It's been almost four years since a revolutionary new cancer therapy from Bristol-Myers Squibb (BMY +1.40%) became the first of its kind to treat lung cancer patients. The early lead seemed like the beginning of a golden age for Bristol-Myers, but since then, the stock has lost 26% of its value.
Bristol's stock price has plummeted over the past four years, but revenue has risen 36% over the same period on a trailing-12-month basis. That has plenty of investors wondering if the market has been too harsh. Let's look at what's gone wrong, and what could go right, to see if the stock's a bargain at recent prices.
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Why everyone's so put off
Bristol's late-stage pipeline is barren of potential new drugs that will drive growth. Instead, the company has become increasingly dependent on Opdivo, a cancer therapy that makes it hard for tumors to shut down an immune system attack. Lung cancer claims more lives than any other malignancy, and for a moment it looked like Opdivo was going to become widely used in this indication.
In early 2015, the Food and Drug Administration expanded Opdivo's addressable patient population to include some patients with advanced-stage lung cancer following their first relapse. That was a step in the right direction, but new patients tend to stay on treatment much longer than patients who have already relapsed.
With the drug's early lead in the second-line indication, Bristol-Myers shareholders expected Opdivo to become the first of its kind to treat new lung cancer patients. Yet the stock has underperformed because clinical-trial results have been disappointing and a competing drug from the same class, Keytruda, has taken a commanding lead.
Even if Opdivo is approved, the results we've seen suggest it will never reach more than a sliver of patients newly diagnosed with the most common form of lung cancer.
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Are you sure this a good idea?
In 2018, Bristol-Myers gave Nektar Therapeutics (NKTR 0.37%) a whopping $1.85 billion up front to get its hands on an experimental drug called NKTR-214. Bristol splurged for limited rights to NKTR-214 because adding it to Opdivo appeared to boost response rates among small groups of patients with lung cancer and other solid tumors.
It's beginning to look like Bristol made an expensive mistake with Nektar, which doesn't instill much confidence in the company's ability to sign the right deals. An attempt to acquire Celgene (CELG +0.00%) might have excited investors a year ago, but not now. When Bristol started 2019 by announcing it would buy the troubled biotech for $74 billion, investors knocked the big pharma stock 14% lower before the day was over.
Bristol's big offer wasn't nearly large enough to please long-term Celgene investors, and that isn't the only sign the big pharma is making a smarter purchase than investors initially thought. During the year ended in September, Celgene's operations generated a $3.3 billion profit while selling and administrative expenses came in at $3.2 billion. A lot of Celgene's operations overlap Bristol's, which is why Bristol is confident it can squeeze out synergies worth $2.5 billion annually in a few years.
Celgene's shareholders will own 31% of the new company, but there will be plenty of sales to share with Bristol's shareholders that will keep the rest of the combined company. Revlimid sales reached $9.7 billion in 2018, and the multiple myeloma therapy could add $10.8 billion to Bristol's top line in 2019.
Generic competition will probably begin pressuring Revlimid sales in 2023, but Celgene isn't a one-trick pony anymore. Bristol will also take hold of three more drugs that are already generating over $1 billion in annual sales each. In fact, sales of non-Revlimid drugs are expected to rise about 15% to $6.3 billion this year.
Bristol can make this deal pay off for investors with sales from drugs that are already approved, but there could be some blockbuster new-drug launches ahead. The big pharma will take hold of three potential new drugs that could earn their first approvals in 2019. If fedratinib, luspatercept, or ozanimod live up to expectations, Bristol's going to make its investors rich.
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A bargain now?
Annual sales of Bristol's next-generation blood thinner, Eliquis, surged 32% to $6.4 billion in 2018, and despite a lack of success with the lung cancer population, Opdivo sales are surging as well. A first-line approval to treat kidney cancer pushed Opdivo sales 36% higher to $6.7 billion last year.
Bristol has several established brands that are losing ground to generic competition. The sagging segment was responsible for 22% of total revenue at the beginning of 2018, but it won't cause much of a headwind in 2019. By the end of 2018, established brands contributed just 12% of total revenue.
Investors disappointed with Opdivo and uncertain about the Celgene acquisition have driven Bristol-Myers Squibb stock down to just 11.7 times forward earnings estimates. That seems pretty low when you consider the average S&P 500 stock trades at 15.8 times estimates.
Bristol's bottom line is probably going to outpace most stocks in the benchmark index, which makes the big pharma look like a terrific bargain at recent prices.
Check out the latest Bristol-Myers Squibb earnings call transcript.
