I am bullish on Bristol-Myers Squibb (BMY) due to a range of positives, including resilience during a potential second wave of the coronavirus pandemic, a low valuation & above-average dividend yield, and a solid long-term growth outlook. Bristol-Myers Squibb is not a risk-less investment – there is none – but the risk to reward ratio looks skewed in investors’ favor right here.
I have never covered Bristol-Myers Squibb before, so let’s start with a little overview. The company is a leading biotech/pharma company that is active in hematology, oncology, cardiovascular, and some additional markets. Founded more than 130 years ago, Bristol-Myers’ growth recently made a big jump when the company took over the high-growth biotech company Celgene.
Thanks to this takeover, Bristol-Myers is now among the largest players in the industry:
Its sales are comparable to those of Pfizer (PFE), Merck (MRK), and AbbVie (ABBV), which recently made a major acquisition as well via its Allergan takeover. Roche (OTCQX:RHHBY), however, is still in a class of its own.
Bristol-Myers is research-focused, having spent more than $6 billion on R&D during the last year, despite R&D expenses that occurred at Celgene not yet being fully accounted for. Going forward, we can thus expect even higher reported research and development spending by the company, which is one of the key factors for its solid growth outlook.
For now, Bristol-Myers’ biggest drugs are Revlimid (from Celgene), Eliquis, and Opdivo. The growth rates of these three key drugs during the most recent quarter stood at an attractive 13%, 37%, and -2%, which equates to an average growth rate of 18% when weighted for their respective sales. For a company the size of Bristol-Myers, growing its top drugs at a high-teens pace is a very compelling feat that bodes well for future revenue growth.
The company’s long-term growth outlook is convincing
The pharma/biotech industry profits from the megatrend of growing healthcare spending around the globe, including in the US. This has been true for decades, and there is little risk that things will change. An aging population will result in more need for treatments for a wide array of ailments, and drug manufacturers are one of the industries that will profit from increased spending.
Experts are forecasting that US healthcare spending will rise to as much as 19% of GDP by 2027, which equates to an annual growth rate of 5.5% per year. This includes spending on hospitals, doctor’s salaries, etc. Due to the rise of highly potent new drugs that help treat ailments that were not treatable in the past, one could argue that drug spending will grow at an even faster pace compared to all healthcare spending. Even if this were not true, a mid-single-digit growth tailwind for the revenues of the broad healthcare industry is a very positive sign for Bristol-Myers (and its peers). This is only the US, and growth in other markets could be even higher in the future. China, for example, is forecasted to see healthcare spending grow by more than 12% in 2020 alone (before the impact of the coronavirus pandemic). Due to the current rather low level of overall healthcare expenditures in China and other emerging markets, the potential for future revenue growth is even larger there, compared to the US.
Bristol-Myers has a deep pipeline, with more than 50 compounds under development, aimed at treating more than 40 different diseases. Of those, many components/drugs are already in late-stage studies, as dozens of phase III studies are underway right now. This includes new indications for Opdivo+Yervoy, e.g. for the 1st line treatment of non-small cell lung cancer, but also many other treatments, such as CAR-T therapy ide-cel that is aimed at multiple myeloma. On top of that, many other phase 3 studies are underway, in oncology, hematology, but also areas such as immunology. Several of Bristol-Myers’ pipeline drugs are forecasted to generate peak sales in the multi-billion dollar range, such as Reblozyl/luspatercept, which is seen generating more than $2 billion in annual sales eventually. Zeposia/ozanimod is forecasted to generate more than $3 billion annually at its peak in the MS and ulcerative colitis markets. In the long run, the CELMoDs technology that Bristol-Myers received through the Celgene takeover could turn into a whole platform of future drugs that could generate sizeable revenue streams a couple of years down the road.
All in all, Bristol-Myers has a compelling growth outlook, thanks to a combination of attractive growth for its biggest drugs, the long-term tailwind of growing healthcare spending, and a deep pipeline with many promising drug candidates. It is not surprising to see that management forecasts earnings-per-share growth of 20% for 2021, following a strong 2020 (according to management’s current guidance). The analyst community is forecasting long-term earnings per share growth of 8.7% (per YCharts), which is quite attractive as well.
Bristol-Myers’ low valuation could allow for outsized returns
Buying an attractive company is only one part of a winning investment, however, buying at the right price is important as well. In Bristol-Myers’ case, the price looks quite right at the moment:
Shares are trading for just above 9 times this year’s expected profits, and for about 7.5 times 2021’s expected profits. This is an almost laughably low valuation compared to the 3-year median earnings multiple of close to 25. The 5-year and 10-year median earnings multiples are even higher than that. Bristol-Myers trading at an earnings multiple of 20+ in the foreseeable future is not a likely scenario, we believe, but even a moderate multiple expansion towards an earnings multiple of 10-12 would result in meaningful appreciation. If the analyst consensus estimate for 2021 comes true, and the earnings multiple expands to 11 by the end of 2021, investors could see returns of 45% over the next 18 months. Even if Bristol-Myers were to trade at just 9 times trailing earnings by the end of 2021, its share price would still rise by 18% throughout the next one and a half years, or at a low-double-digit annualized rate.
The currently low valuation has also made Bristol-Myers’ dividend yield rise to an above-average level. Right here, investors get a dividend yield of 3.2%, which is at the upper end of the historic range. This also compares favorably to the yield of the broad market, although it should be noted that a range of other pharma/biotech companies offer similar or even higher yields. The whole industry is worthy of a close look for income-oriented investors right now.
Bristol-Myers should be resilient during the current environment
We live in very troubled times, and there is the risk of a second wave of the pandemic. If this were to occur, a lot of businesses would likely be faced with severe headwinds again. Healthcare companies, however, should be relatively resilient in case that happens, as the need for drugs does not diminish. Bristol-Myers should, therefore, be among the more resilient businesses in case things get worse again. If the recovery from the economic impact of the pandemic is a slow one (L-shaped, U-shaped), Bristol-Myers and other pharma/biotech players should also outperform most other businesses.
As such, we believe that Bristol-Myers is a lower-risk bet compared to more aggressive, more cyclical businesses such as industrials, airlines, or anything hospitality-related.
Risks To Consider
Despite its resilient business model, Bristol-Myers is not a risk-less investment. Possible risks include political pressure to limit price increases, which could lead to lower-than-expected revenue and earnings growth. This seems not very likely with either Trump or Biden as president, but this is still something that investors in all pharma/biotech stocks should keep in the back of their minds.
Another risk is that major pipeline candidates fail to deliver. In that case, the growth outlook would weaken, and at least in the short term, the share price could come under pressure if such a news item were to be released. If Bristol-Myers’ huge R&D efforts would not result in successful developments in the long run, the patent expiry on existing drugs would eventually lead to a decline in revenues. This is not a very likely scenario, we believe, but cannot be ruled out completely.
The combination between Bristol-Myers Squibb and Celgene has created a new biotech/pharma giant that combines attractive existing drugs, a deep pipeline with many late-stage candidates, and a solid near-term and long-term growth outlook. On top of that, shares are also offering a 3%+ yielding dividend and trade at a very inexpensive valuation.
On top of rising income, investors can expect sizeable share price gains over the coming years from this company, we believe. Adding in the low cyclicality and resilience, which is positive in uncertain times such as these, Bristol-Myers looks like a solid long-term choice right here.
One Last Word
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Disclosure: I am/we are long BMY, ABBV. 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.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Originally published on Seeking Alpha