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Investment Overview for Bristol-Myers Squibb (NYSE:BMY)
Below are key drivers of Bristol-Myers Squibb's value that present opportunities for upside or downside to the current Trefis price estimate for the company's stock:
Less than expected success in immuno-oncology
- Bristol-Myers Squibb Oncology Drugs Revenue: The sales of Bristol-Myers Squibb's cancer drugs have grown rapidly in recent years, thanks to the success of Yervoy and ramp up of Opdivo (Nivolumab). We currently forecast the revenues from cancer drugs to increase from $4.2 billion in 2015 to nearly $12.8 billion by the end of our forecast period. Most of this increment will be attributed to Opdivo and newly launched drug Empliciti. This forecast is based on our assumption that Opdivo will get additional approvals, and Empliciti will gain strong adoption. However, if these assumptions don't materialize and the division's revenue falls $3-$3.5 billion below our forecast, it could result in nearly 15% downside to our price estimate.
Hepatitis C ramp up exceeds expectations
- Bristol-Myers Squibb Virology Drugs Revenue: Considering that Bristol-Myers Squibb's key anti-viral drugs such as Baraclude, Reyataz and Sustiva will witness sales loss due to patent expiry, much of the company's hope rides on ramp up of its Hepatitis C drugs, especially Daklinza. We currently forecast the company's virology drugs revenue to decline in the long run. This is despite our estimate that the Hepatitis C franchise will bring in nearly $3.1 billion in annual revenue by the end of our forecast period. The franchise is facing stiff competition from Gilead Sciences Epclusa. However, considering that the market is growing Daklinza has some advantages, our estimates could turn out to be conservative. If the franchise adds additional $1.5-$2 billion in annual sales by the end of our forecast period, there could be nearly 10% upside to our price estimate for Bristol-Myers Squibb.
Bristol-Myers Squibb is a biopharmaceutical company that discovers, develops and sells pharmaceutical products globally.
Over the last few years, the company has executed a strategy to transform itself into a core biopharmaceutical company. As a result, it divested its non-pharmaceutical businesses including, Medical Imaging and ConvaTec in 2008, and Mead Johnson in 2009, and acquired Kosan Biosciences in 2008, Medarex in 2009, ZymoGenetics in 2010, Amira Pharmaceuticals in 2011, Inhibitex and Amylin Pharmaceuticals in 2012.
The company's products primarily include small molecules, which are chemically synthesized drugs, and products from biological processes called biologics. Most of the company's revenues come from products belonging to the following therapeutic classes: oncology, virology, immunology, neuroscience and cardiovascular. It sold its global anti-diabetics portfolio to AstraZeneca in 2014.
Oncology drugs form the most valuable business segment for Bristol-Myers Squibb.
High revenue contribution
Oncology drugs accounted for nearly 25% of Bristol-Myers Squibb's revenue in 2015. However, this figure stood below that of virology drugs (32%) but stood much higher than other segments including cardiovascular, neuroscience and immunology. Nevertheless, the valuation of oncology drugs business is significantly higher than that of virology drugs due to higher expected growth.
High expected growth for oncology drugs
We expect revenue from oncology drugs to increase from $4.2 billion in 2015 to $12.6 billion by the end of our forecast period. Consequently, the revenue contribution will increase from 25% to more than 58% during the same time period. This amounts to annual CAGR of nearly 17%. In comparison, we expect virology drugs revenue to decline at a CAGR of -0.3% during this period. New oncology drugs Opdivo and Empliciti hold promise.
Patent expiry leads to significant loss in net sales
In the pharmaceutical industry, after a patent expires the use of generics becomes widespread due to the higher cost of patented drugs. This switch to generics causes net sales of the patented drug to fall significantly and often sharply. In case of Bristol-Myers Squibb, the company lost patent exclusivity of Plavix and Avapro/Avalide in May 2012. Since then sales of these two drugs have experienced a sharp and significant decline in sales.
Accordingly, research-based pharmaceutical companies need to continuously invest in R&D to develop and launch new drugs in order to offset these lost sales.
Launch of new drugs or approval for an additional indication
A new drug or regulatory approval for an additional indication of a drug (essentially another use for the drug) provides an opportunity for further topline growth.
Therefore a company's drug pipeline is extremely important in order to sustain long-term revenues.
Generic competition and patent litigation
Generic manufacturers do not need to invest in costly and time consuming drug trials to prove the safety and efficacy of their drugs. They can use the drug trial data of the corresponding patented drug, owned by a research based pharmaceutical company, to seek regulatory approval for their drug. This allows generic manufacturers to price their products significantly lower in comparison to patented drugs. Thus, after the patent period generic competition nearly wipes out sales of the patented drug.
Manufacturers of generic products sometimes launch a generic product before the expiry of the applicable patent, leading to patent litigation with the patent-owning pharmaceutical company. A negative outcome for the pharmaceutical company results in significant revenue losses. For example, in Canada, Bristol-Myers Squibb lost patent exclusivity for Plavix in a case with Apotex Inc in December 2011, prior to the scheduled loss of market exclusivity.
Globalization of healthcare reforms
Governments around the world have been trying to implement healthcare reform measures, many of which are aimed at reducing the cost of healthcare. Some of this legislation could result in price reductions in the pharmaceutical industry, thus pressuring revenues.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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