases. Further, cell therapies will advance BMY in ways that are not possible without the acquisition.

Valuation

Analysts are optimistic that BMY stock will increase by over 30% in the next year. When the stock’s P/E is below that of its peers, negative emotions are likely to blame for the stock’s underperformance. In the near-term, the stock may head even lower as selling pressure accelerates. Still, value investing is all about patience, so starting a position at these levels may pay off over time. Investors who find the stock appealing at these levels will need to hold the stock for at least 2-3 years. By then, Celgene’s new product launches will be accretive to Bristol-Myers’ results.

As of this writing, the author did not hold a position in any of the aforementioned securities.