BRISTOL MYERS SQUIBB CO quarterly report, Q1 FY2011

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Bristol-Myers Squibb Company — Q1 2011 Form 10-Q

Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless stated otherwise. Amounts are in millions of dollars except per-share data. The company operates as a single BioPharmaceuticals segment.

Financial performance

MetricQ1 2011Q1 2010Change
Net sales$5,011$4,807+4%
Earnings before income taxes$1,767$1,452+22%
Net earnings$1,367$1,101+24%
Net earnings attributable to BMS$986$743+33%
Diluted EPS attributable to BMS$0.57$0.43+$0.14
Operating cash flow$481$464+$17
  • Net earnings attributable to BMS were 19.7% of sales, versus 15.5% a year earlier. The effective tax rate was 22.6%, down from 24.2%.
  • Non-GAAP earnings attributable to BMS were $1,000 million, or $0.58 diluted EPS, versus $967 million, or $0.56, in Q1 2010. These company-defined measures exclude specified items and are not GAAP results.
  • R&D expense was $935 million (18.7% of sales); cost of products sold was $1,343 million (26.8%); marketing, selling and administrative expense was $928 million (18.5%). Total expenses declined 3% to $3,244 million.
  • Operating cash flow was $481 million; capital expenditures were $75 million. Cash flow from investing was negative $1,437 million, primarily reflecting net purchases of marketable securities. Financing cash flow was negative $692 million, including dividends, share repurchases and debt repayment.
  • At March 31, cash and cash equivalents were $3,405 million and marketable securities totaled $6,453 million. Total debt was $5,411 million; the company reported a net cash position of $4,447 million. Working capital was approximately $6.5 billion.
  • Current assets were $13,296 million and current liabilities were $6,755 million. The quarterly dividend declared was $0.33 per share, compared with $0.32.

Material changes and business drivers

  • Sales growth was attributed to 1% volume, 2% price and 1% foreign-exchange effects. U.S. sales rose 5%; non-U.S. sales rose 3%.
  • Key growth products included BARACLUDE (+27% to $275 million), SPRYCEL (+31% to $172 million), ORENCIA (+18% to $199 million) and ONGLYZA/KOMBIGLYZE (to $81 million from $10 million). PLAVIX sales rose 6% to $1,762 million, principally reflecting U.S. price increases despite lower U.S. prescription demand.
  • AVAPRO/AVALIDE sales fell 8% to $290 million, including U.S. supply disruption related to recalls; mature products and all other sales declined 9% to $734 million. ABILIFY sales rose 1% to $624 million; BMS’s U.S. revenue share was reduced from 58% to 53.5% in January 2011 under its Otsuka agreement.
  • Gross-to-net adjustments increased to $588 million from $478 million, or 11% of gross sales versus 9%. Medicaid rebates, government-program charge-backs and other discounts increased. The Medicare Part D coverage-gap impact was not significant in Q1 but was expected to increase in the second half of 2011.
  • Cash and cash equivalents declined by $1,628 million from year-end, while marketable securities increased. Total cash, cash equivalents and marketable securities were $9,858 million at quarter-end, versus $9,982 million at December 31, 2010.

Outlook, management commentary and risks

  • Management expects a rapid, material decline in PLAVIX sales, net income and operating cash flow following anticipated U.S. loss of exclusivity. The FDA granted an additional six months of exclusivity; expiration was scheduled for May 17, 2012.
  • Management expected the 2011 impact of healthcare reform to reduce EPS by approximately $0.25 overall. It estimated approximately $250 million of lower 2011 net sales from Medicare Part D coverage-gap discounts and approximately $250 million of additional marketing, selling and administrative expense from the annual pharmaceutical-company fee. The two provisions reduced Q1 EPS by approximately $0.03.
  • The FDA had issued a warning letter concerning Good Manufacturing Practices at the Manati, Puerto Rico facility and, after a Q1 reinspection, Form 483 observations. Further regulatory action, production disruption, or delays in decisions on the NULOJIX application and ORENCIA subcutaneous formulation were possible if issues were not resolved.
  • Pipeline and regulatory developments included FDA approval of YERVOY for unresectable or metastatic melanoma; a positive European regulatory opinion for ELIQUIS in prevention of venous thromboembolic events after hip or knee replacement; and an accepted FDA review of dapagliflozin, with an October 28, 2011 target action date. Management expected initial ARISTOTLE results in Q2 2011 and anticipated ELIQUIS filings in the U.S. and Europe in Q3 or Q4, contingent on results.
  • Enrollment in the Phase III INSPIRE study of necitumumab was stopped after safety concerns involving thromboembolism; a separate Phase III study continued. This is a clinical-development risk.
  • Unusual items affected comparison: Q1 2011 included $102 million of litigation recoveries, $26 million of product-liability charges, $88 million of licensing payments, $15 million of in-process R&D impairment and $71 million of restructuring and related costs. Q1 2010 included a $200 million manufacturing-operations impairment. A favorable $100 million discrete tax adjustment related to settlement of uncertain tax positions also affected the 2011 tax rate.
  • Significant legal matters include PLAVIX patent and generic-competition proceedings, product-liability claims, pricing and marketing litigation, environmental matters and a continuing SEC inquiry into German subsidiary activities concerning potential Foreign Corrupt Practices Act issues. The company stated that it generally could not estimate outcomes or potential losses for many proceedings.
  • The company reported investment-grade credit ratings and compliance with its revolving-credit-facility covenant. It said existing liquidity and expected operating cash flows should cover working capital, capital expenditures, alliances, acquisitions, milestones and dividends. Fitch’s long-term outlook was negative; Moody’s and S&P outlooks were stable.

Most important facts for investors to verify

  • Progress and timing of PLAVIX U.S. exclusivity expiration, generic entry, and the expected earnings and cash-flow decline.
  • Resolution of Manati GMP observations and any effect on manufacturing, NULOJIX or ORENCIA regulatory decisions.
  • Actual realization of healthcare-reform sales discounts and fees, including the expected increase in coverage-gap effects later in 2011.
  • Whether growth in newer products and the pipeline can offset mature-brand erosion and PLAVIX exposure.
  • Outcomes and financial exposure from material patent, product-liability, pricing, environmental and regulatory matters; the filing does not provide clear loss estimates for many of these contingencies.
  • Cash-flow conversion and working-capital needs, including the effect of alliance collections, pension contributions, dividends and repurchases.