The share builds up momentum again
In my last analysis in November, Bristol-Myers Squibb (BMY) stock was a clear underperformer versus the S&P 500 (SPY) and iShares Nasdaq Biotechnology (IBB). This picture has improved significantly, at least in the short term. Over the past three months, the share price has risen by 8% and thus significantly outperformed the S&P 500 and the Nasdaq Biotechnology.
On a positive note, the share has been very stable in recent weeks despite the high volatility, a sign of relative strength that has not been seen for some time. Bristol-Myers Squibb is also benefiting from the slight sector rotation from High-Growth to Value/Quality, as it is probably one of the cheapest stocks among US large caps currently available.
Q4 and FY 2021 Summary
The Q4 figures were broadly in line with expectations. Total sales were $12 billion, representing year-on-year growth of 8.3%. Since the GAAP result this year does not adequately reflect the actual development of the operating business due to extraordinary write-downs in connection with the acquisitions made, the non-GAAP result is relevant at Bristol-Myers Squibb. Earnings increased by 25% to $1.83. The company has sales of 46.385 billion (9.1% y/y) for the entire year with a profit of 16.854 billion or EPS of $7.51 (16.5% y/y). This puts the net margin at a comfortable 36%.
In addition to this high margin, highlights in the annual report included sales increases from Opdivo and Eliquis. Opdivo sales, for example, increased by 11% in the fourth quarter. With annual growth of 8%, management’s goal for the drug to return to growth in 2020 after a weak year was achieved. Eliquis grew dynamically by 18% in the fourth quarter, delivering an effective full-year growth rate of 17%. Eliquis is thus likely to remain one of the key growth drivers in the coming years.
In addition to slightly disappointing stagnating sales at Orencia and Sprycel, sales of Revlimid, in particular, fell short of expectations. In what was probably the last quarter of patent protection, Revlimid only achieved one per cent growth and the 6% figure for the year as a whole is also relatively meagre. From the coming quarter onwards, sales are likely to decline, but more on this in a moment when I discuss the Group’s outlook.
Dividend increase, organic Growth and Buybacks despite crucial patent losses
The outlook for the coming fiscal year was essentially the same as that already communicated at the J.P. Morgan HealthCare conference. In this respect, there were few surprises. Sales are expected to increase to at least $47 billion, while earnings per share are expected to range between $7.65 and $7.95. It remains a sign of strength that management expects sales and profits to rise despite the partial patent loss with Revlimid.
Revlimid sales are expected to be around $9.75 billion, down 24% or $3 billion in absolute terms. In addition, Abraxane is also losing exclusivity, which is expected to cost another 500 million in sales in 2022. This 3.5 billion in losses must, therefore, first be compensated. But the management is once again proving that it can take timely action to increase shareholder value despite decisive patent losses.
A further increase in the quarterly dividend by a robust 10.2% growth rate, or $0.54 per share, was announced in December. This value corresponds to a dividend yield of 3.3% on today’s closing price. At 33% of free cash flow, the payout ratio is not exceptionally high and leaves further scope for further increases in the coming years. In addition to the dividend, the company announced a massive $15 billion share buyback program on the same day, of which $5 billion will be directly executed on an accelerated basis in the first quarter of 2022.
This accelerated purchase is a sign that management believes the current price is too low and wants to buy back shares as quickly as possible while the price is still lacking. It is to be expected that, thanks to the high free cash flows, management will not refrain from buybacks in the coming years either. In any case, it is very appealing to investors to be rewarded with a share buyback program that represents 10% of the current market capitalization, in addition to a robust dividend.
Mid- and Long-term targets remain strong
Probably the biggest fear by far remains that the patent losses of Revlimid and Abraxane (2022), Pomalyst (2024), Yervoy (2025), and Inrebic (2026) will put the company in deep trouble, and sales will not be adequately compensated. This fear is quite understandable because the drugs mentioned above currently account for 42% of annual sales. How can this be balanced? The management has presented a clear strategy, briefly outlining here.
The medium-term plan envisages that sales in fiscal 2025 will be burdened with around 13 billion from expiring patents, attributable primarily to Revlimid and Abraxane. On the other hand, management expects about $9 billion in additional sales from organic growth of established drugs, especially Eliquis and Opdivo. In addition, it is assumed that the new drug portfolio can reach annual sales of up to 13 billion.
With these numbers, it is expected to enable mid-single digit by 2025 annually while the operating margin is expected to be a strong 40-45% in this period. These assumptions are also roughly in line with analyst estimates of $50 billion in annual sales in 2025, which is quite conservative but seems appropriate given certain risks.
The most exciting fact is probably management’s long-term outlook. While management realistically foresees a further decline in sales of loss-of-exclusivity products, it expects equally strong gains in the new drug portfolio, which has already been approved, and other successes in the promising pipeline. The pipeline should also enable annual sales growth until 2029.
I find it particularly important here that the sales declines of Opdivo and Eliquis have already been heavily calculated here, although they do not expire until 2028. I am sure that many a management would have given a long-term outlook only until 2027 and bragged about strong growth instead of addressing the patent losses of two blockbusters. It is all the more convincing that growth is expected despite Eliquis and Opdivo.
Here, the Group’s outlook differs sharply from analysts’ estimates, who expect sales to decline from 2026 onwards and anticipate sales of only $40.8 billion in 2031. This shows the low expectations for the company, which is also reflected a certain extent in the current share price.
Feasibility of financial targets and pipeline update
Since acquiring Celgene in 2019 and MyoKardia, Bristol-Myers Squibb has massively expanded its pipeline. The number of Phase 1 & 2 assets has since doubled to 64, as has the number of Phase 3 assets to 22, putting the company in an unprecedented position to more than compensate for patent losses. In combination with the presumably soon to be approved compounds mavacamten, deucravacitinib and the relatlimab + nivolumab combo, the recently approved products are expected to have a sales potential of over 25 billion by 2029.
For example, that alone would be enough to offset Revlimid, Pomalyst and Eliquis fully, but the company provided more compelling pipeline insights at its Investors Day. Behind the aforementioned late-stage assets, seven other promising compounds with blockbuster potential are expected to lead to organic growth for the company soon.
I want to highlight Bempeg & CC-92480, developed in collaboration with Nektar Therapeutics (NKTR) and touted as the next-generation Opdivo opportunity. In a series of trials, the efficiency of Bempeg versus Opdivo is being investigated in the areas of melanoma, renal and bladder. Phase 3 results in all three areas are expected as early as this year. If the results indicate superiority over Opdivo, it would be an incredible opportunity for the company to build on Opdivo’s success over the next decade.
As a potential replacement for Revlimid in the fight against multiple myeloma, Iberdomide is currently in a phase 2 trial. In combination with other agents, Iberdomide delivered convincing safety and efficacy results in 2021. Even if the drug can only partially match the success of Revlimid, it would be a multi-billion blockbuster in terms of sales. In addition, further studies are currently underway to expand Iberdomide into other areas such as Lymphoma and Immunology.
Detailed Sales Projections
Based on management’s statements and my forecasts, I have prepared a breakdown of expected sales in the coming years. This is my detailed forecast for the mid-term. By 2025, about 13 billion LOE products have been eliminated, while Key Brands add 9.4 billion in sales and the New Drug Portfolio contributes 11 billion. With these assumptions, I arrive at sales of over 53 billion in 2025.
The following table shows the long-term estimates up to 2029. Sales are expected to peak in 2027, but 2029 sales should still be higher than 2025 at just under 55 billion, as predicted by management. This should also be well above current analyst estimates of 41 billion. However, it must be mentioned here that these estimates are significantly more vague and uncertain than for 2025. After all, a large part of the estimates is based on drugs that have not yet been approved or still require approval extensions to unleash the sales potential. However, the analysts appear to be far too pessimistic.
Peer group comparison
Bristol-Myers Squibb’s market capitalization is currently $143 billion. Subtracting a cash position of 14 billion and adding short- and long-term debt of 44.5 billion, which results in an enterprise value of 173 billion dollars. With the close of fiscal 2021, EV/Sales is 3.8, and EV/Free Cash Flow is 11.9, well below historical levels of 5 and 22, respectively.
But how do these two metrics compare to competitors? In my last analysis, it was mentioned by a reader that compared the company’s metrics to somewhat inappropriate peers in the pharmaceutical sector. I am happy to take that criticism and compare Bristol-Myers Squibb’s metrics to those of Merck (MRK), AbbVie (ABBV), Amgen (AMGN) and Regeneron (REGN).
The two comparisons clearly show that Bristol-Myers Squibb is valued very favourably, not only historically but also relative to its peers. Assuming that the stock approaches its historical averages in the future, based on an EV/Sales of 5, the fair value is 211 billion and 225 billion, respectively, at an EV/FCF of 15, which corresponds to an average potential of 26% from the current price.
Discounted Cashflow Model
- Revenue grows as previously calculated until 2029
- Free Cash Flow Margin between 36% and 40%
- WACC 10%
- Terminal Growth Rate 0%
This brings me to these calculations:
The results show that Bristol-Myers Squibb is fundamentally strongly undervalued even without optimistic assumptions or massive speculation on upcoming products. These assumptions result in a value of $206 billion. With a current share count of 2.22 billion, the company’s fair value based on free cash flow is $93.2.
This corresponds to a share price potential of 43% and would theoretically be even higher if one considers that the company intends to buy back around 10% of all shares in the medium term. It would mean that the value of the cash flows would only be spread over just under 2 billion shares, and the fair value would rise to $104.
The Bottom Line
Bristol-Myers Squibb remains one of the most attractive stocks in the biopharma sector for me after the latest quarterly figures. At the current level, the stock offers a mix of organic growth, high profitability, attractive payouts through dividends and buybacks, and a strong management team with a clear strategy for the coming years. In recent years, the company has massively strengthened its pipeline through acquisitions and sound management decisions, which investors have not sufficiently rewarded.
In recent months, the share has performed very well and built up relative strength despite the high volatility on the markets. This trend will likely continue in the coming years. In addition, the historically low valuation suggests significant upside potential, both in a peer group comparison and in the discounted cash flow model. For these reasons, I rate the stock a Strong Buy and will hold my shares for many years to come.