Bristol Myers Squibb: Consistently Hitting Targets, New Drug Launches Drive Share Price

Mar. 16, 2022 3:50 PM ETBristol-Myers Squibb Company (BMY)11 Comments

Summary

  • Bristol Myers Squibb is rapidly becoming a momentum growth stock.
  • I put that down to management's good stewardship in taking on a massive M&A deal with the 2019 Celgene acquisition, and making it work.
  • The Revlimid LOE is almost as large as AbbVie's upcoming LOE with Humira, but BMY still intends to grow revenues by ~3.5% per annum.
  • That ought to see the company grow revenues >$55bn by 2026, and turn several new product launches into >$1bn earning assets, while growing key assets e.g. Eliquis and Opdivo.
  • BMY's slew of product launches in the last couple of years plus three more in 2022 ought to help the company challenge for a $200bn market cap valuation and share price in the $80s.
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Investment Thesis

Shortly before Bristol Myers Squibb (NYSE:BMY) completed its $74bn acquisition of Celgene back in November 2019 - against the wishes of many shareholders, including its largest institutional investor, Wellington Management, its share price had sunk to a low of ~$43, having traded at ~$75 in mid-2016, and $69 in February 2018.

The pharma and its management looked to be biting off more than they could chew, taking on a massive debt load, and even though the Celgene buyout gave the pharma control of the blood cancer therapy Revlimid - a ~$12bn per annum selling drug, and a second blockbuster asset in Pomalyst - also indicated for hematological cancers - the market questioned the wisdom of acquiring assets facing imminent patent expiries, and loss of exclusivity ("LOE").

It's taken management more than two years - and a 77% growth in top line revenues, three dividend hikes, and a doubling of GAAP net income between 2019 and 2021 (via a $9bn GAAP loss in 2020) to get investors back on side, and to get the share price moving again. BMY stock is up 16% across the past three months, and up 14% across the past 12 months.

Frankly, there have been better big pharma horses to back recently - the stock prices of Pfizer (PFE), Eli Lilly (LLY), and AbbVie (ABBV) are up respectively 47%, 46%, and 41% over the past 12 months,

Investors don't generally buy big pharma to accumulate short term gains, however, which is why BMY stock may represent the best value buy at the present time.

Pfizer's recent growth is tied to its COVID vaccine, Comirnaty, and Antiviral, Paxlovid - whose revenue contribution, as spectacular as it they will be in 2022 may erode rapidly in subsequent years, while Eli Lilly stock gains have been largely driven by hype around its Alzheimer's therapy Donanemab. Donanemab has a similar mechanism of action to Biogen's much maligned Aduhelm, meaning it may struggle to make it to market, let alone generate meaningful revenues. However - Lilly's PE ratio of 43x and Price to Sales ratio of 9x are both twice as high as any other big pharma concern.

That leaves AbbVie, a company which I have said many times before has much in common with BMY. Both recently made mega-money acquisitions - AbbVie acquiring Allergan for ~$63bn in May 2020 - meaning both are heavily in debt - and both face challenging patent cliffs - AbbVie's $20bn per annum selling Humira will lose patent exclusivity in the US in 2023, having already done so in the EU.

The great thing (for investors) about both companies is that their management has a plan in place to overcome these issues that is simple to understand and explains how the company will continue to drive growth - not spectacular, but in the low single digits - until the end of the decade, despite revenues from their biggest selling assets falling at a rate of billions of dollars per annum.

Clarity is a wonderful thing in the pharmaceutical industry - the biotech sector has been in freefall for the past year, with the average pre-revenue company's stock price falling by >50%, and with interest rates and inflation looking likely to rise and rise in 2022 and 2023, AbbVie and BMY's debt will start to look less attractive and its shares more attractive.

Being profitable, reliable, and thanks to management's carefully thought out plans, driving revenue growth in the low single digits (comparable to the yield on their debt) even while facing a pharmaceutical company's biggest threat patent cliffs affecting key assets - both companies share prices are climbing, but with AbbVie stock being up +44% in the last six months, and BMY's just 12%, it's tempting to wonder if BMY has the greater upside potential.

BMY has the lower P/S ratio - 3x compared to AbbVie's 5x, and also the marginally lower PE ratio - 22x versus AbbVie's 23x, which broadly speaking, suggests it has the greater stock price upside potential.

Of all the big pharmas, Merck's PE of 15x, and P/S of 4x, and Gilead's PE of 12x, and P/S of 3x is arguably superior, although Merck is substantially reliant on its key assets, the immune checkpoint inhibitor Keytruda, while Gilead is suffering on multiple fronts, with its latest setback being the underwhelming performance of key breast cancer therapy Trodelvy in late stage trials, and its share price is -18% over the past 6m.

I would probably make Merck and BMY the two momentum stocks to watch in the big pharma sector over the next six months, and in the remainder of this post I will explain how BMY management's clear vision and 7-10 year plan makes the company look like a solid bet for a long-term buy and hold.

I also will discuss some caveats - can a global pharmaceutical company really run like clockwork, as BMY's CEO Giovanni Caforio seems to believe, and will BMY's approved drugs and late stage really live up to expectations? And what role will curbs on drug pricing introduced by government - if it ever happens - play in BMY's growth strategy.

BMY has never been a momentum stock - at least not in the past 5-6 years, and investors should not necessarily expect explosive growth - but in the current climate the pharma looks a solid bet, if it can execute on its simple plan.

BMY Building On A Solid Platform

chart

BMY 2021 performance overview and outlook for FY22. ((Q421 earnings presentation))

The above slide from BMY's Q421 earnings presentation lays out some of the fundamentals that support an investment in the company - 9% annual topline growth, $46.4bn annual sales, $17bn in cash (total debt is $44.6bn, however, making net debt $27.6bn), and steady debt reduction - $6.1bn for the year, as well as an attractive share buyback program - $5bn in Q122, as part of a total $15bn authorisation. So far so good. Now let's look at key asset sales.

chart

BMY key asset sales Q421 and FY21. (BMY key asset sales Q421 and FY21. (Q421 earnings presentation))

BMY has a very nicely diversified set of assets - with eight blockbusters (drugs making >$1bn per annum sales) in its portfolio, the pharma has more than any other, which mitigates its risk.

The "Big 3" assets are Revlimid - acquired from Celgene, and primarily indicated for Multiple Myeloma ("MM"), as well as Mantle Cell Lymphoma, Follicular Lymphoma and Marginal Zone Lymphoma, Eliquis, a blood thinner that works by inhibiting factor Xa, jointly developed and marketed by BMY and Pfizer, and Opdivo, an immune checkpoint inhibitor ("ICI") that is a key rival of Merck's Keytruda.

These three accounted for respectively 28%, 23% and 16% of BMY's total revenues in 2021. The outlook for Eliquis is strong - sales were up 18% in Q421, and it's No. 1 in its market, outselling Johnson & Johnson (JNJ) and Bayer’s Xarelto, and Boehringer Ingelheim's Pradaxa.

Opdivo (nivolumab) is often considered the bridesmaid to Keytruda, targeting all of the same indications, but often falling slightly short on head-to-head efficacy, but it has been phenomenally successful in its own right. Its sales have flatlined across the past couple of years, while Keytruda's have climbed, but analysts still believe it will make ~$15bn of sales by FY26. Alongside the tyrosine kinase inhibitor Yervoy, BMY has a powerful combo and there is no reason why BMY cannot keep contesting for market share in a host of solid tumor cancers, as illustrated below.

chart

Cancers in which guidelines promote treatment with Opdivo of Keytruda ( (Medical News Today)

That leaves Revlimid, which is a problem for BMY, due to its patent protection expiring this year. On March 7, Teva Pharmaceutical (TEVA) became the first company to launch a generic version of Revlimid, with Natco Pharma, Sun Pharma, Zydus Cadila, Cipla and Dr. Reddy’s Laboratories expected to launch their own generic versions.

With Pomalyst, oral tyrosine kinase inhibitor Sprycel and chemotherapy Abraxane all also facing loss of exclusivity ("LOE"), BMY expects that it will lose between $12 - $14bn between 2022 and 2025. Usually, that's the kind of news that would drive fear, uncertainty and doubt ("FUD") and cause a major share selloff, but BMY has moved very quickly to address those concerns.

Established Brand Growth Offsets LOE Losses whilst Celgene Approvals Drive Organic Growth

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BMY's plan to compensate for LOE's with established brand growth and new product launches ( BMY Q4 earnings presentation)

As we can see above, BMY expects to offset that decline in revenues with $8 - $10bn growth in its established brands, chiefly Opdivo, which is expected to double its revenues by 2026, and Eliquis, still the dominant player in its market.

BMY also believes it can add to those revenues another $10 - $13bn from new product launches. Although many observers felt BMY was naive to acquire Celgene with Revlimid set to go off patent, management also wanted Celgene for its highly promising pipeline.

The cell therapies Abecma and Breyanzi were approved last year, with exceptional efficacy readouts - Abecma achieving a tumor response rate of 72% and 28% complete response ("CR") rate in its pivotal trial in MM, and Breyanzi a 73% ORR, and 54% CR in 268 patients with relapsed or refractory large B-cell non-Hodgkin lymphoma ("NHL"), prompting peak sales expectations of ~$1bn, and $3bn.

Reblozyl, approved to treat Beta Thalassemia and perhaps following in Revlimid's footsteps and targeting cancers of the blood, is pegged for peak sales of $2 - $4bn, whilst Onureg, an oral form of Acute Myeloid Lymphoma ("AML") drug, could be yet another blockbuster asset for BMY.

Zeposia - approved for treatment of relapsing MS in May 2020 - could be the biggest selling of all of the "Big 5" Celgene pipeline assets. Analysts expect $1.6bn in sales by 2024, while BMY see the drug - a sphingosine 1- phosphate receptor modulator whose differentiated mechanism of action has marked it out as a potential class leader (Pfizer recently paid $6.7bn to acquire Arena Pharmaceuticals and its S1P modulator Etrasimod) - as a potential $5bn seller.

These five drugs were a major part of the reason BMY acquired Celgene, and so far, everything appears to be working out as management had planned, with five approvals out of five. And the good news is that BMY has more approvals due in 2022.

3 More Potential Blockbusters Set To Be Approved In 2022

By my calculation, if BMY wishes to grow its topline in the low-to mid single digit percentages - let's say 3.5% per annum, even while Revlimid is shedding $2 - $2.5bn in sales revenues per annum owing to generics, plus losses from Pomalyst, Sprycel and Abraxane, then it needs to find an extra ~$22bn of revenues overall, to reach a revenue figure of ~$55bn by 2026.

BMY has made the math very simple. $46.4bn, take away ~$13bn from LOE assets, add ~$9bn from growth of Opdivo and Eliquis, and another $11.5bn from the Celgene pipeline assets discussed above.

That leaves the company a little short of where it wants to be, at ~$54bn of revenues, and perhaps we should factor in some assets failing to achieve peak sales forecasts in highly competitive markets - let's say $5bn, leaving BMY $6bn short.

If that proves to be the case, investors need not necessarily worry, because BMY has three more assets scheduled for approval this year.

The first is Relatlimab - another exciting breakthrough in the oncology space, being a LAG3 inhibitor. LAG3 is a cell surface molecule that has various effects on T cell function, and an immune checkpoint receptor, and Relatlimab looks set to become the first ever drug approved that addresses this intriguing target.

The PDUFA date (when the FDA decides whether to approve a new drug application or biologics license application) for Relatlimab arrives this month in unresectable or metastatic melanoma, and given that, in combo with Opdivo, the drug helped extend median Progression Free Survival ("PFS") to 10.1 months vs 4.6m for Opdivo alone, approval looks set to be a formality.

BMS believes Relatlimab will reach peak sales of $4bn, and it also believes that Mavacamtem - a myosin inhibitor acquired when BMY bought out Myokardia in a $13bn deal, indicated for heart disease, will generate peak sales of $4bn.

Mavacamtem had its PDUFA date of Jan. 28 pushed back to April 28, but approval is nevertheless a near certainty, and BMY is preparing for a strong commercial launch.

And finally, Deucravacitinib is the final asset that could win approval in 2022, with a PDUFA date of September in moderate to severe plaque psoriasis. Once again, this is drug with a differentiated mechanism of action, being an oral, selective tyrosine kinase 2 ("TYK2") inhibitor, the first of its kind, which could go on to challenge for approval in several more lucrative anti-inflammatory / auto-immune markets. Once again, BMY management believes this is a >$4bn peak seller.

Three more approvals, with a $12bn peak sales potential, certainly gives BMY management a lot of leeway when it comes to hitting its ~$20bn new product sales target and if BMY is able to build on its nearly $10bn of operating income in 2021 in each subsequent year, and net income margin of ~15%, its forward P/S ought to fall to 3x, and PE ratio to ~15x, at current share price. By big pharma standards, these ratios would be a little too low, implying the company is presently undervalued, and my price target would start to climb towards the $90 - $100 range.

Bristol Myers Risk Factors - Pressure On Pricing, Commercial Execution, Debt, Competition

It's important to stress that BMY is not a perfect company, and neither is its management.

Debt is a constant concern for the company - its debt to equity ratio is ~130%, and net debt of $27.6bn will constantly gnaw away at management, potentially influencing its decision making, especially as the cost of debt is likely to rise with higher interest rates - virtually guaranteed in 2022 and 2023.

Management shouldn't be dissuaded from its path, however - debt can be a positive, and there are signs that CEO Giovanni Caforio is willing to spend whenever he thinks the need or the opportunity arises. That's BMY's modus operandi and if the company tried to play a more conservative game, its carefully laid plans could quickly unravel.

Buybacks ought to keep shareholders happy, and by paying back $6bn per annum - hardly a problem given BMY's exceptional cash flow generation, which was $4bn in Q421 alone - BMY could be debt free in five years. It won't be, because management will keep spending, but the point is, it could be.

Drug pricing will be an issue if the Democrat and Republican parties are ever in a position to exert sufficient pressure, which is tricky given that pharmaceuticals have powerful lobbying capabilities. Nevertheless, ~50% of drug prices went up on average ~5% in 2022, and this kind of inflation beating growth may not be sustainable.

Management faced questions from analysts on its Q421 earnings call around e.g. pricing of Eliquis and its decision to limit 340B compensation for patients who can't afford to pay for drugs, and to substitute volume for pricing, as one analyst put it.

That raises another concern - whether BMY's latest approved drugs really can drive the multi-billion sales expected of them by management, and by extension, shareholders. Again, analysts were asking questions about Mavacamtem, for example, which has a rival in Cytokinetics' (CYTK) CK-274, whose data in hypertrophic cardiomyopathy ("HCM") appears comparable to BMY's. Should Mavacamtem's peak sales expectations therefore be cut in 2?

Can Opdivo grow its sales by 2x when Regeneron (REGN), amongst others, is targeting the ICI market with Libtayo, or, when Legend Biotech and Johnson & Johnson's Carvykti is now approved as a cell therapy for the same indication as Abecma, can the latter generate >$1bn per annum?

One potential weakness of BMY is that it has drugs marketed in many therapeutic areas, but does not have an exceptionally strong franchise in any one area, i.e. it has cell therapies, an ICI, a blood thinner, a TKI, an auto-immune drug - but in each field, it faces a Pharma concern with a similar drug, and at least as big a sales force and marketing infrastructure.

Conclusion - Management May Be Close To Over-Promising, But They Are Also Over-Delivering - BMY Has Finally Become A Momentum Stock

It may have taken a $77bn outlay on Celgene to get things moving for BMY share price wise, but in fairness, BMY has always been able to grow its top line revenues from year-to-year, and if it does so between now and 2029, as management have promised, investors must be rewarded for their patience.

Ambitious plans are in place, but the good thing is, it's easy to tick off successes on a scorecard thanks to the detailed guidance provided, and management frequently does provide such scorecards.

It has excelled in bringing the promised drugs to market, now it needs to deliver on the commercial front, because declining Revlimid sales are now a reality, not a prospect.

If there are problems bubbling under the surface - and analysts certainly raised a few issues during the Q421 earnings call, then that's hardly surprising, but it does seem as though there is enough momentum, enough new products, and enough cash, for BMY to meet its targets without the downside risk becoming unbearable.

For all of these reasons, I find it not too difficult to recommend BMY as one of the strongest investment opportunities in the big pharma sector at the present time. Not based on hype, current sales, or dangerously wide net profit margins, as some pharmas are, but on demonstrable progress, cash generation, share buybacks, dividend strength, portfolio, pipeline, and above all, a simple plan that is being adhered to, and if delivered, very nearly guarantees growth in top and bottom line, and in market cap valuation.

As mentioned above, my long-term price target would be $80 - $90, or an upside opportunity of ~25%.

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This article was written by

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Disclosure: I/we have a beneficial long position in the shares of BMY, ABBV, GILD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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