Bristol-Myers Squibb Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. BMS is a global biopharmaceutical company reporting as one business segment. Comparative figures are for Q1 2013 unless otherwise noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $3.811 billion | $3.831 billion | Down 1% |
| Net product sales | $2.807 billion | $2.957 billion | Down 5% |
| Alliance and other revenue | $1.004 billion | $874 million | Up 15% |
| Earnings before income taxes | $985 million | $674 million | Up 46% |
| Net earnings attributable to BMS | $937 million | $609 million | Up 54% |
| Diluted EPS, GAAP | $0.56 | $0.37 | Up 51% |
| Diluted EPS, non-GAAP | $0.46 | $0.41 | Up 12% |
| Operating cash flow | $617 million | $(428) million | Improved by $1.045 billion |
Cost of products sold was $968 million, or 25.4% of revenue, compared with $1.063 billion, or 27.7%, in Q1 2013. The filing does not present a conventional operating-income subtotal; pretax earnings include significant other income and expense items. The effective tax rate was 5.0%, versus 7.6%.
Liquidity, debt and cash flow
- Cash, cash equivalents and marketable securities totaled $10.617 billion at March 31, 2014, up from $8.272 billion at year-end 2013.
- BMS reported a net cash position of $2.969 billion, compared with net debt of $68 million at December 31, 2013. Total debt was $7.648 billion, including $281 million of short-term borrowings and current debt and $7.367 billion of long-term debt.
- Cash from investing activities was $2.212 billion, including $3.055 billion of proceeds from the diabetes-business sale. Financing activities used $1.192 billion, including $676 million to redeem debt and $605 million in dividends. Capital expenditures and capitalized software additions were $118 million.
- Dividends declared were $0.36 per share, compared with $0.35 a year earlier. No commercial paper or revolving-credit-facility borrowings were outstanding at quarter-end.
- Approximately $2.7 billion of cash and marketable securities were held in the U.S.; most of the remaining balance was held primarily in low-tax jurisdictions and expected to remain indefinitely reinvested offshore.
Material changes and business developments
- Diabetes-business divestiture: BMS terminated its AstraZeneca diabetes alliance and sold substantially all of the business in February. The filing reports $3.5 billion of consideration accounted for in Q1, including $700 million of contingent regulatory milestones; about $2.8 billion was allocated to the business sale and $649 million to undelivered elements. The pretax gain was $259 million, and MD&A describes a $355 million after-tax gain. BMS also received $100 million in April for Japanese approval of dapagliflozin. Further regulatory and sales milestones of up to $700 million, royalties through 2025, and additional asset-transfer payments may be received.
- Revenue fell slightly overall as U.S. revenue declined 10%, primarily reflecting the diabetes divestiture and wholesaler buying patterns. Rest-of-world revenue rose 8%; Europe was approximately flat.
- Selected product trends included growth in Sprycel (+19%), Yervoy (+18%), Orencia (+13%), Baraclude (+11%) and Eliquis (from $22 million to $106 million). Sustiva franchise revenue declined 18%, the diabetes alliance declined 50%, and mature products and other revenue declined 6%.
- Research and development expense increased 2% to $946 million, including a $33 million in-process R&D impairment charge and higher upfront licensing payments. Marketing, selling and administrative expense declined 4%, and advertising and promotion declined 14%.
- Other income/expense included the $259 million diabetes-business gain, a $64 million pension curtailment/settlement and special termination charge, $29 million of litigation charges, and a $45 million loss on debt redemption. The low tax rate included a $96 million tax benefit related to the diabetes sale.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or earnings guidance. Management said alliance and other revenues are expected to decline in 2015 and 2016 as certain royalty and alliance agreements expire; it also expects Abilify revenue to decline in the third and fourth quarters following EU loss of exclusivity.
- BMS plans a rolling submission for nivolumab in third-line squamous non-small-cell lung cancer, with completion expected by year-end. It also reported progress in its hepatitis C and Eliquis programs. These are development and regulatory expectations, not assurances of approval or commercial results.
- Key commercial risks include generic competition and patent challenges. BMS warned of a potentially rapid, significant decline in U.S. Baraclude sales if generic entry follows the appeal of a ruling invalidating its U.S. patent; a Korean patent challenge also creates risk. Pricing and reimbursement pressures in Europe, generic erosion of mature products, foreign exchange, and wholesaler/customer purchasing patterns are additional risks.
- Legal matters include more than 5,700 Plavix product-liability claims, more than 300 Byetta lawsuits involving over 1,300 plaintiffs, and more than 500 New Brunswick environmental/personal-injury cases. The filing generally says outcomes and potential losses cannot be reasonably estimated. BMS estimated its share of future CERCLA site costs at $66 million.
- Pension remeasurement reflected a lower discount rate, and management said similar pension settlement charges may occur in the future. The company also disclosed exposure to European government-backed entities: $135 million of trade receivables in Greece, Portugal, Italy and Spain, about 70% from government-backed entities.
- In April 2014, BMS acquired iPierian for $175 million upfront, with up to $550 million in contingent development and regulatory milestones plus potential royalties. The transaction is expected to result in a $175 million R&D charge.
Most important facts for investors to verify
- How much of the reported earnings improvement is sustainable: GAAP net earnings rose to $937 million, while non-GAAP net earnings were $766 million; the diabetes-sale gain, pension charges, impairment, and debt-redemption loss materially affected comparability.
- Whether growth in newer products, particularly Eliquis, Yervoy, Sprycel and Orencia, can offset declines from diabetes divestiture, loss of exclusivity and mature-product erosion.
- Progress and outcomes of the Baraclude patent appeal and other material patent, product-liability, environmental and commercial proceedings; several potential losses are not estimable in the filing.
- Cash availability and tax consequences: most cash and marketable securities were held offshore and expected to remain indefinitely reinvested; repatriation could trigger additional U.S. taxes.
- Completion and timing of AstraZeneca asset transfers, future milestone and royalty receipts, and the costs and obligations of transitional, supply and development agreements.