(FORTUNE Magazine) – As the saying goes, people get sick in good times and bad. For that reason drug stocks have traditionally provided investors with a relatively safe haven in rough markets. In fact, since the bubble burst in 2000, Big Pharma has handily outperformed the broader market. But one player in the group has stood out like a terminally ill patient. Drug giant Bristol-Myers Squibb (BMY) has spent the past year embroiled in a wave of seemingly unending scandals, ranging from a dubious investment to an SEC investigation to earnings restatements.

As a result, Bristol's stock has tanked--it's now trading at about $23 a share, down almost 50% from a year ago. But despite the cloud of controversy that lingers over the company, many Bristol boosters believe the prognosis is good for a full recovery--and at the stock's current price that could mean a healthy return for shareholders. "We think that this will be one of the best-performing stocks in 2003--04 and that much will be forgotten by the majority of investors," says Neil Sweig, a pharmaceutical analyst with institutional research firm Fulcrum Global Partners.

Bristol certainly has a lot of painful memories to put behind it. For starters, the company lost about $2 billion in sales for 2002, or 11% of its estimated revenue, to generic manufacturers because of expiring patents on three key drugs--cancer medicine Taxol, diabetes drug Glucophage, and anti-anxiety medicine BuSpar.

CEO Peter Dolan had hoped to stem some of the bleeding. Back in the fall of 2001 Bristol shelled out $1.2 billion for a stake in biotech company ImClone Systems, whose cancer drug Erbitux was supposedly on the verge of gaining FDA approval and becoming the next blockbuster. It didn't work out that way. After the FDA delayed the Erbitux go-ahead, ImClone founder Sam Waksal emerged as the key figure in a nasty and well-publicized insider-trading scandal (including the he-said, she-said saga of Martha Stewart and her broker). By early 2002 three-quarters of Bristol's investment had already gone up in smoke.

Incredibly, the news got even worse for the drugmaker's shareholders. Last April, Dolan revealed that in 2001 the company had persuaded its wholesale customers to buy about $2 billion more of drugs than they actually needed so that Bristol could meet its earnings targets for that year--a practice known as "channel stuffing." The consequence, of course, was that the company's sales dropped sharply in 2002 since wholesalers were already loaded to the gills with Bristol products.

The revelation launched investigations by the SEC and the Justice Department (both ongoing) into Bristol's inventory and accounting practices. The company is now in the process of restating its earnings for fiscal years 2000 through 2002 to better reflect the timing of its sales; management has said it expects to release the revised numbers in February. Many observers believe that the financial restatements will satisfy the SEC, although hefty fines and penalties (not to mention shareholder lawsuits) could still wallop the company.

So why is Bristol a buy? Because despite the chaos, it should generate profits this year of $1.60 to $1.65 a share. That means the stock is now trading at about 14 times expected 2003 earnings, well below the industry average. That lag in the multiple is due to continuing skepticism about the credibility of the drugmaker's management. However, investors who are bullish on Bristol point out that the future value of any pharmaceutical company hinges more on the success of the drugs in its pipeline--and on that basis, Bristol stock is trading far below its intrinsic value.

According to a recent study conducted by research house Sanford Bernstein, the average drug company sports a market capitalization equal to $5.39 for every R&D dollar it spends on its longer-term drug pipeline (drugs in Phase I or II of the three-stage FDA approval process). Think of that figure as a measure of investor confidence in a company's ability to get profitable products to market. In Bristol's case, the market credits it with only $3.30 in market cap for every R&D dollar it spends. The market is valuing Bristol's pipeline at 40% below the industry average.

Such a discount would be warranted if Bristol's record of converting R&D dollars into profitable products were much worse than that of its peers. But in fact the opposite appears to be true. Bernstein compared each major drug company's share of industry R&D spending with its future share of operating income over a 20-year period ending in 2001--a productivity acid test, in effect. By that measure Bristol has been 30% better than average. "At a minimum, Bristol's pipeline should be valued as highly as its peers," contends Bernstein analyst Richard Evans.

Bristol's depressed value, say many observers, makes it a ripe candidate for a takeover bid from a rival pharma company looking to rebuild its pipeline. And experts say an acquirer could afford to pay a significant premium--as much as 30% or more--over Bristol's current share price and still come out ahead.

There are reasons to be high on Bristol even without a takeover. The drugmaker recently provided evidence of its R&D prowess with some good news on the new-product front. In November 2002, Bristol launched Abilify, a schizophrenia drug, which experts say could add as much as $3 billion or more to the company's sales over the next four years. Plus, at its current share price, the stock offers a rich 4.9% dividend yield.

Bristol-Myers isn't without risk. The dividend could be cut or its pipeline could fail. There's also a possibility, however slight, that the SEC or the Justice Department will discover accounting fraud at Bristol. But barring another scandal, it looks as if investors now have a rare opportunity to buy a premium brand for the price of a cut-rate generic.

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