Bristol-Myers Squibb Company Fundamental Analysis
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Bristol-Myers Squibb Company
Last Updated: 9 May 2023
NYSE: BMY
GICS Sector: Healthcare
Sub-Industry: Drug Manufacturers — General
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Table of Contents
You can download a summary of Bristol-Myers Squibb's fundamental analysis in PDF here.
Management
CEO: Giovanni Caforio
Tenure: 8yrs
Bristol-Myers Squibb's management team has an average tenure of 3.7 years. It is considered experienced.
Source of Revenue
Bristol-Myers Squibb Company operates in one segment engaged in the discovery, development, licensing, manufacturing, marketing, distribution, and sale of biopharmaceutical products on a global basis.
The company focus on offering medicines for patients facing serious diseases in these areas: oncology, haematology, immunology, cardiovascular and neuroscience.
Products, Intellectual Property and Product Exclusivity
The pharmaceutical products include chemically synthesised or small molecule drugs, products produced from biological processes, called “biologics” and chimeric antigen receptor (CAR) T-cell therapies.
Small molecule drugs are typically administered orally in the form of a tablet or capsule, although other drug delivery mechanisms are used as well. Biologics are typically administered to patients through injections or by intravenous infusion. CAR-T therapies are administered to patients by intravenous infusion.
In the pharmaceutical industry, most of the product’s commercial value is usually realised during the period in which the product has market exclusivity. A product’s market exclusivity is generally determined by two forms of intellectual property: patent rights held by the innovator company and any regulatory forms of exclusivity to which the innovative drug is entitled.
Patents are important for market exclusivity in the pharmaceutical industry, giving the innovator the right to exclude others from using the invention related to the medicine. Patents cover various aspects such as active ingredients, drug delivery mechanisms, and manufacturing processes. The protection period varies depending on the expiration dates of patents in different countries and depends on the type of patent, its scope of coverage, and the availability of legal remedies in the country.
Regulatory data protection (RDP) exclusivity rights can also influence market exclusivity. Developed countries provide non-patent incentives, such as RDP exclusivity, for the development of medicines, particularly orphan drugs, and pediatric treatments. RDP exclusivity can extend the market exclusivity period beyond the patent term.
As there are 18 significant products with different indications and market exclusivity, I have decided to summarise them into a downloadable PDF for free. For more information, always refer to the Bristol-Myers Squibb Company website.
Bristol-Myers Squibb Company Product Revenue FY2022
Bristol-Myers Squibb Company Revenue Geographic Breakdown FY2022
Research and Development
R&D is a critical focus for the long-term competitiveness of the company, with efforts concentrated on disease areas with significant unmet medical needs. The R&D pipeline includes various types of potential medicines, including small and large molecules, degraders, engagers, millamolecules, conjugates, cellular and gene therapies. Bristol-Myers Squibb Company also seeks to expand the value of existing products through new indications and formulations. The clinical development process for new drugs involves preclinical testing and controlled clinical evaluation through Phase I, II, and III clinical studies to support regulatory approval for a particular indication.
Phase I involves a small number of volunteers to test safety and dosage, while Phase II involves a larger patient population to investigate side effects and efficacy. Phase III involves a significantly larger patient population to confirm Phase II results and provide conclusive data regarding safety and efficacy. While regulatory approval is typically based on Phase III results, approval can sometimes be granted based on data from earlier studies.
Drug development is a long, expensive, and risky process that typically takes around 14 years from target identification to major market approval. Drug candidates can fail at any stage, and there is a high risk of failure in each stage of development. According to the KMR Group, the failure rates for small molecules and biologics are very high, with approximately 89% of small molecules in Phase I failing to achieve regulatory approval, and approximately 87% of biologics in Phase I also failing to achieve approval. The failure rates decrease in later stages of development, but there is still a high risk of failure.
Alliances
Bristol-Myers Squibb Company enters into alliances with third parties for the development and commercialisation of products. These alliances involve upfront payments, milestones, royalties, and equity investments. Alliances reduce investment risk but may reduce profitability due to profit sharing. The company may terminate alliances for material breaches, bankruptcy, or product safety concerns. The company typically does not retain any rights to the other party's product or intellectual property after an alliance terminates. The loss of rights to marketed products could have a material impact on the company's financial condition and liquidity. Profit-sharing payments have no expiration date, while royalty payments cease upon loss of market exclusivity.
The company products are sold principally to wholesalers, speciality distributors, speciality pharmacies, and to a lesser extent, directly to distributors, retailers, hospitals, clinics, and government agencies.
Bristol-Myers Squibb Company Economic Moat
Bristol-Myers Squibb Company Economic Moat
Economic Moat: Narrow
There are many ways to identify Bristol-Myers Squibb Company’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Bristol-Myers Squibb Company. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Bristol-Myers Squibb Company’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? No.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? No.
Bristol-Myers Squibb Company Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Yes.
Bristol-Myers Squibb Company FCF per Share
Management Effectiveness
Is Bristol-Myers Squibb Company’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Bristol-Myers Squibb Company Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? No.
Bristol-Myers Squibb Company Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is increasing, which is something that an investor would not be pleased to see.
Bristol-Myers Squibb Company Shares Outstanding (Million Shares)
Bristol-Myers Squibb Company Financial Health
Bristol-Myers Squibb Company Financial Health (USD Million)
Current Ratio: 1.4 (pass my requirement of >1.0)
Debt-to-EBITDA: 1.9 (pass my requirement of <3.0)
Interest Coverage: 7.4 (pass my requirement of >3.0)
Debt Servicing Ratio: 9.4% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 3.3%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
Bristol-Myers Squibb Company’s dividend payments are reasonably covered by its earnings and its cash flows.
Bristol-Myers Squibb Company Stock Performance
The following graph compares the cumulative total stockholders’ returns of the company’s common shares with the cumulative total stockholders’ returns of the companies listed in the S&P 500 Index and a composite peer group of major pharmaceutical companies comprised of AbbVie, Amgen, AstraZeneca, Biogen, Gilead, GlaxoSmithKline, Johnson & Johnson, Lilly, Merck, Novartis, Pfizer, Roche and Sanofi.
The graph assumes a $100 investment on 31 December 2017 in each of Bristol-Myers Squibb Company’s common shares, the S&P 500 Index and the stock of our peer group companies, including reinvestment of dividends, for the years ended 31 December 2018, 2019, 2020, 2021 and 2022. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
Bristol-Myers Squibb Company Stock Performance
Bristol-Myers Squibb Company Intrinsic Valuation
Estimated intrinsic value: $105.46
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$12,000M
Projected growth rate: 5% - 6%
Beta: 0.43
Discount rate: 5.0%
Margin of safety: 40% (Uncertainty: High)
Price range after the margin of safety: <$63.00
Date of calculation: 9 May 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Bristol-Myers Squibb Company Intrinsic Valuation
Bristol-Myers Squibb Company Relative Valuation
Bristol-Myers Squibb Company EV-to-EBITDA vs its peers
Bristol-Myers Squibb Company Price-Earnings Ratio vs its peers
Bristol-Myers Squibb Company Historical Price-Earnings Ratio
Additional Resources
I recommend reading University of Berkshire Hathaway as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.
My Top Concern
The pharmaceutical industry faces increasing market access pressures and pricing controls globally. Bristol-Myers Squibb expects market access constraints and pricing controls to become more acute as payers take steps to control expenditures. These constraints could negatively affect future revenues and profit margins, including changes in laws and regulations relating to pricing and reimbursement, cost-cutting measures, and the grant of additional authority to governmental agencies.
The value of a new pharmaceutical product is typically realised during its market exclusivity period, which is based on patent rights and regulatory forms of exclusivity. When market exclusivity expires, revenues can rapidly decline due to competition from generic or biosimilar versions of the product. The scope of patent rights varies by country, and challenges to patent validity, enforceability, and infringement are common. There is no guarantee that a product will maintain market exclusivity for the entire estimated period.
Generic competition can arise at any time, and patents may not always prevent this. In addition, competition from new products entering the market poses a threat, with factors such as lower prices, better efficacy, safety profiles, and marketing programs making it harder for Bristol-Myers Squibb's products to compete.
This makes Bristol-Myers Squibb’s future success dependent on new products in the pipeline. However, there is a high rate of failure in the research and development process, with compounds or products appearing promising in development but ultimately failing to reach the market. Additionally, regulatory approval delays, safety concerns, and competition pose significant risks to the company's pipeline of new products. The company cannot guarantee the approval or commercial success of any of its products, and any setbacks could impact its business. Maintaining a continuous flow of successful new products and indications is crucial to Bristol-Myers Squibb's financial prospects.
One key concern is that the revenue and earnings of the company heavily depend on a few key products such as Revlimid, Eliquis, and Opdivo. The loss of market exclusivity or other issues with any of these products could hurt the company's earnings and cash flows. Furthermore, if any major product faces issues such as loss of patent protection, changes in demand, unexpected side effects, supply disruptions, or competition from other products, it could have an adverse impact on the company's business.
Lastly, the acquisitions of Celgene and MyoKardia increased the amount of debt resulting in additional interest expenses. This could reduce Bristol-Myers Squibb’s financial flexibility to continue capital investments or develop new products.
Summary for Bristol-Myers Squibb Company
Bristol-Myers Squibb’s economic moat is primarily based on its intangible assets which include a range of patent-protected drugs, a good reputation, an entrenched salesforce, and strong alliances.
The patent protection allows the company to price its drugs at levels that generate superior returns on invested capital, particularly in cancer drugs. The patents also provide ample time for the development of new drugs. The use of biologics creates additional hurdles for generic firms as the cost of developing and marketing is more expensive than for typical generic small molecules.
Bristol-Myers Squibb has a strong record of developing and marketing successful drugs. This is evident from their robust pipeline, which includes several blockbuster drugs like cardiovascular drug Eliquis and cancer drug Opdivo.
However, the company faced a slight operational decline in total sales due to generic Revlimid pressures, which are expected to continue as per existing agreements with generic firms until 2026. The 2028 patent losses of Opdivo and Eliquis are also a cause of long-term patent concerns. Despite these challenges, Bristol-Myers Squibb is launching a considerable number of new products that hold growth potential.
Bristol-Myers Squibb has a strong portfolio of drugs and pipelines due to its partnerships and acquisitions, as seen in its acquisition of Celgene. The company is expanding through patent losses and has shed various divisions to focus on the high-margin speciality drug group. The Celgene acquisition boosts Bristol's position in the speciality pharmaceutical market, particularly in cancer drugs, which tend to have strong pricing power. This should help the company maintain its drug pricing ability despite pushback from governments and private payers.
The partnership with Pfizer in cardiovascular drugs, particularly in managing the blockbuster potential of Eliquis in atrial fibrillation, is one of Bristol-Myers Squibb's most important partnerships. Such strategic partnership helps reduced development costs and diversify the risks of clinical and regulatory failure. The acquisition of Medarex has also secured Bristol-Myers Squibb's first-mover advantage in cancer immunotherapy, which should yield several major blockbuster compounds.
These pipelines of drugs and established alliances strengthen Bristol-Myers Squibb’s overall intangible assets.
Bristol-Myers Squibb has achieved some cost advantages through economies of scale, as the company has grown its operations and expanded its product offerings through acquisitions and partnerships. Additionally, the company has implemented cost-saving measures, such as divesting non-core businesses and restructuring operations, to focus on its high-margin speciality pharmaceutical segment. However, the cost advantages are not as significant as the company's other competitive advantages, such as its strong pipeline, patents, and brand recognition.
Switching costs can be a factor in the pharmaceutical industry, particularly for patients who have been prescribed a certain medication and are hesitant to switch to a new drug. For example, if a patient has been taking a specific drug for a chronic condition and has had success with it, they may be hesitant to switch to a new medication, even if it has been shown to be more effective or has fewer side effects. In this case, there could be a switching cost for patients.
In terms of Bristol-Myers Squibb specifically, there may be some switching costs for healthcare providers who are familiar with the company's drugs and have experience prescribing them. However, since many drugs have generic alternatives, patients and providers may be more willing to switch to a different drug if it is less expensive or has other benefits. Overall, while switching costs may be a factor, they may not be as significant in the pharmaceutical industry compared to other industries.
With the considerations above, I will only assign Bristol-Myers Squibb’s economic moat a narrow rating.
Bristol-Myers Squibb has been experiencing consistent year-over-year revenue growth for the past 5 years. However, the net income has not grown consistently during this period. The cash flow from operating activities has been inconsistent, although the free cash flow has remained positive. Despite this, Bristol-Myers Squibb's size has allowed the company to generate strong and stable cash flows, which it can use to fund the high costs of bringing new drugs to the market, which can be as much as $800 million per drug. Additionally, the gross margin percentage has been consistent and growing over the past 5 years, with both gross margin and net margin consistently above the industry averages.
Bristol-Myers Squibb’s capital allocation strategy has been inconsistent over the past 5 years. The ROE has not consistently fallen within the 12%-15% range year-over-year during this period, although the current ROE is slightly above the industry average. Similarly, the ROIC has not consistently been in the 12%-15% range year-over-year, although it is currently twice as high as the WACC. One concerning trend for investors is that the number of shares outstanding has been increasing, which is not a positive sign as it can dilute the value of existing shares.
Bristol-Myers Squibb's financial health is generally positive, with several key metrics passing established benchmarks. The current ratio is at a healthy level of 1.4, indicating the company has enough current assets to cover its current liabilities. Additionally, the debt-to-EBITA ratio is at a reasonable level of 1.9, demonstrating that the company can cover its interest payments with earnings before interest, taxes, and amortization. However, over the past 5 years, the debt-to-equity ratio has increased significantly from 60% to 120%, which is considered high. Despite this, the interest coverage ratio is at a strong level of 7.4, indicating that the company's earnings are sufficient to cover its interest payments. Furthermore, the debt servicing ratio is at a low level of 9.4%, indicating the company can comfortably meet its debt obligations.
Investing in Bristol-Myers Squibb has its uncertainty, given its narrow economic moat and unsatisfactory performance and capital allocation. As discussed in my Top Concern, investing in pharmaceutical companies involves inherent risks and uncertainties, and investors should exercise caution before committing capital to this sector. To invest in Bristol-Myers Squibb, a high margin of safety of at least 40% to account for these risks and uncertainties. In summary, while Bristol-Myers Squibb is a reputable pharmaceutical company, the inherent risks, and uncertainties of investing in this industry make it a challenging investment proposition, and investors should approach it with caution.
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