Despite almost a 32% rise in Bristol Myers Squibb’s stock (NYSE: BMY) since the March lows of this year, at the current price of around $60 per share, we believe BMY stock has a significant upside. Why is that? The key is BMY stock hasn’t moved since 2018, over two years ago, while the S&P has gained roughly 30%. Our dashboard, Why Bristol Myers Squibb Stock Moved -1%?, provides the key numbers behind our thinking, and we explain more below.
Bristol Myers Squibb’s fundamentals have been robust over the last 2 years. Its revenue grew 25.8% from $20.8 billion in 2017 to $26.1 billion in 2019. The company also managed to expand its Net Margins from 23.9% to 30.7% on an adjusted basis. Strong revenue and margins growth meant the Non-GAAP EPS surged 56% from $3.02 to $4.71. So what explains the drop in stock price? It was primarily the company’s P/E ratio.
Bristol Myers Squibb’s P/E ratio declined from about 20x trailing earnings at the end of 2017 to 14x in 2019. This can partly be attributed to Opdivo’s lackluster performance in late stage trials vis-a-vis Merck’s Keytruda, which has been gaining market share. While Bristol Myers Squibb’s’ P/E is down to about 13x now, given the volatility of the current situation, and with a much broader portfolio and pipeline given the Celgene acquisition in Q4 2019, there is a significant additional possible upside for Bristol Myers Squibb’s multiple when compared to levels seen in the past years – P/E of 20x at the end of 2017.
So what’s the likely trigger and timing to this upside?
The spread of coronavirus has meant increased social distancing, deferment of elective surgeries, and fewer visits to doctors, impacting the overall pharmaceutical sales. That said, the impact of Covid-19 on Bristol Myers Squibb was minimal with sales for some of its drugs declining in mid-to-high single-digits. Overall revenues were higher thus far in 2020, due to the impact of the Celgene acquisition. However, Bristol Myers Squibb’s blockbuster oncology drug – Opdivo – with $7 billon in sales in 2019, is seeing a slowdown in its growth rate, and this trend could continue, given the stiff competition from Merck’s Keytruda, which has shown better results in recent studies. Keytruda has established a dominant position in lung cancer, the largest oncology drugs market, and it will be difficult for Opdivo to challenge it. Currently, Keytruda-chemo combo can reduce patients’ risk of death by 51%, while the figure is just 21% (based on the part 1 of the phase 3 Checkmate-227 trial) for Bristol Myers Squibb’s Opdivo. Opdivo’s future growth largely depends on its further approvals for other indications, while Merck’s Keytruda is likely to gain market share.
While this partly explains why BMY stock price didn’t move much over the recent years, we believe it could see a significant upside from the current levels. Why is that? The company has access to a wide pipeline courtesy of Celgene. The company’s new drug – Ozanimod – could be another blockbuster drug with peak sales of over $5 billion. It was approved by the US FDA in March this year for the treatment of Multiple Sclerosis. Also, the company has shown strong revenue growth and margin expansion over the past few years, a trend which will likely continue over the coming years. Additionally, the company’s attractive valuation of just 9.7x expected 2020 earnings of $6.28 per share could result in a significant upside for the stock, in our view.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.