Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Pfizer and Bristol Myers Are Winning the Biopharma Turnaround
Transcript
- Lucas: So big pharma has been the stock market's waiting room for most of the past three years. But in the second quarter of 2026, two names have quietly broken out: Pfizer and Bristol Myers Squibb. Both are up low double digits year-to-date, and they've actually outpaced the S&P 500 over the last three months. Luna: And that's surprising because pharma has been dead money for a while. What changed? Lucas: Two different stories, actually, but they converge on the same point: these companies are finally addressing the structural problems that kept their stocks cheap. For Pfizer, it's about proving the post covid pivot is real. For Bristol Myers, it's about showing they can manage the patent cliff without destroying margins. Luna: Let's start with Pfizer. Everyone knows the COVID revenue cliff was brutal. But what's the specific catalyst now? Lucas: The market is starting to believe that Pfizer's oncology pipeline is more than just window dressing. They acquired Seagen in 2023, which gave them a set of antibody-drug conjugates that are showing real clinical differentiation. And the latest data from their ADCs in breast and lung cancers has been strong enough that analysts are raising peak sales estimates. Luna: Right, Seagen was a $43 billion deal. That's a huge bet. Is it paying off? Lucas: The early signals are positive. One of their key ADC programs, a drug called sigvotatug vedotin — you can see why they use the acronym — just posted progression-free survival data that beat the standard of care in non-small cell lung cancer. That's a massive addressable market. And the street is starting to model that drug as a multi-billion dollar peak seller, which is something Pfizer hadn't had since the COVID vaccine. Luna: So the narrative is shifting from 'Pfizer is a COVID stock' to 'Pfizer is an oncology company'. That's a big re-rating opportunity. Lucas: Exactly. And the numbers support it. Pfizer's gross margins, which collapsed during the COVID years because of revenue mix, are recovering. In 2023, gross margin was around 45 percent. This year, it's tracking toward the mid-50s. That's still below their pre covid level of around 60 percent, but the trajectory is clear. And free cash flow is starting to look healthy again, which lets them pay down debt and increase the dividend. Luna: And what about Bristol Myers? They have a different problem. Their top-selling drugs — Revlimid, Eliquis, Opdivo — are all facing generic or biosimilar competition. The patent cliff is right there. Lucas: Bristol Myers is a classic show-me story. The market has been discounting their entire pipeline because the revenue hole from patent expirations is real. But they've been doing two things right. First, they've been aggressively cutting costs. They announced a restructuring in early 2024 that's supposed to save $1.5 billion annually by 2027. Second, their new product launches — specifically their car t therapies like Breyanzi and their oral factor XIa inhibitor milvexian — are gaining traction faster than expected. Luna: So the cost cuts are protecting margins while the pipeline fills the revenue gap? But that takes time. Are investors really patient enough? Lucas: They are if the valuation is low enough to compensate for the risk. Bristol Myers trades at around 8 times forward earnings, which is cheap relative to the S&P 500 at over 20 times. Even with the patent cliff, if they can maintain earnings per share around $7 to $8 in the next couple of years, the stock has room to re-rate. And the free cash flow yield is around 10 percent, which gives management options for M&A or buybacks. Luna: That free cash flow yield is striking. It's higher than most of the market. But isn't it at risk if the pipeline disappoints? Lucas: Absolutely. The biggest risk for both names is pipeline execution. If Pfizer's ADCs hit a regulatory hurdle or Bristol Myers' new drugs don't get the label expansions they're hoping for, the stocks could get crushed. But that's the nature of concentrated stock picking. You're making a bet on a specific outcome. In a diversified portfolio, you can own five pharma names and let the winners cover the losers. In a concentrated portfolio, you need to be really confident about the catalyst timeline. Luna: So what does that timeline look like for these two? When do we get the next big data read? Lucas: For Pfizer, the big event is later this year when they present full phase 3 data for their ADC in lung cancer at a major medical conference. If the data is compelling, you could see analysts revise their peak sales estimates upward by billions. For Bristol Myers, the next catalyst is the approval decision for milvexian as a stroke prevention drug, which is expected in the first half of 2027. But in the meantime, quarterly earnings will show whether the cost restructuring is on track. Luna: So these are not overnight trades. They're thesis-driven holds where you have to monitor the pipeline milestones. Lucas: Exactly right. And that's what separates stock picking from index investing. You're not betting on the entire sector. You're saying, 'I understand the specific clinical and financial dynamics of these two companies better than the market does, and I think the market is underpricing the probability of success.' That's the essence of active management. Luna: You know, speaking of the economics of making these calls — Lucas, this show is completely listener-funded. No ads, no sponsors. Just the work. Lucas: Yeah, and that's only possible because a small group of listeners chips in each month through buy me a coffee dot com slash fexingo. It's not a big ask — it's just what keeps the episodes coming without any commercial pressure to cover certain stocks or angles. Luna: Exactly. So if our conversations have helped you think about a stock pick differently, that's the way to support it. No obligation, but it makes a real difference. Lucas: Anyway, back to the thesis. So we've talked about the catalysts. But there's another angle I want to look at for both companies: management's capital allocation discipline. Because a cheap pharma stock can become a value trap if management squanders the cash. Luna: And that's been a real concern in pharma historically. Big acquisitions that destroy value, excessive share buybacks at peak prices. How are Pfizer and Bristol Myers doing on that front? Lucas: Pfizer actually surprised the market earlier this year by announcing a $5 billion accelerated buyback program. That signals confidence in their own stock and in their cash flow outlook. And they've been relatively disciplined on M&A — the Seagen deal was big, but they've largely avoided the temptation to do a string of small bolt-on acquisitions that don't move the needle. Bristol Myers, meanwhile, has been paying down debt and reinvesting in their pipeline organically. Their R&D spend as a percentage of revenue has actually increased slightly, which is the right move when you're facing a patent cliff. Luna: So both are showing a level of capital discipline that the market hasn't fully priced in yet? Lucas: I think that's part of it. The market tends to lump all big pharma together — 'patent cliffs, regulatory risk, pricing pressure' — and ignores the company-specific decisions that create divergence. That's where the stock picker's edge comes from. If you can identify which management teams are actually executing on a turnaround, you can buy at a discount before the broader market catches on. Luna: One thing I want to push back on: valuation. Pfizer trades at around 12 times forward earnings, Bristol Myers at 8. Those look cheap, but if earnings decline because of the patent cliff or pipeline delays, the multiples could expand in a way that masks real value destruction. How do you avoid that trap? Lucas: That's the right question. The key is to look at free cash flow per share rather than reported earnings, because free cash flow is harder to manipulate. For both companies, free cash flow per share has been stable or improving over the last four quarters. That tells you the underlying business is generating cash even as reported earnings are depressed by amortization and restructuring charges. As long as free cash flow holds up, the stock is likely undervalued. Luna: So the free cash flow yield is your margin of safety. And the pipeline catalysts are the upside. Lucas: Exactly. And that's the kind of risk-reward you want in a concentrated portfolio: a downside protected by cash flows, and an upside driven by specific, identifiable catalysts. If the catalysts hit, you get a double — multiple expansion plus earnings growth. If they miss, you still have a cash-generating business that can be acquired or restructured. Luna: Alright, so for listeners who want to dig deeper, what's the one metric they should watch for each stock over the next quarter? Lucas: For Pfizer, watch gross margin. If it continues to recover toward 60 percent, that confirms the revenue mix shift away from COVID products toward higher-margin oncology drugs. For Bristol Myers, watch free cash flow conversion — the ratio of free cash flow to net income. If it stays above 100 percent, it means the cost restructuring is working and the patent cliff is being managed. Luna: Great calls. And if those metrics deteriorate, it's time to reconsider the thesis. Lucas: Right. Stock picking is a process, not a one-time buy. You have to monitor the evidence and be willing to change your mind. That's what makes it interesting.