This Pharmaceuticals Stock Is A Better Pick Over Bristol Myers Squibb

We think that Eli Lilly stock (NYSE: LLY) currently is a better pick compared to Bristol Myers Squibb stock (NYSE: BMY) in the pharmaceuticals space, despite Eli Lilly being the more expensive of the two. LLY stock trades at about 9x trailing revenues, compared to 3x for BMY stock. Although both the companies saw a rise in revenue over the last year or so, with a rebound in demand post pandemic, along with market share gains for some of Eli Lilly’s drugs, including diabetes drug Trulicity, as well as its Covid-19 treatment, aiding its top-line expansion. For Bristol Myers Squibb, its anticoagulant – Eliquis – continues to gain market share and bolster its overall top-line growth. BMY stock has been weighed down over the recent months owing to the mounting concerns over loss of sales as its top selling drug – Revlimid – nears patent expiry in 2022.

For perspective, BMY stock is down 7% over the last six months, underperforming the broader indices, with the S&P500 rising 12% over the same period. This compares with a 32% rise for LLY stock, partly aided by hopes for regulatory approval for its Alzheimer’s treatment – Donanemab – which, if approved, will be a multi-billion dollar opportunity for Eli Lilly. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Bristol Myers Squibb vs Eli Lilly: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Bristol Myers Squibb’s Revenue Growth Has Been Stronger

Now, Eli Lilly’s revenue grew at a faster pace of 20% compared to 15% for Bristol Myers Squibb during the last twelve month period, primarily driven by market share gains for Truliciti. However, if we were to look at the last three years, Bristol Myers Squibb’s revenue grew at a CAGR of 27% vs. the CAGR of 7% for Eli Lilly. Note that Bristol Myers Squibb’s revenue expansion can also be attributed to its Celgene acquisition in 2019.

Looking forward, Bristol Myers Squibb’s revenue is expected to rise 9% in 2021, but the growth rate will likely decline to low single-digits next year, as Revlimid faces biosimilar competition. However, Bristol Myers Squibb’s other drugs, including Reblozyl, and Eliquis should continue to bolster top-line growth. Our Bristol Myers Squibb Revenue dashboard provides more insight on the company’s revenues.

Eli Lilly’s revenue is expected to rise 11% in 2021 and rise in the low single-digits next year, aided by continued market share gains for drugs, such as Trulicty, Verzenio, Olumiant, and Bamlanivima, as well as its Covid-19 treatment. The company recently announced that it will supply another 614,000 doses of its Covid-19 cocktail (a combination of bamlanivimab and etesevimab) to the U.S. government for a total of $1.3 billion, bolstering its top-line growth over the coming quarters.

2. Eli Lilly Has Seen Better Margin Growth

Looking at profitability, unlike the trend seen in revenue growth, Eli Lilly’s operating margin of 21.6% over the last twelve month period is far better than the -15.6% for Bristol Myers Squibb. Even if we were to look at last three year average operating margin, Eli Lilly’s 20.8% figure is much better than 7.8% for Bristol Myers Squibb. Eli Lilly’s operating margin of 21.6% over the last twelve month period compares with 21.8% in 2019, before the pandemic. The current operating margin of -15.6% for Bristol Myers Squibb is lower compared to Eli Lilly, and lower compared to the 22.5% figure in 2019.

It should be noted that Bristol Myers Squibb’s margins are adversely impacted due to a one-off in-process R&D charge of $11.4 billion recorded in Q4 2020. This has significantly skewed the reported margins. If we were to look at operating margin for the nine months period ending September 2021, it stands at 18.1%. Now, we see that Bristol Myers Squibb’s margins were actually better than Eli Lilly between 2016 and 2019, hovering around the 22% mark. But, Eli Lilly has seen a gradual rise from 16% in 2016 to 22% in 2019 and 22% currently. We expect margins for both companies to face some headwinds in the near term, given the inflationary pressure and supply chain constraints.

The Net of It All

Bristol Myers Squibb’s current valuation is seemingly more attractive than that of Eli Lilly, with BMY stock trading at about 3x trailing revenues, versus 9x for LLY stock, and Bristol Myers Squibb has also seen better revenue growth, courtesy of the Celgene acquisition. However, Eli Lilly has seen better margin expansion, and it is more profitable, partly explaining the difference in valuation of the two companies. Even if we were to look at financial risk, while Bristol Myers Squibb’s 14% cash as percentage of assets is higher than 8% for Eli Lilly, Bristol Myers Squibb’s 36% debt as a percentage of its equity is much higher than the 7% figure for Eli Lilly, implying that Eli Lilly has a better debt position, while Bristol Myers Squibb has a better cash cushion. This means that LLY stock does not appear to be at a higher financial risk compared to BMY stock.

On one hand we have Bristol Myers Squibb, which faces biosimilar competition for its top selling drug – Revlimid (accounts for 28% of the company’s total sales) – starting next year, and, on the other hand, we have Eli Lilly, which has a strong trigger in the form of Donanemab. If Donanemab is approved, LLY stock can see much higher levels from its current price of $262. That said, investors should weigh in the fact that Donanemab is not yet approved by any regulator. Eli Lilly has recently begun the process to get regulatory approval for its Alzheimer’s treatment. While its late stage clinical study data will be available only in 2023, the FDA will consider the accelerated approval application sometime in 2022.

Overall, with superior margins for Eli Lilly, and vast potential for Donanemab, with its peak sales estimated to top $10 billion (if approved), we think this gap in valuation between BMY and LLY is justified and LLY may continue to outperform BMY stock, going forward.