It's been an abysmal year for Bristol Myers Squibb (BMY 0.34%) and its shareholders. The company's shares are down by nearly 30% year to date. That starkly contrasts with the broader market, which has rebounded this year. Bristol Myers is facing several issues, most notably generic competition for some of its former best-selling therapies.
That's one of the biggest challenges drugmakers can encounter, but after the recent sell-off, some might think that the price is finally right and it is time to click the "buy" button on Bristol Myers. Is that the case? Let's dig in a little deeper and find out.
Recent results aren't great, but should improve
As one would expect from a company dealing with patent cliffs, Bristol Myers' earnings haven't been solid. In the third quarter, revenue declined by 2% year over year to about $11 billion, while adjusted earnings climbed by just 1% to $2 per share from a year ago. That's not great, but it's important to look a bit deeper.
Bristol Myers' cancer therapy Revlimid, which lost patent exclusivity last year (it was the biotech's best-selling product before) is still having a massive impact on financial results. Revlimid's sales declined by 41% year over year in the period to $1.4 billion, or a non-negligible 13% of the company's top line.
Given that a single drug which still accounts for this much of the company's revenue is seeing its sales drop off, one might have thought that Bristol Myers' top line would be declining much more than just 2% year over year. The company has been able to keep things afloat -- more or less -- partly thanks to older medicines that are still growing their sales.
The more exciting aspect here is Bristol Myers' portfolio of brand-new medicines approved starting in 2019. They don't make up much of the company's revenue yet. In the third quarter, these nine products racked up a combined $928 million in sales, far less by Revlimid by itself. But note that these medicines grew their sales by 68% year over year.
It might take a few years, but eventually, these medicines should fill in the gap left by Revlimid -- and then some. This means Bristol Myers' top line will likely return to growth. The biotech expects more than $25 billion in risk-adjusted sales from its new portfolio by 2030.
Naturally, that will also depend on potential label expansions. And elsewhere, Bristol Myers won't stop innovating. The company's pipeline looks strong, with more than 45 clinical compounds in development and several dozen ongoing clinical trials, including some targeting brand-new approvals.
What does all this mean for investors? Patent cliffs are nothing new for drugmakers, and Bristol Myers is handling it relatively well. Once things stabilize for the company, its financial results and stock market performances should improve.
A reasonable valuation and a solid dividend
There is a silver lining to Bristol Myers' terrible performance in 2023. The company's shares look reasonably valued at current levels, at least going by its forward price-to-earnings (P/E) ratio. The biotech's current forward P/E is only 6.7, which looks dirt cheap compared to the biotech industry's average of 14.9. The market seems somewhat bearish on the company, which makes sense as long as all we're considering is the near term.
But for patient investors willing to hold Bristol Myers' shares for five years or more, getting in at current levels might be a steal, not only because its underlying business, though not perfect right now, should strengthen, but also because of its dividend. Bristol Myers currently offers a highly competitive yield of 4.70%. The S&P 500's average is 1.62%. Moreover, Bristol Myers has increased its dividend per share by 46% in the past five years.
The company's cash payout ratio of 40.5% is reasonable and suggests more than enough room to cover its current dividend program. Dividends matter to long-term investors as reinvesting them will boost returns over long periods.
Bristol Myers might not be a stock for everyone. People looking for high-growth companies should look elsewhere. But the biotech can offer a lot to those looking for a blue chip dividend stock. Investors in the market for such stocks can comfortably add shares of Bristol Myers Squibb to their portfolios.
