BMY: Might Be Approaching A Bottom In 2024 (NYSE:BMY)

Introduction

Last year we saw an uptick in M&A from big pharma to combat the significant drug patent cliff later in the decade. Amongst the worst anticipated patents cliffs is Bristol Myers Squibb (NYSE:BMY) who announced a number of deals into the end of 2023.

Last year former COO and now current CEO Chris Boerner revised the $10bn-13bn sales target for new drugs by 2025 to $10bn by 2026, raising concerns over the company ability to completely offset patent loss in later years. Opdivo which accounted for 20.7% of Q3 sales has a patent cliff in 2028 and Eliquis which accounted for 24.6% of Q3 sales has a patent cliff in 2026. Roughly 45% of revenue is at risk over the next 4 years and management have already pulled back some guidance.

Opdivo sales is expected to be somewhat offset with Opdualag, a combination relatlimab and nivolumab (Opdivo). Outside melanoma, Opdualag proof of concept data in 1L NSCLC (lung cancer) could be a potential catalyst if read out positively this year. Other new drugs include Abecma, Reblozyl, Zeposia, Breyanzi, Inrebic etc which continue to grow at strong double digits YoY. However these new drugs still represent only 10% of total Q3 sales.

While the upcoming patent loses has investors worried, BMY is richly producing $15-16bn yearly in FCF which allows for M&A flexibility, debt repayments, dividends and buybacks. With the performance in recent years its easy to see why investors are disappointed. BMY always seems to be active M&A wise but the equity value has barely moved for ten years. The Celgene acquisition in 2019 was the third largest transaction in pharma history and on a per share level there’s been no price appreciation over the past decade.

BMY has returned $66bn to shareholders via dividends / buybacks over the past decade, but this hasn’t stopped shareholders exiting over the past few years including Berkshire.

Active M&A Signals Disappointing Pipeline & Confuses Market

Deals announced late into last year include Mirati ($5.8bn), RayzeBio ($4.1bn) & Karuna ($14bn). Most interesting is Kaurna’s KarXT, an oral medication to treat schizophrenia, expected to launch in September 2024. Clinical data for KarXT’s effectiveness in treating Alzheimer’s disease psychosis is also expected in 2026. KarXT might have additional indications for other neurologic conditions like Bipolar disorder. Some analysts suggest KarTX could deliver peak sales between $6bn-7bnb. If accurate this would account for roughly 13% – 15% of BMY’s current sales.

The majority of funding for these deals will come from new debt, maybe $18-22bn in my estimation based on the deal disclosures. This would increase net debt / EBITDA from 1.49x in FY22 to 2.75x, a roughly 85% increase.

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The market doesn’t have faith that the pipeline can bridge the LoE gap and deliver single digit CAGR into the end of the decade. Management have signalled this to the market by announcing 3 deals in Q4 or at least this is how the market might have interpreted it.

Is current or previous guidance contingent on acquiring these early and late stage assets?

If this isn’t the case, one would expect BMY to upgrade their 2025+ growth outlook to reflect these deals (unlikely). More deals in 2024 would further stretch the balance sheet potentially leading to lower a lower equity value.

Valuation

On an EV/EBITDA basis, the valuation is not significantly cheaper than last year due to a larger enterprise value as a result of $20bn est. in new debt. Enterprise Value might now sit at around $153bn. Assuming EBITDA in-line with Wall St. estimates over the next few years between $17-19bn, the forward multiple would be between 8-9x. For every $5bn of new debt that might be issued for further M&A, this multiple would increase by 0.26x.

Is this a screaming deal?

Considering the chart below the sell side doesn’t seem to think so with falling sales, EBITDA and FCF. Wall street currently has a median price target of $61 down from $80 12 months ago.

I agree this seems cheap for a bluechip, but I cannot say this is a screamingly attractive valuation where investors will likely generate easy alpha. Sell side forecasts indicate a -3.2% revenue fall in 2026 which would make the 3yr sales CAGR basically flat unlike what management are guiding. Amongst the big pharma peer group, BMY deserves a lower valuation alongside Pfizer (PFE). That is until the concerns over the patent cliff are both accounted for and lead to positive YoY to sales growth.

If more deals (more debt) are needed to deliver YoY sales growth above $46bn then investors could be shooting in the dark. However I believe BMY is approaching a bottom in valuation as it heads into the $90bn market cap range.

Conclusion

Due to new drugs sales and pipeline assets, I personally expect BMY to bridge the LoE gap in the next 4-5 years despite some flat or negative growth years (mainly 2026 – Eliquis patent expiry). After the adjustments in Enterprise Value from new debt, todays valuation might be:

EV/FCF = 9.5x

MC/FCF = 6.25

At todays price of $49 per share, BMY offers a sensible entry point while providing a small forward dividend of 4.8%.

If shares continue trading down into the low $40s or even $30s, the board should seriously consider authorising larger buybacks at the expense of a smaller dividend if they have faith in bridging the LoE gap. BMY reports Q4 results next week on the 2nd of February. Management need to clearly communicate two things to investors in the next call if they want to restore confidence:

1. BMY’s approach to debt, should investors expect new the leverage ratio from Mirati, RayzeBio & Karuna acquisitions to be the new normal?

2. Do these deals improve existing guidance in 2025+ or are these acquisitions required to meet existing guidance?