BRISTOL MYERS SQUIBB CO annual report, FY2015

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Bristol-Myers Squibb Company — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. BMS is a global specialty biopharmaceutical company operating in one BioPharmaceuticals segment, with a strategic focus on oncology and immuno-oncology, immunoscience, cardiovascular disease, fibrosis and genetically defined diseases.

Financial performance and position

  • Revenue: $16.56 billion, up 4% from $15.88 billion in 2014. Net product sales increased to $14.05 billion from $11.66 billion, while alliance and other revenues declined to $2.52 billion from $4.22 billion. Foreign exchange reduced the reported revenue growth rate by approximately 7 percentage points.
  • Profit: GAAP net earnings attributable to BMS were $1.57 billion, down from $2.00 billion; diluted EPS was $0.93 versus $1.20. Non-GAAP diluted EPS increased to $2.01 from $1.85. The filing attributes the GAAP decline principally to higher R&D charges for acquired and licensed pipeline assets.
  • Expenses and margins: Total expenses were $14.48 billion, including R&D of $5.92 billion, up 31%. Gross margin was $12.65 billion, approximately 76% of revenue. Pretax earnings were $2.08 billion; the effective tax rate rose to 21.5% from 14.8%.
  • Cash flow: Operating cash flow fell to $1.83 billion from $3.15 billion. BMS cited timing of alliance-partner payments, higher upfront licensing payments and slower customer collections. Capital expenditures were $820 million; dividends paid were $2.48 billion.
  • Liquidity and debt: Cash, cash equivalents and marketable securities totaled $8.93 billion, down from $11.84 billion. Short- and long-term debt totaled $6.69 billion, leaving a reported net cash position of $2.24 billion. Two $1.5 billion revolving credit facilities were undrawn at year-end. Approximately $7.2 billion of cash and securities was held primarily offshore and may face repatriation restrictions or additional tax.
  • Quarterly item: Fourth-quarter revenue was $4.29 billion, but BMS reported a net loss attributable to the company of $197 million, or diluted EPS of negative $0.12. The filing lists substantial quarterly specified items; investors should review the quarterly reconciliation for their timing and composition.

Material changes versus 2014

  • Growth was led by launches and expanding demand for the Hepatitis C franchise, Opdivo and Eliquis. Eliquis revenue rose to $1.86 billion from $774 million; Opdivo reached $942 million from $6 million; Orencia rose 14% to $1.89 billion.
  • Declines in mature products offset some growth: Abilify revenue fell 63% to $746 million following expiration of BMS commercialization rights; Baraclude, Reyataz and Sustiva also declined amid generic or competitive pressure. Yervoy fell 14%, partly reflecting competition from newer immuno-oncology treatments.
  • R&D expense increased by $1.39 billion, including $800 million for Flexus, $167 million for Cardioxyl, $350 million for the Five Prime agreement and a $160 million impairment of an investigational fibrosis asset. These and other specified items increased reported earnings volatility.
  • BMS transferred North American Erbitux rights to Lilly for sales-based royalties and its Japanese co-commercialization rights to Merck KGaA for royalties. It also announced the planned sale of its investigational HIV pipeline to ViiV Healthcare; closing was expected in the first half of 2016.
  • Operating cash flow and the net cash position decreased. BMS issued $1.3 billion of notes and redeemed or repurchased debt; long-term debt ended the year at $6.55 billion.

Outlook, commentary and key risks

  • Management emphasized growth of key brands, new product launches, continued investment in the pipeline and biologics manufacturing, and disciplined capital allocation. The filing does not provide a clear numerical revenue or earnings forecast.
  • Management expected international Hepatitis C revenue to decline significantly in 2016, particularly in Japan, as competition increased. Capital expenditures were projected at approximately $1.3 billion in 2016 and $1.0 billion in 2017, including biologics capacity expansion.
  • Opdivo was a central growth opportunity and risk concentration: further 2016 trial and regulatory developments were anticipated, but clinical outcomes, competitor data, approvals and commercial uptake were uncertain. Eliquis and other major brands also face patent challenges and competition.
  • Other material risks include rapid sales erosion after loss of exclusivity; pricing, reimbursement and foreign-exchange pressure; dependence on alliance partners and third-party manufacturers; clinical and regulatory failure; and supply interruptions. Orencia, Eliquis, Sprycel and the Hepatitis C franchise each represented approximately 10% or more of 2015 consolidated revenue.
  • Legal and compliance matters include an October 2015 SEC settlement of approximately $14.7 million relating to alleged FCPA violations, with a two-year self-monitoring period; product-liability and pricing litigation; and environmental remediation. BMS estimated its share of CERCLA site costs at $60 million. The company stated that some legal outcomes could not be reasonably estimated.
  • The EPO revoked a key European Sprycel patent in January 2016; BMS said it would appeal and the patent remained in force pending appeal. An inter partes review challenge to Eliquis’s U.S. composition patent was also pending.

Most important facts for investors to verify

  • Reconcile GAAP and non-GAAP earnings, particularly the $1.68 billion in 2015 license and asset acquisition charges and other specified items.
  • Assess whether Opdivo and Eliquis growth can offset mature-product erosion, expected Hepatitis C competition and the loss or transfer of commercial rights.
  • Review cash conversion, customer collections, alliance payment timing, offshore cash availability and the capacity to fund dividends, capital investment and development milestones.
  • Track patent challenges and exclusivity timelines for Eliquis, Sprycel and other major products, alongside the progress and commercial prospects of late-stage trials.
  • Review pending litigation, tax exposures, manufacturing dependencies and the ViiV transaction’s closing and contingent-payment terms. The filing’s financial statements and internal-control audit opinions were unqualified.