Bristol Myers Squibb Valued At $75 Per Share

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Bristol Myers Squibb

Bristol Myers Squibb’s stock (NYSE: BMY) gained almost 30% – increasing from $46 levels on March 23 when markets made a bottom, to around $60 now, underperforming the S&P500, which grew 54%. Why? Pharmaceutical companies, such as Bristol Myers Squibb are not immune to the current crisis. The spread of coronavirus has meant increased social distancing, deferment of elective surgeries, and fewer visits to doctors, impacting the overall pharmaceutical sales. That said, economies are gradually opening up. 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.

But is this all there is to the story?

No, not quite. Despite the recent underperformance, Trefis estimates Bristol Myers Squibb’s Valuation at about $75 per share, roughly 25% above the current market price based on two key opportunities and a risk.

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The first opportunity we see is to Bristol Myers Squibb Revenue growth over the coming years. The company’s 2020 revenues will include the full year sales from Celgene. Bristol Myers Squibb’s oncology portfolio now includes, Revlimid, Pomalyst, and Abraxane from Celgene, which combined could garner sales of over $15 billion in 2020, in our view. This would represent 55% of the total oncology drugs sales for the company in 2020. Looking at the cardiovascular drug – Eliquis – it has added over $1 billion in new sales each year since 2014. This can be attributed to its increased acceptance among physicians, which has led to the drug becoming the market leader in novel anticoagulants total prescriptions. Eliquis garnered $8 billion in sales in 2019, and it could peak around $11 billion. Finally, in the immunology segment, Bristol Myers Squibb has  another blockbuster drug – Orencia – which is used for the treatment of rheumatoid arthritis. While Orencia lost one of the patents in 2019, there is no biosimilar currently in the market. Looking beyond 2021, the company’s new drug – Ozanimod – could be another blockbuster drug with peak sales of over $5 billion, if approved. Currently, the drug is being tested in the phase 3 pipeline. Overall, with a mix of Celgene’s portfolio and the expansion of its own drugs, Bristol Myers Squibb looks poised for steady revenue growth over the coming years.

The second key opportunity stems from Bristol Myers Squibb’s valuation multiple compared to its own historical multiple and that of its peers. The stock now trades at 9.6x its projected 2020 adjusted earnings per share of about $6.28. This is much lower than some of its peers, Johnson & Johnson trading at 19x, Merck trading at 15x, and Eli Lilly trading at 21x their average consensus 2020 earnings. However, Bristol Myers Squibb’s revenue and earnings growth over the recent years has been faster than some of its peers. Bristol Myers Squibb’s revenues grew 35% between 2016 and 2019, compared to 14% growth for Johnson & Johnson and 18% for Merck. Similarly, looking at the bottom line, Bristol Myers Squibb adjusted earnings grew a strong 66% compared to 29% for Johnson & Johnson and 37% for Merck. As we look forward, we believe Bristol Myers Squibb revenue and earnings growth will continue to see strong growth. That said, it should also be kept in mind that though the Celgene acquisition appears to be a great fit for Bristol Myers Squibb, it has resulted in a massive surge in total debt from around $9 billion in 2016 to over $46 billion currently. As such, we believe a P/E multiple close to 12x, also seen in 2018 and 2019, will be appropriate for Bristol Myers Squibb.

 

That said, there is a risk to the company’s business.

Bristol Myers Squibb’s blockbuster oncology drug – Opdivo – with $7 billon in sales in 2019, is seeing a slowdown in its growth rate, and this trend could continue, given the stiff competition from Merck’s Keytruda, which has shown better results in recent studies. Keytruda has established a dominant position in lung cancer, the largest oncology drugs market, and it will be difficult for Opdivo to challenge it. Currently, Keytruda-chemo combo can reduce patients’ risk of death by 51%, while the figure is just 21% (based on the part 1 of the phase 3 Checkmate-227 trial). Opdivo’s future growth largely depends on its further approvals for other indications, while Merck’s Keytruda is likely to gain market share.

Furthermore, given the current Covid-19 pandemic, several types of elective surgeries were postponed in the first half of the year, and people avoided non-emergency visits to hospitals, impacting the sales for pharmaceutical companies. That said, the situation is changing on the ground with an increase in number of procedures performed as the economies open up and result in a likely increase in the number of prescriptions issued in the second half of the year. As far as the Celgene integration is concerned, the company in its recent earnings conference call stated that it is on track to deliver $2.5 billion synergies by the end of 2022.

Looking at the broader economy, the rebound in growth and its timing hinge on the containment of the coronavirus spread. Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

What if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

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