Interspersing the next half-decade, what can we expect from Bristol Myers Squibb?
Investors frequently turn to prominent pharmaceutical stocks as a reliable foundation for their portfolios, thanks to their supposed predictable income streams that leading companies generally show, often increasing in value steadily over time.
However, this isn't always the scenario. Even promising firms can stumble. Take, for instance, Bristol Myers Squibb (BMY, -1.00%). Over the past five years, its shares have only managed a minor 2% rise, fluctuating throughout this timeframe. Let's explore the potential developments within the next five years for this underperforming drug company.
The current outlook isn't encouraging
From a financial perspective, this pharmaceutical company is in a vulnerable position. This will significantly impact its capacity to achieve significant accomplishments in the following five years. Its trailing-12-month operational expenditures of $28.2 billion surpass its operating income of approximately $7.3 billion during the same period.
Presently, the management is implementing cost-cutting measures aimed at reducing annual expenses by around $1.5 billion by the end of 2025. Additionally, it intends to continue funding research and development (R&D) programs in oncology, believing that these initiatives will yield the best returns on capital and catalyze some growth as it addresses its expenses.
To manage its financial situation while these plans get implemented, within the last 12 months, it has released $20.6 billion in debt. As a result, its long-term debt and capital lease obligations now amount to about $50.1 billion.
In the third quarter alone, the company used approximately $2.5 billion of its cash flow for debt repayment and paid $505 million in interest expenses. Such large outlays prove to be substantial hurdles to fully engaging in growth projects. These issues are unlikely to fade away in the near future.
There are no groundbreaking catalysts on the horizon, either. Its new product lineup will continue to progress slowly in their respective markets, while existing drugs remain stagnant. The pipeline advances a collection of ordinary programs through clinical trials.
This company, with over 30 late-stage programs in its pipeline and numerous items on sale in the market, has very few prospects for new blockbuster drugs, even considering the potential increases in indications for its current medications.
The primary reason for this is because it has chosen to focus on a highly competitive sector – cancer drugs. Majority of its candidates primarily seek approvals to become secondary, tertiary, or quaternary treatments, which translate to smaller markets and greater risks of failure in clinical trials.
Management predicts the top line to grow at a modest pace, at least for this year. However, it might be challenging to maintain this pace over the next five years. The mid-stage pipeline is particularly weak, featuring fewer than a dozen initiatives.
Can there be a turnaround?
As things stand, it is hard to envision how Bristol Myers could significantly improve its position in late 2029 compared to its current state without a strategic overhaul. Another five years of dismal stock performance relative to the market appears to be an almost certainty. If its financial situation worsens due to underperforming investments, it might even require a reduction in its dividend.
However, despite its substantial debt burden and ordinary pipeline, the company could still turn things around by employing the right tactics. Bristol Myers' size might warrant spinning off its non-core pipeline segments, such as the cardiovascular drugs division or the non-oncology hematology portfolio. This move would provide it a more concentrated focus on its competency areas in cancer drugs.
Selling or licensing the rights to its underperforming medications directly to generic drug manufacturers instead of waiting for its exclusivity protections to lapse could also be a smart move.
Nevertheless, spinning off these divisions would potentially reduce Bristol Myers Squibb to a smaller enterprise over the next five years. For now, it is advisable not to invest in this company. If it announces substantial new changes, it might be worth reconsidering.
Given Bristol Myers Squibb's financial struggles and modest growth prospects, some investors might consider diversifying their investments in the finance sector. Instead of focusing on pharmaceutical stocks for steady income, they could explore other options for potential returns, such as investing in various industries or asset classes.
Furthermore, if Bristol Myers decides to spin off its non-core divisions or sell underperforming medications, interested investors might consider keeping an eye on these new entities, as they could potentially offer more promising investment opportunities. However, it's crucial to conduct thorough research and analysis before making any investment decisions to mitigate risk.
