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Bristol Myers Squibb Co (BMY) is facing significant challenges, should you invest?

Bristol Myers Squibb Co (BMY) has long been a stalwart in the pharmaceutical industry, renowned for its innovative therapies and robust product pipeline. However, the company is facing a significant challenge with a projected 92% drop in operating earnings for 2024, primarily due to expiring patents on key drugs. This blog post aims to provide a detailed analysis of the investment potential of BMY, comparing its current situation with AbbVie (ABBV), which faced a similar scenario with Humira. We’ll also delve deeply into BMY’s dividend history, its classification as a Dividend Challenger, and assess whether it can maintain its dividend payments despite upcoming financial pressures.


The Impact of Expiring Patents on BMY


The primary reason behind the anticipated drop in BMY’s operating earnings is the expiration of patents on blockbuster drugs such as Revlimid and Eliquis. These drugs have been significant revenue drivers for BMY, and their loss of exclusivity means they will now face intense generic competition. This situation is akin to what AbbVie experienced with Humira, a top-selling drug that also faced generic competition post-patent expiration.

Expiring patents pose a significant threat to earnings. BMY has been trading below its fair value since 2018. Back then it may have been a good looking investment, but is it a good investment today?

BMY EPS vs price


Comparing BMY with AbbVie


To understand the potential path for BMY, we can look at AbbVie’s journey:


AbbVie Case Study


Patent Expiry Impact:


Humira Loss: AbbVie’s Humira faced patent expiration, leading to a sharp decline in revenue. The stock price dropped by around 50% between 2018 and 2020.


Recovery Factors:


Strong Pipeline: AbbVie’s robust pipeline and successful launch of new drugs like Skyrizi and Rinvoq were crucial in driving recovery.

Strategic Acquisitions: The acquisition of Allergan diversified AbbVie’s portfolio, providing new revenue streams and growth opportunities.

Effective Management: AbbVie’s management effectively controlled costs and invested in new growth areas, contributing to the recovery of its stock price. As of now, AbbVie’s stock has not only recovered but is also trading near its all-time high, showcasing the effectiveness of its strategic initiatives.


Assessing BMY’s Potential for Recovery


BMY’s Pipeline and Strategic Actions


Late-Stage Pipeline:


Reblozyl: Used for treating anemia in patients with myelodysplastic syndromes and beta-thalassemia.

Zeposia: Approved for multiple sclerosis and ulcerative colitis.

Opdivo: Continuously expanding its indications in oncology, enhancing its market presence.


New and Recently Launched Drugs:


Breyanzi: A CAR T-cell therapy* for lymphoma, representing significant advancement in cancer treatment.

Abecma: Another CAR T-cell therapy for multiple myeloma, contributing to BMY’s innovative oncology portfolio.

Camzyos: For hypertrophic cardiomyopathy, a potential blockbuster in the cardiovascular space.


Acquisitions and Partnerships:


Myokardia Acquisition: The acquisition brought Camzyos into BMY’s portfolio, enhancing its cardiovascular drug offerings.

Strategic Collaborations: Various partnerships aim to bolster the pipeline and expand into new therapeutic areas, diversifying revenue sources.


Dividend Analysis: Is BMY’s Dividend Safe?

BMY key metrics

Given the projected drop in earnings, investors are understandably concerned about the safety of BMY’s dividend. Let’s examine several key metrics to assess this:


Payout Ratio:


Historically, BMY has maintained a moderate payout ratio. However, with the projected drop in earnings, the payout ratio for 2024 is expected to be around 900%. This indicates that dividends far exceed earnings, making the current dividend payout unsustainable in the long term unless the company can significantly boost its earnings or reduce dividend payouts.

2021: 57.1%
2022: 61.8%
2023: 67.7%
2024 (Projected): 900%

The payout ratio shows a significant increase in 2024 due to the projected drop in earnings. A payout ratio of 900% indicates that the dividends far exceed the earnings, which is unsustainable in the long term.


Free Cash Flow (FCF) Coverage:


BMY’s FCF coverage ratio has been above 1, suggesting that the company generates enough free cash flow to cover its dividends. However, the declining trend in FCF coverage, projected to be 1.18 in 2024, indicates potential pressure on cash flow sustainability.

2021: 1.50
2022: 1.38
2023: 1.27
2024 (Projected): 1.18

The FCF coverage ratio remains above 1, indicating that the company generates enough free cash flow to cover its dividends. However, the declining trend suggests potential pressure on cash flow sustainability.

BMY FCF vs dividend


Balance Sheet Strength:


BMY’s increasing debt levels could pressure its financial flexibility, affecting its ability to sustain dividends. The debt-to-equity ratio is projected to rise to 0.80 in 2024, reflecting a growing leverage that warrants attention.

Despite these concerns, BMY has a solid history of paying dividends and is classified as a Dividend Challenger. This status reflects a relatively shorter but consistent history of dividend increases, spanning at least five consecutive years but fewer than ten years.


Dividend Challenger: BMY’s Status and Implications


Dividend Kings are companies that have increased their dividend payouts for at least 50 consecutive years. Dividend Aristocrats are part of the S&P 500 and have increased their dividends for at least 25 consecutive years. Dividend Contenders have a streak of 10-24 years, while Dividend Challengers have increased their dividends for 5-9 consecutive years. BMY falls into the Dividend Challenger category, indicating a positive trend in dividend growth but not the long-term reliability of the more established Dividend Aristocrats or Kings.


Conclusion: Can BMY Follow AbbVie’s Path to Recovery?


Based on the comparison with AbbVie, it is plausible that BMY could experience a similar recovery path if it successfully leverages its pipeline, engages in strategic acquisitions or partnerships, and manages costs effectively. While the initial impact of patent expirations is significant, a strong strategic response could lead to a recovery in BMY’s stock price over time.


Key Recommendations for Investors


Monitor Pipeline Developments: Stay updated on the progress of clinical trials for BMY’s pipeline drugs and any regulatory approvals.

Evaluate Market Launches: Assess the market performance of recently launched drugs like Breyanzi, Abecma, and Camzyos.

Strategic Developments: Keep an eye on any strategic acquisitions or partnerships that could further strengthen BMY’s pipeline and market position.

Dividend Sustainability: Regularly review BMY’s financial statements and management commentary on dividend policy to gauge the sustainability of dividend payments.


Final Thoughts


Bristol Myers Squibb is at a critical juncture, facing significant challenges due to expiring patents on key drugs. However, the company’s strong and diversified pipeline, innovative therapies, and strategic initiatives provide a foundation for potential recovery. While BMY is not a Dividend King or Aristocrat, its status as a Dividend Challenger and its commitment to returning value to shareholders through dividends offer some reassurance to investors.

By closely following the factors outlined above, investors can make informed decisions about the potential recovery and long-term prospects of Bristol Myers Squibb. If BMY can navigate its current challenges effectively, it may well follow a path similar to AbbVie, emerging stronger and continuing to provide value to its shareholders.

* CAR stands for Chimeric Antigen Receptor. CAR T-cell therapy is a type of treatment in which a patient’s T cells (a type of immune cell) are changed in the laboratory so they will attack cancer cells.


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