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Bristol Myers Squibb: An undervalued pharmaceutical stock.

Opdateret: 7. aug.

The health care sector can be a great place to invest during inflation as they are high margin business with relatively low commodity price exposure. Furthermore, the sector doesn't see large fluctuations in demand and even with higher prices consumers still need their medicine. Bristol Myers Squibb is one of the largest pharmaceutical companies in the world, and the stock price seems cheap 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 mention that at the time of writing this analysis, I do not own shares in Bristol Myers Squibb. However, I own shares in other pharmaceutical companies such as Abbvie. If you want to see what stocks I own or want to copy my portfolio, you can see how to do so here. While I don't currently own Bristol Myers Squibb, it is on my watch list, as many other pharmaceutical companies are.

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 and mainly focusses on four different therapeutic areas being Oncology, Hematology, Immunology and Cardiovascular (they also have some early stages development drugs in Fibrotic Diseases, Neuroscience and Covid-19). 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 secret moat due to their patents. Meaning that once you invest in pharmaceuticals you need to be up to date with their drugs, and their patents. While Bristol Myers Squibb has more than 30 drugs in their portfolio, their top three drugs are responsible for approximately two-thirds of their revenue. These three drugs are Revlimid (patent expired March 2022), Opdivo (patent expiry 2028) and Eliquis (patent expiry 2026).

Their CEO is Giovanni Caforio. He first joined Bristol Myers Squibb in 2000 and had held various positions in the company before becoming the CEO of Bristol Myers Squibb in 2015. Prior to joining Bristol Myers Squibb, he spent twelve years at Abbott Laboratories, where he had several leadership positions. He is educated as a physician from the University of Rome. He is often credited for making Bristol Myers Squibb an important part of the oncology market once again, as he has focused on fighting cancer. Under his leadership Bristol Myers Squibb is evolving their operating model, to increase speed and competitiveness. He is known for strengthening Bristol Myers Squibb patient focused culture, and as a leader he is described to believe in a company culture that promotes and rewards diversity and inclusion. He is also the CEO behind the acquisitions of Celgene and MyoKardia. According to comparably, he has a CEO score of 81%, which puts him in top 5 % of similar size companies. Personally, I like how he has made Bristol Myers Squibb an important part of the Oncology market, and while it is too early to say if the acquisitions turn out good, I do like that he has strengthened their core therapies with these acquisitions.

I believe that Bristol Myers Squibb has a strong secret moat. And I feel rather confident about management as well. Now let us investigate the numbers to see, if Bristol Myers Squibb does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website. Before we go through the numbers, it is important to know that Bristol Myers Squibb acquired Celgene in 2019 and MyoKardia in 2020, these acquisitions will skew the numbers from 2019 and onwards.

The first number I investigate is the return on investment capital, also known as ROIC. We would like to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. The numbers are certainly a bit underwhelming, as Bristol Myers Squibb only manages to deliver a ROIC above 10 % in three years 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 scare me away from investing in Bristol Myers Squibb as we haven't seen the full effect from the acquisitions in 2019 and 2020 yet but I would like to see a ROIC above 10 % in 2022.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Once again, the numbers are underwhelming. I would like to see the equity grow year over year and Bristol Myers Squibb hasn't managed to do so in most years. I wouldn't put too much importance in the last couple of year because of acquisitions and the pandemic but the numbers are disappointing.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. These numbers are a bit more encouraging than the previous numbers. Since the low point in 2015, Bristol Myers Squibb has managed to grow their free cash flow year over year, which is always nice to see. Hopefully the trend continues moving forward. Free cash flow yield has also grown higher since 2016, which means that Bristol Myers Squibb is continuously delivering a relatively high free cash flow compared to their market cap.

Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current earnings. Doing the calculation on Bristol Myers Squibb, I can see that Bristol Myers Squibb has 5,66 years earnings in debt. It is higher than you would like to see. However, this debt is mainly due to the acquisitions of Celgene and MyoKardia, and if you believe that these acquisitions are good for the future performance of Bristol Myers Squibb, you could still invest in the company despite their large debt. You will just need to monitor if they pay off debt every quarter/year.

Based on my findings so far, Bristol Myers Squibb has their ups and downs. All investments come with a risk, and Bristol Myers Squibb are also facing some risks. One risk that always comes with pharma companies is drug pricing. Lately, we just had some news regarding the Reduced Costs and Continued Cures Act, which would allow price negotiation by Medicare. It is too early to say if it will get approved in Congress and how it will affect pharmaceutical companies moving forward. However, drug pricing is not a new discussion and so far, the strong pharmaceutical lobby has prevented it to be something that would affect the companies. Nevertheless, it is a risk as approximately 62 % of their revenue comes from the United States. Another risk when investing in a pharmaceutical company is the patent expiration of their drugs. It is especially the patent expiration of Revlimid that is a risk, as it expired in March 2022. In the second quarter in 2022 was the first quarter after the patent on Revlimid expired, and sales were down 22 % year over year. Their other two top selling drugs, Eliquis and Opdivo, also have a patent expiration in this decade, which is a slight concern as well. The final risk is the debt. Bristol Myers Squibb has a much higher debt than you would like to see. Bristol Myers Squibb has managed to pay off a large chunk of their debt, but they recently acquired Turning Point Therapeutics for $76 per share, meaning that debt will rise again. Hence, you will need to monitor if they pay off debt moving forward.

There are also plenty of potential for Bristol Myers Squibb. Regarding Revlimid, Bristol Myers Squibb has made a patent settlement with Dr. Reddy's Laboratories, which is an Indian generics company that has made a generic drug of Revlimid. The patent settlement means that Dr. Reddy Laboratories may start with a "volume-limited" launch sometime after March 2022 but won't be allowed to sell their generic Revlimid with no limits until 2026 (there are also similar settlements with Alvogen and Natco Pharma regarding their generic versions of Revlimid). One way to make up for the losses of Revlimid is increased sales of Eliquis and Opdivo, and Evaluate Pharma predicts Eliquis will be the second best-selling drug in the world by 2026, while Opdivo will be the third best-selling drug in the world. Looking at other drugs in the pipeline. Due to their acquisitions of Celgene and MyoKardia, Bristol Myers Squibb have some promising drugs in the pipeline such as Reblozyl ($172 million in Q2 2022) and Mavacamten ($3 million in Q2 2022), which together with Zeposia ($66 million in Q2 2022) and Onureg ($32 million in Q2 2022) are among the drugs that are expected to make up for the patent loss of Revlimid, and later Eliquis and Opdivo. One thing I really like about Bristol Myers Squibb's pipeline though is their new focus on cell therapy with the drugs Breyanzi and Abecma, with Breyanzi being approved by the FDA in early 2021. While these Breyanzi ($39 million in Q2 2022) and Abecma ($89 million in Q2 2022) are just a small part of the cell therapy market, I like that Bristol Myers Squibb focuses on a market that is expected to grow at a 25,6% CAGR until 2027.

All right, we have gone through the numbers, potential and risk regarding Bristol Myers Squibb, and now it is time for us to calculate a price for Bristol Myers Squibb. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS as it was in 2021 at 3,12. I chose an Estimated future EPS growth rate of 8 (Bristol Myers Squibb has mentioned that they expect to grow in the high single digits), Estimated future PE 16 (which the double of the growth rate, as the historically PE for Bristol Myers Squibb has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $26,64, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Bristol Myers Squibb at price of $13,32 (or lower obviously), if we use the Margin of Safety price.

Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 16.207. The Capital Expenditures was 973. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 681,1 in our further calculations. The Tax Provision was 1.084. We have 2.221 outstanding shares. Hence, the calculation will be like this: (16.207 - 681,1 + 1.084) / 2.221 x 10 = $74,79 in TEN CAP price.

The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 6,86 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $78,80.

Bristol Myers Squibb is an interesting company as it operated in a sector with a huge moat, which should perform relatively well during inflationary times. The historical numbers are a bit underwhelming, but it is important to remember that these numbers are historical and doesn't necessarily say much about the future. Despite Bristol Myers Squibb being able to make patent settlements with companies that make generic versions of Revlimid, sales still dropped by 22 % in the first quarter without the patent. It is a bit worrisome, as it is their largest drug. Bristol Myers Squibb does have an interesting pipeline that with time should make up for the losses of Revlimid and later Eliquis and Opdivo, and the patent loss of Revlimid is probably also one reason why Bristol Myers Squibb trades at a discount. I'm still undecided if I should add Bristol Myers Squibb to the portfolio, as I already have quite a lot of exposure to the pharma sector. If I do decide to add Bristol Myers Squibb to the portfolio, I would be comfortable in doing so when it trades below the TEN CAP price of $74,79.

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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to Mission Pawsible. The non-profit organization that rescues, rehabilitate and re-home animals on Bali. It is an organization I donate to myself. If you have enjoyed the analysis and want some good karma, I hope that you will donate a little to Mission Pawsible here. Even a little will make a huge difference to save these wonderful animals. Or you can even adopt a new best friend! Thank you.

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