Bristol-Myers Squibb

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Bristol-Myers Squibb is a global biopharmaceutical company focused on the discovery, development, licensing, manufacturing, marketing, distribution, and sale of bio-pharmaceutical products and related compounds, across numerous therapeutic areas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Bristol-Myers Squibb (BMY) operates in the pharmaceutical industry, developing and marketing drugs and biologics for various therapeutic areas, including oncology, immunology, cardiology, and neuroscience. The company generates revenue mainly from sales of pharmaceuticals, with some contribution from licensing and research agreements. BMY’s revenue is categorized into two main regions: United States and International. In 2023, U.S. revenues accounted for 60.1% of total revenues with international revenues constituting 39.9%. Within these regions, there’s a significant diversity of products and distribution channels.

Product Portfolio: BMY’s portfolio includes both traditional pharmaceuticals and novel biologics. Key areas include oncology, where drugs like Opdivo, Yervoy, and Reblozyl play important roles. Immunoscience is another major area, including Orencia and Zeposia and their treatments in immunology. In the past year, they have been increasingly focusing on multiple-myeloma with new launches and expanded indications for several products.
Industry Trends: The global pharmaceutical industry is characterized by increasing healthcare needs, which will be leading to high R&D and selling expenses. Regulatory and pricing pressures exist in almost every major market. Global pharmaceutical industry is slowly undergoing consolidation in the market. Technological advances in medical devices and software are changing the pharma landscape. The industry is also heavily influenced by intellectual property protection and innovation.
Competitive Landscape: The pharmaceutical landscape is highly competitive, with numerous companies vying for market share in key therapeutic areas. Competitors include major multinational players like Merck, Pfizer, and Novartis, as well as smaller, specialized biotech firms. Brand strength, pricing power, access to distribution networks, and the ability to obtain regulatory approvals are vital elements in this competition.

What Makes BMY Different? BMY distinguishes itself with a strong focus on immuno-oncology and its ability to obtain approvals for novel and blockbuster drugs. They have a strong emphasis on science and innovation. This is not always easily observable, as not all of the new candidates that have shown promising signs have a good track record of success. It has a broad and diverse pipeline that is in different phases of development across multiple therapies, with an increased focus on personalized medicine. They are working on improving and discovering more and better drug candidates and also trying to develop faster methods for drug discovery and development. In contrast to many companies, they have a lot of experience with acquisitions and their integrations into the company.

Financial Analysis: BMY’s financial performance reflects a business model that balances product development, manufacturing, sales, and marketing.

Revenues and Margins: Revenues are largely driven by net product sales and alliance revenue which have increased by 5.3% in Q3 of 2023 over the same quarter in 2022. However, in 2022 revenues saw an increase of 2.7% over 2021. Some main drivers are the recent launches of innovative medicine, increased sales in the cardiovascular segment, and the immunology divisions. This was offset partially by lower volumes and pricing pressure on older drugs, and unfavorable foreign exchange rates. The gross margin was 76% and the adjusted gross margin was 78.7% in Q3 2023. Operating expenses have been under control, showing great results in both Q3 and YTD, which is a sign of management’s focus.
Research and Development: Their research and development expenses are quite large, amounting to 28% of the revenue, representing a serious investment into the growth of the company. This also means high potential for risk as R&D can be unpredictable and a potential loss of money. R&D mainly focused on finding molecules for hematology and immunology. They have also spent a lot in licensing activities, which bring more flexibility and innovation into the company.
Debt and Capital Structure: BMY has a mix of debt and equity in its capital structure. As of September 30, 2023, long-term debt was $48.5 billion, and stockholders’ equity was $26.1 billion. This results in leverage of 1.86 debt-to-equity ratio. This is not too dangerous and is around the industry average for pharmaceutical companies. They have reduced their debt considerably from $51.1B in the beginning of 2022 to a current $48.5B.
Cash Flow: Cash flow from operations has been volatile, with some quarters showing positive cash flow, while others show deficits. However, generally cash from operations has been positive, showing consistent returns for a company with big R&D projects.

Moat Assessment: 3 / 5 (Narrow)

BMY has a narrow economic moat, stemming mainly from the patent protection on some of its blockbuster drugs, and to some extent, from the scale and distribution network of a large pharma company. The intangible assets are partially protected by regulatory approvals. These patents provide a limited period of exclusivity in the market, but with constant innovation, those are becoming temporary advantages.

Brand Recognition: While BMY has several well-known brands, such as Opdivo, the drug market is not heavily brand-centric. Consumers rely more on physicians, insurers, and data from clinical trials. Consequently, BMY’s brand recognition, while still useful, doesn’t have the power of a branded consumer-good.
Proprietary Technology: BMY invests heavily in research and development. They are very aggressive in expanding their knowledge and technology capabilities, especially with acquisitions. However, new and existing drugs have to go through expensive and time-consuming trials, and they do not all have the same degree of success. This also means a high degree of research volatility. Furthermore, their core research program is focused on the current trends of the industry.
Switching Costs: While certain drug treatments create some switching costs, they are limited by pricing power from insurers and government regulations. This is a constant threat to the company and the moat.

Risks to the Moat and Business Resilience While BMY’s position is relatively stable, there are several real risks that can negatively affect the moat and the business:

Patent Expiration: Patent cliffs and subsequent generic entry are a major risk in the pharmaceutical industry, which will lead to erosion in returns from products with expired patents. Also, patent challenges from competitors can also reduce future profitability if BMY patents get overturned.
Drug Development Failures: The pharmaceutical R&D can be very unpredictable, often leading to expensive failures. Even if R&D has high initial results, that does not guarantee that future phases will be successful and will lead to profitable products.
Regulatory and Pricing Pressures: Government regulations and policies, as well as pricing pressure from healthcare payers, such as private insurance and Medicare, are constantly under scrutiny, which could put downward pressure on pharmaceutical prices and erode profitability. Furthermore, changes to these programs can create volatility in the sector.
Competitive Threats: Competition in the pharmaceutical industry is very fierce and can lead to the displacement of even very established competitors. Competitors with similar products can easily erode pricing power and market share, or the company may fail to have a moat on a specific new product due to market dynamics, regulatory problems or other unforeseen circumstances.
Macroeconomic Factors: Interest rate changes, foreign exchange risks, inflation, and global events have a large impact on pharmaceutical industries, especially for multinational companies. These events can create volatility in sales and revenues, or reduce profitability by increased costs.
Acquisition Risk: BMY’s acquisition activities may not lead to the successful integration of targets or the synergies may not materialize. This could also create volatility and uncertainty within management.

Despite these threats, BMY has some significant strengths that could mitigate them. They can capitalize on their R&D, brand recognition, and scale advantages. They have built a business with very diversified product offerings across several medical segments, giving them stability even if specific product lines fail.

Understandability: 3 / 5 BMY is a well-established company with several known products. However, the pharmaceutical industry has a significant amount of technical details that may be difficult for average investors to follow. Their financials are more complex compared to other industries, and rely heavily on the success of R&D projects, that can be very unpredictable. The nature of their operations, and the effects of regulatory and patent environments can also be hard to understand. Overall, the business model is complex but reasonably understandable.

Balance Sheet Health: 4 / 5 BMY’s balance sheet is reasonably sound. While the company has some debt, it is at manageable level. BMY has improved the debt to equity ratio from 2.49 in the end of 2021 to 1.86 in 2023, which is a great improvement.

Liquidity and Solvency: They have adequate current assets to cover current liabilities. Long-term debts are also well managed.
Asset Management: The company manages its assets reasonably well, with a decent asset turnover ratio. BMY has improved its operating cycles from -5 days in 2021 to -60 days in 2022.
Capital Structure: BMY has a mix of equity and debt in their funding. Though they still rely on external financing, they have consistently improved their debt ratio over the last 3 years. They should try to continue improving this ratio in the future.
Shareholder Returns: Even if they have recently reduced their dividend per share from $0.54 to $0.51 per share in the latest earning call, BMY consistently returns value to shareholders using dividends and share repurchases.