Bristol Myers Squibb (BMY 0.34%) has historically been a growth machine, always on the hunt for acquisitions and ways to get bigger and better. But acquisitions have also been a bit of a necessity since it faces some concerning patent cliffs in the future that could result in a significant drop in sales. That's one of the key reasons the stock trades at a big discount now.
The company recently announced yet another acquisition. Does this latest deal alleviate some of the risks related to Bristol Myers stock, and is it a good investment to add to your portfolio today?
Bristol Myers to buy Mirati Therapeutics
On Oct. 8, Bristol Myers announced plans to acquire Mirati Therapeutics. Under the merger agreement, it will cost up to $5.8 billion ($1 billion is contingent on the approval of a new drug application for MRTX1719, which could be several years away). Mirati is an oncology company that Bristol Myers says is a "strong fit" for its portfolio that can help diversify and expand its line of drugs.
A key asset for the company is lung cancer drug Krazati. In December 2022, the Food and Drug Administration granted accelerated approval for the drug as a treatment for advanced or metastatic non-small cell lung cancer in patients who have a particular mutation, KRASG12C. At its peak, the drug may generate annual sales of $1.4 billion by 2032. But that could increase if it's approved for more indications.
Bristol Myers expects the transaction to close within the first half of next year. It also cautions investors that it will initially have a dilutive effect on the business and that over the 12-month period after the close, it will bring down adjusted earnings per share by $0.35.
Tons of cash, but highly unprofitable
Mirati has approximately $1.1 billion in cash on hand, according to Bristol Myers' chief commercialization officer, Adam Lenkowsky, who believes the company has gotten a great deal with its latest acquisition.
But Mirati has been incurring consistent quarterly losses. Over the trailing 12 months, it has reported a net loss of $737.5 million on revenue of just $27.2 million. The business is still in its early growth stages and with research and development expenses alone costing the company $523.2 million over the past 12 months, getting to breakeven would have been a tall task for the business.
Mirati has other potential revenue-generating assets -- multiple programs in its pipeline are potential cancer treatments (including MRTX1719). But all of them remain in early stage trials. For investors, that means it could take years at best for them to obtain approval, which is by no means a guarantee.
For Bristol Myers, the end goal appears to be to diversify its operations and put more assets in its portfolio to increase its odds for success, and potentially bring more products to market. Doing so could help offset declines in revenue in the years ahead from key assets such as Opdivo, Revlimid, and Eliquis.
Does this make Bristol Myers a good buy?
Bristol Myers' revenue declined by 6% to $11.2 billion in its most recent quarterly results, for the period ended June 30. Losses in exclusivity are starting to weigh on the business but the good news is that its new product portfolio is growing at a fast rate of around 80%. The addition of Mirati does help give the company more assets in its portfolio but it could still be many years before there's a bump up in revenue due to the transaction.
For risk-averse investors who were concerned about Bristol Myers' lack of growth, this recent acquisition unfortunately doesn't do enough to alleviate those worries. However, with the healthcare stock trading at a forward price-to-earnings multiple of just 7, there's a decent margin of safety in case the company struggles, which could still make the stock worth buying right now. The company is working on expanding its operations and the risk is arguably priced into the stock already.
Although this isn't an entirely risk-free investment, Bristol Myers Squibb is a top name in healthcare and with plenty of resources at its disposal to seek out more growth opportunities, it could make for an underrated stock to buy given its low valuation.
