Source: Bristol-Myers Squibb.
Bristol-Myers Squibb (BMY 3.91%) is one of the planet's biggest drugmakers and a staple in dividend investors' portfolios, but it's been navigating a series of sales-crunching patent expirations that have investors wondering whether the company's dividend is safe. Let's take a closer look and see whether investors should be concerned.
Obstacles to growth
In 2012, Bristol-Myers lost patent protection on Plavix, the company's top selling cardiovascular drug. Sales of Plavix have since tumbled from $2.5 billion in 2012 to just $258 million last year.
That's a stiff headwind challenging Bristol-Myers' top line, but unfortunately it's not the only patent expiration the company will need to overcome. Roughly $3 billion in annual sales could also be in jeopardy because of generic competition by the end of 2017, including sales of Baraclude, a hepatitis B treatment that had sales of about $300 million in the U.S. before losing patent protection this year. Following the entry of generic versions of Baraclude, U.S. sales of the drug slumped 40% to just $40 million in the third quarter. However, it's Abilify that poses a much larger revenue risk to investors. Abilify, a schizophrenia drug that racked up sales of $2.3 billion last year, goes off patent in 2015. In addition to those two drugs, Bristol-Myers' HIV drug Sustiva, with $1.6 billion in sales, will lose patent protection in 2017.
That patent expiration hurdle is even more concerning to investors considering that expiring patents are already having a profit-busting impact on the company. In 2010, the company's operating margin was 32%, but Bristol-Myers' operating margin stands at roughly 17% today.
BMY Operating Margin (TTM) data by YCharts
Reasons for dividend hope
Those obstacles are daunting, but there are signs that Bristol-Myers may be on a path that could return it to growth.
The company has embarked on a cost-cutting plan to help improve its profitability that includes divesting its half of its diabetes partnership with AstraZeneca. That move could be worth $4 billion, plus annual royalties tied to sales of top diabetes medicines including Onglyza, an insulin-boosting drug. Additionally, selling its stake to AstraZeneca shifted 4,000 employees off Bristol-Myers' payroll, helping cut ongoing expenses.
In addition to buttressing its bottom-line, Bristol-Myers may also benefit from ongoing sales growth for maturing products, including the cancer drug Yervoy, leukemia drug Sprycel, the rheumatoid arthritis drug Orencia, and the anticoagulant Eliquis. Sales of those four drugs jumped by a combined $425 million in the third quarter from a year ago.
Sources: Bristol-Myers Squibb and author's calculations.
Those fast-growing drugs should help offset some of the pain of patent expiration, but a much bigger impact could be coming in the form of Bristol-Myers' new PD-1 targeting cancer drug Opdivo. Bristol-Myers filed for FDA approval of Opdivo for use in patients with previously treated advanced melanoma, and a decision is expected by regulators at the end of March. If Opdivo gets the green light, it could be just the first of many, given that Bristol-Myers is conducting more than 50 ongoing trials for the drug.
The combination of cost-cutting and emerging drug sales should shore up the company's balance sheet, which is already pretty flush with $11.5 billion in cash. That cash position should enable Bristol-Myers to maintain its current dividend payout, particularly given that the company's cash dividend payout ratio, which measures how much cash after capital expenses and preferred dividends is used to pay common stock dividends, is 68.9%. That level falls right about in between peers Johnson & Johnson and AstraZeneca and suggests there isn't an imminent threat to Bristol-Myers' dividend.
BMY Cash Dividend Payout Ratio (TTM) data by YCharts
Fool-worthy thoughts
Bristol-Myers has its work cut out for it, but it doesn't appear that its dividend is in jeopardy. The company's cash balance is climbing, and a handful of rapidly growing drugs should provide plenty of cash flow to support it. If the FDA approves Opdivo next year, investors will have more encouragement to look forward to the realization of analysts' projections that Opdivo could post peak annual sales of $10 billion someday. That forecast suggests that Bristol-Myers' short-term patent risk shouldn't keep long-term dividend investors away.
