Bristol-Myers Squibb Company — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Figures are unaudited and in U.S. dollars; financial amounts are in millions unless otherwise noted.
Business context and performance
BMS is a global biopharmaceutical company focused on developing and selling innovative medicines. It reported one operating segment. The February 2014 sale of substantially all of its diabetes business to AstraZeneca materially affected comparisons and shifted resources toward its specialty-care portfolio.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenues | $3,889 | $4,048 | $7,700 | $7,879 |
| Earnings before income taxes | $448 | $530 | $1,433 | $1,204 |
| Net earnings attributable to BMS | $333 | $536 | $1,270 | $1,145 |
| GAAP diluted EPS | $0.20 | $0.32 | $0.76 | $0.69 |
| Non-GAAP diluted EPS | $0.48 | $0.44 | $0.94 | $0.85 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,673 | $1,082 |
Q2 revenue decreased 4% year over year; first-half revenue decreased 2%. Q2 net product sales fell to $2,770 from $3,024, while alliance and other revenues rose to $1,119 from $1,024. The diabetes divestiture and lower sales in certain established products weighed on revenue; growth in Yervoy, Sprycel, Orencia and Eliquis partly offset those declines. Q2 GAAP earnings included substantial R&D and other unusual items; non-GAAP measures exclude specified items and are not a substitute for GAAP results.
Cost of products sold was 25.5% of revenue in Q2 versus 27.4% a year earlier, and 25.4% versus 27.6% for the first half. GAAP net margin was approximately 8.6% in Q2 versus 13.2%, and 16.5% for the first half versus 14.5%.
At June 30, cash and cash equivalents were $4,282 and marketable securities totaled $6,769. BMS reported a net cash position of $3,314, compared with net debt of $68 at December 31, 2013. Total debt was $7,737, comprising $365 of short-term borrowings and current debt and $7,372 of long-term debt. Current assets were $14,062 and current liabilities were $7,798. First-half investing cash flow was $701 and financing cash outflow was $1,678; operating cash flow increased $591 year over year. Capital expenditures and capitalized software additions were $228 in the first half.
Cash, cash equivalents and marketable securities increased to $11,051 from $8,272 at year-end, including approximately $2.6 billion held in the U.S.; most of the remainder was held primarily in low-tax jurisdictions and expected to be indefinitely reinvested offshore.
Material changes and unusual items
- Diabetes business sale: BMS received $2.7 billion at closing, with additional contingent milestones and royalties possible. The filing reports $3.6 billion of consideration accounted for in the first half, including $3.2 billion of sale proceeds in investing cash flow. The pre-tax gain on sale was $247 million; management described the after-tax gain as $328 million.
- R&D expense rose 49% in Q2 to $1,416 and 26% in the first half to $2,362. This included a $310 million impairment of the peginterferon lambda asset and a $148 million charge for acquired iPierian assets; first-half IPRD impairment charges totaled $343 million.
- Other income/expense was income of $104 million in Q2 and $312 million for the first half, compared with expense of $199 million and $180 million, respectively, in 2013. Items included diabetes-sale-related gains and royalties, restructuring, pension charges and debt-redemption costs.
- BMS redeemed its 5.45% notes due 2018 for $676 million, including a $45 million loss; no commercial paper was outstanding at quarter-end. First-half dividends paid were $1,203, and dividends declared were $0.72 per share, up from $0.70.
Outlook, commentary and risks
- The filing gives no consolidated revenue or earnings guidance. Management said existing cash, securities and operating cash generation should meet normal cash needs for at least the next few years, including dividends, capital expenditures, milestones and working capital.
- Management expected specialty-care transformation restructuring costs of $210 million to $275 million in 2014 and 2015. Costs under the AstraZeneca development agreement were expected to be approximately $227 million in 2014, $127 million in 2015 and $84 million in 2016.
- Pipeline and product developments included planned U.S. submissions for Opdivo in advanced melanoma and lung cancer, and priority FDA review of hepatitis C drug applications with a November 30, 2014 target action date. These are forward-looking plans, not assured outcomes.
- Baraclude faces a material patent risk: a federal appellate court affirmed invalidation of its U.S. composition patent, and BMS sought en banc rehearing. The filing warned of a rapid, significant potential decline in U.S. sales if generic competition launches. South Korean patent challenges also remained pending.
- Other risks include continuing healthcare pricing pressure, generic erosion, product development and regulatory uncertainty, and litigation and investigations. BMS disclosed more than 6,300 Plavix product-liability claims, Byetta litigation, FCPA investigations including sales and marketing practices in China, and a settlement in principle for New Brunswick environmental cases. The company said it could not estimate potential loss for many proceedings.
- Tax audits could result in changes to unrecognized tax benefits; BMS estimated a possible decrease of $300 million to $360 million over the next twelve months, while noting new issues may arise. Offshore earnings repatriation could also trigger additional taxes.
Important facts for investors to verify
- Whether the Baraclude patent decision leads to generic entry, and the resulting timing and sales impact.
- Progress, approval timing and commercial potential for Opdivo and the hepatitis C portfolio.
- Revenue, royalties, milestones and remaining deferred consideration under the AstraZeneca transaction, including transfer of the China business and Mount Vernon facility.
- How much reported earnings and operating cash flow depend on one-time gains, timing effects and non-GAAP adjustments.
- Developments in major litigation, environmental claims, tax audits and regulatory investigations, for which many outcomes remain uncertain.