Bristol-Myers Squibb Q1 Earnings: Is CEO Caforio's Sudden Departure A Concern?
Summary
- Bristol-Myers Squibb Company announced Q1 2023 earnings yesterday - and the shock departure of its longtime CEO Giovanni Caforio the day before.
- Caforio oversaw the $74bn acquisition of Celgene - battling his own biggest shareholder to get the deal done.
- BMY's actual Q123 earnings saw revenues decline year-on-year, although EPS grew, and guidance for 2023 was upheld.
- Sales of new products were a little lower than might be expected however - concerns as major products like Revlimid have lost patent protection.
- With Opdivo and Eliquis also losing patent protection this decade, Caforio's sudden departure may look a little suspicious - is the departing leaving his successor a poisoned chalice?
- We're currently running a sale for our private investing group, Haggerston BioHealth, where members get access to portfolios, market alerts, real-time chat, and more. Learn More »
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Investment Overview
The New York based Pharma giant Bristol-Myers Squibb Company (NYSE:BMY) announced its Q1 2023 earnings yesterday, but before it did so, the company dropped a bombshell.
Chief Executive Officer Giovanni Caforio shared the news Wednesday that he has decided to retire after 8 years at the helm. Succeeding him will be Christopher Boerner, PhD, formerly Chief Commercialization Officer.
The news appears to have come almost completely out of the blue, and it has rocked the Bristol-Myers share price, which was trading >$70 before the announcement was made on 26th April. Current traded price is $67.6.
Caforio's time leading BMY can be viewed as successful - a statement in the press release announcing his departure reads as follows:
Under his leadership over the past eight years, Bristol Myers Squibb has nearly tripled its revenue; successfully completed our transformative combination with Celgene; overseen highly strategic acquisitions and partnerships; and launched 12 new medicines, including five first-in-class assets in five different disease areas.
When Caforio took over as CEO in 2015, BMY generated just $16.5bn of revenues in that year, but by 2019, that top line figure had risen to $26bn, and in the same year BMY completed the controversial, mega-money deal of rival Pharma Celgene, in a deal valued at ~$74bn.
Caforio had to battle BMY's largest shareholder, Wellington Asset Management, to get the deal over the line - Wellington believed the deal was overpriced and carried too much risk - although today it is widely regarded as an excellent deal for BMY.
From Celgene, BMY acquired assets such as the oncology drugs Revlimid, Pomalyst, and Abraxane - assets that drove $17.3bn of sales in 2021, although their loss of patent protection saw their revenues eroded in 2022, to $14.3bn, and the declines are terminal.
More importantly, however, BMY acquired Celgene's pipeline, which included 5 late stage assets that BMY has successfully commercialised - Beta Thalassemia therapy Reblozyl, blood cancer treatment Inrebic, Multiple Sclerosis drug Zeposia, and 2 oncology cell therapies - Abecma and Breyanzi.
Inrebic aside, all of these assets are expected to generate "blockbuster" - >$1bn per annum - revenues, and under Caforio's leadership, BMY has added several more blockbusters in waiting - heart disease drug Camzyos, acquired as part of the $13bn acquisition of Myokardia in 2021, Opdualog, and Sotyktu, indicated for melanoma and autoimmune conditions respectively. All 3 have peak revenues expectations of ~$4bn.
Under Caforio's rein, BMY has spent big and tripled its revenue, but of course, the spending spree has meant taking on debt - as of FY22, the current portion of long term debt stood at $3.9bn, whilst the long term debt position was $35bn.
Considering the money spent, the debt pile could have been much higher, and the investment grade debt rating under threat, but BMY's outstanding cash flow generation has allowed it to rapidly pay down debt, whilst returning cash to shareholders via stock buybacks - there is ~$7bn remaining in the current buyback allocation - and raising its dividend every year - currently it is worth $0.57 per quarter, and yields 3.4%.
In summary, Caforio's reign at BMY looks like a success from most perspectives, although questions remain about what shape Caforio is leaving the company in going forward, why he is leaving so suddenly, and the capabilities of his replacement, Christopher Boerner, who has been with BMY since 2018, but has not held a position of such responsibility before.
The one thing that Caforio arguably failed to achieve during his time at BMY was to drive real growth in the company's share price. In mid-2016, shortly after Caforio became CEO, BMY stock traded ~$75 - it took Caforio until mid-2022 to match that peak, and it was a shortlived peak, as the current share price testifies.
Can Boerner succeed in the one area Caforio struggled, increasing BMY's flagging share price? Over the past 5 years BMY's share price is +29%, while the S&P 500 has increased in value by 55%, and rival Pharmas Eli Lilly and Company (LLY), Merck & Co., Inc. (MRK) and AbbVie Inc. (ABBV) has delivered respectively >370%, >100%, and >50%.
In this post I will first briefly review Q1 '23 earnings, then look at BMY's forward planning, and discuss what kind of challenges the new CEO will face, and whether he stands a good chance of delivering value for shareholders.
Bristol Myers Squibb Q1 '23 Earnings Review - LOEs Begin To Hit Home
BMY Q123 earnings (BMY earnings presentation)![Bristol Myers Squibb [BMY] Q1 2023 earnings](https://static.seekingalpha.com/uploads/2023/4/28/49171940-16826729195217547_origin.png)
As we can see from the above slide taken from BMY's Q123 earnings presentation, top line revenues in Q1 '23 fell year-on-year, although not by much, whilst GAAP earnings per share ("EPS") increased 81%, to $1.07, and non-GAP EPS increased 5%. I would say the latter is more representative of the kind of profitability growth BMY is driving, although total expenses fell substantially on a GAAP basis, from $9.96bn, to $8.57bn, and net earnings were $2.26bn compared to $1.28bn in Q122 (data from BMY press release).
As we can see above, BMY places great emphasis on the performance of its new products, i.e., the Celgene assets mentioned above, plus Camzyos, Opdualog, Sotyktu, and there is a good reasons for that.
BMY Product sales 2022 vs 2021 (my table using BMY data )
As per the table above, we can see that in FY22, 3 assets - the anticoagulant Eliquis, solid tumor cancer therapy Opdivo, and blood cancer drug Revlimid accounted for >65% of BMY's total revenues - just over $30bn in total.
In other words, BMY is highly dependent on these 3 drugs, but Revlimid has already lost its patent protection, meaning it is subject to generic drug competition and its revenues will likely decline by at least 20% per annum going forward, and Opdivo and Eliquis are both set to lose their patent protection this decade - in 2028 and 2026 respectively.
In a previous note on BMY, I mapped out product sales forecasts that suggest these 3 assets could drive <$15bn of revenues by 2030, a decline of 50%. To offset these declines, BMY says it expects to drive $10-$13bn of risk adjusted sales from its new products by 2025, with that figure rising to ~$25bn by 2030.
Provided this happens, as I explained in my last note, BMY ought to be able grow its top line revenues, drive better cashflow, and according to my discounted cash flow analysis modelling, grow its share price so that it is challenging a triple digit figure.
It is a strategy that can work, but there is a lot of work to be done.
BMY product sales Q123 vs Q122 (my table using BMY data )
As per the above table, in Q1 '23 the trifecta of Eliquis, Opdivo and Revlimid still contribute 65% of all revenues - Opdivo and Eliquis revenues are actually showing strong growth, which is ok for now, but that growth will end when patent protection ends - that is guaranteed.
As we can also see, the new product portfolio sales are growing too - by >100% year-on-year - but bear in mind BMY expects to see >$10bn in annual revenues from this source by 2025. That may prove very challenging when they currently generate <$1bn per quarter.
We can already see how rapidly Revlimid sales are declining - 37% year-on-year - and they are virtually guaranteed to keep falling - but are the new products "virtually guaranteed" to hit their peak sales targets?
The news on several fronts in that regard is not particularly encouraging, based on Q1 '23 performance. BMY likely expected a much better performance from Camzyos, Sotyktu, Inrebic and Onureg. Whilst it is early in their product lives, to meet blockbuster expectations, a combined revenues figure of just $175m might set some alarm bells ringing.
On the product development front, BMY reported on the Q123 earnings call with analysts that Sotyktu's Phase 2 study in Crohn's disease did not support moving the drug into Phase 3 studies - potentially limiting its peak revenue opportunity.
Under discussion also was Eliquis, whose revenue generation it seems may well be impacted by Medicare price negotiations and the drug pricing limitations imposed by the Inflation Reduction Act ("IRA").
Chief Medical Officer Samit Hirawat told analysts: "we do anticipate that Eliquis will be in the early wave of IRA price setting." Eliquis may go off patent in a few years, but it is a vital cog in BMY's cashflow machine at the present time, and falling revenues from this source could be problematic for the new CEO.
BMY 2023 guidance (BMY earnings presentation)
BMY's guidance for 2023 remains unchanged and it is a relatively encouraging set of figures - looking at the non-GAAP EPS, we can calculate a forward Price to Earnings ("PE") ratio of 8.3x, and using GAAP EPS< a ratio of ~16x, which is substantially lower than the sector average of ~23x.
On the more negative side, top line growth of just 2% is not especially encouraging, and there is increasing pressure on the new product portfolio to grow revenues faster, if it is to meet management's very high expectations, as shown below.
New product portfolio expected performance (BMY earnings presentation)
Is this portfolio as de-risked as management wants shareholders to believe, or will analysts uncover more issues in subsequent quarters?
Conclusion - Caforio's Decision To Retire Is Hard To Explain When Plans Set In Motion Remain In The Balance
Giovanni Caforio's tenure at BMY looks to have been a successful one at this time, but will his legacy be tarnished by a failure to oversee the progression from over-reliance on Opdivo, Revlmid, and Eliquis, to a more diversified product portfolio with no patent issues in play?
Based on Q1 '23 performance, you could argue that the challenge of squeezing ~$25bn per annum from the new product portfolio looks harder now than it did at the end of 2022, because the concrete evidence of product sales has not quite matched expectations.
New CEO Boerner has been with BMY since before the Celgene deal himself, and has been credited with playing a key role in driving commercial revenues, although it should be noted that revenue growth has not been especially impressive across the past couple of years and won't be in 2023, either, and BMY drives one of the lower net profit margins amongst Big Pharma concerns.
You could therefore make a case that Caforio is handing his successor a poisoned chalice, and the impossible job of turning new product sales of ~$750m per quarter into $25bn per annum in a little over 5 years. It does seem odd that Caforio would leave half way through this detailed transition plan which he helped put into place.
On the other hand, the commercial experience of Boerner may be what's needed now that the necessary product approvals have been secured. BMY's pipeline behind the new products division is not particularly substantial - I forecasted for ~$6bn in new, "new" product revenues by 2030 in my last note - although the company is likely to continue its policy of spending its way out of trouble - both Caforio and Boerner believe there are M&A deals to be made, if the Q123 earnings call is anything to go by.
Should shareholders be concerned about Caforio's departure?
As a Bristol-Myers Squibb Company shareholder myself, I intend to keep the faith, based on the steady, growing dividend, and the $7bn buyback program. As far as growing the share price is concerned, however, although I have not completed detailed modelling based on Q1 '23 performance (perhaps it is better to wait for half-yearly performance), I have a sneaking suspicion that when I share it in a future post, I will be revising my target share price down, as the new product revenues aren't quite adding up yet, while the declines in sales of Revlimid and upcoming LOE's for Opdivo and Eliquis are all too real.
This article was written by
Edmund Ingham is a biotech consultant. He has been covering biotech, healthcare, and pharma for over 5 years, and has put together detailed reports of over 1,000 companies. He leads the investing group Haggerston BioHealth.
The group is for both novice and experienced biotech investors. It provides catalysts to look out for and buy and sell ratings. It also provides product sales and forecasts for all the Big Pharmas, forecasting, integrated financial statements, discounted cash flow analysis and market by market analysis. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of BMY 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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