Bristol-Myers Squibb (BMY) is one of the smaller large cap companies trying to find its footing in the Pharmaceutical Industry. With a market capitalization of 55 billion, Bristol-Myers is much smaller than Pfizer (PFE) and Johnson & Johnson (JNJ), and more comparable to AstraZeneca (AZN) and Eli Lilly (LLY). All three companies fall in the 50 to 60 billion market capitalization range and all three have fallen out of favor from the Street. Times are tough for all Pharma majors, but the Small- large cap companies seem to have taken the brunt of the heat.
The first thing that caught my eye while analyzing Bristol-Myers performance was the sales numbers. Revenue has been flat for the past ten years. In 2011, Bristol Meyers registered 21.24 billion in sales, up from 18.11 billion in 2002. That's 3 billion more in ten years. If you factor in inflation during that period then Bristol's revenue growth will become negative for the ten year period. Most of the pharma majors doubled their revenue during that time but Bristol really got stuck in the same place. Eli Lilly went from 11 Billion to 24 billion, while AstraZeneca went from 17 billion to 33 billion. In 2002, Novartis was very much in the same league as Bristol-Myers. Today Novartis is closing on 60 billion sales and commands closer to three times Bristol's market capitalization.
Bristol-Myers announced its 'string of pearls' strategy in 2007. Led by Jeremy Levin, Bristol started selling products by forming strategic alliances with other Pharmaceutical Companies - an innovative idea to add more products quickly, share revenue and grow. To be fair, after 2007 Bristol slowly started improving its sales numbers and announced 17 pearl transactions by 2011. But Jeremy Levin left Bristol to join Teva Pharmaceuticals as their CEO.
After 2007 Bristol started cutting down its investment in properties, plant and equipment. So it's clear, the idea was to cut investment costs, keep property/plant bills to a minimum, join hands with other companies and sell as much as you can. But the problem is, it hadn't worked wonders and now it's going to be even more difficult for Bristol Meyers to start producing from its own pipeline.
Let's analyze the capital expenditure incurred by Bristol in the past ten years and compare it with other pharma majors.
Property, Plant and Equipment (in Millions)
Net Change %
Of all the ten companies analyzed, Bristol is the least invested in Properties and the only company to cut properties by more than 10% in ten years.
While talking about 'owner's earnings' in Berkshire's 1987 annual report, Warren Buffet said, "These represent (A) reported earnings plus (B) depreciation, depletion, amortization, and certain other non-cash charges...less (C) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume".
Capital expense is very important for every company to sustain its position. It's good if we can reduce it to save costs but not to a point where it affects the company's future ability to compete in the market. For pharmaceutical companies, drug innovation and patents are everything. Their labs need to produce drugs that can bring in the revenue or they need to buy companies that have a robust pipeline. But nothing can replace producing drugs in their own labs and it's not good to lose that edge.
Bristol-Myers is a pure-play pharmaceutical company. It operates as a single segment player and the chances of diversifying into similar areas look slim. Bristol's top drugs are Plavix and Abilify. Together these drugs brought closer to 10 billion in 2011, accounting for 46% of total revenue. Plavix lost exclusivity in May 2012 and most of its revenue will be eroded in the next few quarters. Abilify loses patent protection in April 2015. Existing product revenue may not be enough to offset the revenue loss of Plavix leaving Bristol with an uphill task to keep the uptick in sales. The pipeline needs to deliver as quickly as possible, preferably with a couple of billion dollar drugs before Abilify loses its protection.
Bristol-Myers did take some effort to turn things around by buying Inhibitex for 2.5 billion and aggressively push for drugs addressing the growing multi-billion dollar hepatitis C market. But unfortunately the move backfired and they had to suspend phase II trials.
Turning things around is not impossible but it will take time. Until then it's going to be a bumpy ride for existing shareholders.