Lacuna HC Observer #32: Bristol Myers Squibb – Is steep patent cliff a concern?
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."?— Warren Buffett
?We want to a share a brief note on one of our portfolio companies – ‘Bristol-Myers Squibb’
About the Company
Bristol-Myers Squibb (“BMY”) develops biopharmaceuticals across four therapeutic areas: oncology, cardiovascular, hematology, and immunology. The company is foraying into the neuroscience space where most of the drugs are in early-stage clinical trials.
How Robust is the pipeline?
Like all the big pharmaceutical companies across the globe, the future growth of BMY is dependent on bringing the right balance between an upcoming patent expiration and the potential pipeline strength. The top three key products of BMY?– Revlimid, Eliquis, and Opdivo which contributed 67% of 2021 revenues are nearing patent expiry over the next five years. BMY has one of the largest drug pipelines amongst its US peers which makes the management confident in mitigating the patent cliff risk, as the new product’s market share will grow along with increasing applications.
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Revenue from the recent launches has nearly tripled in 2021, and the management expects continued growth from these launches as they gain more market share and get further approved for other applications. Additionally, BMY is expecting approval of three more products in 2023.?
Lacuna’s perspective
Despite the recent run-up of the stock price (YTD ~21%), we believe that the market is still undervaluing the pipeline growth and the current valuation reflects the negative market sentiments about the upcoming patent cliff. The company is run by a strong management team that has previously demonstrated its ability to develop and commercialize new products at a massive scale.
After adjusting for cash, the company is currently in a net debt position of USD 30bn. This number appears to be daunting, however, we do not see it as high risk because of the company’s ability to generate free cash flow. From 2019-21, BMY has doubled its free cash flow from about USD 8bn. to USD 15bn. We believe this track will continue and the company will be able to pay off its debt along with generous dividend payments to its shareholders.