The problem with Bristol-Myers Squibb (NYSE:BMY) is that it isn’t what it once was. That’s not to say the business has been run poorly. It’s not even really a reference to the BMY stock price, which touched a six-year low. Rather, both the pharmaceutical industry and dividend investing have changed dramatically in the last 15-20 years.
After all, large-cap pharmaceutical stocks historically were safe havens. They were defensive stocks, largely unmoved by macro factors. Many investors in the sector were looking for dividends — which in the case of Bristol-Myers Squibb often yielded 4% or more — and safety.
That combination of high yield and low risk is increasingly difficult, if not impossible, to find anymore — in or out of the drug space. So many seemingly “safe” dividend stocks have either cut their payouts and/or fallen sharply. Income-seekers a few years ago could hardly have predicted that titans like General Electric (NYSE:GE), Kraft Heinz (NASDAQ:KHC), or Anheuser-Busch InBev (NYSE:BUD) would slash their payouts.
That’s particularly true in the pharmaceutical sector, which increasingly looks like a challenged industry. The SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH) has fallen over 40% from 2015 peaks. The BMY stock price hasn’t fared much better, dropping over one-third from 2016 highs, a decline that has more than wiped out dividend payments over that stretch. Merck (NYSE:MRK) has gained nicely in recent years; that company aside, most pharmaceutical stocks at best have underperformed and more often have declined.
So an investor can’t just look at Bristol-Myers Squibb stock here and see a cheap entry point for a safe 3.5% yield. But that doesn’t mean an investor can’t buy BMY stock.
Bristol-Myers Squibb Buys Celgene
It’s tempting to look at weak returns in pharmaceutical plays and blame them largely on acquisitions. We’ve seen Bausch Health (NYSE:BHC) (formerly Valeant Pharmaceuticals), Teva Pharmaceuticals (NASDAQ:TEVA) and Mallinckrodt (NYSE:MNK) all lose at least 90% of their value after debt-fueled buying sprees failed. And now Bristol-Myers Squibb stock has taken a hit since the company announced its intent to acquire Celgene (NASDAQ:CELG).
So far, at least, investors have treated the Celgene acquisition as another in the long history of value-destroying deals in the pharmaceutical industry. The BMY stock price has dropped 8.7% YTD despite strong performance in its business. In fact, full-year EPS guidance (which does not include Celgene) was raised after Q2 earnings last month.
And there are risks here. Bristol-Myers Squibb is acquiring a company whose stock fell by more than half in the about 18 months before the deal was announced. Celgene’s key drug, cancer treatment revlimid, faces patent expiration in 2026, with limited competition on the way in 2022. Celgene shareholders are acquiring almost one-third of the company at what, to bulls, looks like a cheap price. Bristol-Myers Squibb is taking on some $32 billion in debt in the process.
Given the history of the industry, investors would be forgiven for selling first and asking questions later. And given that Bristol-Myers has been the subject of takeover rumors in the past, the deal likely takes a sale off the table, at least in the near-term.
The Risks to BMY Stock
There’s a key risk in the legacy Bristol-Myers Squibb business, too. As noted, Merck stock has been a noted outperformer among large-cap pharmaceuticals. BMY stock, in contrast, has disappointed. And there’s one key reason why.
Merck’s cancer immunotherapy Keytruda quickly is proving to be a blockbuster. As James Brumley noted last year, the drug is versatile, with approval to treat a range of cancers. Its success is leading to ever-higher estimates of peak sales, with some analysts now forecasting the drug could reach over $20 billion in revenue.
In contrast, Bristol-Myers Squibb’s Opdivo has been somewhat of a disappointment. The drug has been approved, and is driving sales: per the BMY 10-K, Opdivo and atrial fibrillation treatment Eliquis drove an 11% (about $1.2 billion) increase in U.S. revenue last year.
But the BMY stock price dropped last month amid mixed results from a lung cancer study combining Opdivo with the company’s Yervoy. BMY stock dropped 18% in a single session back in 2016 when Opdivo, tested alone, failed to meet endpoints in another lung cancer study.
In the wake of the more recent study, Bristol-Myers Squibb CEO Giovanni Caforio forecast that Opdivo sales would see pressure in 2020 as a result. And it’s not a coincidence that Merck shares rallied yet again. Opdivo is a nice product. Keytruda, however, is the obvious winner — and so is Merck stock, at least so far.
The Case for BMY Stock
Again, it’s important to understand the risks here. The Celgene deal is a bit of gamble, given the importance of revlimid (63% of revenue, as activist Starboard Value has pointed out) and the history of drug industry M&A. BMY itself lacks an obvious blockbuster, save for plaque psoriasis treatment TYK2.
But it’s important to understand the rewards, too. Based on the current earnings power on the two companies, plus an estimated $2.5 billion in cost savings, BMY stock trades at roughly 10x earnings. The debt load isn’t nearly as big as it sounds: Celgene, in particular, should print cash in the near term, allowing for relatively quick deleveraging.
Bristol-Myers Squibb should be able to raise its dividend as well. And while revlimid’s expiration is a big deal, it’s also over six years away. The combined company will have time to find new drugs — or, potentially, acquire them. Celgene has five potential winners in development, and while no single drug likely will replace revlimid, a couple of wins could notably change its long-term profit contribution.
Just last month I called BMY stock one of the 10 best dividend stocks to buy. I still believe that’s the case. But it’s important to understand why. It’s not because Bristol-Myers Squibb is a guaranteed, safe, income investment, but because it is a company that could generate as much as $15 billion, if not more, in after-tax earnings in coming years. That kind of cash can make problems, and risks, go away.
As of this writing, Vince Martin has no positions in any securities mentioned.