Investors in Bristol-Myers Squibb (BMY) react favorably to the announced sale of its diabetes activities towards AstraZeneca (AZN), allowing the company to fully focus on cancer research and biotechnology. To offset dilution to its shareholders, the company hiked its quarterly dividend by a penny while the company received a favorable ruling from the FDA for Eliquis.
Following the strong momentum so far this year, shares have become a bit too expensive in my opinion at current levels.
Bristol-Myers announced that it has reached an agreement to sell its diabetes business to AstraZeneca, thereby continuing its evolution to be a specialty biopharma firm.
Bristol-Myers will receive upfront payments of $2.7 billion resulting from the deal. On top of that, the company stands to receive upto $1.4 billion in payments based upon regulatory and sales-based milestones through 2015.
The company is furthermore eligible to receive $225 million following the transfer of certain assets to AstraZeneca. As part of the deal, some 4,100 Bristol-Myers workers, including those of Amylin which has been acquired last year, will be transferred to AstraZeneca.
Back in 2007, Bristol-Myers and AstraZeneca entered into an alliance agreement. Initially the companies focused on the research and development of drugs targeting type 2 diabetes. This has been elaborated with additional diabetes products in the meantime.
CEO Lamberto Andreotti commented on the rationale behind the deal, "This agreement will allow us to further evolve our business model as a leading specialty BioPharma company and increase resources behind the opportunities that drive the greatest long-term value for patients, our company and our shareholders. Today's announcement puts the diabetes franchise in the capable hands of AstraZeneca and allows us to move to a more simplified operating model consistent with our pipeline and portfolio."
Drugs which are included in the sale are Onglyza, Kombiglyze, dapagliflozin, Byetta, Bydureon, Symlin and metreleptin. Following the deal the company sees proceeds of $3.4 billion in the first quarter of 2014, including $700 million in expected regulatory approval milestones for dapagliflozin.
For 2014, Bristol-Myers sees non-GAAP earnings of $1.65 to $1.80 per share. The company has not provided a reliable GAAP estimate at this point in time. Earlier the company guided for GAAP earnings of $1.41 to $1.49 per share.
Back in October, Bristol-Myers released its third quarter results. The company ended the quarter with $6.34 billion in cash, equivalents and marketable securities. Total debt stands at $7.21 billion, resulting in a modest net debt position of around $870 million.
Revenues for the first nine months of 2013 came in at $11.94 billion, down 11.1% on the year before. Despite the drop in revenues, GAAP earnings rose by 77.5% to $1.84 billion, as the company took a $1.83 billion charge in the comparable period of 2012.
At this pace, annual revenues are expected to approach $16 billion as an extrapolation of GAAP earnings would imply annual earnings of $2.5 billion.
Trading around $53.50 per share, the market values Bristol-Myers at $88 billion. This values equity in the firm at 5.5 times annual revenues and 35 times annual earnings.
On Thursday, Bristol-Myers hiked its quarterly dividend by a penny to $0.36 per share, providing investors with an annual dividend yield of 2.7%.
Some Historical Perspective
Shares of Bristol-Myers mostly traded in a $20-$30 trading range over the past decade. Since 2011, shares have risen to fresh all time highs around $54 at the moment, with the company focusing on cancer drug research.
While shares have performed very strong in the past years, both revenues and earnings have seen stagnation at best. Shareholders have seen some implicit returns through sizable share repurchases after the company retired about 15% of its shares over that time period.
The sale is quite substantial. Sales of Bydureon, Byetta, Forxiga and Onglyza totaled $1.17 billion in the first nine months of the year, putting annual sales on track of around $1.55 billion. Note that the drugs reported solid growth with Bydureon and Byetta not generating revenues yet in the comparable period of 2012 as they were still in the hands of Amylin at the time.
While the price tag seems "cheap" on a sales multiple, Bristol Myers noted that the joint venture has been loss-making. This is despite the $5.3 billion purchase of Amylin Pharmaceuticals last year.
The fact that the activities are reporting losses, and allows Bristol-Myers to focus on cancer, antiviral and specialty medicines are the major reasons behind the sale. On top of that margins were poor and the products were losing market share.
Back in October of this year I last took a look at Bristol-Myers' prospects following the release of its third quarter results. I concluded that there was life after the expiration of Plavix, yet a 50% year to date return made shares expensive at those levels, with GAAP earnings seen between $1.41 and $1.49 per share. Note that sales of Plavix for the first nine months of the year came in at just $177 million, compared to $2.5 billion a year earlier.
I furthermore noted that sales of debuting drug Eliquis were a bit light, totaling just $41 million for the pill being sold in a partnership with Pfizer (PFE). Sales of competing drugs Xarelto from Johnson & Johnson (JNJ) and a competing drug from Bayer fared much better. I will be very interested for that reason alone to see the fourth quarter sales results of the drug, to see if there has been any meaningful uptick in sales.
On Thursday, Bristol-Myers furthermore announced that Eliquis has been accepted by the FDA for a Supplemental New Drug Application for the treatment of deep vein thrombosis and pulmonary embolism, among others.
Further growth has to come from nivolumab, the lung cancer drug which is still in the pipeline. If approved and marketed successful, the drug could fetch over $10 billion in annual sales in about a decade's time. The drug is already in a few late-stage studies and could hit the market as early as 2015.
As such Bristol-Myers is applying more focus on cancer research as well as biotechnology. The pick up in Eliquis and introduction of nivolumab could grow revenues to $20 billion in a few year's time, to even $25 billion in less than a decade from now.
Despite the nice growth prospects, the sale of the business including the expensively acquired assets of Amylin is a sign that the company admits its failure in the area. The current valuation is very high, and requires much higher revenues and earnings to justfity the current valuation, which in its turn requires success in Eliquis and nivolumab.
After returns of 65% so far this year, I think it is time to be a bit more cautious.