Ahead of its quarterly earnings report scheduled for July 25, Bristol-Myers Squibb (NYSE:BMY) found itself trading at fresh 52-week lows. While BMY stock has kept up with the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) in that time, investors are getting increasingly negative on the company. With that in mind, what should we expect in the upcoming report and should investors still be bearish?
Thus far, the outlook for BMY isn’t so great. Even if Bristol-Myers were to report a blowout quarter, shareholders may not even react at all. And if it issued a stronger outlook, BMY stock may barely nudge higher.
Investors are deeply fixated on the Celgene (NASDAQ:CELG) acquisition, where BMY is paying $74 billion for the company and the fact that it needs this massive acquisition to offset its own clinical setbacks. Its cancer immunotherapy drug Opdivo is losing ground to Merck’s (NYSE:MRK) Keytruda. Celgene’s key myeloma drug, Revlimid, faces generic competition starting in March 2022.
Bristol-Myers reportedly must divest Celgene’s arthritis medicine Oteza to get the U.S. Federal Trade Commission’s sign off on the deal. This compromise is devastating for the companies because the drug brought in 10%, or nearly $400 million, in sales in Celgene’s first quarter. Celgene’s disposition of this unit ahead of the deal will hurt Bristol-Myers, which needs all the cash flow generation to pay down debt. Although BMY said it will find $2.5 billion in cost synergies, the $1.6 billion in lost annualized revenue makes the Celgene buyout less attractive.
Investors continued to vote against the deal by selling BMY stock overall. The stock tried, on two occasions, to breakout and rally back to the $50 – $55 level, only to fail. And after each failed breakout, trading volume increased.
Bristol Myers shares may bring pain for investors, but the company is a fundamentally strong company with a top-notch management team. It completed the divestment deal with its consumer health business (UPSA) on July 1 — a deal that brings in $1.6 billion. And BMY is streamlining operations to cut costs ahead of the Celgene deal’s closing. Once the deal is complete, expect Bristol Myers to use as much available free cash flow to pay down its debt quickly. AbbVie (NYSE:ABBV) has the same strategy with its Allergan (NYSE:AGN) buyout. It will use all cash flow generation from Humira to pay off the mountain of debt related to the acquisition.
Second-Quarter Earnings Expectations
In the first quarter, BMY earned $1.10 a share as revenue grew 14% to $5.92 billion, beating consensus estimates in both cases. Analysts expect the company will report earnings of $1.06, up just slightly from last year’s earnings-per-share of $1.01. Despite the flat earnings growth, analysts are very bullish and have an average price target of $57.67. This is ~35% higher than its recent closing price of $42.77.
The company may give an updated view of its expectations stemming from the Celgene integration. With respect to the RCC (Renal Cell Carcinoma) market, BMY saw very strong tailwinds in the U.S. in the last quarter. It grew Opdivo, Yervoy market share to just over 40% in the U.S. And positive feedback from early launches in Germany and France are encouraging. Expect access to Canada, Australia and the U.K. to add to its market share and revenue growth.
For the full year, Bristol-Myers expects operating expenses consistent with historical trends. It plans to continue increasing its dividend even though it pays down its debt rapidly over the next few years. All the while, it seeks to improve its credit metrics. Management forecasts growth of the combined company will offset the expected drop in Revlimid sales starting in 2022. It believes it may drive continued annual growth through 2025.
Valuation and Your Takeaway
BMY stock has upside of 35% if income investors use a dividend discount model to value the company. Assuming modest perpetuity growth of just 2.7% – 3.7%, the stock clearly trades at a discount. Investors are punishing the company more than they need to. If the company forecasts a stronger outlook for the rest of the year, look for the stock to reverse its 12.5% monthly drop and 17.7% year-to-date declines.
As of this writing, Chris Lau owned shares in ABBV.