Bristol-Myers Squibb Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results are presented under U.S. GAAP. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
BMS is a global biopharmaceutical company operating as one reportable segment. Its strategy emphasizes business performance, immuno-oncology, a diversified portfolio, and disciplined capital allocation. Growth in prioritized medicines, particularly Opdivo and Eliquis, offset declines among established brands.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $5,254 | $4,922 | $15,327 | $14,184 |
| Net earnings attributable to BMS | $845 | $1,202 | $3,335 | $3,563 |
| Diluted GAAP EPS | $0.51 | $0.72 | $2.02 | $2.12 |
| Diluted non-GAAP EPS | $0.75 | $0.77 | $2.32 | $2.20 |
| Operating cash flow | Not provided separately | Not provided separately | $4,158 | $1,615 |
Revenue rose 7% in Q3 and 8% for the nine-month period. BMS-attributable earnings fell 30% in Q3 and 6% year to date; diluted GAAP EPS declined 29% and 5%, respectively. Gross margin, calculated as revenue less cost of products sold divided by revenue, was approximately 70.1% in Q3 2017 versus 73.5% in Q3 2016, and 71.3% versus 74.9% for the nine-month periods.
Prioritized-brand sales included Q3 Opdivo of $1,265 (+38%) and Eliquis of $1,232 (+39%). For nine months, Opdivo sales were $3,587 (+46%) and Eliquis sales were $3,509 (+47%). The hepatitis C franchise fell 81% in Q3 and 74% year to date amid competition. Sustiva and Reyataz sales also declined.
Nine-month operating cash flow improved by $2,543 year over year. Management attributed the increase primarily to approximately $1.4 billion of lower income-tax payments, about $500 million of higher out-license proceeds, and $481 million received from the Keytruda patent settlement, partly offset by higher R&D licensing payments. Investing cash flow was a use of $1,085, versus cash provided of $1,464 in 2016; financing cash flow was a use of $2,725, including $2,220 of share repurchases and $1,938 of dividends.
At September 30, cash and marketable securities totaled $9,648, against short- and long-term debt of $8,443, for a reported net cash position of $1,205. Current assets were $15,048 and current liabilities were $9,438. The nine-month declared dividend was $1.17 per share. BMS reported no outstanding borrowings under its $5 billion revolving credit facilities.
Material changes and unusual items
- Q3 cost of products sold increased 20% and R&D expense increased 36%; for nine months, they rose 23% and 27%, respectively. Higher Eliquis profit-sharing, inventory charges, licensing and asset-acquisition costs, accelerated depreciation, and expanded Opdivo development contributed.
- Nine-month R&D included $753 of license and asset-acquisition charges and a $75 IPRD impairment. The quarter included a $310 IFM asset-acquisition charge.
- Other income included $481 of BMS’s share of the Merck/Keytruda patent settlement and $470 of upfront licensing fees from Biogen and Roche. Royalties and licensing income totaled $1,093 for nine months, compared with $579 in 2016.
- BMS incurred a $109 loss on redemption of debt during the first half of 2017. It issued $1.5 billion of notes in February and repaid $750 million of notes at maturity in Q3.
- Nine-month share repurchases totaled approximately $2.2 billion, including a $2 billion accelerated repurchase arrangement.
- Gross-to-net deductions were 24% of gross product sales for nine months, versus 21% in 2016, reflecting higher deductions, including on Eliquis sales.
Outlook, management commentary, and risks
- Management said existing cash, securities, operating cash generation, and U.S. commercial-paper access should meet normal cash requirements for at least the next few years. It expects capital expenditures of approximately $1.0 billion in 2017 and $900 million in 2018.
- The announced restructuring plan is expected to generate $1.5–$2.0 billion of charges through 2020, with cash outlays estimated at 40%–50% of total charges. Management expected approximately $250 million of restructuring charges in 2017 for the actions, in addition to accelerated depreciation from early site exits.
- For 2018 adoption of the new revenue standard, BMS expected revenue and other income to be approximately $225 million and $125 million lower, respectively, than under the prior standard.
- Puerto Rico manufacturing sites sustained hurricane damage and were operating at limited capacity. BMS reported no supply disruption to date and said it did not foresee product-supply issues, while continuing to monitor conditions.
- A partial clinical hold was placed on three Opdivo-based multiple-myeloma trials following safety concerns in studies of another anti-PD-1 medicine. Separately, an independent committee found the Phase III Prostvac prostate-cancer study futile.
- Key risks include competition and generic erosion, product pricing and rebate pressure, clinical and regulatory outcomes, tax-law changes, and legal proceedings. Sustiva and Reyataz exclusivity losses were expected in December 2017; Sprycel faced a revoked European patent and potential generic competition. Eliquis patent challenges and product-liability cases remain ongoing.
- Legal contingencies include a pending Australian government claim related to Plavix; the company could not predict its outcome or impact. BMS estimated its share of future CERCLA environmental costs at $63 million. Other significant litigation outcomes and potential losses generally could not be estimated from the filing.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2016 Form 10-K.
Important facts for investors to verify
- Whether growth in Opdivo and Eliquis can offset established-brand declines, pricing pressure, and increased gross-to-net deductions.
- How much of the sharp year-over-year operating-cash-flow increase reflects recurring operations versus lower tax payments and one-time settlement and licensing receipts.
- The effects of rising R&D and restructuring costs, and whether announced clinical and pipeline developments translate into approvals and sales.
- Progress on Puerto Rico manufacturing recovery and whether operating capacity or product supply is affected.
- Developments in product patent challenges, litigation, tax examinations, and potential U.S. tax reform.
- Debt, cash deployment, and the sustainability of dividends and repurchases given that most cash and marketable securities were held outside the U.S. and could be subject to restrictions or additional taxes upon repatriation.