Bristol Myers Squibb — Q2 2017 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2017. BMS is a global biopharmaceutical company reporting as a single segment. Its stated priorities include business performance, building its immuno-oncology franchise, maintaining a diversified portfolio, and disciplined capital allocation.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $5,144 (+6%) | $4,871 | $10,073 (+9%) | $9,262 |
| Net earnings attributable to BMS | $916 | $1,166 | $2,490 | $2,361 |
| Diluted GAAP EPS | $0.56 | $0.69 | $1.50 | $1.41 |
| Diluted non-GAAP EPS | $0.74 | $0.69 | $1.58 | $1.43 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $2,445 | $211 |
- Revenue mix and trends: Q2 net product sales were $4,770, up 8%; alliance and other revenues were $374, down from $439. Q2 growth in prioritized brands included Eliquis ($1,176, +51%), Opdivo ($1,195, +42%), Yervoy ($322, +34%) and Orencia ($650, +10%). The Hepatitis C franchise fell 79% to $112; established brands were generally pressured by competition and erosion.
- Profit and expenses: Q2 pretax earnings were $1,295 versus $1,615, and net earnings were $922 versus $1,188 before noncontrolling interests. Q2 cost of products sold rose 30% to $1,562 and R&D rose 31% to $1,659; SG&A fell 6% to $1,167. The filing does not present a headline operating-margin measure.
- Cash, liquidity and debt: At June 30, cash and cash equivalents were $3,470 and marketable securities totaled $5,615. Total short- and long-term debt was $8,217, yielding a reported net cash position of $868, down from $2,361 at year-end 2016. Six-month investing cash flow was $(1,227), financing cash flow $(2,019), and ending cash was $3,470. BMS reported $5 billion of revolving credit facilities with no borrowings outstanding.
- Shareholder returns: BMS repurchased $2.0 billion of stock in the first half and paid $1.298 billion in dividends. Dividends declared were $0.39 per share in Q2 and $0.78 for the first half.
Material changes and unusual items
- Six-month revenue growth reflected stronger prioritized-brand demand, particularly Opdivo and Eliquis, partly offset by competition in established products. U.S. net selling prices increased approximately 3% in the first half.
- GAAP EPS growth for the first half was partly supported by higher royalties and licensing income and a $481 million BMS share of a Merck Keytruda patent settlement. These benefits were partly offset by higher licensing, asset-acquisition and restructuring charges and lower divestiture-related income. The settlement also provides BMS and Ono ongoing royalties on Keytruda sales under the disclosed agreement.
- Q2 included $470 million of upfront licensing income from Biogen and Roche, while the first half included $200 million of CytomX R&D expense and $200 million of Flexus and Cardioxyl milestone charges. The Ireland manufacturing-site sale led to a $127 million impairment charge; the expected sale price is approximately $150 million, subject to adjustments and closing conditions.
- The company issued $1.5 billion of notes in February and repurchased $337 million of debt in Q2, recording a $109 million debt-redemption loss. The $2 billion accelerated share repurchase was funded with debt and cash.
- Six-month operating cash flow increased substantially year over year, aided by lower income tax payments (approximately $1.3 billion), out-license proceeds (approximately $500 million) and the $481 million litigation settlement. The comparison also reflects timing and other working-capital effects; it should not be read as a recurring cash-flow run rate.
Outlook, risks and contingencies
- The filing provides no formal full-year revenue or EPS guidance. Management said it expects increased Opdivo competition in the second half of 2017.
- Management expects capital expenditures of approximately $1.0 billion in 2017 and $900 million in 2018. Restructuring charges are expected to total $1.5–$2.0 billion through 2020, with cash outlays estimated at 40%–50% of total charges. Approximately $250 million of restructuring charges were expected in 2017, in addition to accelerated depreciation from early site exits.
- BMS said existing cash, marketable securities, operating cash generation and U.S. commercial-paper capacity should cover normal cash needs for at least the next few years. A $750 million principal-value debt maturity was due in August 2017. Most cash and securities were held outside the U.S. and may face restrictions, withholding taxes or additional U.S. taxes upon repatriation.
- Key risks include generic and competitive erosion, including the expected December 2017 loss of exclusivity for Sustiva and Reyataz and the potential impact of European patent developments for Sprycel. Twenty-five generic companies challenged Eliquis patents; BMS and Pfizer filed patent suits. The filing also describes product-liability and other litigation, tax examinations, and $64 million accrued for the company’s estimated share of CERCLA environmental costs. Outcomes of several matters could not be reasonably estimated.
- The company reported no material changes to the risk factors in its 2016 Form 10-K and stated that disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in Opdivo, Eliquis and other prioritized brands can offset declining established and Hepatitis C products, while accounting for rising gross-to-net deductions.
- How much first-half earnings and cash flow depended on licensing proceeds, settlement income, tax-payment timing and other nonrecurring or specified items; compare GAAP results with the company’s adjusted non-GAAP measures.
- Progress on restructuring costs, the Ireland site sale and expected capital spending, including the timing and cash impact of related charges.
- Developments in Eliquis patent litigation, Sprycel exclusivity and the disclosed product-liability, environmental and tax matters.
- Debt maturities, the reduced net cash position, offshore cash accessibility and the effect of future capital allocation and competition on liquidity.