BMY

Business Context and Reporting Period

Company: Bristol-Myers Squibb Company (BMS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended June 30, 2008
Business Overview: BMS is a global biopharmaceutical company focused on the discovery, development, and commercialization of pharmaceuticals and related health care products. The company operates two primary reportable segments: Pharmaceuticals and Nutritionals (Mead Johnson). During the period, BMS continued its Productivity Transformation Initiative (PTI) to reduce costs and streamline operations, while executing a strategy to divest non-pharmaceutical assets, including the pending sale of its ConvaTec business.

Key Financial Metrics

Note: Operating cash flow for the three-month period is derived from the MD&A text stating $1.1 billion generated in the quarter.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16% in Q2 and 18% in the first six months of 2008 compared to the same periods in 2007. Growth was driven by strong performance in the Pharmaceuticals segment, particularly PLAVIX* (+17% Q2, +27% YTD) and ABILIFY* (+28% Q2, +26% YTD), partially offset by declines in PRAVACHOL due to generic competition.
• Profitability: Net earnings from continuing operations increased 23% in Q2 and 16% YTD. Earnings per share (diluted) from continuing operations rose from $0.30 to $0.36 in Q2 and from $0.60 to $0.69 YTD.
• Restructuring Costs: The company incurred $109 million in charges in Q2 and $222 million YTD related to the Productivity Transformation Initiative (PTI), including workforce reductions and manufacturing rationalization.
• Acquisitions and Divestitures:
  • Acquisition: Completed the acquisition of Kosan Biosciences, Inc. for approximately $191 million, recording a $32 million in-process R&D charge.
  • Divestitures: Entered a definitive agreement to sell the ConvaTec business for approximately $4.1 billion (closing expected August 2008). Completed the sale of the Medical Imaging business in January 2008.
• Debt Issuance: Issued $1.6 billion in senior notes in May 2008 ($600 million 5.45% Notes due 2018 and $1 billion 6.125% Notes due 2038), increasing long-term debt significantly from year-end 2007 levels.

Guidance, Outlook, and Risks

• Productivity Transformation Initiative (PTI): The PTI is on track to achieve $1.5 billion in annual cost savings by 2010. The company has expanded the initiative to target an additional $1 billion in annual savings by 2012. Total implementation costs are estimated between $0.9 billion and $1.1 billion.
• Strategic Divestitures: BMS plans to file a registration statement by the end of 2008 to sell 10-20% of Mead Johnson Nutritionals via an IPO, retaining at least an 80% equity interest.
• Key Risks:
  • PLAVIX* Patent Litigation: The company is engaged in significant patent litigation regarding PLAVIX* in the U.S. (Apotex appeal pending) and Europe. Loss of market exclusivity or sustained generic competition would be material to sales and cash flows. Data protection for PLAVIX* expired in the EU in July 2008.
  • Investment Portfolio: The company holds significant investments in Auction Rate Securities (ARS) and Floating Rate Securities (FRS). Due to market liquidity concerns, the company recorded unrealized losses in Other Comprehensive Income. Further impairments could negatively affect financial condition if market conditions deteriorate.
  • Legal Proceedings: Ongoing litigation regarding pricing, sales practices, and environmental matters (e.g., New Brunswick facility) poses potential financial risks.
• Tax Matters: The effective tax rate for the six months ended June 30, 2008 (24.2%) was higher than the prior year (13.8%) due to the expiration of the R&D tax credit and earnings mix, though it was favorably impacted by a $91 million benefit from an IRS audit settlement.

Investor Verification Checklist

• PLAVIX* Litigation Status: Verify the outcome of the Apotex appeal in the U.S. Court of Appeals and the status of generic entry in European markets following the expiration of data protection.
• ConvaTec Sale Closing: Confirm the closing of the ConvaTec sale and the final purchase price adjustments.
• Investment Portfolio Valuation: Monitor the fair value of ARS and FRS holdings for potential further impairments or liquidity constraints in the credit markets.
• PTI Cost Savings: Track the realization of the targeted $1.5 billion in annual cost savings by 2010 and the associated implementation costs.
• Mead Johnson IPO: Watch for the filing of the registration statement for the partial IPO of Mead Johnson Nutritionals.