Bristol Myers Squibb — Q3 2018 Form 10-Q
Business context and period. BMS is a global biopharmaceutical company reporting one operating segment. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $5.691bn | $5.254bn | $16.588bn | $15.327bn |
| Net earnings attributable to BMS | $1.901bn | $0.845bn | $3.760bn | $3.335bn |
| Diluted GAAP EPS | $1.16 | $0.51 | $2.30 | $2.02 |
| Net cash provided by operating activities | Not separately stated for quarter | Not separately stated for quarter | $3.511bn | $4.158bn |
| Cash, cash equivalents and marketable securities | $8.847bn at September 30, 2018 | $9.292bn at December 31, 2017 | ||
| Short- and long-term debt | $7.307bn at September 30, 2018 | $7.962bn at December 31, 2017 | ||
| Net cash position | $1.540bn at September 30, 2018 | $1.330bn at December 31, 2017 |
Q3 total revenue rose 8%; attributable earnings and diluted EPS more than doubled, with the comparison also reflecting lower income tax expense and other period-specific items. Nine-month revenue increased 8%, attributable earnings rose 13%, and diluted EPS increased 14%. Nine-month operating cash flow declined about 16%. Q3 and nine-month dividends declared were $0.40 and $1.20 per share, respectively.
Major growth products were Opdivo ($1.793bn Q3, up 42%) and Eliquis ($1.577bn, up 28%). Nine-month sales of Opdivo and Eliquis increased 37% and 35%, respectively. Established brands weakened, including Sustiva (nine-month sales down 59%), Baraclude (down 29%) and the Hepatitis C franchise (down 96%). Gross-to-net adjustments rose 34% in the first nine months, faster than gross product sales growth of 17%; management attributed pressure in part to Eliquis payer-formulary competition.
The filing does not present an operating-margin measure. Cost of products sold was $1.648bn in Q3 and $4.857bn for nine months. Effective tax rates were 11.8% for Q3 and 15.1% year to date, versus 27.6% and 25.5% in 2017.
Material changes and unusual items
- R&D expense was $4.965bn for nine months, up 9%, including $1.050bn for the Nektar collaboration rights; total license and asset acquisition charges were $1.135bn.
- BMS paid Nektar $1.85bn: $1.05bn was allocated to collaboration rights and expensed in R&D, and $800m to an equity investment. Future contingent payments may reach $1.8bn.
- Other income, net, was a benefit of $912m for nine months, versus $1.497bn in 2017. The prior-year period included a $481m litigation settlement benefit and $470m in Biogen and Roche upfront licensing fees. The 2018 period included a $244m net loss on equity investments, primarily reflecting Nektar fair-value movements.
- Adoption of new revenue guidance reduced reported 2018 revenue by approximately $53m for Q3 and $151m for nine months compared with the prior accounting guidance. The timing of ordinary product sales recognition was not significantly changed.
- Net cash was positive, though total cash and marketable securities declined from year-end. BMS repaid $617m of short-term debt net and paid $1.960bn in dividends during the first nine months.
Outlook, commentary and risks
- No specific full-year revenue or EPS guidance is stated in the supplied filing text. Management said available cash and securities, operating cash generation and U.S. commercial-paper access should meet normal cash needs for at least the next few years, including dividends, capital spending, milestones, taxes and debt maturities.
- Management expected capital expenditures of approximately $900m in both 2018 and 2019. About $1.25bn of long-term debt was due in 2019. A $2.6bn U.S. deemed-repatriation tax is payable over eight years; its accounting remained provisional, with completion expected in Q4 2018.
- The 2016 restructuring plan is expected to generate $1.5bn–$2.0bn in charges through 2020; approximately $1.0bn had been recognized through September 2018. Management expected about $150m of restructuring charges in 2018, in addition to accelerated-depreciation effects.
- Pipeline developments were mixed: Opdivo received several approvals, but the Phase III CheckMate-331 study in previously treated relapsed SCLC failed its overall-survival primary endpoint, as announced in October 2018. The FDA extended review of the Opdivo/Yervoy first-line NSCLC application, with a new action date of May 20, 2019.
- Risks include generic and other competition affecting established brands, pricing and rebate pressure, uncertain clinical and regulatory outcomes, and patent challenges. The filing describes multiple product-liability and other legal matters; BMS says it generally cannot estimate outcomes or potential losses. The Australian government’s pending Plavix claim seeks up to AUD449m plus interest, to be shared with Sanofi. Estimated BMS CERCLA environmental costs were $64m.
- Tax authorities are examining the company’s positions. Unrecognized tax benefits could decrease by approximately $305m–$355m over the next 12 months, but the outcome and cash or earnings effects are uncertain. Management reported no material changes to the 2017 Form 10-K risk factors.
Most important facts for investors to verify
- Whether Opdivo and Eliquis growth can offset ongoing erosion in established brands and rising gross-to-net deductions.
- Clinical and regulatory progress following the CheckMate-331 failure and the extended review of Opdivo/Yervoy in NSCLC.
- Cash generation and funding needs after the Nektar investment, dividends, 2019 debt maturity, and planned capital spending.
- Potential effects of tax-audit settlements, completion of the provisional tax-reform accounting, and the timing of tax payments.
- Developments and any estimable exposure in material patent, product-liability, pricing, and environmental proceedings.
- Comparability of reported revenue and earnings, including the effects of accounting changes and non-GAAP exclusions.