Bristol-Myers Squibb Company — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. BMS operates as a single global biopharmaceutical segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $5,193 | $4,929 | +5% |
| Net product sales | $4,972 | $4,580 | +9% |
| Earnings before income taxes | $1,779 | $1,955 | -$176 |
| Net earnings attributable to BMS | $1,486 | $1,574 | -$88 |
| Diluted GAAP EPS | $0.91 | $0.94 | -$0.03 |
| Diluted non-GAAP EPS | $0.94 | $0.84 | +$0.10 |
| Cash from operating activities | $1,175 | $861 | +$314 |
| Cash and marketable securities, March 31 | $9,022 | — | — |
| Net cash position, March 31 | $1,322 | $1,330 at Dec. 31, 2017 | -$8 |
The effective tax rate was 16.0%, down from 21.9%, primarily reflecting U.S. tax reform. Cash dividends declared were $0.40 per share versus $0.39. Total debt was approximately $7.7 billion, comprising $1.925 billion short-term and $5.775 billion long-term debt. Current liabilities were $9.624 billion and current assets were $14.649 billion at quarter-end.
Material changes and drivers
- Revenue growth was led by Opdivo ($1.511 billion, +34%) and Eliquis ($1.506 billion, +37%), with foreign exchange contributing 4% to total revenue growth. Orencia rose 11%.
- Established brands weakened: Sustiva franchise fell 54%, Reyataz 36%, Baraclude 20%, and the hepatitis C franchise 98%. Sprycel declined 5% and Yervoy 25%.
- U.S. revenue grew 1%; Europe grew 23%, including a 15% foreign-exchange contribution; Rest of World revenue declined 6%. U.S. average net selling prices were approximately 2% lower.
- Gross-to-net deductions increased 35% to $1.729 billion, faster than gross product sales growth of 14%; the deduction rate rose to 26% from 22%, driven in part by Eliquis payer discounts and rebates.
- GAAP EPS decreased, while non-GAAP EPS increased. BMS attributed the GAAP comparison in part to a $481 million share of a Keytruda-related patent settlement in Q1 2017; higher royalties and licensing income and lower restructuring costs partly offset this comparison.
- Operating cash flow improved by $314 million, primarily due to timing of collections and payments, partly offset by approximately $500 million less in litigation settlement proceeds than in Q1 2017. Investing cash use was $43 million and financing cash use was $1.222 billion.
Outlook, commentary, risks and unusual items
- Management said existing cash, securities, operating cash generation and U.S. commercial-paper access should meet normal cash needs for at least the next few years, including dividends, capital expenditures, milestones, working capital, tax payments and $1.25 billion of debt maturing in 2019.
- Capital expenditures are expected to be approximately $1.0 billion in 2018 and $850 million in 2019. Management expected approximately $150 million of restructuring charges in 2018, in addition to accelerated depreciation from site exits. The filing does not provide clear full-year revenue or EPS guidance.
- In Q2 2018, BMS entered a Nektar collaboration and paid $1.85 billion plus acquired 8.3 million Nektar shares; up to $1.8 billion in contingent milestones may also be payable. The filing allocated $800 million of the initial payment to the equity investment and $1.05 billion to rights, expected to be recorded as R&D expense in Q2. A separate Janssen collaboration also commenced in Q2.
- Q1 unusual items included a $64 million impairment of an out-licensed asset following a Phase II study that missed its primary endpoint, $54 million of restructuring charges, and $60 million of license and asset acquisition charges. Royalties and licensing income was $367 million, versus $199 million.
- New revenue and asset-derecognition accounting standards increased opening retained earnings; under the new guidance, Q1 revenue was approximately $61 million lower and other income approximately $7 million lower than under the prior guidance. The accounting for the provisional $2.6 billion U.S. deemed-repatriation tax remained incomplete; the provisional amount was reduced by $32 million in Q1.
- Risks include pricing and rebate pressure, generic competition and patent challenges, clinical and regulatory uncertainty, and legal proceedings. BMS disclosed multiple product-liability and patent matters; it could not estimate potential losses for most proceedings. Estimated share of future CERCLA environmental costs was $63 million. Tax examinations may also affect unrecognized tax benefits.
Most important facts for investors to verify
- Whether growth in Opdivo and Eliquis can offset established-brand erosion and rising gross-to-net deductions.
- The sustainability of operating cash flow given working-capital timing and the absence of the prior-year litigation proceeds.
- Q2 accounting and cash effects of the Nektar transaction, including the R&D charge and potential milestone obligations.
- Resolution of the provisional tax-reform accounting and material legal, patent and product-liability matters.
- Execution of restructuring and capital-spending plans, alongside the 2019 debt maturity and dividend commitments.