Many analysts think that Bristol-Myers Squibb Co is one of the best stocks to buy. Part of this reasoning is due to a favorable patent ruling for Eliquis extends its commercial life through 2026 and potentially through 2031. BMY trades at 7.9-times our 2021 EPS estimate, below the average multiple of 12.5 for our coverage universe of pharmaceutical stocks. Given the growth prospects from BMY’s pipeline and current portfolio, we think this is an attractive valuation for the stock.
Opdivo, Bristol’s flagship oncology drug, is now on track for a return to sales growth in 2021 after recently receiving two first-line approvals in lung cancer from the FDA. Opdivo, in combination with Yervoy, is now approved (using data from clinical trial CM-227) as a first-line treatment for patients with a form of non-small cell lung cancer. The combination is also approved (using data from trial 9LA) in a treatment regimen alongside two cycles of chemotherapy, to treat NSCLC. The approval under CM-227 provides patients the option to avoid the debilitating effects of chemo for the first-line treatment of lung cancer. Opdivo is approved in treating numerous other solid tumor types, such as melanoma, renal cell carcinoma and bladder cancer. Opdivo, which had worldwide sales of $1.653 billion in 2Q20 has declined 9% because it lost market share among immunotherapy drugs to competitors such as Merck’s Keytruda. Opdivo’s two approvals arrived along with recent FDA approvals of two other Bristol products. Zeposia was approved in multiple sclerosis and Reblozyl in myelodysplastic syndromes (MDS). This MDS indication (Rebloyzl’s second) provides a larger market opportunity than its first approval as a treatment for beta-thalassemia.
We see the launches for these newly approved indications as growth drivers for BMY in 2021 and beyond. Reviewing financial results, the company reported results for 2Q20 on August 6. Adjusted EPS reached $1.63, beating the consensus estimate by $0.15 and rising 38%. GAAP net loss was $85 million or $0.04 per share, compared to net income of $1.432 billion or $1.18 per share a year ago. Total revenue was $10.129 billion, compared to $6.273 billion a year ago. This was primarily driven by the Celgene acquisition, which was completed in November 2019. On a pro forma basis, which includes sales of Celgene products as if the merger closed on January 1, 2019, total revenue was flat with what it was a year ago. Product sales were negatively impacted by about $600 million due to reversal of channel buildup in 1Q20 and lower demand due to reduced new patient startups and fewer patient visits to physicians during the pandemic. Looking at product sales for the largest products, Revilimid sales reached $2.884 billion (+6%), followed by Eliquis ($2.163 billion; +6%), Opdivo ($1.653 billion; -9%), and Orencia ($750 million; -4%). Besides the launches of new indications, we see Bristol’s patent win for Eliquis, an anticoagulant drug, as another growth driver. A federal court upheld the patent claims covering Eliquis, ruling that generic products infringed on patents held by Bristol. The court upheld Eliquis’s composition of matter patent that expires in 2026 and formulation patent that expires in 2031. This effectively extends the patent protection for Eliquis at least until 2026 and possibly until 2031. Bristol and Pfizer co-developed Eliquis and share profits and losses on a 40/60 basis. Eliquis generated some $2.6 billion in sales for Bristol in 2019. Reblozyl, Zeposia, and Inrebic (approved in August 2019 for myelofibrosis) are three of the five drugs in Celgene’s late-stage pipeline that BMY and Celgene touted in January 2019 as potentially reaching blockbuster status (at least $1 billion in annual sales). The other two are the CAR T drugs liso-cel (acquired from Juno) and ide-cel (in partnership with bluebird bio), and they both currently are suffering setbacks. Launching new indications for existing products, such as Opdivo, and new products will be critical to Bristol’s revenue growth over the next 10 years. Revlimid, its largest product by revenue, will see limited generic competition in March 2022 and then expanded generic competition by early 2025. Still, Revlimid, a relatively mature drug, generates substantial cash flow that will be reinvested in pipeline development and product acquisitions.
EARNINGS & GROWTH ANALYSIS
Bristol has updated its financial guidance for 2020. It now expects adjusted EPS of $6.10-$6.25, up from a prior forecast of $6.00-$6.20. This update effectively raises the midpoint of the range by $0.075. It also reaffirmed its 2021 EPS guidance of $7.15-$7.45. Included in the updated 2020 EPS guidance are these factors: operating expenses and R&D expenses will be at the high end of the range as the company invests in launching the new indications and new products. It will also accelerate R&D spending as all clinical trial activities are resumed by year’s end. Bristol also raised the lower end of for 2020 revenue and narrowed the guidance range to $40.5 billion-$42.0 billion, from $40.0-$42.0 billion. Based on the updated guidance and the outlook for launches of new indications and new products, we are raising our estimates for adjusted EPS to $6.30 from $6.10 for 2020 and to $7.55 from $7.35 for 2021.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on BMY is Medium-Low, the second-lowest point on our five-point scale. The company used debt to fund the Celgene acquisition. As at the end of 2Q20, BMY had more than $45 billion in total debt. With cash and marketable securities of approximately $22 billion, the company has a net debt position of $24.5 billion. It is, however, committed to paying down debt. Cash flow from operations for the first six months of 2020 was $8.2 billion, compared to $3.5 billion in the 1 year ago period. BMY pays an annualized dividend of $1.80, for a yield of about 3.0%. Our dividend estimates are $1.80 for 2020 and $1.96 for 2021.
BMY faces risks in developing and commercializing new drugs, which can sometimes take 10 years. Typically, only a small percentage of drugs that enter clinical trials emerge with FDA or EC approval. On the other hand, drugs that reach patent expiration and lose marketing exclusivity face competition from generics or biosimilars. In the race to achieve approval for Opdivo as a first-line treatment for lung cancer, BMY is seeking a competitive position for the drug behind market leader Keytruda.
Bristol-Myers Squibb is a leading worldwide biopharmaceutical company. Its products focus on oncology, HIV, and cardiovascular conditions. The company completed its merger with Celgene in November 2019. BMY shares are a component of the S&P 500.
BMY trades at 7.9-times our 2021 EPS estimate, below the average multiple of 12.5 for our coverage universe of pharmaceutical stocks. Given the growth prospects from BMY’s pipeline and current portfolio, we think this is an attractive valuation for the stock. The growth drivers include the launch of new indications for products such as Opdivo and Reblozyl and the launch of new products. The favorable patent ruling for Eliquis extends its commercial life through 2026 and potentially through 2031. As such, we are reiterating our BUY rating with a target price of $83.