Bristol-Myers Squibb Company Fundamental Analysis

Bristol-Myers Squibb Company Product Revenue 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

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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

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.

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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.

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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.

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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.