Daniel Grizelj
Investment Thesis
In my opinion, Bristol-Myers Squibb (NYSE:BMY) stands at a critical juncture. My forthcoming analysis contends that the company’s valuation and future market position may be at risk due to the looming patent expirations of its blockbuster drugs. I aim to dissect the potential impact of these expirations on BMY’s revenue and scrutinize the company’s strategic responses, such as its recent product launches and the strength of its development pipeline. I believe it’s crucial to assess whether these initiatives can truly compensate for the anticipated revenue shortfall. In my view, management’s optimistic long-term projections require a rigorous examination to gauge their feasibility amidst the challenges ahead.
Furthermore, I think that a closer look at BMY’s valuation metrics in relation to the sector median and the Seeking Alpha grades is warranted. In my assessment, these financial indicators will reveal much about the stock’s current standing and the market’s expectations of its earnings trajectory. I intend to explore whether the current stock price reflects an accurate anticipation of BMY’s future performance or if it overlooks the fundamental risks associated with the patent cliff. My analysis is driven by the premise that investors should be fully informed about the potential disconnect between BMY’s valuation and its near-to-mid-term business realities. Ultimately, I aim to articulate a clear rationale for my sell thesis (whilst including bullish indicators for a comparative analysis), based on my interpretation of these various factors and their implications for BMY’s stock.
Introduction
Bristol-Myers Squibb is a prominent global biopharmaceutical company, renowned for its innovative approach to developing treatments for serious diseases. Today, the company stands at the forefront of research in oncology, immunology, cardiovascular, and fibrotic diseases, driving progress in areas with significant medical needs. Its commitment to patient-centric healthcare has led to the creation of several life-changing medicines and therapies. Headquartered in New York City, Bristol-Myers Squibb operates worldwide, emphasizing quality, safety, and ethical practices in its mission to discover, develop, and deliver innovative medicines that help patients prevail over serious diseases. The company’s dynamic approach to healthcare is a testament to its dedication to improving global health outcomes.
The Potential Impact of Patent Loss
BMY faces significant risk from imminent patent expirations for leading drugs Revlimid, Eliquis and Opdivo. In the third quarter of 2023, Bristol Myers Squibb’s major products—Revlimid, Eliquis, and Opdivo—formed a substantial portion of the company’s revenues. Revlimid contributed around 13%, Eliquis was about 24.6%, and Opdivo accounted for approximately 20.7% of the total $11 billion revenue, cumulatively making up roughly 58.3% of the company’s revenue for the quarter. However, exclusivity on all three will terminate within the next few years, exposing substantial sales to instant competition from generics and biosimilars.
Revlimid has already started this slide – its 2022 Q4 revenues plunged 32% YoY amid early erosion from the first Revlimid generics hitting the market in 2022 after loss of exclusivity. But the impact is just beginning, with more competitors launching Revlimid copies I believe the risk of losing market share outweighs the reward in this aspect.
A similar expiry cliff lurks for blood thinner Eliquis, partnered with Pfizer, in 2026 and cancer immunotherapy Opdivo after that in 2028. Again, both of these currently rank among BMY’ largest revenue contributors. But standard discounts for generics and biosimilars will drastically shrink their profit contributions post-expiry.
With 58.3% of revenues at risk, BMY is depending on its nine 2022 product launches and six late-stage pipeline assets to account for any loss of upcoming sales. However, new drug launches often severely underperform expectations. And even if late-stage assets reach market successfully, they still face inherent launch risks and must replicate three current blockbusters revenue.
Considering common new drug delays and commercial struggles, odds seem low that BMY’s pipeline can fully offset revenue hemorrhaging from core brands losing protection. With leading drug revenue cliffs arriving imminently and speculative pipeline replacement efforts still unfolding, I believe BMY earnings could sustain substantial shocks for a period of time (long-term). Unless late-stage assets firmly establish themselves commercially first, income-focused investors face too much uncertainty to warrant owning battered BMY stock through this transition.
Management’s Outlook
Several key new product launches are underperforming, leading BMY to push back its target for the new portfolio to reach over $10 billion in sales from 2025 to 2026. Bristol-Myer COO Chris Boerner acknowledged:
“We have, however, recognized the timing change that we’ve communicated today, and that’s really around a few things. First, there are, as I mentioned in the prepared remarks, a number of products where expectations — where performance is achieving, if not exceeding expectations. However, we also have to acknowledge that there are a few products where the dynamics are different. For products like Sotyktu and Camzyos, the reality is while the long-term potential for these products remains unchanged, it’s taking a bit longer” – Q3 earnings transcript
The delays signal challenges in gaining traction in competitive spaces. These issues arise alongside declining contributions from aging blockbusters like Revlimid. With 60% of expected revenue erosion to occur by year end, revenues could fall sharply in its absence, offsetting growth due to a struggle to replace the current revenue from veteran drugs.
Management, however, maintains a bullish long-term view, predicting considerable future pipeline expansion:
“We have exciting opportunities to strengthen our pipeline and deliver more important medicines to patients across therapeutic areas, including expanding our registrational pipeline from six to 12 assets over the next 18 months” – Q3 earnings transcript
This ambitious vision depends on flawless in-house and acquired asset development to offset brands losing exclusivity. So far, however, some newly launched products have stumbled out of the gates. If new product troubles persist, hitting registration and clinical targets could remain elusive.
At the same time, margin guidance declined to above 37% from over 40% due to additional spending on both new and forthcoming pipeline products. As COO Boerner emphasized:
“We continue to see opportunity to invest in our launch portfolio and invest behind products like Camzyos and Sotyktu” – Q3 earnings transcript
If new product sales disappoint, however, BMY risks missing even its reduced margin goals. Given multiple new product delays already and possibility of further pipeline setbacks, coupled with shrinking contributions from aging blockbusters, BMY’s growth outlook in the medium term appears cloudier than management’s bullish commentary suggests. Continued pipeline setbacks or steeper-than-expected sales drops from brands losing exclusivity warrant a sell rating on BMY until commercial and R&D execution materially improve.
The Bullish Indicators
Despite recent new product launch delays, Bristol-Myers Squibb retains meaningful upside potential stemming from its deal-making capabilities and still-substantial pipeline of new products, which include Reblozyl, Opdualag, and Zeposia. Continued flawless execution and additional value-enhancing acquisitions could drive improved growth trajectories not fully reflected in the current stock price.
Several pipeline assets retain blockbuster peak sales expectations per management, including recent approval of repotrectinib and pending KRAS inhibitor adagrasib from the planned Mirati acquisition. Repotrectinib targets a high unmet need in the lung cancer population, while adagrasib showed promising efficacy in similar groups. If upcoming Phase 3 data cement best-in-class profiles, these compounds could quickly ascend to become major contributors. However, the number of new lung cancer cases continues to decrease, partly because more people are quitting smoking (or not starting). Additionally, products like ZYN from Phillip Morris are shifting toward and promoting smoke-free products, which has gained major traction from the younger population as a “better” alternative.
Beyond the nearer-term candidates, as BMY continues to augment its earlier-stage assets, it could maintain momentum in enhancing the prospects of restocking its portfolio while other brands face the loss of exclusivity. Based on the Q3 earnings results, Reblozyl, Opdualag, and Zeposia in the new portfolio of products have respectively earned $248mm, $166mm, and $123mm. These are the highest earners in the portfolio of nine, which after the top three drop by $30 million and beyond. It’s questionable whether these products along with others that are brewing can account for the current whopping revenue of the in-line portfolio, but I would like to emphasize the following, so please read carefully: The total revenue generated by the full range of products amounted to $9.27 billion, with the new product line contributing $977 million to this total, per Q3 earnings report. The new product portfolio accounts for 10% of the entire portfolio, just 10%! This really illustrates how dependent the veteran drugs really are.
Moving along, supplementing internal development, business development remains BMY’s “top priority for capital allocation” per Boerner. The company retains enviable financial flexibility after the Mirati transaction. Further disciplined deals targeting innovative therapies with strategic fit could provide additional catalysts.
Still, flawless execution across clinical, regulatory, and commercial domains represents an imperative to fully capture pipeline promise and support a possible positive outlook. Encouragingly, the new products I mentioned like Reblozyl, Opdualag, and Zeposia are meeting or exceeding launch targets so far, which is a positive, but this must continue for many others, too.
If new product sales can soon inflect positively and business development bears additional fruit, Bristol-Myers Squibb could enter a new phase of reliable growth. Margin pressure may persist near-term, but if topline expansion trends upward sustainably, profitability has room for upside surprises as well.
With transformational pipeline promise still intact if dependably executed upon, the stock warrants consideration by risk-tolerant, long-term focused investors. Buying upon additional pipeline advancements or deal announcements could better optimize return potential. Still the turnaround underway, if maintained, may reward shareholders willing to weather possible interim volatility.
Valuation
Bristol-Myers Squibb’s valuation presents a nuanced picture for my sell thesis. The forward Price to Sales (P/S) ratio at 2.22, significantly lower by 38.33% than the sector median, could be a double-edged sword. On one hand, it might suggest a potential undervaluation; on the other, it could raise concerns about the company’s sales growth and market competition, supporting the bearish outlook.
Similarly, the forward Price to Earnings (P/E) ratio is 12.91, a substantial 50.46% below the sector median. While a lower P/E is often attractive, indicating possible undervaluation, it may also hint at expected earnings headwinds or a market anticipating slower growth for Bristol-Myers Squibb, which validates my sell rating.
The forward Price to Book (P/B) of 3.43 stands above the 2.43 sector median. In isolation, this metric typically triggers a sell signal, as it indicates the company is overvalued with its net assets relative to peers. In combination with the ‘C-‘ grade from Seeking Alpha, it might reinforce concerns about the company’s future value growth.
Overall, these metrics, taken together with Seeking Alpha grades, may bolster the argument for a sell thesis. Investors might perceive the lower valuation multiples not as a discount, but as a reflection of potential risks, such as competitive pressures or slowing growth, which could impact Bristol-Myers Squibb’s stock performance.
Conclusion
In conclusion, my deep dive into Bristol-Myers Squibb paints a picture of a company at a crossroads, with its immediate future clouded by significant patent expirations. The impending loss of exclusivity for its top drugs casts a long shadow over its revenue prospects, and the success of its strategic pivots remains uncertain. I have reservations about the company’s ability to offset the expected downturn with its current pipeline, and management’s optimistic projections strike me as potentially too rosy given the market realities.
The valuation analysis, while highlighting some positive metrics, doesn’t fully alleviate my concerns, especially when considering the broader industry context. The stock’s current price might not be factoring in all of the challenges ahead, suggesting a possible disconnect from BMY’s 12 month outlook. I believe a deeper discounted stock price of sub-$40 is appropriate to maximize value and possible upside; this would be a 5-year low. In my opinion, I would only begin a long position contingent on new portfolio products gaining enough traction to observe a foreseeable replacement of upcoming patent expirations. Therefore, I stand on a sell rating, advising caution for investors who prioritize stability and predictability. While BMY’s history of innovation and its portfolio’s potential cannot be discounted, the near-term headwinds are too strong to overlook. Investors will need to carefully weigh these risks against any potential upside, keeping a close eye on the company’s execution of its strategic initiatives in the coming months.
