For investors in pharmaceutical companies, few things are more concerning than a loss of market share, particularly if it's because of the patent expiration of a blockbuster drug. Bristol Myers Squibb (BMY -8.51%) is currently tackling just such issues, with its lead immuno-oncology drug, Opdivo, taking a beating from Merck's (MRK 2.93%) market-leading immuno-oncology drug, Keytruda, across multiple cancer indications. Keytruda managed to secure approval from the U.S. Food and Drug Administration (FDA) ahead of Opdivo in the advanced melanoma indication in 2014, but success in the advanced non-small cell lung cancer (NSCLC) market catapulted Opdivo ahead of Keytruda in 2015. However, Keytruda took the lead again in late 2016 when it demonstrated clinical success as a first-line treatment for NSCLC, while Opdivo failed to make its mark in this indication. Optivo's global patents will begin to expire in 2026.
Revlimid, a blood cancer drug that Bristol Myers Squibb obtained in its recently completed mega-acquisition of Celgene, will be facing generic competition in the U.S. beginning in March 2022. Eliquis, the market-leading oral anticoagulant, will face patent expirations starting in 2026. All these are major challenges for Bristol Myers Squibb, considering that Opdivo, Revlimid, and Eliquis raked in global sales of $7.2 billion, $10.8 billion, and $7.9 billion, respectively, in fiscal 2019.
But there is much more to the Bristol Myers Squibb story than patent expirations. Here are some reasons why the company remains an attractive, safe pick for healthcare investors.
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Life-cycle management of growth assets is a priority
While all three drugs are facing patent expirations in the longer term, Bristol Myers Squibb's near-term story is based on the growth prospects of Opdivo, Eliquis, and Revlimid.
Shelter-at-home restrictions affected demand for Opdivo in the first half of fiscal 2020, but the fundamentals behind the drug haven't changed. Demand for Opdivo as a second-line treatment option for non-small cell lung cancer (NSCLC) remains stable, and the combination therapy of Opdivo plus another Bristol Myers Squibb drug, Yervoy, is a leader in treating renal cell carcinoma. For these reasons, the company expects Opdivo to return to annual revenue growth in fiscal 2021.
Recently, the U.S. Food and Drug Administration (FDA) approved Opdivo plus Yervoy as a first-line treatment for certain NSCLC patients, and the combination of Opdivo, Yervoy, and chemotherapy has already been approved as a first-line treatment for all patients with NSCLC.
While Merck's Keytruda-chemotherapy regimen is far ahead in the race, both in terms of revenue as well as patients treated, Bristol Myers Squibb's combination of Opdivo and Yervoy is chemotherapy-free and will be preferred by prescribers and patients due to lower safety risks. The Opdivo and Yervoy combination regimen has also shown improved survival odds in clinical trials. Management says its share of the NSCLC market has already reached a mid-single-digit percentage in the U.S., an impressive feat within such a short time considering Keytruda's stronghold in this indication. And management remains committed to expanding Opdivo's usage in multiple cancers across a variety of therapies and treatment settings. That, in turn, should bring in robust revenue streams in the coming years.
Unlike Opdivo, Revlimid and Eliquis both saw revenue rise year over year in the first half of 2020. The company has been entering into multiple legal settlements with generic players to slow the pace of the drop in revenue after the patents on these drugs -- which are still growth assets -- expire. Bristol Myers Squibb's settlement with Dr. Reddy's Laboratories (RDY 4.37%) will allow the latter to release a limited volume of generic Revlimid after March 2022, with limits remaining into 2026. The company has entered into similar deals with Natco Pharma and Alvogen for managing Revlimid's "generic erosion."
Acquisitions have brought promising late-stage candidates
The Celgene acquisition added many promising late-stage assets to Bristol Myers Squibb's roster, including multiple sclerosis drug Zeposia (ozanimod) and an immunotherapy called liso-cel. In June, Bristol Myers Squibb launched Zeposia as a treatment for multiple sclerosis; the company has also released robust top-line data from its trial for Zeposia to treat ulcerative colitis.
Bristol Myers Squibb is also awaiting potential FDA approval for liso-cel as a treatment for certain forms of advanced lymphoma. The target date for this decision has been set for Nov. 16, though travel restrictions due to the coronavirus pandemic have left the FDA unable to inspect the two plants where liso-cel is manufactured, creating some uncertainty about the timeline.
Earlier this month, Bristol Myers Squibb announced the acquisition of biotech MyoKardia (MYOK) -- and its promising pipeline of cardiovascular drugs -- for $13.1 billion in cash. MyoKardia's lead candidate, mavacamten, targets a highly underserved chronic cardiovascular condition called hypertrophic cardiomyopathy (HCM), in which the muscle of the heart becomes unusually thick. There are currently no FDA-approved treatments for this condition. The company is planning to submit a new drug application (NDA) to the FDA for mavacamten in early 2021. If it overcomes regulatory hurdles, Bristol Myers Squibb will have another potential blockbuster drug in its portfolio.
A solid dividend and the capacity to pay back debt
Bristol-Myers Squibb's current dividend yield is 2.9%, much higher than the S&P 500's average of 1.7%. Yet the company's dividend payout ratio is only 38.4%, implying significant financial flexibility to fulfill its dividend commitments.
Investors are concerned about the company's long-term debt of $47.5 billion, of which $19 billion was raised to fund the Celgene deal. However, Bristol Myers Squibb boasts a cash balance of $22 billion as of the end of June, and in the past 12 months, it has generated free cash flow of $15.8 billion. Management plans to leverage that cash to bring its debt-to-EBITDA ratio from 5.7 to less than 1.5 by the end of 2023.
Reasonable valuation
Bristol Myers Squibb is trading at a forward price-to-earnings (P/E) multiple of only 8.3. Peers including Merck, Johnson & Johnson (JNJ -1.15%), and AstraZeneca (AZN 5.38%) are trading at forward P/E multiples of 12.7, 16.8, and 21.8, respectively.
There is no doubt that loss of patent protection and increasing competitive pressures are major risks for Bristol Myers Squibb. However, the company has already lined up six new product launches with a consolidated revenue potential of $20 billion (excluding mavacamten -- the MyoKardia acquisition is still not finished) achievable by the second half of the decade. Management estimates the Celgene deal will save it $2.5 billion by the end of 2022, with one-third of that expected to show up on the income statement by the end of 2020. Based on its risk-reward proposition, Bristol-Myers Squibb looks like a smart buy for healthcare investors with average risk appetite.
