Bristol-Myers: Value Time Again

Bristol-Myers: Value Time Again


Bristol-Myers has seen a relatively uneventful 2021 after the Celgene and MyoKardia deal.

Leverage has rapidly come under control. Bristol-Myers needs some further success on the topline sales front, amidst some upcoming expirations.

The situation is very manageable amidst a non-demanding valuation. I am happily adding to my position here.

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Luis Alvarez/DigitalVision via Getty Images Bristol-Myers Squibb (NYSE: BMY ) has been a name which I have covered on various occasions. My last take on the business was October of last year, when the company acquired MyoKardia in a $13 billion deal.

That deal came less than a year after the closing of the massive Celgene deal which came in ahead of expectations, yet the purchase of MyoKardia looked a bit rushed and too upbeat, which made me a bit cautious. My Former Take

The investment thesis around Bristol-Myers is dominated by the $90 billion purchase of Celgene announced early in 2019. In response to that deal, which involved a huge $26 billion premium, shares fell 15% overnight to the mid-forties. With both somewhat struggling names combining operations, and a big premium being offered, investors were very cautious as they did not see the logic of a business combination.

That deal should result in pro forma sales of $37 billion, EBIT of around $16 billion, and net debt of $52 billion, at least based on the situation at the time of the announcement. Assuming 15% tax rates, I pegged adjusted earnings at around $4.80 per share, with more favorable financing opportunities and synergies allowing for some accretion to come.

The resulting 10 times earnings multiple looked very appealing, yet high leverage and highly adjusted earnings meant that some caution could be warranted, especially as adjusted earnings excluded some sizeable stock-based compensation expenses, among others. Nonetheless, I initiated a position at $46.

Ahead of the deal closing, the company retained earnings, as it furthermore sold the OTEZLA rights in a $13.4 billion deal to Amgen (NASDAQ: AMGN ) to deleverage. In fact, upon the release of the 2019 results (with the Celgene deal closing late that year), net debt was down to $31 billion already.

Moreover, the company guided for 2020 sales at $41.5 billion, which is $4.5 billion ahead of the pro forma sales, despite the OTEZLA divestment. Non-GAAP earnings were seen at $6.10 per share as this inspired confidence. This led to shares rallying to $60 late in 2019, and a 30% return in less than a year triggered me to cut out of my position. The Pandemic

Since the pandemic, shares initially moved lower, but in general they have been trading in a $60-$70 range since the start of the pandemic, all the way through the summer of 2021. During the pandemic, the company was hit, yet to a smaller extent as the pace of deleveraging was promising with net debt standing at $24 billion in October of last year. That was before the $13.1 billion deal for MyoKardia, a big number for a clinical biopharmaceutical company focussing on treatment for cardiovascular diseases.

The immediate prize should be mavacamten, a potential product used to treat obstructive hypertrophic cardiomyopathy, a chronic heart disease. Again, as was the case with the Celgene deal, Bristol-Myers paid a huge premium, in this case about $5 billion.

At $59, I decided to not get involved given the aggressiveness displayed by management in pursuing this deal. In February 2021, the company posted its 2020 results with $42.5 billion in sales reported, as well as adjusted earnings of $6.44 per share. Net debt was down to $34 billion and change after the latest deal closed quickly. Moreover, the company guided for 2021 earnings at a midpoint of $7.45 per share, as well as modest sales growth, which looked quite compelling, but earnings remain quite adjusted of course. In March, the FDA accepted the NDA for mavacamten, with a goal date set in January 2022.

In October, the company posted third quarter results which continue to be in line with expectations. The company maintained the adjusted earnings range for this year, while slightly cutting the GAAP estimates, as net debt has been cut again to $29.0 billion. While the company continues to chug along nicely, shares have lost quite some ground and now trade at $56. This is equivalent to just 7-8 times adjusted earnings, while leverage is rapidly coming down. Concluding Thoughts

It should be clear by now that investors in […]

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