In October, when Bristol-Myers Squibb Company (NYSE: BMY) traded to close to $65 and looked poised to sail higher, few expected the stock to fall from there. To the value investor, Bristol-Myers Squibb stock correcting to below $50 a share will pique buying interest.
The first question to ask is why the stock fell and the follow-up from there is deciding if the stock is valued at a big enough discount.
Poor CheckMate-331 Results and Bristol-Myers Squibb Stock
As the Phase 3 clinical trial name (“checkmate”) suggested, Bristol-Myers reported that Opdivo (nivolumab), failed to achieve the primary endpoint of OS (overall survival). Patients with relapsed small cell lung cancer (or “SCLC”) were no better off taking this drug in combination with Yervoy compared to a placebo.
Not all hope is lost for the drug because the company has other studies in SCLC. Its Phase 2 study that evaluates Opdivo and Yervoy in patients who received platinum-based chemo is underway.
Bristol-Myers Squibb said on Dec. 10 that it is teaming up with Vedanta Biosciences to evaluate Opdivo and VE800 for treating patients with advanced or metastatic cancers.
Checkpoint inhibitors, through the PD-1 antibodies, is advancing in cancer therapy. But because patients do not respond to it or the response is brief, the companies are evaluating a microbiome-based immune-oncology approach with VE800.
The recent clinical data will not move Bristol-Myers Squibb stock by much. Ultimately, the four or five management priorities, if executed with success, will justify a higher valuation for the stock over the next few years. The company’s priorities are:
- Digital and informatics
- Cancer biology
- I-O resistance
- Research in treating early-stage diseases
- Product diversification
The first three goals are positive catalysts that will add meaningfully to profits. The fourth priority of R&D spending on early-stage diseases is not unique for drug firms.
Drug companies must continue investing in the hopes of discovering novel drugs. Having a product diversification becoming a must as governments clamp down on drug pricing. Companies may no longer rely on a small handful of blockbuster products for profit growth.
Bristol-Myers is embracing the combination of I-O standard of care therapies. In its 9LA study, which is a chemo I-O study in lung cancer, it looks at a renal cell chemotherapy plus a TKI. The company is exploring drug development for liver fibrosis. And in immunoscience, it has a drug, BTK-Max, that it thinks will treat immunodeficiency disease .
Suitability of Bristol-Myers Squibb Stock for Value Investors
Bristol-Myers Squibb pays a dividend yielding around 3% and suits the value investor as well as the income investor. The P/E of 20 times is higher than desired, especially when political pressures are mounting for pushing down drug prices. Plus, market volatility is worsening.
Since October, the S&P 500 (NYSE: SPY) swung in the range of 2650 – 2800. The market movements may take away the investor appetite for risks. Given the biotech sector is more volatile than the index with a higher beta, selling momentum could pick up against BMY.
Investors could consider Merck & Co Inc. (NYSE: MRK). Its shares rose steadily throughout the year. Merck’s stock yields a dividend of 2.78%. Valuations are less favorable (the stock trades at a 36 times P/E) but the company continues to forge partnerships with firms like Roche. The firm also announced it would acquire Antelliq Group for EUR 2.1 billion, an animal health firm.
Pfizer Inc. (NYSE: PFE) is also up this year. This stock pays a dividend yielding 3.05%. And the stock is reasonably valued at 18.6 times earnings.
Bristol-Myers Squibb looks attractive after the October sell-off but the stock is reflecting the limited near-term growth ahead. If clinical results are favorable, that may give the stock a positive lift.
For value investors, holding the stock for the long-term may pay off as the company brings those products to market.
Disclosure: author does not hold shares in any of the companies mentioned.