Bristol Myers: Looking Good For 2023

Late this summer, I concluded in this premium article that Bristol Myers (NYSE:BMY) was still in a good place, after its shares had seen a meaningful outperformance, notably on a relative basis. This came as the operational performance was largely in line with expectations, although softness was the result of a stronger dollar. The company commanded modest valuations as growth had to come from new product introductions and M&A activity, following some patent expirations in the portfolio.

A Starting Point

Bristol Myers has undergone a massive transformation since its $90 billion deal for Celgene in 2019, a transaction set to create a $37 billion business which was set to post EBIT of $16 billion. This earnings power was badly needed as pro forma net debt would rise to $52 billion.

With earnings power seen around $5 per share, and potential synergies and reduced financing costs over time having the potential to grow these earnings per share, a valuation in the mid-40s looked quite compelling.

To offset some of the increase in leverage following this deal, the company sold its Otezla rights in a $13 billion deal to Amgen (AMGN) as all of this resulted in a re-rating in the share price to $60-$70 by the summer of 2021.

The company rather quickly embarked on acquisitions again, including a $13 billion deal of MyoKardia in 2020, a deal through which the company obtained the chronic heart disease drug mavacamten. The re-rating in the share price and purchase of MyoKardia was supported by solid operating conditions, with 2020 sales of $42 billion comfortably surpassing the pro forma sales numbers at the time of the Celgene deal announcement. Earnings were posted at $6.00 per share, with the company guiding for 2021 earnings to rise to $7.00 per share, all while net debt was down to about $30 billion, aided by organic deleveraging and the sale of Otezla.

As it turned out, revenues for the year 2021 rose 9% to more than $46 billion, albeit that Bristol Myers still has a concentration risk with sales of Revlimid, Eliquis and Opdivo combined being responsible for $31 billion sales, about two-thirds of total revenues. The company posted adjusted earnings of $7.51 per share in 2021, in line with the original guidance.

For 2022, a much more modest outlook was issued, with sales seen around $47 billion and earnings seen around $7.80 per share. The lack of real growth comes as the company expects a real impact from the expiration of Revlimid. That was the original guidance, as a stronger dollar made that the company updated for sales to come rather flattish, cutting the earnings guidance a bit as well.

In June of last year, the company furthermore announced a $4.1 billion deal to acquire Turning Point Therapeutics, an oncology company which focuses on non-small cell lung cancer, being granted no less than three breakthrough therapy designations by the FDA, with lead candidate repotrectinib expected to be approved in 2023.

With earnings power seen around $7.50 per share by last summer, and shares trading at $66, it was clear that valuations were not demanding at all, as a pro forma net debt load of $33 billion following the Turning Point deal was still very manageable.

Given the still favorable set-up, I concluded to remain upbeat on Bristol Myers, although I would be tempted to take some profits if shares might revisit the $80 mark, levels seen in spring of 2022.

An Update

Since trading at $66 in August, BMY shares have seen a swift recovery to the $80 mark in December, I cut part of my position based on the discussion above. Like many pharmaceutical names, shares have been a major underperformance as of late, now trading down to $71 per share again.

In October, Bristol Myers reported third quarter sales at $11.2 billion, down 3% on a reported basis, although that revenues were flat if we adjust for the impact of a strong dollar. Adjusted earnings, mostly adjusted for amortization charges, were reported at $1.99 per share, six cents ahead of the year before.

Pressure on the topline numbers has been driven by expiration of Revlimid, whose sales fell 28% from $3.3 billion to $2.4 billion on an annual basis. This was offset by a 5% increase in the core "in-line" products business which contributed a little over $8 billion in sales and a 61% increase in the "new product portfolio", which included recent revenue contribution from Opdualag, Camzyos and Sotyktu.

To provide comfort and relative appeal in this higher interest rate environment, Bristol Myers announced a three penny hike in its quarterly dividend to $0.57 per share in December, adding to an uninterrupted dividend track record which started 91 years ago.

In February, the company posted fourth quarter sales of $11.4 billion, down 5% on the year before, and down a percent if we adjust for currencies. Revlimid sales now fell 32% to $2.3 billion, as continued pressure on sales of this drug (still responsible for 20% of sales) will hurt the growth profile for some time to come.

This was offset by a 4% increase in "in-line" products business and now an 83% increase in the new product portfolio, with combined revenues of $645 million starting to make a real contribution. Fourth quarter adjusted earnings fell two pennies to $1.82 per share. For the year, the company posted earnings of $7.70 per share, with net debt posted at $30 billion.

Moving Into 2023

For the current year, the company expects revenues to grow by around 2% to approximately $47 billion with adjusted earnings seen at a midpoint of $8.10 per share. This is quite impressive given the patent expiration of Revlimid, as Bristol Myers expects revenues to come in around $6.5 billion for this drug this year. This came after 2022 sales were down 22% to $10.0 billion already, as the $3.5 billion shortfall itself is responsible for a 7-8% headwind to reported sales growth this year.

The guidance is quite comforting as I am warming up again to initiate a full position here. At just 9 times adjusted earnings, with leverage being very reasonable, and the 2023 guidance being quite comforting, value is imminent. Revlimid will likely pressure the topline results for some time to come, but Bristol Myers has some growth engines in house as well, to make a meaningful impact as well.

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