BRISTOL MYERS SQUIBB CO quarterly report, Q2 FY2019

Bristol Myers Squibb — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Unaudited results are presented in U.S. dollars. BMS operates as one biopharmaceutical segment.

Financial performance

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Total revenue	$6.273bn	$5.704bn	$12.193bn	$10.897bn
Net earnings attributable to BMS	$1.432bn	$0.373bn	$3.142bn	$1.859bn
Diluted GAAP EPS	$0.87	$0.23	$1.92	$1.13
Diluted non-GAAP EPS	$1.18	$1.01	$2.29	$1.95
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$3.473bn	$2.232bn

Q2 revenue rose 10%; first-half revenue rose 12%. Q2 pretax earnings were $1.776bn and the effective tax rate was 19.0% (26.1% in Q2 2018). Cost of products sold was $1.992bn in Q2 and $3.836bn in the first half. Approximate gross margin, calculated as revenue less cost of products sold divided by revenue, was 68.2% in Q2 versus 71.5% a year earlier; first-half margin was 68.3% versus 70.6%.

Growth was led by Eliquis (Q2 sales $2.042bn, up 24%) and Opdivo ($1.823bn, up 12%). Orencia, Yervoy and Empliciti also grew. Established brands declined, including Baraclude (down 18% in Q2) and other brands (down 23%). Higher Eliquis sales contributed to increased royalties and profit sharing. Gross-to-net deductions reached 32% of gross product sales in Q2, versus 27% a year earlier, partly reflecting Eliquis payer-formulary competition.

Cash, debt and liquidity

• Cash and cash equivalents were $28.404bn at June 30, 2019, compared with $6.911bn at year-end 2018. Cash, cash equivalents and marketable securities totaled $30.351bn.
• Net cash position was $5.373bn, versus $3.310bn at year-end. Short- and long-term debt totaled approximately $24.978bn, up substantially from $7.349bn at year-end.
• Operating cash flow was $3.473bn for the first half. Investing activities provided $1.775bn; financing activities provided $16.239bn, including $18.790bn of net proceeds from a $19bn May debt issuance.
• The company reported $6bn of revolving credit facilities with no borrowings outstanding. It said available cash, operating cash generation and borrowing capacity should cover anticipated operating needs and the expected cash portion of the Celgene transaction.
• First-half dividends paid were $1.340bn. Capital expenditures were expected to be approximately $800m in 2019 and $600m in 2020.

Material changes and unusual items

• Revenue and earnings improved year over year, while reported R&D expense fell sharply from the 2018 comparison, which included a $1.05bn Nektar upfront payment. BMS reported first-half GAAP EPS of $1.92 versus $1.13; non-GAAP EPS was $2.29 versus $1.95.
• Q2 2019 included $303m of Celgene acquisition expenses and $106m of integration expenses in other income (net), as well as a $109m impairment charge related to the planned sale of the Anagni manufacturing facility. The May notes also generated $83m of first-half interest expense, partly offset by $54m of investment income on proceeds.
• Cash growth largely reflected acquisition financing, not operating cash generation. BMS issued senior notes with maturities from 2020 to 2049; they are subject to special mandatory redemption at 101% plus accrued interest if the Celgene acquisition is not completed by July 30, 2020 or is abandoned.
• UPSA consumer health business sale closed in July 2019 for approximately $1.6bn; BMS expected to record a gain of approximately $1.2bn in Q3. The Anagni facility sale, for approximately $50m, was expected to close by year-end subject to conditions.
• Termination of the U.S. pension plan was expected to close in Q3 2019 and produce an approximately $1.5bn non-cash pretax settlement charge.

Outlook, commentary and risks

• Management expected U.S. average net selling prices to be roughly flat for full-year 2019. It expected the Celgene acquisition to close at the end of 2019 or beginning of 2020, subject to regulatory approvals and other customary conditions.
• To address FTC concerns, BMS planned to divest Otezla; the divestiture required further FTC review and a consent decree. The acquisition was approved by both companies’ shareholders, but remained pending at June 30.
• Management noted continuing softness in Opdivo demand in previously treated advanced lung cancer and expected that trend to continue until the market stabilized or new indications launched. It also cited possible European Sprycel pressure from generic competition and ongoing generic erosion in established brands.
• Pipeline outcomes were mixed: Phase III Opdivo trials in glioblastoma and first-line liver cancer missed their primary endpoints; CheckMate-714 in head and neck cancer also missed its primary endpoints. A July 2019 announcement on CheckMate-227 reported one study part met its overall-survival endpoint and another did not; this was subsequent to the quarter.
• Risks include acquisition approval, integration and financing; drug pricing and payer rebates; clinical and regulatory outcomes; patent challenges and generic entry; and litigation, tax examinations and environmental obligations. BMS estimated its share of future CERCLA site costs at $66m. The company said its credit ratings were under review for possible downgrade or on negative CreditWatch following the acquisition announcement, while expecting to retain investment-grade ratings.

Important facts for investors to verify

• FTC consent decree, Otezla divestiture terms and timing, and whether Celgene closes on the expected schedule.
• Final acquisition funding, post-close debt levels, credit ratings and any planned approximately $5bn accelerated share repurchase, which remained subject to board approval.
• Whether Eliquis growth can offset rising gross-to-net deductions and whether Opdivo demand stabilizes or new indications gain approval.
• Actual Q3 pension settlement charge and UPSA disposal gain compared with management’s estimates.
• Developments in material patent, product-liability, pricing and other legal matters; the filing generally does not provide a clear estimate of potential losses for these proceedings.