Bristol-Myers Squibb (BMY) - Options Strategy

Despite recent performance struggles, BMY remains a key player in the pharmaceutical industry with a robust pipeline of new drugs and a strong market presence. The company is set to report its next earnings on July 26, 2024, a date that investors are closely watching.

BMY offers a compelling dividend yield of approximately 5.88%, making it an attractive option for income-focused investors. Over the past five years, BMY has consistently grown its dividend at an average annual rate of about 6%, reflecting the company’s commitment to returning value to shareholders.

To assess the intrinsic value of BMY, I explored multiple valuation models:

Discounted Cash Flow (DCF) Model: Using projected free cash flows, a discount rate (WACC) of 8.84%, and a terminal growth rate of 2%, I estimated the intrinsic value of BMY to be approximately $62.35 per share.

Dividend Discount Model (DDM): Given BMY’s dividend of $2.40 per share, I explored two different growth rates:

Growth Rate of 6%: With a required return of 8.5%, the intrinsic value is approximately $101.76 per share.

Growth Rate of 5%: With a required return of 9.6%, the intrinsic value is approximately $54.78 per share.The significant difference between these valuations highlights the sensitivity of the DDM to growth rate and discount rate assumptions.

Given the current market conditions, I recommend an options strategy to capitalize on the elevated implied volatility (IV) of BMY options:

Option Strategy: Sell BMY July 19, 2024, $40.00 put options.

Implied Volatility: 32.58%, significantly higher than the historical volatility of 20.85%, indicating high premium collection.

Premium Collected: $1.15 per share.Break-Even Point: $40.00 (strike price) - $1.15 (premium) = $38.85 per share.

Earnings Date: July 26, 2024.

Selling the $40.00 put option allows me to collect a substantial premium due to the elevated IV. The break-even price of $38.85 provides a cushion against potential declines. If BMY remains above $40.00 by expiration, I keep the premium. If it drops below $40.00, I’ll acquire BMY shares at an effective price of $38.85, which is still near its 52-week low. Even if the option is exercised and I end up owning the shares, the high dividend yield from BMY provides a good consolation, ensuring a steady income stream.

If I end up owning BMY shares, it’s important to consider the following risks and growth catalysts:

Patent Expirations: Key drug patents expiring could lead to significant revenue loss.

Regulatory Risks: Changes in healthcare regulations and drug pricing policies could impact profitability.

Clinical Trial Failures: Failures in drug trials can lead to financial losses and delays.

Competition: Intense competition in oncology, immunology, and cardiovascular sectors.

Pricing Pressures: Increased pressure from governments and insurers to reduce drug prices.

Litigation and Liability: Legal challenges and product liability lawsuits can be costly.

Strong R&D Pipeline: BMY has a robust pipeline of new drugs, particularly in oncology and immunology. For instance, the company is expecting FDA approval for its new immunotherapy drug relatlimab (Opdualag) in combination with nivolumab (Opdivo) by Q4 2024, which could significantly boost revenues.

Strategic Acquisitions and Partnerships: Recent acquisitions, such as the purchase of Celgene in 2019, have strengthened BMY's portfolio in oncology and hematology. Future strategic acquisitions could further enhance growth prospects. For example, acquiring a company specializing in gene therapy, such as bluebird bio, could be announced in early 2025.

Expansion in Emerging Markets: BMY is increasing its presence in emerging markets like China and Brazil, where healthcare spending is rising. The company plans to launch its blockbuster drug Revlimid in these markets by mid-2025, potentially capturing significant market share.

Advances in Precision Medicine: BMY is at the forefront of developing targeted therapies and biomarker-driven treatments. The company's precision medicine platform, including drugs like Abecma (ide-cel) for multiple myeloma, is expected to bring new therapies to market by 2026, catering to unmet medical needs.

Immuno-Oncology Leadership: Leveraging flagship products like Opdivo and Yervoy, BMY continues to lead in the immuno-oncology space. Expanded indications for these drugs are anticipated in 2024 and 2025, which could drive additional revenue growth.

Digital Transformation: Adoption of digital technologies to enhance R&D efficiency and patient engagement is a priority for BMY. The implementation of AI-driven drug discovery platforms is expected to accelerate the development of new therapies, with significant milestones anticipated in 2025.

This blog post is for informational purposes only and does not constitute financial advice. The information provided is based on publicly available data and personal analysis. Investors should conduct their own research or consult a financial advisor before making any investment decisions. The author is not responsible for any investment decisions made based on this information. Additionally, I have sold the same option at $1.18, reflecting my personal investment position.