We think that Bristol Myers Squibb (NYSE: BMY) currently is a better pick compared to Eli Lilly & Company (NYSE: LLY). BMY stock trades at about 3.7x trailing Revenues, compared to around 8.1x for LLY. Does this gap in Bristol Myers Squibb valuation make sense? We don’t think so. While Bristol Myers Squibb’s revenue growth has been impacted by slowing Opdivo sales, amid market share gains for Merck’s Keytruda, its other drugs including Eliquis and Revlimid continue to gain market share. On the other hand, positive findings for Eli Lilly’s breast cancer drug – Verzenio – in new clinical trials, along with market share gains for Trulicity, has aided LLY stock growth over the recent past. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue Growth as well as Operating Income and Operating Margin growth. Our dashboard Bristol Myers Squibb vs. Eli Lilly: BMY stock looks undervalued compared to LLY stock has more details on this. Parts of the analysis are summarized below.
1. Revenue Growth
Between 2016 and 2019, Bristol Myers Squibb’s Revenues grew by about 34%, from around $19.4 billion to $26.1 billion, primarily led by its anticoagulant – Eliquis – which saw its sales grow from $3.3 billion to $7.9 billion over the same period. For the last 12 months period, Bristol Myers Squibb’s sales have surged to $39.4 billion, due to the Celgene acquisition. Looking at Eli Lilly, total revenue grew a mere 5% from $21.2 billion in 2016 to $22.3 billion in 2019, and the figure stood at $23.2 billion for the last 12 months.
2. Operating Income
Bristol Myers Squibb’s operating income grew from $4.5 billion in 2016 to $5.9 billion in 2019, reflecting a 31% growth, led by an increase in revenues while its operating margin remained around 23%. Looking at Eli Lilly, the operating income grew from $3.3 billion in 2016 to $5.0 billion in 2019. Eli Lilly’s operating margins grew from 15.4% to 22.3% between 2016 and 2019. However, looking at the last 12 months period, Bristol Myers Squibb’s operating margins have plunged to less than 10%, while Eli Lilly’s margins have increased to north of 27%. Bristol Myers Squibb’s drop is partly due to the impact of the Celgene acquisition, increased R&D expenses, and the impact of the pandemic on the overall costs.
The Net of It All
Although Bristol Myers Squibb’s Revenue growth compares favorably with Eli Lilly over the recent years, Eli Lilly’s operating margins are better. However, Bristol Myers Squibb may continue to see steady revenue growth led by market share gains for Eliquis and Celgene drugs over the next few years. It will also benefit from merger synergies and a robust pipeline. Bristol Myers Squibb’s stock has been weighed down partly due to the slowing sales growth of its blockbuster drug Opdivo, given the stiff competition from Merck’s Keytruda, which has shown better results in recent studies. Keytruda has established a dominant position in lung cancer, the largest oncology drugs market, and it will be difficult for Opdivo to challenge it. That said, the market share gains for other drugs will more than offset the impact from slowing sales of Opdivo, in our view. As such, we think the difference in P/S multiple of 3.7x for Bristol Myers Squibb versus 8.1x for Eli Lilly will likely narrow going forward, implying better returns for BMY stock.
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