Bristol Myers Squibb Isn't Nearly as Cheap as It Looks -- Here's the 1 Thing That Could Change That

Bristol Myers Squibb (NYSE: BMY) looks attractive from a value perspective. For example, its dividend yield is a lofty 4% compared to the S&P 500 index's (SNPINDEX: ^GSPC) 1% and the pharmaceutical sector's average of around 1.5%. From a more traditional perspective, Bristol Myers Squibb's 17.5x price-to-earnings ratio is well below the industry average of 25x. Here's why it may not be as cheap as it looks and what needs to happen to change that.

Bristol Myers Squibb is nearing the end

There is nothing particularly unusual happening with Bristol Myers Squibb's business. That is important to highlight because the pharmaceutical industry is highly competitive, research-driven, and has a unique patent situation that materially complicates things even for the largest drug makers. The issue is that the patent protections for new drugs are time-limited, but research and development outcomes are unpredictable.

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That's the crux of the problem with Bristol Myers Squibb right now. Material patent expirations are occurring, including Revlimid and Pomalyst in 2026. And that will be followed by Eliquis, which is marketed with Pfizer (NYSE: PFE) in 2028. While patent expirations are common, the outcome is usually a material drop in revenue from the affected drugs. So Bristol Myers Squibb's top and bottom lines are going to be under pressure for a bit. If that's the case, the low P/E and high yield relative to the broader sector could simply be Wall Street pricing in the patent expirations.

Bristol Myers Squibb needs a new drug

Management isn't sitting around with its head in the sand. The company is actively looking for new drug candidates. And it actually has some attractive pipeline options in rare diseases, immunology, and cancer. If the company gets a couple of new blockbuster drugs approved, it could easily offset the hit from drugs that are losing patent protection. If that comes to pass, today's relatively low price will turn out to be a bargain.

The problem is that Bristol Myers Squibb isn't quite at the point where investors can comfortably expect a positive outcome. So buying the stock requires a little faith. If you are a long-term investor, however, it seems highly likely that this well-regarded drug company, founded in 1858, will deliver new blockbusters over the finish line. Given the history, that seems like a reasonable bet. But you'll need the fortitude to hold on while the rest of Wall Street frets that this healthcare stalwart has lost its way.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.