Is Bristol Myers Squibb an undervalued pharmaceutical stock?
Opdateret: 3. maj
Lately, there seems to have been many analyses regarding Bristol Myers Squibb and how it is an undervalued company. It has also found its way into Warren Buffett's portfolio where it is his second largest position among his pharma stocks (0,49 % of his portfolio).
This is not a financial advice. I am not a financial advisor and I only do these post 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.
Those of you that copy me or regularly read my posts or blog will know that I like the pharmaceutical sector. For full disclosure, I should mention I have never owned Bristol Myers Squibb. It doesn't mean I don't like the company, as it is on my watchlist like many other companies in the pharma industry. As always I will keep this analysis objective.
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 expiry 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 have determined that Bristol Myers Squibb has a strong secret moat. And I feel rather confident about management as well. Now let us investigate the big five number 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 big five numbers are, you can have a look at "MY STRATEGY" on the website. Before we go through the numbers, I would encourage you not to put too much importance in the numbers in the one-year benchmark. Bristol Myers Squibb acquired Celgene in 2019 and MyoKardia in 2020, these acquisitions will skew the numbers. The numbers in the one-year benchmark are further sewed due to the pandemic last year, where especially oncology is still lacking other therapies to reach pre Covid-19 levels.
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. Looking at the ROIC of Bristol Myers Squibb the numbers are certainly a bit underwhelming. While they are by no means disastrous, they don't reach the 10 % level in any of the benchmarks.
The next numbers I will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. These numbers look much more promising. While they are just under the requirement in the ten-year benchmark, they are well above in the other benchmark, and are growing from benchmark to benchmark.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Ouch, these numbers are disastrous. While you shouldn't completely discard investing in a company based on one growth rate alone, these numbers are very discouraging.
The Equity Growth Rate is the most important of the four growth rates. If we ignore the one-year benchmark, these numbers look great. While I was discouraged with the numbers in the previous growth rate, these numbers are much more encouraging. Well above the 10 % in all the growth rate that matters, and they are growing from benchmark to benchmark.
Finally, I investigate the Cash Growth Rates. Once again Bristol Myers Squibb delivers great numbers. All of them way above the required 10 %. And while the numbers decrease a bit between the five hear and three-year benchmarks, it is certainly nothing to worry about when the number is 38,6 %.
To sum up the five numbers. The most important number will always be the ROIC, and the numbers are underwhelming. This alone means that I'm a bit wary about investing in the company. The EPS growth rate is disastrous, which further discourage me when evaluating Bristol Myers Squibb as an investment opportunity. However, the sales growth rate, the equity growth rate and the cash growth rate all deliver great numbers. I wouldn't completely stay away from Bristol Myers Squibb because of the historic numbers, as there are much more to investing than that, but I would need to see a much brighter future than past, for me to add Bristol Myers Squibb to my portfolio.
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 cash flow. Doing the calculation on Bristol Myers Squibb, I can see that Bristol Myers Squibb has 12,81 years earnings in debt. It is obviously much 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 expires in March 2022. 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, and if they are not able to pay down the debt continuously, it is another risk.
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 and Mavacamten, which together with Zeposia and Onureg 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 and Abecma 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 2019 at 1,55 (as I think it is the most representative). I chose an Estimated future EPS growth rate of 8 (Bristol Myers Squibb mentioned in their latest earnings call 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 $13,23, 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 $6,62 (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". In order 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 14.052. The Capital Expenditures was 753. 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 527,1 in our further calculations. The Tax Provision was 2.124. We have 2.220 outstanding shares. Hence, the calculation will be like this: (14.052 - 527,1 + 2.124) / 2.220 x 10 = $70,49 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 2,89 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $33,20.
I believe Bristol Myers Squibb, like most other major pharmaceutical companies, is an interesting company. However, there are some concerns regarding Bristol Myers Squibb that makes me a bit wary. First, the ROIC has been underwhelming, which is not something I like. I don't like that the drug that generates the most revenue has a patent expiry next year, and even though some patent settlements have been made, I reckon it will still hurt sales a bit. The debt is also a slight concern but in general I'm optimistic about the acquisitions. What does intrigue me about Bristol Myers Squibb is their new drugs and pipeline, as I think they have plenty of potential, especially them moving into cell therapies is something that interest me. As it is now, I would buy Bristol Myers Squibb if I could get it on a 50 % discount to intrinsic value on two out of my three calculations, meaning I would buy it at the PAYBACK TIME price at $33,20.
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