The past several months have been tough ones for Bristol-Myers Squibb (NYSE:BMY), and by extension, for shareholders. Though up since reporting solid Q2 results on July 25, the current BMY stock price near $46 is still 27% below October’s high. Last month’s multi-year lows are still in sight as concerns about drug-pricing legislation continue to cast a shadow on the entire industry.
Still, on balance, Bristol-Myers Squibb stock could prove to be a worthy pickup here at current levels. Pharmaceutical stocks as a group look and feel ripe for a cyclical, psychological upswing in the absence of any actual pricing regulation, while the impending deal to meld with rival Celgene (NASDAQ:CELG) will undoubtedly make for a more complete drug maker.
Still Going Strong Through the Storm
In an arena that includes the likes of Merck (NYSE:MRK) and Pfizer (NYSE:PFE), Bristol-Myers Squibb isn’t usually a top-of-mind name. Make no mistake, though. The $75 billion outfit has enough size and strength to muscle its way around the pharma market.
Of last quarter’s $6.27 billion worth of revenue, $1.44 billion of it, or $1.18 per share of BMY stock, was turned into earnings. The top line was up 10% year-over-year.
Sales of stroke-prevention drug Eliquis carried most of the weight.
Jointly marketed with Pfizer, Eliquis revenue topped $2.0 billion, while rheumatoid arthritis treatment Orencia drove $778 million worth of revenue in just one quarter. Opdivo, used to treat a handful of cancers, generated $1.8 billion worth of sales during the second quarter.
Such lopsided success, however, acts as a double-edged sword.
While all drug companies want and need so-called blockbuster drugs that generate more than $1 billion in annual sales, nothing breeds competition like success. Opdivo’s sales, in fact, were kept in check last quarter by Merck’s impressive Keytruda. Indeed, Opdivo failed to perform as hoped recently in one of two different non-squamous non-small cell lung cancer (NSCLC) trials, limiting its potential that some BMY stock holders may have been counting on.
Nevertheless, the long-suppressed stock may be poised to finally bounce back for a handful of reasons, not the least of which is a compelling valuation.
A Bigger, Better Bristol-Myers
Concerns about the unclear future pharmaceutical companies are valid.
Going as far back as President Barack Obama’s first term, legislators have entertained ideas of how to lower the cost of healthcare, beginning with lower drug prices. Although the current White House administration has yet to submit a plan that’s palatable to a majority of lawmakers and the public, the discussion has never gone away. Bristol-Myers CEO Giovanni Caforio affirmed the inevitable legislation during the Q2 conference call, bluntly saying, “We are at the beginning of a period of change,” in reference to drug-pricing limits.
That change, however, is arguably fully priced into Bristol-Myers Squibb stock.
At the current BMY stock price near $46, shares are valued at only 12 times trailing earnings, and 10.4 times projected earnings.
Those metrics may still underestimate what lies ahead. The drug maker upped its full-year operating profit guidance by a dime, to a new range of between $4.20 and $4.30 per share, but was arguably tempered with its public expectations.
Those numbers also don’t yet reflect the pending merger with Celgene, which is expected to close late this year or early next year now that the European Commission has given the deal the nod of approval.
The deal won’t come cheap. Bristol-Myers intends to shell out $74 billion for Celgene. But, once the deal is done, the combined company will boast at least nine blockbuster drugs that span several different kinds of illnesses, as well as several different business models. Caforio explained during that recent earnings call, “I felt it was important to us … to have a broader and more diversified portfolio that goes across multiple types of reimbursement.”
Looking Ahead for BMY Stock
Bristol-Myers Squibb won’t be allowed to hold onto all of its blockbusters. Regulators insist that for the merger to get their go-ahead, Celgene’s psoriasis and psoriatic arthritis drug Otezla must be sold to a third-party as it’s too similar to Bristol-Myers Squibb’s Orencia. The two drugs under one umbrella would translate into a competition-limiting dominance of the arthritis drug market.
It may be small price to pay for access to the rest of Celgene’s portfolio, though. Although some analysts foresee peak annual sales of $2.5 billion, Otezla only generated $389 million in revenue last quarter. Celgene’s total second quarter revenue was a hefty $4.4 billion, up 15% year-over-year, with most of that growth being driven by other drugs.
While Bristol-Myers Squibb lowered its full-year GAAP profit outlook to account for acquisition-related expenses, the two companies are uniting at a time when both are at full stride.
The changing regulatory backdrop is looking more and more benign as well, calling into question the weakness BMY stock has suffered over the course of the past 10 months.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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