Managing Director & Senior Partner
With a market capitalization in the neighborhood of $100 billion, Bristol-Myers Squibb (BMS) is one of the largest biopharma companies and one of the strongest value creators. A decade ago, however, the company’s situation was far less promising. In the mid-2010s, many blockbuster drugs were about to go off-patent. In 2006, BMS lost patent exclusivity for Pravachol, a statin used to fight cholesterol, causing sales to drop by $1.2 billion in one year. What’s more, a patent dispute over BMS’s top-selling anticholesterol drug, Plavix, triggered a 15% decline in sales for that drug, resulting in an additional loss of $1.5 billion.
At the time, many biopharma companies were turning to megamergers and portfolio diversification. But BMS’s executive team made the bold bet to transform BMS from a diversified health care company into a biopharma pure play by systematically reshaping the company’s business and R&D portfolios.
In 2007, the company announced a major productivity improvement initiative that over the next five years took some $2.5 billion out of the business—the majority from cuts in SG&A expenses. Management used that capital to fund the new strategy and win over investors. In parallel, the company began shedding businesses that were not part of the new focus on biopharma. BMS closed its diagnostic-imaging business in 2007, sold its wound care business to a private equity company in 2008, and spun off its nutritionals business in an IPO in 2009. These divestitures not only freed up additional funds to invest in the most promising new therapeutic areas but also allowed the senior executive team to focus its time and attention on assembling a new biopharma portfolio.
One area the company decided to target was immuno-oncology (I-O), an innovative approach that fights cancer by harnessing the body’s immune system. Two drugs, Yervoy and Opdivo—both developed at a company that BMS partnered with and ultimately acquired—were among the first I-O drugs approved by the FDA (in 2011 and 2014, respectively) for use in treating certain cancers. The acquisition was the start of a major bet on immuno-oncology. Since 2011, the company’s I-O business has grown from 0% to 25% of total sales and is expected to grow to more than 50% by 2021. Opdivo alone generated nearly $3.8 billion in sales in 2016, becoming a new-generation blockbuster that has helped the company outperform the industry in revenue growth for the first time since 2008. According to consensus estimates, Opdivo is expected to generate $8 billion to $9 billion in sales by 2020.
In addition to transforming its business portfolio, BMS has also transformed its organization in order to manage that portfolio for value. Although changes have taken place across the company, some of the most important have been in R&D. The goal was for R&D to see itself not primarily as the originator of new drugs but as a decision-making hub, responsible for making smart tradeoffs among drugs in the company’s R&D pipeline. To achieve this, the company took the following steps:
These moves have paid off. Over the past six years, the company’s total shareholder return (TSR) has outpaced that of its peers by an average of five percentage points per year, and its R&D productivity has been among the highest in the industry. Since 2013, revenue has increased by 18%, and EBITDA margins have increased by 15%. (See the exhibit.)
During the same period, the company’s market cap has nearly doubled, and management has satisfied investors by steadily increasing its dividend. The newer, streamlined organization can better allocate resources to strategic goals, focus its R&D efforts on value, and react more quickly to changes in the health care industry.