By Stephen Leeb, Income Performance Letter

Select large pharmaceuticals, whose valuations have been depressed for years because of the so-called "patent cliff," are poised to deliver more than just outsized yields to investors.

We think portfolio veteran Bristol-Myers Squibb (BMY) is capable of becoming more than just an income stock, i.e., it can deliver significant price appreciation if some of its potential works out. Meanwhile, it remains a defensive stock and reliable income generator.

The company has delivered more than its fair share of news. First, the positive news. In late June 2012, Bristol teamed up with AstraZeneca (AZN) to buy Amylin.

Diabetes drugs to contribute to growth
The companies, which will share profits from Amylin's offerings, are interested in its type 2 diabetes drugs that belong to the still-novel GLP-1 class. It's a once-weekly extended release version of the company's already successful twice-daily injection Byetta (exenatide).

It's the promise of Amylin's GLP-1 drugs that has attracted Bristol-Myers to Amylin and us to the transaction. More specifically, Bydureon is the jewel in Amylin's crown.

The drug could generate sales of over $2 billion a year, and potentially much more, as one of its major side effects (beyond controlling blood sugar) is weight loss. This is a huge positive as many type 2 diabetics are obese.

The transaction is expected to be only modestly dilutive to earnings per share in this and next year and accretive beginning in 2014.

Inhibitex acquisition may not be fruitful

Now, for the not-so-good news. In January 2012, BMY bought Inhibitex for $2.5 billion because of a still-in-development​ hepatitis C oral pill, INX-189.

Clinical data for INX-189 had been favorable, but due to certain cardiovascular concerns, a further study was suspended in August 2012. This will either push back the drug's timetable or end its prospects completely.

Should the studies be continued and the drug approved, INX-189 annual sales could exceed $1 billion a year, with the potential for more.

With the drug trials in question, however, and the stock trading like the program has been abandoned, INX-189 will simply serve as a bonus to the pipeline and new investors should the company be able to solve the safety concerns.

The bottom line

This points to 2013 as a down year for earnings with profits ramping up in the following year. In the meantime, the company is generating more than $4 billion in free cash flow annually and had $5 billion in cash and short-term investments as of June 2012.

The stock yields almost 4%, but its payout ratio was only 61% in 2011, meaning the dividend is not only safe, but has room to grow.

Moreover, the company has authorization to repurchase approximately $6 billion in common stock, with $3.34 billion remaining to be used for future repurchases. Cash-rich and actively returning that cash to shareholders, Bristol-Myers remains a buy.

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