Bristol-Myers Squibb: Market Uncertainty Makes For A (Potential) Buying Opportunity

Investment Thesis

The S&P experienced its worst day of trading for 2 years on Monday, falling more than 3% on coronavirus fears as traders switched to risk-off mode pending further news on the spread of the disease and its likely effect on the economy. At the same time, an emphatic win for Bernie Sanders in the Nevada caucuses put pressure on stock prices of healthcare insurers and big-pharma concerns – the Democratic candidate’s desire to nationalise health insurance and slash the prices of prescription drugs is well-known.

Whether these twin developments will finally bring an end to the long bull market and drive down the price of healthcare stocks over the long term is open to debate, but for those who believe these setbacks are temporary – that the coronavirus fears will have eased by April and that Sanders will not win the Democrat nomination or will fail to overcome President Trump in November – the current dip in prices of many blue-chip healthcare stocks provides an opportunity to acquire positions at the lowest levels so far this year.

Bristol-Myers Squibb stock price vs S&P 500 plus numerous healthcare ETFs. Source: TradingView

When Bristol-Myers Squibb (BMY) completed its protracted takeover of Celgene in November 2019 there was uncertainty about whether the deal represented good value – even BMS’ largest shareholder, Wellington Asset Management, had been against the proposal – but to date the share price gains have fully-justified BMS managements’ faith.

BMS stock has gained 18% since the Celgene deal rising from $57 to a high of $67 in mid-January, but has since dropped to $62 at the time of writing owing to the headwinds mentioned above. As such, investors who missed out on the gains provided by the acquisition (BMS stock traded as low as $43 in July last year) now have a chance to buy in at a price that will seem cheap if the company delivers the growth it has projected for 2020 and beyond, and the systemic threats that are pulling the overall healthcare market down fail to materialise.

In this article I will provide a brief overview of BMS’ post-acquisition portfolio, highlight some strengths, opportunities and threats the company faces, discuss the company’s pipeline of new drug candidates, new indications for its commercialised candidates, the threat of generic competition, and whether I support management’s view that sales of $41.5bn are achievable in 2020.

There’s no doubt that 2020 represents a transitional year for BMS as they attempt to integrate Celgene’s portfolio into their existing business structures. The very limited (besides sales targets) financial forecasts the company has provided are hard to decipher, with a significant difference between GAAP and non-GAAP EPS and no detail on EBITDA or net profit margins making it hard to make a call on a current fair value price for the stock. The company’s debt pile post-acquisition now stands at ~$45bn – up from $5.6bn at year-end 2018.

What we do know, however, is that BMS pays a generous dividend, intends to complete stock buybacks in 2020, and now has three of the world’s top 10 best-selling drugs in its portfolio – Opdivo, Revlimid and Eliquis – and two out of the top three. Analyst consensus 12-month price targets for the stock are ~$71 with a low of $63 and high of $80. My price target would be the midpoint of $71.

As for timing a purchase, I do not think there is any immediate rush – healthcare stocks may be in the doldrums for some time and a Sanders’ win in 2020 will put long-term pressure on the sector. Whilst I can’t see BMS stock slipping back into the $40s I think the stock price may have further to fall. If it drops below $56 I would be very tempted to go ahead and purchase some BMS stock as I believe the underlying value of the company justifies a higher price.

Company Overview

As mentioned the Celgene acquisition has transformed BMS, making it the world’s fourth largest pharma concern (behind Pfizer, Novartis and Roche) with franchises in oncology, haematology, immunology and cardiovascular disease.

Commercial Portfolio

The company earns 59% of its total revenues ($26.15bn in 2019) in the US, 24% in Europe and 17% across the rest of the world. Prior to the deal for Celgene BMS’ top 3 selling drugs – Eliquis ($7.9bn of revenues in 2019), an oral factor XA inhibitor targeting stroke prevention and treatment of VTE disorders, Opdivo ($7.2bn), a monoclonal antibody targeting various types of cancer, and Orencia ($2.98bn), a treatment for rheumatoid arthritis (“RA”) and psoriatic arthritis (“PsA) contributed ~70% of the company’s total revenues.

Yervoy, a monoclonal antibody targeting unreselectable or metastatic melanoma made $1.5bn of sales for the company in 2019 and is also approved in multiple markets in combination with Opdivo to treat melanoma and colorectal and renal cell carcinoma (“RCC”) – trials for this combination targeting other tumor and disease types are ongoing. Sprycel, an oral inhibitor of multiple tyrosine kinase indicated for treatment of various types of Chronic myelogenous leukemia, made $2.1bn of sales in 2019 (source: BMS 10K Submission 2019)

From the Celgene portfolio (which made total worldwide sales of ~$17bn in 2019) Revlimid – an orally administered immunomodulatory drug administered with dexamethasone for treatment of multiple myeloma – made sales of $10.8bn in 2019 making the drug by some distance the biggest contributor to Celgene’s revenues. Pomalyst/Imnovid – an orally administered third-line treatment for multiple myeloma – made sales >$2.0bn whilst the third biggest contributor to Celgene revenues Otezla (revenues ~$1.9bn, indicated for psoriasis) was sold by BMS to Amgen for $13.4bn to help secure approval from the FTC for the takeover (although BMS also has a psoriasis treatment candidate in development which they believe is close to approval).

BMS drug portfolio & sales 2018 and 2019 (Celgene acquired drugs highlighted yellow). Source: my table taken from BMS 10K 2019 submission data.

The table above breaks down BMS’ current portfolio more clearly and also shows that, amongst the company’s “prioritized brands” all grew sales revenues on an annual basis, with Eliquis performing particularly impressively achieving 23% year-on-year growth. Eliquis continues to take market share from the older and less effective blood-thinner Warfarin, although the drug also competes for market share with 2 other rivals – Bayer’s Xarelto and Boehringer Inghelheim’s Pradaxa.

I have highlighted the brands acquired from Celgene – the sales figures represents only their contribution to BMS revenues in 2019 hence there is no comparable 2018 data – but – with a $1.2bn revenue contribution between November 19th and year end we can already see that Revlimid will be a key revenue driver for BMS in 2020 and beyond.

On the other hand, BMS’ “Established Brands” have seen sales decline over the same period – by 26% – and their contribution to the company’s overall revenues declined from 14% to 9% year-on-year. An “Established Brand” is really one that is now competing against generics or other drug brands owing to the expiration of their patents – as such they are a good illustration of what can happen to a drug’s sales once a patent expires.

Patent (expiry) pending – the dangers for BMS

Patent protection and exclusivity is crucial to drug developers who spend billions of dollars developing drug candidates and progressing them through lengthy and expensive clinical trials. If commercialised, the new drugs are usually granted an exclusivity period which prevents other drug developers from copying the formula and competing in the same markets. But these anti-competitive periods don’t last forever, and when a drugs’ loss of exclusivity (“LOE”) occurs its sales are liable to come crashing down.

LOE dates for BMS portfolio drugs. Source: BMS 10K submission

As we can see from the table above, for example, the exclusivity period for Revlimid will come to an end in 2022, and not just in Europe but also in the US (info can be found in the table’s footnotes) where two companies, Natco Pharma and Alvogen have been granted permission to sell volume-limited amounts of generic Revlimid – lenalidomide – after settling litigation with Celgene, from March 2022. In fairness, although the volume-limited amounts are confidential, they increase period by period “to no more than a single digit percentage” until 2026, when the limitation expires. Hence, my understanding would be that the generics can take no more than a 20% US market share until 2026.

Still, sales of Revlimid will be impacted more severely in Japan and Europe one would assume, whilst we can also see the LOE for big-sellers Orencia and Sprycel occur in 2021, and 2020 respectively.

As mentioned previously BMS expects to generate sales of between $40.5bn – $42.5bn in 2020. If we make a rudimentary calculation and bolt on Celgene’s ~$17bn of sales in 2019 to BMS’ $24.5bn (I have subtracted out the Celgene sales included in the initial BMS FY calculation of $26.15bn) we get precisely $41.5bn – the midpoint of the company’s 2020 forecasts – which illustrates that falling sales across any brand owing to generic competition might create problems for the company – although management will doubtless expect growth in some brands, plus new drug approvals and new indications for existing ones to offset losses in others (and I am in agreement here).

The point I am trying to make is that pharma companies must maintain a constant balancing act, rapidly switching focus from “Established Brands” whose sales are dwindling, to making the most of patent protected “Prioritized brands” and ensuring there is a promising pipeline of new drugs approaching commercialisation that can replenish those that no longer make profits for the company.

In the clinic – BMS’s portfolio of drugs approaching commercialisation + new indications & combinations

Pharma companies can (and do) manage the problem of LOE in 2 ways. By developing new drugs, and by finding new treatment indications for existing drugs, either as a stand-alone treatment or in combination with other drugs.

The list of BMS candidates in trials across the fields of hematology, oncology, immunology, cardiovascular and fibrotic diseases is included in the company’s latest 10K but is too large to reproduce here! So let’s focus on the company’s potential registrational readouts for 2020 and 2021.

BMS potential registrational study readouts anticipated through 2021. Source: BMS 10K 2019

As we can see Opdivo, and Opdivo in combination with Yervoy dominates the metastatic and early stage settings. Opdivo is engaged in a close battle with Merck and Co’s Keytruda for market share and best-in-class status and at present it would probably be fair to say that Opdivo is (narrowly) losing the battle. Opdivo grew revenues by just 7% year-on-year in 2019 and achieved a measly 1% growth between quarters 3 and 4. Management has warned the drug may be “under pressure” but the trials with Yervoy could bring in some much-needed positive news.

Last week BMS released further positive data from its CheckMate-214 phase 3 trial. Compared to standard-of-care treatment sunitinib the Opdivo / Yervoy combo achieved a superior overall survival rate at 42 months (52% vs 39%) with an overall response rate (“ORR”) of 42% vs 26% for sunitinib. Furthermore, an update from the Phase III CheckMate -025 trial showed superior OS and ORR when compared to everolimus. The company also received approval from the European Medicines Agency to use Opdivo / Yervoy as a treatment for RCC in January.

There has been bad news too, however – Opdivo / Yervoy has been rejected in Europe as a first line treatment for lung cancer and kidney cancer, despite the combo having been approved for kidney cancer in the US. Keytruda, on the other hand, has been approved in the US for first line lung cancer. On the Q4 earnings call, BMS management were hopeful they will secure approval for first line lung cancer in May this year. The battle looks set to rage throughout 2020 and 2021, burning up vast amounts of both companies cash, but the rewards on offer mean neither company will want to cede any ground.

Returning to the readouts another highlight to look out for in 2020 will be results from trials of the liso-cel and ide-cel CAR-T therapy treatments acquired from Celgene. Recently published data looks promising, and BMS say they intend to submit a biologics license application before the end of the year to start the process of applying for the candidate to be commercialised. Trial data indicated high rates of durable responses to treatment and low rates of adverse events such as cytokine release syndrome or neurological issues.

Finally, BMS should discover in March whether Ozanimod – a treatment for multiple sclerosis – will be approved by the FDA. Another candidate developed by Celgene the drug almost won approval two years ago but was rejected by the FDA at the time owing to incomplete submission data. If approved, Ozanimod will compete against, amongst others, Roche’s Ocrevus. Ozanimod has been shown to be an effective treatment in clinical trials and sales expectations have been estimated to exceed $1.5bn.

Conclusion and fair value price calculation

With a company the size and scale of BMS it can be hard to forecast which business sectors will thrive and which will disappoint, and the limited forward financial information provided by the company makes the task harder still.

Management have suggested that growth will be driven by new opportunities (e.g. Ozanimod, liso-cel, Opdivo / Yervoy approvals) rather than growth in the existing portfolio which is subject to intense competition from competitors and emerging generics.

BMS 2020 guidance. Source: company Q4 earnings release presentation.

BMS have forecasted GAAP EPS of $0.75 – $0.95 for 2020 and $6 – $6.20 on a non-GAAP basis. The table above seems to suggest total operating expenses of ~$18bn which would represent a significant discount to 2019’s figure of $21.1bn so I will assume that cost of sales has not been included in the company’s calculations and instead use 2019’s operating margin of 81% as my guide.

Interest income / expense will certainly be higher that in 2019 thanks to the $45bn of debt the company took on to complete the Celgene acquisition. The company also suggests a GAAP tax rate of ~43% and non-GAAP of 17%. I have decided to use a standard tax rate of 21%.

This gives me a 2020 net profit figure of ~$5bn and EPS of $2.95 which is close to the midpoint of GAAP and non-GAAP suggested by the company. Free cash flow I also calculate to be around the $5bn mark. Projecting out the numbers I am assuming a revenue growth rate of 8% rising to 10% by 2025 and operating margin increasing steadily to ~30% (as the Celgene acquisition starts to realise cost savings which have been estimated by BMS to be $2.5bn in the first year), which gives me a suggested revenue figure of ~$65bn by 2025 and net profits of ~$15bn (net profit margin of 23%). FCF in 2025 would be in the region of $16.6bn.

Therefore, using a WACC of 14.2%, debt equity split of 71 / 29 and expected market return of 15% I arrive at a present firm value figure OF $120bn and a fair value price of $71.

Naturally, I would not urge any investor to take these figures as gospel but as some kind of ballpark figure guide. A pharma company’s revenue growth is dictated by new drugs, approvals, expiring patents, legal challenges, trends in medical treatments, government authorities such as the FDA and CMS, and many other factors besides. Although growth may look steady to an outsider (e.g. 8% per annum) in reality that consistency is likely to have been achieved more by accident and circumstance than by design, in my view.

That said, as mentioned in my intro I do believe that a price of $71 represents a reasonable price at which to purchase BMS stock and the fact that BMS stock currently trades at a 15% discount to that figure make me bullish about the potential for share price growth. The current uncertainty in the markets could be resolved quickly if, for example, the threat of coronavirus dissipates but where healthcare is concerned I believe it may go on a while longer – possibly until the end of the presidential elections.

Hence, although I am bullish in the long-term about BMS – because I believe the strength of BMS’ portfolio post-Celgene acquisition means it can find the costs synergies and revenues streams it needs to deliver shareholder value – I believe the current volatility in the markets means investors should keep a close eye on the markets and try to time their investment right.

A few more bad days and we could see BMS trading in the low $50s – perhaps the optimal time to buy may be in mid-march ahead of the decision on Ozanimod which would surely give BMS stock a nice boost, should the verdict be positive.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BMY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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