Bristol Myers Squibb Company (BMY)

Bristol Myers Squibb trades on the New York Stock Exchange under the ticker BMY and is one of the world’s largest pharmaceutical manufacturers. The company is the product of a 2019 megamerger between Bristol-Myers Squibb (itself the result of numerous acquisitions) and Celgene Corporation, a deal that created a behemoth focused on oncology, immunology, cardiovascular disease, and cell therapy. Like all large pharma companies, Bristol Myers Squibb depends on a handful of blockbuster drugs that generate most of its revenue and profit, and its future is shadowed by patent expirations, regulatory hurdles, and the perpetual challenge of replacing drugs that lose exclusivity.

“Pharma is not a growth business — it is a patent-life business.”

The 2019 merger and what it created

Bristol-Myers Squibb, the predecessor, was itself a creature of mergers and acquisitions. The company traces its roots to 1858, when the Bristol company was founded, and 1887, when the Myers company started. They merged in 1989 to form Bristol-Myers Squibb. Over the following decades the company acquired numerous other drug makers, each bringing new patents and products.

By the 2010s, Bristol-Myers Squibb was a large but aging pharmaceutical company whose blockbuster drugs were beginning to face patent expiration, and whose pipeline of new drugs was deemed insufficient to replace them. Celgene, meanwhile, was a much younger company that had developed and commercialized several highly successful cancer drugs, most notably thalidomide-derived immunomodulatory compounds used to treat multiple myeloma and other blood cancers. Celgene was valued at roughly 90 billion dollars when Bristol-Myers Squibb agreed to buy it in 2019 for about 74 billion dollars in cash and stock.

The merger was immediately controversial. Celgene’s stock fell sharply after the deal was announced because investors feared that Bristol-Myers Squibb’s struggling pipeline and weak management would dilute Celgene’s growth. The company’s chief executive officer acknowledged that the deal was not about growth, but about ensuring the survival of a company facing a “patent cliff” — a situation where the patents on blockbuster drugs are set to expire in the near term, threatening a sharp drop in revenue.

The merged entity inherited Celgene’s cancer portfolio, which became the crown jewel of the new Bristol Myers Squibb, and Bristol-Myers Squibb’s legacy drugs in immunology and cardiovascular care. The combination was meant to create a diversified pharmaceutical company with a deeper pipeline and more resources to invest in research and development.

How Bristol Myers Squibb makes money

Pharmaceutical companies make money by selling patented drugs at high prices for a limited period — typically 20 years from the date of patent filing, though in practice market exclusivity is often shorter because it takes many years to get a drug through clinical trials and approved by regulators.

Bristol Myers Squibb’s revenue comes from selling these branded drugs to hospitals, physicians, insurance companies, and pharmacies in the United States and internationally. The largest and most profitable drugs are those for cancer (oncology), which command the highest prices and often treat conditions for which the patient has few alternatives.

A few major drugs generate a large proportion of the company’s revenue. Opdivo, a checkpoint inhibitor used to treat multiple cancer types, is one of the company’s flagship oncology drugs and generates several billion dollars annually. Revlimid, a Celgene drug used to treat multiple myeloma and other blood cancers, was one of the most profitable drugs in the company’s portfolio until it began to lose exclusivity in some geographies. Eliquis, an anticoagulant, is the leading drug in a large and growing market for blood thinners. Orencia, for rheumatoid arthritis, and a suite of cardiovascular and immunology drugs round out the major revenue drivers.

The business model is straightforward: develop a drug, get it approved by regulators (a process that can take a decade or more and cost billions of dollars), and then sell it at a high price during the period of patent protection. Once the patent expires, generic versions flood the market and the drug’s price and sales collapse. A company’s survival depends on continuously developing and launching new drugs to replace ones that have lost exclusivity.

The oncology engine

Oncology — cancer treatment — is the most profitable part of Bristol Myers Squibb. Cancer patients are often willing and able to pay any price a drug company charges, because the alternative is death, and insurance companies often have little choice but to reimburse. This creates conditions where drug companies can charge prices that seem astronomical to the lay public.

Bristol Myers Squibb inherited a strong oncology franchise from the Celgene merger. The company’s cancer drugs include immunotherapies (drugs that harness the patient’s own immune system to attack cancer), targeted therapies (drugs designed to hit specific genetic mutations in cancer cells), and traditional chemotherapies. The company is investing heavily in cell therapy — a cutting-edge approach where doctors remove a patient’s immune cells, engineer them to recognize and kill cancer cells, and infuse them back — and in combination therapies, where multiple drugs are used together to achieve better results than either alone.

The oncology market is enormous and growing, because global cancer rates are rising as populations age, and because the range of treatable cancers is expanding as new drug classes succeed. However, the market is also intensely competitive, with other large pharma companies (Roche, Pfizer, Merck, AbbVie) investing heavily, and with smaller biotechnology companies developing innovative new approaches. Maintaining a leadership position requires continuous investment and a successful string of new drug approvals.

Patent cliffs and the pipeline problem

The core structural challenge facing Bristol Myers Squibb, like all large pharmaceutical companies, is the patent cliff. Major drugs mature, enter their final years of patent protection, and then face generic competition. A company that fails to develop enough new drugs to replace the expiring ones sees its revenue plunge.

Revlimid, acquired from Celgene, exemplifies the problem. It was one of the most profitable drugs in Bristol Myers Squibb’s portfolio, generating billions annually. But the US patent on Revlimid expired, and generic versions came to market, causing sales to decline sharply. The company must now rely on newer oncology drugs and on drugs in other therapeutic areas to make up the gap.

This has made the company’s pipeline — the collection of drugs in development, not yet approved — the focus of intense scrutiny from investors. A pharma company is only as good as its next blockbuster. Bristol Myers Squibb has several drugs in late-stage development that management believes could become major revenue generators, but there is always uncertainty. Some drugs fail in clinical trials, others are approved but fail to find a large market, and regulatory approvals can be delayed or denied.

The risk of innovation failure

Unlike a software company or a bank, a pharmaceutical company cannot simply launch a new product and iterate based on customer feedback. New drugs must be tested extensively in human subjects, approved by government regulators, and proven safe and effective. This takes years and costs billions of dollars, and at any point in that process the drug can fail.

The vast majority of experimental drugs never make it to patients. A company might invest a billion dollars or more in developing a drug, run expensive clinical trials, fail to prove benefit, and lose that entire investment with nothing to show. Bristol Myers Squibb, like all pharma companies, is perpetually betting that the drugs in its pipeline will succeed. If too many fail, the company’s growth will slow or reverse.

This is why mergers and acquisitions are common in pharma. Bristol-Myers Squibb merged with Celgene partly to acquire Celgene’s pipeline — the assumption being that adding Celgene’s drugs to Bristol-Myers Squibb’s portfolio increased the probability that at least some would become blockbusters.

Regulation, pricing, and political risk

Pharmaceutical companies are heavily regulated. The Food and Drug Administration approves every drug before it can be sold, and the approval process is rigorous. Some drugs are rejected or delayed because the evidence of benefit is not strong enough. In recent years, the FDA has also begun requiring “real-world evidence” that a drug works outside the controlled setting of a clinical trial.

More contentious is the question of drug pricing. Pharmaceutical companies argue that high prices are necessary to recoup the enormous investments in research and development and to fund future innovation. Critics argue that prices are so high that they restrict access to life-saving medicines, and that the companies are exploiting the desperation of sick patients and the fact that insurance companies will pay almost any price rather than let a patient die.

The result is ongoing political pressure to regulate drug prices. In the United States, the government has limited power to negotiate prices (historically, Medicare was barred from doing so by law), but that is changing. If price controls become more aggressive, pharma company profitability will suffer. Bristol Myers Squibb is already exposed to price pressure in various geographies, where government health systems refuse to reimburse at high prices, and this risk will likely increase.

How to research Bristol Myers Squibb

The company’s annual 10-K filing (SEC CIK 0000014272) breaks down revenue by drug, by therapeutic area, and by geography. Read it carefully, paying attention to which drugs are the largest revenue sources, which are declining (likely facing patent expiration), and which are the most recently approved (the company’s future).

The pipeline is disclosed in the company’s quarterly earnings calls and in presentations at medical conferences. Look for information about drugs in Phase 2 and Phase 3 trials, which are the stages most likely to result in approval. Pay attention to the timeline — when does management expect each drug to be approved, and how large is the potential market?

Key metrics include the ratio of revenue from recently approved drugs (the last 3-5 years) to revenue from older drugs — a company with many recently launched drugs is in a better position than one relying on aging blockbusters. Also track gross margins on drugs as they age — newer drugs command higher prices, so margin profile indicates pricing power.

Finally, read what the company says about patent expiration dates. Know which major drugs are losing exclusivity in the next five to ten years, and whether the company has credible replacements. If the company has a large patent cliff with no promising pipeline, risk is elevated.