Bristol-Myers Squibb Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited U.S. GAAP results. BMS operates as a single BioPharmaceuticals segment.
Financial results
| Metric ($ millions, except per-share data) | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | 5,345 | 4,798 | 15,790 | 14,373 |
| Earnings before income taxes | 1,830 | 1,614 | 5,387 | 4,658 |
| Net earnings attributable to BMS | 969 | 949 | 2,857 | 2,619 |
| Diluted EPS attributable to BMS | $0.56 | $0.55 | $1.66 | $1.51 |
| Non-GAAP diluted EPS | $0.61 | $0.59 | $1.75 | $1.69 |
| Effective tax rate | 26.0% | 19.3% | 25.2% | 21.2% |
Q3 sales rose 11% year over year, driven by volume (+6%), price (+2%) and foreign exchange (+3%). For the first nine months, sales rose 10%. Cost of products sold was 26.3% of sales in Q3 and 26.8% for the nine months, implying gross margins of approximately 73.7% and 73.2%, respectively. BMS-attributable net earnings increased 2% in Q3 and 9% year to date; diluted EPS increased 2% and 10%, respectively. Non-GAAP results exclude specified items and are not a substitute for GAAP results.
For the nine months, operating cash flow was $3.272 billion, investing cash flow was negative $1.932 billion, and financing cash flow was negative $1.903 billion. Capital expenditures and capitalized software were $233 million. Dividends paid were $1.694 billion and share repurchases were $859 million.
At September 30, 2011, cash and cash equivalents were $4.471 billion and marketable securities totaled $6.541 billion. Total debt was $5.619 billion ($182 million short-term and $5.437 billion long-term); reported net cash position was $5.393 billion. Working capital was approximately $7.6 billion. The company reported no borrowings under its new $1.5 billion revolving credit facility.
Material changes and drivers
- Key growth products included PLAVIX (+8% Q3), ABILIFY (+14%), BARACLUDE (+36%), SPRYCEL (+47%), ORENCIA (+27%) and ONGLYZA/KOMBIGLYZE (+170% from a smaller base). YERVOY, launched in 2011, generated $121 million of Q3 sales.
- AVAPRO/AVALIDE sales fell 29% in Q3, reflecting lost demand after supply shortages associated with recalls, as well as generic competition in some markets. Mature Products and All Other declined 3% in Q3.
- Gross-to-net sales adjustments rose to $736 million in Q3 from $562 million a year earlier; as a share of gross sales they increased to 12% from 10%. The filing cites Medicare Part D coverage-gap discounts, Medicaid rebates and other discounts.
- Q3 research and development expense increased 18% to $973 million, partly due to licensing payments and clinical costs. Marketing, selling and administrative expense increased 14%, including a $165 million year-to-date charge for the annual pharmaceutical company fee.
- Q3 GAAP earnings included $75 million of after-tax specified items, including licensing payments, restructuring, impairment and product-liability charges. Nine-month specified items reduced earnings by $158 million after tax in 2011, compared with $309 million in 2010.
Outlook, risks and unusual items
- Patent expirations: Management expected rapid, material declines in PLAVIX sales and reductions in net income and operating cash flow after U.S. exclusivity ends in May 2012. AVAPRO/AVALIDE U.S. exclusivity was expected to end in March 2012. PLAVIX was the company’s largest product by sales.
- Healthcare reform: The company estimated a 2011 annual EPS impact of approximately $0.23, compared with $0.10 in 2010. It expected about $270 million of 2011 net-sales reductions from Medicare Part D coverage-gap discounts and approximately $220 million of additional marketing, selling and administrative expense from the pharmaceutical company fee. Estimates remained subject to revision.
- Pipeline and approvals: The ARISTOTLE trial results showed ELIQUIS reduced stroke or systemic embolism, major bleeding and mortality versus warfarin; BMS expected U.S. and EU filings for the atrial-fibrillation indication by year-end 2011. The FDA advisory committee voted against recommending dapagliflozin approval; the FDA extended its review timeline to January 28, 2012.
- Acquisition and collaborations: BMS acquired Amira Pharmaceuticals for $325 million cash plus contingent milestone payments; preliminary total consideration was $383 million, including $267 million of goodwill. BMS also terminated its XL-281 license, eliminating potential contingent development/regulatory milestones of $315 million and sales milestones of $150 million.
- Legal and regulatory exposure: The filing describes numerous patent, product-liability, commercial, pricing and environmental matters. The PLAVIX Apotex damages award was upheld in October 2011, although prejudgment interest was reversed; other appeals and proceedings remained. Estimated BMS share of future costs for specified environmental sites was $69 million. Management said it could not reasonably assess the outcome or potential impact of several proceedings.
- Other risks: European payer cost-control measures may pressure prices. Cash held outside the U.S. was approximately $3.1 billion and repatriation may face restrictions or taxes. The company noted potential tax-law changes and ongoing tax examinations; unrecognized tax benefits could decrease by approximately $190–$220 million over the next 12 months, subject to settlements and other events.
Management stated that operating cash, existing investments and access to capital markets were expected to cover working capital, capital spending, alliances, acquisitions, dividends and repurchases. No general full-year revenue or earnings guidance is clearly provided in the filing text.
Investor verification priorities
- Track PLAVIX and AVAPRO/AVALIDE sales and cash flow as the disclosed 2012 U.S. exclusivity losses approach.
- Verify growth-product demand, pricing and alliance economics, particularly for ABILIFY, SPRYCEL, YERVOY and ONGLYZA/KOMBIGLYZE.
- Monitor gross-to-net reserves, Medicare discounts, Medicaid rebates and the pharmaceutical company fee.
- Follow ELIQUIS regulatory filings and dapagliflozin’s FDA review, including the stated January 28, 2012 action date.
- Assess material developments in patent litigation, product-liability claims, environmental matters and tax examinations.
- Reconcile cash generation and capital returns with the planned shift in the product portfolio and the expected post-expiry decline in PLAVIX cash flow.