Image Source: Bristol-Myers
Bristol-Myers Squibb continues to put up nice revenue growth as demand for Eliquis is coming in better than expectations. The company’s hopes to win first-line therapy in combination therapy for non-small cell lung cancer have been dealt a severe blow, however. We haven’t liked Bristol-Myers’ share-price performance of late and remain on the sidelines. However, we are watching its equity closely for addition to the simulated newsletter portfolios.
By Alexander J. Poulos
Key Takeaways
We remain astounded by the stellar growth of Eliquis as the product remains a runaway blockbuster for Bristol-Myers. The growth of Eliquis has surpassed our most optimistic expectations as it is now the market leader.
We believe the growth in Opdivo is far from its peak as evidenced by the stellar data posted in Renal Cell Carcinoma.
Opdivo’s aspirations on winning the coveted first-line therapy in combination therapy for non-small cell lung cancer (NSCLC) were dealt a severe blow by market leader Keytruda as the results of Merck’s PD-1 continue to dominate.
Recent volatility has brought the share price of Bristol-Myers comfortably below our fair value of $58 per share. We’d only grow interested if the company’s share price turns meaningfully higher.
Twin Pillars Continue to Shine
Bristol-Myers Squibb’s (BMY) revenue growth continues unabated thanks in large part to two unique drugs that we have dubbed “the twin pillars” powering the company forward. As a general reminder, one of the key characteristics we look for in the pharma/biotech sector is top-line growth across the company’s entire portfolio without an overreliance on one product for the bulk of the growth. We feel an overreliance on one product opens the company to substantial downside risk either through the combination of creative destruction (a competitor introduces a superior product) or the end of the patent life on the product.
Eliquis
We remain astounded by the stellar growth of Eliquis as the product remains a runaway blockbuster for Bristol. Sales in the recently completed first quarter topped $1.5 billion for a delta of 37% versus the comparable period in 2017. We simply will not mince words here—Eliquis is the undisputed market leader with a long runway for sustained growth.
In our analysis, the key trend is the continued growth of new prescriptions written for an anti-coagulant (Eliquis treatment area). This metric is key as we view it as a leading indicator of future prescribing and commercial activity. Eliquis requires twice-a-day daily adherence to the therapy, thus setting up a wonderful annuity stream for Bristol and its commercial partner Pfizer (PFE). The theory is straightforward: as more patients are prescribed Eliquis versus the cheaper alternative Warfarin the overall market share of Eliquis will grow.
We are closely watching a potential catalyst that may accelerate adoption and relegate Warfarin further down the list of potential treatments. One of the main drawbacks of Eliquis therapy, however, is the lack of a reversal agent in case of an uncontrolled bleed versus the well-established reversal agent for Warfarin. We know of many clinicians who remain apprehensive in prescribing Eliquis until a true reversal agent hits the market. The FDA is preparing to render its decision of a potential reversal agent in May. Though Bristol does not own the reversal agent, a win would, in our view, accelerate Eliquis growth potential.
Opdivo
The second twin pillar remains Opdivo, the revolutionary yet suddenly controversial PD-1 inhibitor for the treatment of various oncolytic conditions. For a quick background, Bristol remained poised to dominate the market as Opdivo burst onto the scene with an impressive string of FDA approvals. The momentum, however, ground to a severe halt as Opdivo failed a key clinical trial for the treatment of first-line non-small cell lung cancer (NSCLC), thus casting doubt on the full growth potential of Bristol.
Hopes sprung eternal once again with the share price of Bristol staging a furious rally earlier this year to test the old highs, partially based on the hope of a win in combination therapy in NSCLC, along with a rumor its partner in promoting Eliquis Pfizer is interested in acquiring Bristol.
We would like to take a moment to address the takeout rumor. We firmly believe 2018 will go down as the year of the small to mid-stage biotech buyout bonanza. We do not envision large-scale mergers will become the rage. We maintain the best return on invested capital will come from well-timed tuck-in acquisitions to gain novel near-stage products, not by buying a mature pipeline at the end of its commercial life with the expectation of squeezing costs by reducing headcount.
Opdivo’s aspirations on winning the coveted first-line therapy in combination therapy for NSCLC were dealt a severe blow by market leader Keytruda, as the results of Merck’s (MRK) PD-1 continue to dominate. We felt the combination of Opdivo along with the highly-toxic Yervoy would not yield a superior therapy, as the side-effect potential would be far greater than the average patient would be able to bear.
Lost in the disappointment of the setback in the NSCLC trials is the stellar growth of the franchise, however, as Opdivo posted quarterly sales of $1.51 billion in the first quarter of 2018 for a positive delta of 34% versus the comparable period in 2017. We can’t stress the following point enough: Bristol possesses two high-growth properties that are well on track to post sales in excess of $5 billion each at the current run rate.
Despite some setbacks, the growth in Opdivo is far from its peak, in our view, as evidenced by the stellar data posted in Renal Cell Carcinoma. We feel the data may justify approval by the FDA for this indication. If this were to materialize, it would galvanize another leg higher in the growth trajectory for Opdivo.
Valuation and the Dividend
Recent volatility has brought the share price of Bristol comfortably below our fair value estimate of $58 per share at the time of this writing. Bristol is a high-quality entity, but we’d still like to see an improving share price before considering the company in the simulated newsletter portfolios. A rising share price means the market has greater confidence in the “true” intrinsic value of the equity being higher.
Peculiarly, we find it interesting the market is seems to be willing to overlook the long growth runway of Bristol’s “twin pillars,” as the share price is trading near its 2014 levels. If you may recall, Bristol broke out in 2014 anticipating the explosive growth of both Eliquis and Opdivo, but unlike other key pipeline assets such as Gilead Sciences (GILD) Hepatitis C franchise, the growth runway for both of Bristol’s products remains robust.
We continue to like Bristol’s dividend as it scores favorably with respect to our cash-flow based dividend assessment. Bristol has earned a Dividend Cushion ratio of 2.1 at our latest update, a solid ranking for the pharma giant. We believe the cash flow generated by its “twin pillars” will continue to power the dividend higher in years to come. That said, there is always risk, and modest dividend increases in the next few years may be most likely, as Bristol continues to aggressively fund its oncology trials. We view the use of its cash flow for new drug discovery or label expansion as an optimal use of resources.
Conclusion
We are keeping a close eye on Bristol-Myers for potential inclusion into the simulated newsletter portfolios as the alluring combination of continued top-line growth coupled with a slow decline in aggressive R&D spending should pave the way for higher dividends, in our view. The current yield of ~3% may be considered attractive in the current low rate environment for those that may wish to gain increased pharma exposure with a traditional income tilt. We’re being a bit more patient and are waiting for the market to get behind the stock first, as would be evidenced by a rising share price (momentum).
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Independent Healthcare Contributor Alexander Poulos is long Gilead Sciences. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.