The healthcare sector can be a great place to invest during inflation because it consists of high-margin businesses with relatively low exposure to commodity prices. Furthermore, the sector does not experience significant fluctuations in demand, and even with higher prices, consumers still require their medicine. Bristol Myers Squibb is one of the largest pharmaceutical companies in the world, and the stock price seems inexpensive at the current levels. Does it mean that it is time to buy?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Bristol Myers Squibb. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. However, I do own stocks in other pharmaceutical companies such as AbbVie, Novo Nordisk, and Genmab. Nonetheless, I have no personal stake in Bristol Myers Squibb. If you want to purchase shares or fractional shares of Bristol Myers Squibb, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
Bristol Myers Squibb is an American multinational pharmaceutical company. It was founded in 1989 through the merger of Bristol-Myers and Squibb. It is among the largest pharmaceutical companies in the world, ranking as the 12th largest globally. Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. Bristol Myers Squibb offers products for hematology, oncology, cardiovascular, immunology, fibrotic, and neuroscience diseases. The company's largest products include Eliquis for the reduction in the risk of stroke/systemic embolism in non-valvular atrial fibrillation, and for the treatment of DVT/PE; Opdivo for various anti-cancer indications, including bladder, blood, CRC, head and neck, RCC, HCC, lung, melanoma, MPM, stomach, and esophageal cancer; Revlimid, an oral immunomodulatory drug for the treatment of multiple myeloma; Orencia for active rheumatoid arthritis and psoriatic arthritis; and Pomalyst/Imnovid for multiple myeloma. Its top three drugs, Eliquis, Opdivo, and Revlimid, are responsible for 61% of the revenue. Bristol Myers Squibb generates 70% of its revenue in the United States and the remaining 30% from its international business. As with all other pharmaceutical companies, it is not difficult to determine a moat for Bristol Myers Squibb. All pharmaceutical companies, including Bristol Myers Squibb, have a moat due to their patents. Meaning that once you invest in pharmaceuticals, you need to stay updated on their therapies and patents.
The CEO is Chris Boerner. He first joined Bristol Myers Squibb in 2015 and had held various positions in the company before becoming the CEO of Bristol Myers Squibb in November 2023. Prior to joining Bristol Myers Squibb, he held leadership roles of increasing responsibility at Seattle Genetics and Genentech, and he has also worked for McKinsey & Company. He holds a BA in Economics and History from Washington University in St. Louis, and received his PhD and MA in Business Administration from the Haas School of Business at the University of California, Berkeley. He also serves as a member of the Executive Committee of BIO (Biotechnology Innovation Organization) and as a member of the National Council for Arts and Sciences at Washington University. It is impossible to judge his tenure as CEO already, but I appreciate that he has outlined his vision for the next decade. Chris Boerner has stated that he envisions three distinct periods over the next decade: a near-term growth period, a transition period, and the potential for sustainable top-tier growth. He has provided detailed insights into how these three periods will unfold. I believe that this demonstrates his high level of preparedness and long-term focus. Coupled with his extensive industry experience, I am confident in Chris Boerner's leadership at Bristol Myers Squibb, even though he has only been in the role for a short period.
I believe that Bristol Myers Squibb has a strong moat. I feel rather confident about management despite it being new. Now, let us investigate the numbers to see if Bristol Myers Squibb lives up to our requirements for a strong moat. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric I investigate is the return on invested capital (ROIC). We would like to see 10 years of historical data, with all the figures exceeding 10% in all years. The numbers are certainly a bit underwhelming, as Bristol Myers Squibb only managed to achieve a Return on Invested Capital (ROIC) above 10% in three out of the last ten years. The numbers in 2019 and 2020 are skewed by acquisitions, and in the case of 2020, the pandemic as well. The ROIC doesn't deter me from investing in Bristol Myers Squibb as we have not yet witnessed the full impact of the acquisitions made in 2019 and 2020. It is encouraging that Bristol Myers Squibb has grown its ROIC every year for the past three years and managed to deliver an ROIC above 10% in 2023. Hopefully, this trend will continue.
The next numbers represent the book value + dividend. In my previous format, this was known as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentages, I have decided to share both the numerical values and the percentage growth year over year. At first glance, the numbers may seem underwhelming, but there is a reason for that, and that reason is acquisitions. Bristol Myers Squibb made its largest acquisition ever in 2019 when it acquired Celgene for $74 billion. Since then, Bristol Myers Squibb has made another six acquisitions. Thus, I wouldn't give too much importance to these numbers as they are skewed due to acquisitions.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Bristol Myers Squibb has delivered a positive free cash flow for all ten years. Free cash flow has reached a higher level since 2020, primarily due to their $74 billion acquisition of Celgene in 2019. Free cash flow has decreased since its all-time high in 2021, but it is encouraging to see that it has increased from 2022 to 2023. Levered free cash flow margin has consistently been high in the past six years, and hopefully it will reach the same heights as it did in 2020 and 2021. Free cash flow yield is currently at its highest level in the past ten years, indicating that the shares are trading at a discount. However, we will revisit this later in the analysis.
Another important aspect to investigate is debt. It is crucial to determine if a business has a manageable level of debt that can be repaid within a 3-year period. We do this by dividing the total long-term debt by current earnings. Upon calculating Bristol Myers Squibb's financials, I have determined that the company has 4,57 years of earnings in debt. It is higher than you would like to see. However, this debt is mainly due to its acquisitions, including its largest ever, when they acquired Celgene for $74 billion. Hence, the 4,57 years of earnings in debt won't keep me from investing in Bristol Myers Squibb as there is a good reason for its debt. However, management has stated that they are going to take on additional debt in 2024 to finance the planned acquisitions of Karuna and RayzeBio. Management will prioritize paying off debt, but it is something that needs to be monitored.
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Based on my preliminary findings, I believe that Bristol Myers Squibb could be an intriguing investment. However, no investment is without risk, and AbbVie also has its share of risks. The most obvious risk is debt. In his book "Rule #1 Investing," Phil Town mentions the following about debt: "A business that carries a significant amount of debt compared to its income faces an uncertain financial future." "If there are any problems with the economy, a business with a significant amount of loans might be in big trouble." As an investor, I dislike unpredictability. Although I don't believe that Bristol Myers Squibb will go bankrupt, there is an explanation for the company's high debt. However, it is still something that needs to be monitored. Especially because the debt-to-earnings ratio is expected to increase in 2024 due to their acquisition of Karuna Therapeutics and RayzeBio. Management is focused on repaying debt, but having a high debt-to-earnings ratio poses a risk. Patent losses. Patents covering Bristol Myers Squibb products typically provide market exclusivity, which is essential for the profitability of many of Bristol Myers Squibb's products. As patents for certain of its products expire, Bristol Myers Squibb could face competition from lower-priced generic or biosimilar products. The expiration or loss of patent protection for a product is usually followed promptly by substitutes that may significantly reduce sales for that product in a short period of time. Bristol Myers Squibb lost its patent on Revlimid in 2021, and revenue from Revlimid has decreased from $12.821 million in 2021 to $6.097 million in 2023, cutting revenue by more than half. Management expects that Revlimid revenues will decrease in the range of $1,5 billion to $2 billion in 2024. Bristol Myers Squibb will lose its patents on its other highest-selling drugs within the next four years. The patents for Eliquis will expire in 2026, and for Opdivo in 2028. Laws and regulations. The U.S. healthcare industry, in particular, is highly regulated and is subject to frequent and substantial regulatory changes. It is expected that the U.S. healthcare industry will continue to be subject to increasing regulation, political, and legal actions as future proposals to reform the healthcare system are considered by the executive branch, Congress, and state legislatures. According to Fitch Ratings, U.S. pharmaceutical companies are facing increasing legislative and regulatory challenges that could elevate their business and financial risk profiles. Fitch Ratings believes that sector margins will face pressure from lower negotiated prices, while regulatory challenges to mergers and acquisitions (M&A) will make it more difficult for companies to address patent cliffs for existing products.
There is also plenty of potential for Bristol Myers Squibb. One reason is acquisitions. Bristol Myers Squibb made three acquisitions in 2023. These companies include Mirati Therapeutics, RayzeBio, and Karuna Therapeutics. Bristol Myers Squibb has high hopes for these acquisitions. Management has mentioned that Bristol Myers Squibb has further diversified its oncology portfolio with targeted oncology assets such as Krazati and PRMT5 from the recently completed Mirati acquisition. The acquisition of RayzeBio will bring important radiopharmaceutical assets, pipeline, and manufacturing capabilities. However, the most exciting acquisition may be that of Karuna Therapeutics. The acquisition of Karuna Therapeutics brings KarXT, which management believes will be a transformative treatment for patients with schizophrenia, Alzheimer's psychosis, and potentially other conditions. Bristol Myers Squibb will launch KarXT in September 2024, and it will be the first new treatment in decades for schizophrenia. Management believes that it brings a multi-billion dollar opportunity for the company. A robust portfolio. Bristol Myers Squibb has a robust portfolio, with many of its drugs experiencing sales growth. Opdivo achieved significant global sales growth in 2023. Opdualag more than doubled its sales in 2023 and is now a standard-of-care first-line treatment for melanoma. Eliquis generated over $12 billion in sales in 2023, up approximately 0,5 billion compared to 2022, and continues to be the number one oral anticoagulant globally. Sales of Camzyos were strong in 2023, with Bristol Myers Squibb adding roughly 1.000 patients to the commercial drug each quarter. These patients are expected to remain on treatment for an extended period. Reblozyl's global sales grew by 40% in 2023, surpassing $1 billion on an annualized basis for the first time. Breyanzi's global sales doubled year-over-year, and Zeposia's global sales grew by 72% in 2023. Interesting pipeline. Christ Boerner has described three distinct periods for Bristol Myers Squibb over the next decade: a near-term growth period, a transition period, and the potential for sustainable top-tier growth. He has mentioned that many recognize the first two periods. However, the late decade return to a growth phase is not fully recognized externally, which includes several significant products that are currently undervalued in consensus models. And stated "What supports our confidence is our expanding pipeline, recent deals, and newly launched products." Chris Boerner recently emphasized the company's pipeline, which he believes could yield over 16 new products by 2030. He believes that these 16 new products are overwhelmingly first- or best-in-class. The pipeline momentum supports the growth opportunities that he anticipates Bristol Myers Squibb will experience in the latter half of the decade.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,86, which is from the year 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 13% in the next five years, but I find it too optimistic. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Bristol Myers Squibb's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $32,86. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Bristol Myers Squibb at a price of $16,48 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 13.860, and capital expenditures were 1.209. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 846 in our calculations. The tax provision was 400. We have 2.021 outstanding shares. Hence, the calculation will be as follows: (13.860 – 846 + 400) / 2.021 x 10 = $66,37 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Bristol Myers Squibb's free cash flow per share at $6,22 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $71,45.
Bristol Myers Squibb is an intriguing company because it operates in a sector with a large moat. The historical numbers are a bit underwhelming, but it is important to remember that these numbers are historical and do not necessarily reflect much about the future. A new management always comes with some uncertainty, but the new CEO has extensive experience in the industry. Bristol Myers Squibb has a higher debt level than I would prefer, and the debt-to-earnings ratio is likely to increase in 2024. And while there is an explanation for the high debt, it is still important to monitor whether management prioritizes paying off the debt. Bristol Myers Squibb has lost the patent for Revlimid, which has affected revenue. Additionally, Bristol Myers Squibb will also experience patent losses for its other highest-selling drugs within the next four years, which may explain the current stock price. Laws and regulations are also a risk as they could affect the industry's future trajectory. Bristol Myers Squibb is attempting to compensate for its patent losses through acquisitions. Hopefully, they will have a strong start with the launch of KarXT in September 2024. Bristol Myers Squibb is also experiencing growth from Opdualag, Camzyos, Reblozyl, Breyanzi, and Zeposia, which will help make up for the patent loss. Bristol Myers Squibb has an intriguing pipeline that could serve as a growth catalyst in the latter part of the decade following the patent losses. There are many uncertainties surrounding Bristol Myers Squibb due to the upcoming patent expirations of its best-selling drugs. However, if the new CEO delivers, it could be intriguing to purchase a small speculative position. Personally, I already have sufficient exposure to the industry, so I will not be adding Bristol Myers Squibb to the portfolio at this time.
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