Bristol-Myers Squibb (BMY) has been a phenomenal performer in 2013 with shares rallying over 55% while most big pharma names like Merck (MRK), Pfizer (PFE), and Eli Lilly (LLY) have been lagging the S&P 500's return. Over the past few years, these firms have all seen major drugs go off patent, allowing the generic drug makers to come in and crush their profitability. While BMY has suffered the loss of Plavix, it has developed a tremendous pipeline of oncology drugs so that it has been able to grow despite the loss of a major drug. Its development prowess is a major reason why Bristol-Myers has been able to outperform its big pharma competitors in 2013 and remains a buy for long-term investors.
Last quarter (available here) was indicative of the type of growth Bristol-Myers is seeing thanks to its pipeline of new drugs with revenue increasing 9% and non-GAAP EPS 12%. These year over year gains have been powered by new drugs like Yervoy (up 33%), Onglyza (up 19%), Sprycel (up 20%), and Orencia (up 22%). These new drugs are more than making up for older drugs that have gone off patent. As has benefited many of the biotech firms that have performed well in 2013, this new portfolio of drugs represents a focus on oncology (Yervoy and Sprycel) and immunoscience (Orencia) drugs, which tend to have higher selling prices and robust demand. The existing portfolio of drugs will generate double-digit growth at BMY for the next 3-5 years.
Importantly, though, Bristol-Myers has several major drugs that are currently in various trial stages, which will power long-term growth even higher. Importantly, investors should look forward to seeing Nivolumab, currently in Phase III trials, hit the market in 2015. The drug deals with non-small cell lung cancer, and I expect it to reach $1 billion in sales within three years of launching with market potential close to $1.75-$2 billion. BMY also has Elotuzumab in Phase III trials along with a host of virology drugs, which will provide additional revenue growth.
Looking deeper into its pipeline where drug approval is more speculative, BMY has a host of immunology and oncology drugs and a ground-breaking HIV inhibitor. Certainly, some will never reach market, but it has a pipeline to be envied that will power double-digit revenue growth for upwards of a decade as some new drugs continue to hit the market and grow to saturation (full pipeline information here). BMY used its good years with Plavix to spend heavily on new drugs, and as a consequence, it is best positioned to grow after its previous blockbusters have gone off-patent.
In fact, R&D spending has declined 6% as the company sees the fruition of drugs coming on-line. As these drugs enter the market, we will see R&D as a share of revenue continue to decline, which will be fantastic for free cash flow and capital returns to shareholders. Bristol-Myers has reached a point where it can reap the rewards of successful development rather than frantically spend to find new sources of revenue like other companies have. Given the fact that the company already has $6.3 billion in cash and a net debt position of only $867 million or only 1% of capitalization, BMY has the capacity to significantly increase the dividend and share repurchase program. BMY currently sports a $0.35 quarterly dividend, which provides a 2.75% yield at current prices.
Over the past five years, Bristol-Myers has incrementally increased its dividend by a penny per annum, which while better than nothing, might disappoint investors looking for more robust dividend growth. However, these small bumps in the 3% annual range came as the company was ramping R&D spending and investing in future growth while existing lines entered secular decline. With the company poised for secular growth and declining R&D needs, I expect the company to accelerate dividend growth over the next three years.
Over the past twelve months, BMY has generated $2.5 billion in free cash flow, a sum I expect to grow by 12-15% annually over the next five years. This increased cash generation can power dividend hikes in excess of 10% for 5-7 years, bringing BMY back on the radar of dividend growth investors. I would suggest investors get in before the company start to accelerate its capital return program, and investors bid up shares.
The only drawback to BMY is its stretched valuation. On a non-GAAP basis, BMY will earn roughly $1.75 in 2013. I am looking for a bit of accelerating growth in 2014 to the 15% range or about $2.00 a share as its new drugs continue to gain share. This earnings power gives BMY a 25.4x forward multiple, which while below many biotech firms, is a steep premium to entrenched pharma. However, as discussed above, BMY has a fantastic portfolio of drugs that will power continued growth while many struggle with patents rolling off. I do believe BMY is worth a sizable growth premium. With long run EPS growth towards 15%, which could go higher if more of its drugs in development hit the market, I think BMY makes sense as a long term investment at 25x earnings. At or below $50, I recommend long-term investors buy BMY as its drug pipeline will generate growth and higher dividends for years to come.