Where Will Bristol Myers Squibb Be in 5 Years?

Investors often look to major pharmaceutical stocks as an area that is likely to provide an anchor for their portfolios. Thanks to their supposedly consistent cash flows, they often appear to be capable of steadily growing in value over time.

However, that's not always the case. Even once-stellar companies stumble. Consider Bristol Myers Squibb (NYSE: BMY), which has seen its shares rise just 2% over the past five years, seesawing back and forth over that time. Let's map out its next five years and see if better times lay ahead for the ailing drug giant.

This setup does not look favorable

Financially speaking, this pharma is not in good condition, which will have a big effect on what it can accomplish over the next five years. Its trailing-12-month operating expenses of $28.2 billion are substantially higher than its operating income of around $7.3 billion over that period.

It's currently undergoing cost cutting that management thinks should trim around $1.5 billion in expenses annually by the end of 2025. Similarly, it plans to continue focusing on research and development (R&D) programs in oncology that management believes will have the best return on its capital, to continue juicing some growth as it rectifies its costs.

To tide it over while those two initiatives are implemented, over the last 12 months it issued $20.6 billion in debt. That means it now has about $50.1 billion in long-term debt and capital lease obligations.

In the third quarter alone, the company had to spend approximately $2.5 billion of its cash flow on debt repayment, and it paid $505 million in interest expenses. Such sums are dramatic impediments to investing full-bore in growth initiatives, and they won't be going away anytime soon.

There are no game-changing catalysts to look forward to, either. Its newer set of medicines will continue to grow into their markets at a moderate pace, while its older medicines stagnate, and its pipeline advances a collection of typical programs through clinical trials.

For a company with more than 30 late-stage programs in its pipeline, as well as dozens of products on the market, there are very few candidates for new blockbuster drugs, even when including the potential gains from expanding the approved set of indications for its existing medicines.

One reason for that is because the domain it has chosen to focus on -- cancer drugs -- is quite competitive. And the majority of its candidates are only seeking approvals to become second-, third-, or fourth-line treatments, implying smaller addressable markets as well as significantly higher risks of failure in clinical trials.

But management sees the top line continuing to grow at a slow pace, at least for this year. It may be hard to sustain that pace over the next five years, however; its mid-stage pipeline is particularly weak, with less than a dozen programs.

Could there be a turnaround?

As things stand, it is hard to see how Bristol Myers would be in significantly better shape in late 2029 compared to today without a major shake-up in its strategy. Another five years of its stock badly underperforming the market looks all but guaranteed. If its financial situation gets weaker due to some of its recent investments performing worse than anticipated, it might even need to cut its dividend.

But despite its hearty debt load and mediocre pipeline, the company could still turn things around by taking the right actions. Bristol Myers is so large that it might make sense to spin off its noncore pipeline segments, like its cardiovascular drugs unit, or perhaps its non-oncology hematology portfolio. That would give it a bit more focus on its areas of competency in cancer drugs.

It might also be smart to sell or license the rights to its underperforming medicines directly to generic drug manufacturers rather than waiting for its exclusivity protections to lapse, which could take years.

Nonetheless, that would potentially make Bristol Myers Squibb a smaller business in five years. For now, don't invest in this company. If it announces some big new set of changes, it might be worth revisiting.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.