Bristol Myers Squibb — Q1 2019 Form 10-Q
Business context and reporting period. BMS is a global biopharmaceutical company operating as one reportable segment. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $5.920 billion | $5.193 billion | +14% |
| Net earnings attributable to BMS | $1.710 billion | $1.486 billion | +15% |
| Diluted GAAP EPS | $1.04 | $0.91 | +$0.13 |
| Diluted non-GAAP EPS | $1.10 | $0.94 | +$0.16 |
| Earnings before income taxes | $1.979 billion | $1.779 billion | +11% |
| Effective tax rate | 13.3% | 16.0% | Down 2.7 percentage points |
| Operating cash flow | $1.390 billion | $1.175 billion | +$215 million |
| Capital expenditures | $204 million | $239 million | -$35 million |
Operating cash flow less capital expenditures was approximately $1.186 billion, versus $936 million in Q1 2018. Investing activities provided $1.060 billion, largely reflecting marketable-security sales and maturities; financing activities used $2.029 billion, including $1.250 billion of long-term debt repayment and $669 million of dividends.
At March 31, 2019, cash and cash equivalents were $7.335 billion and marketable securities totaled $2.662 billion. BMS reported a net cash position of $3.981 billion, compared with $3.310 billion at year-end 2018. Short-term debt was $381 million and long-term debt was $5.635 billion. Current assets were $17.093 billion versus current liabilities of $8.841 billion.
Performance drivers and material changes
- Net product sales rose 15% to $5.713 billion. Management attributed overall revenue growth primarily to higher demand for Eliquis and Opdivo. U.S. revenue increased 24%; Europe increased 5% despite a 9% adverse foreign-exchange impact; rest-of-world revenue was essentially flat.
- Eliquis revenue increased 28% to $1.925 billion and Opdivo increased 19% to $1.801 billion. Yervoy rose 54% to $384 million. Baraclude fell 37% to $141 million and other brands declined 21% to $487 million, reflecting generic erosion, divestitures and lower demand.
- Gross-to-net adjustments rose 32% to $2.281 billion, faster than gross product sales growth of 19%; adjustments were 28% of gross sales versus 26%. BMS cited higher U.S. Eliquis sales and related payer-formulary rebates as a driver.
- Cost of products sold increased 16% to $1.844 billion, primarily due to higher royalties and profit-sharing tied to Eliquis sales. R&D expense rose 8% to $1.351 billion as immuno-oncology and immunoscience programs expanded. Marketing, selling and administrative expense increased 3% to $1.006 billion.
- Other income (net) was a benefit of $260 million, down from a $400 million benefit a year earlier. Q1 2019 included $175 million of equity investment gains and $187 million of Celgene acquisition and integration expenses; Q1 2018 included $45 million of divestiture gains and a $64 million intangible impairment charge. The lower tax rate primarily reflected recognition of prior-period tax credits.
Outlook, management commentary and significant items
- Celgene transaction: BMS announced an approximately $74 billion acquisition in January 2019. Shareholders of both companies approved it on April 12, 2019, after the quarter; regulatory approvals and other customary closing conditions remained outstanding. BMS expected closing in Q3 2019. The company anticipated approximately $36 billion in cash consideration, to be funded with cash on hand and, subject to market conditions, borrowing and long-term debt. It had arranged an $8.0 billion term loan and a bridge facility commitment reduced to $25.5 billion. A proposed approximately $5.0 billion accelerated share repurchase remained subject to Board approval.
- BMS expected capital expenditures of approximately $800 million in 2019 and $600 million in 2020. Management said available cash, operating cash generation, commercial paper and credit facilities should meet anticipated operating needs for at least the next few years. The filing provides no specific full-year revenue or EPS guidance.
- Credit agencies placed ratings under review for downgrade or on negative CreditWatch after the Celgene announcement. BMS expected additional acquisition debt to result in a downgrade, but expected ratings to remain investment grade; it cautioned that ratings and financing access could change.
- The announced termination of the U.S. pension plan was expected to close in Q3 2019. BMS estimated a non-cash pretax settlement charge of approximately $1.5 billion to $2.0 billion; the plan was reported to have sufficient assets to satisfy transaction obligations.
- The 2016 restructuring plan is expected to generate total charges of $1.5 billion to $2.0 billion through 2020; approximately $1.1 billion had been recognized to date. Q1 2019 charges were $44 million.
- Product and pipeline developments included FDA full approval of Opdivo plus Yervoy for certain melanoma patients and EC approvals for Opdivo plus low-dose Yervoy in specified advanced kidney cancer patients and Sprycel for pediatric ALL. Conversely, a Phase II Opdivo-plus-Yervoy head-and-neck cancer study missed primary endpoints, and BMS withdrew an application for first-line advanced lung cancer pending further evidence.
- Risks and contingencies include ongoing patent, product-liability, pricing, securities and other litigation; BMS generally said outcomes or potential losses could not be estimated clearly. It estimated its share of environmental remediation costs at $65 million. Tax authorities were examining positions, and unrecognized tax benefits could decrease by approximately $355 million to $395 million over the next twelve months, subject to outcomes.
Most important facts for investors to verify
- Whether and when the Celgene acquisition closed, final financing needs, resulting debt and credit-rating effects, and the status of the proposed share repurchase.
- Whether growth in Eliquis and Opdivo continues to offset pressure from older brands, and whether gross-to-net adjustments and U.S. pricing/rebate trends worsen.
- The size, timing and cash/non-cash composition of the anticipated pension settlement charge and remaining restructuring costs.
- Updates to significant legal, tax and environmental matters, for which some outcomes and loss ranges were not estimable in this filing.
- How much reported earnings growth depends on specified items: non-GAAP EPS was $1.10 versus GAAP diluted EPS of $1.04 in Q1 2019; assess the company’s reconciliation and the recurring nature of excluded items.