VALUATION HIGHLIGHTS

1. Oncology Drugs constitute 62% of the Trefis price estimate for Bristol Myers Squibb's stock.
2. Cardiovascular Drugs constitute 17% of the Trefis price estimate for Bristol Myers Squibb's stock.
3. All Other Drugs constitute 16% of the Trefis price estimate for Bristol Myers Squibb's stock.

WHAT HAS CHANGED?

Coronavirus Impact On Bristol-Myers Squibb's Stock

Bristol Myers Squibb lost more than 26% – dropping from $63 at the beginning of 2020 to around $46 in late March 2020 – then spiked 32% back to around $60 now. That means it has partially recovered to the pre-pandemic levels.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound with economies opening up gradually, which will bode well for pharmaceutical companies, such as Bristol Myers Squibb.

Q4 2020 Performance

Bristol Myers Squibb garnered over $11.1 billion in sales, reflecting 39% growth y-o-y in Q4 2020. The growth primarily reflects the impact of Celgene merger, along with continued uptick in Eliquis, which grew 12% to $2.3 billion, while Opdivo saw a growth of just 2% with sales $1.8 billion during the quarter. The slowdown in Opdivo's sales growth was anticipated, amid Merck's Keytruda gaining market share. Looking at the bottom line, the company reported adjusted EPS of $1.46, reflecting 20% y-o-y growth.

Significant Uptick In Eliquis Sales

Eliquis has seen strong growth of late, and it has become the leader in the oral anticoagulants (OAC) market (total prescriptions) in the U.S., amid market share gains. The drug's sales grew sharply from $774 million in 2014 to $7.9 billion in 2019. However, Eliquis sales could start declining from 2023, as it nears its patent expiry, which will likely result in stiff competition from other drugs.

Celgene Merger

Bristol-Myers Squibb has completed the acquisition of Celgene Inc. for $50 per share in cash and one share of Bristol-Myers Squibb for each share of Celgene, which translates into a $74 billion transaction value and $90 billion if we include the debt. Additionally, Celgene shareholders get contingent value rights (CVR), entitling the holder to receive $9.00 in cash, subject to the U.S. FDA approval of ozanimod, liso-cel, and bb2121. The company expects annual cost synergies of $2.5 billion by 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 Oncology

• Bristol-Myers Squibb Oncology Drugs Revenue: The sales of Bristol-Myers Squibb's cancer drugs have grown rapidly in recent years, led by ramp up of Opdivo (Nivolumab). We currently forecast the revenues from oncology drugs to increase from $13.0 billion in 2019 to nearly $27.0 billion by the end of our forecast period in 2026. Most of this increment will come from Revlimid, Opdivo, and the company's new drugs. This forecast is based on our assumption that Opdivo will get additional approvals, and other drugs could gain strong adoption. However, if these assumptions don't materialize and the division's revenue falls $7 billion short of our forecast, it could result in nearly 20% downside to our price estimate.

Immunology Ramp Up Exceeds Expectations

• Bristol-Myers Squibb Immunology Drugs Revenue: Considering that Bristol-Myers Squibb's key immunology drug, Orencia, will lose market exclusivity in 2022, post which the sales are expected to decline, amid biosimilar competition, and giving 50% probability for new immunology drugs to be approved by the regulators, we forecast segment sales to be $4.9 billion by the end of our forecast period. However, considering that the market is growing, and the company does not face tough competition for Orencia, our estimates could turn out to be conservative. If the segment adds an additional $2.5-3 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.

BUSINESS SUMMARY

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, and Celgene in 2019.

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.

SOURCES OF VALUE

Oncology drugs form the most valuable business segment for Bristol-Myers Squibb.

High Revenue Contribution

Oncology drugs accounted for nearly 50% of Bristol-Myers Squibb's revenue in 2019, making them the biggest therapeutic segment for the company. This can be attributed to the strong uptake of strong Opdivo sales and the contribution of Celgene's oncology portfolio for a few weeks. In 2020, the segment is expected to account for over 65% of the company's total revenues, due to full year contribution of Celgene.

High Expected Growth For Oncology Drugs

We expect revenue from oncology drugs to increase from $13.0 billion in 2019 to nearly $26.0 billion by the end of our forecast period in 2026. Consequently, the revenue contribution will increase from 50% to around 71% during the same time period. In contrast, we expect most other business segments to either decline or grow at a slower pace.

KEY TRENDS

Growing Market Share of Eliquis

Eliquis has seen stellar growth of late, and it has become the leader in the oral anticoagulants (OAC) market (total prescriptions) in the U.S., amid market share gains. Note that the global anticoagulants market is estimated to grow in high single digits from $24 billion in 2017 to over $43 billion in 2025, according to a research report. Bristol-Myers Squibb’s Eliquis is one of the key players in this market, and the overall market growth will bode well for the drug sales in the coming years. However, we forecast Eliquis sales to start declining from 2023, as it nears its patent expiry, which will likely result in stiff competition from other drugs.

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.

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.

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 threatening revenue growth.