Confusion Inc. - Bristol-Myers Squibb - BMY
I like to invest in stocks with a certain amount of chaos and and confusion, but BMY is going one step too far. If you must own big caps, and you are looking for defensive stocks, then BMY is a name you might consider.
Let’s consider the issues:
Large cap drug stocks are difficult to invest in. They sell drugs with strange names, to cure diseases you hope you never get. It helps to have a pharmacy degree to understand these companies. Why not just buy a restaurant stock?
Drug pricing is a mysterious subject. I spent two decades trying to understand the PBM’s (Pharmacy Benefit Managers) that stand between the drug makers and the insurance companies. It is not always the best drug that wins.
After two decades of talking about Medicare “negotiating” drug prices, it has actually started to happen. Part of the Inflation Reduction Act has allowed something called the CMS (Center for Medicaid and Medicare Services) to start setting drug prices. Did you know this was actually happing? I did not, and the effects could be profound.
This completely unknown regulator took 50% to 70% off the prices to be paid for 10 popular drugs. The prices will not take effect until 2026, but BMY got caught because Eliquis is 25% of sales and at least 40% of profits. Nobody really knows how the CMS came up with these cuts. Eliquis is a popular blood thinner that helps prevent strokes.
It is not clear that these “negotiated” cuts are constitutional. BMY has been very quiet, and so have the analysts, but this type of regulation seems to be exactly what recent Supreme Court decisions on “Chevron Deference” are all about. How much legislating can Congress push down to faceless regulators. Senator Schumer, if you want to cut the funding of drug company research, then step forward and do it yourself, do not push the job down to Chiquita (the head of CMS).
It is completely unclear how many other drugs will be regulated in this manner, and which ones are next. It is certainly unclear how Trump would react to these cuts.
The Eliquis cut cauued BMY to stop issuing long-term guidance, and ominously start talking about a “transition period” from 2026 to 2030. BMY had previously given a “trough” forecast, but that has been discontinued.
BMY has lots of interesting new drugs in the pipeline, but a dividend cut might be needed before they arrive. This is a subject BMY does not want to discuss. It is unclear how the PBMs will react to the Medicare cuts.
BMY still has more debt than is comfortable from its purchase of Celgene. Interest coverage is still 5x, but the Eliquis cut could reduce that. Stock buybacks seem unlikely with the government hanging around.
You do get almost 5% while you wait, but be careful assuming that will last forever.
Perhaps the drug industry has changed forever, and nobody really noticed. Or perhaps this is just noise and the lobbyists will win again, as they always have. It is just too tough to make a call right now, so I will step aside and get back to Wendy’s. Maybe BMY could come with a drug to cut fast food craving, or maybe Lily already did that.
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Noxious Nine climbed back to 7-4 for the season, just two this week:
Stanford +22.5 at Clemson - brains vs brawn
Central Michigan -1 vs San Diego State - go Mightly MAC
Interesting take! I've been looking at them lately.