BMY

Business Context and Reporting Period

Company: Bristol-Myers Squibb Company (BMS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: BMS is a global pharmaceutical and health care products company. The reporting period was significantly impacted by the at-risk launch of a generic version of its blockbuster drug, PLAVIX*, by competitor Apotex in August 2006, as well as the loss of exclusivity for PRAVACHOL.

Key Financial Metrics

Note: Total Debt includes $630 million in short-term borrowings and $7,837 million in long-term debt as of September 30, 2006.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 13% in the third quarter and 3% for the nine-month period compared to the prior year. The decline was driven primarily by a 36% drop in PLAVIX* sales in Q3 due to generic competition and a 64% drop in PRAVACHOL sales due to patent expiration.
• Profitability Impact: Net earnings from continuing operations fell 65% in Q3 and 31% for the nine-month period. Earnings before minority interest and income taxes dropped 62% in Q3.
• Expense Trends: Research and development expenses increased 13% in Q3 and 14% for the nine-month period, reflecting continued investment in late-stage compounds. Cost of products sold as a percentage of net sales increased to 35.3% in Q3 due to sales mix changes and impairment charges.
• One-Time Items: The prior year (2005) included a $569 million gain on the sale of the Consumer Medicines business, which is not present in the current period. The current period included a $200 million gain on the sale of DOVONEX* assets.

Guidance, Outlook, and Risks

• PLAVIX* Litigation: The most significant risk is the ongoing patent litigation with Apotex. A preliminary injunction halted Apotex's generic sales, but Apotex has appealed. The trial is scheduled for January 22, 2007. If the injunction is overturned or the company loses the patent case, generic competition is expected to resume, materially impacting sales and cash flows.
• Financial Impact of Generic Launch: Management estimates the at-risk launch of generic clopidogrel bisulfate reduced Q3 sales by $525 million to $600 million. The company expects residual impacts on PLAVIX* sales into 2007.
• Legal and Regulatory: The company is subject to a Deferred Prosecution Agreement (DPA) with the U.S. Attorney's Office and an SEC Consent Order regarding inventory and accounting practices. An investigation into corporate governance issues related to the PLAVIX* settlement negotiations is ongoing.
• Liquidity: Management believes existing cash, cash equivalents, and borrowing capacity are sufficient to fund operations, capital expenditures, and dividends, provided there is no sustained generic competition for PLAVIX*.
• Product Pipeline: Positive developments include FDA approvals for SPRYCEL, ATRIPLA*, and ABILIFY* Injection, and new indications for PLAVIX* and REYATAZ.

Investor Verification Checklist

• PLAVIX* Litigation Status: Monitor the outcome of Apotex's appeal of the preliminary injunction and the January 2007 trial date.
• Generic Market Share: Track the volume of generic clopidogrel bisulfate remaining in distribution channels and its impact on branded PLAVIX* demand in Q4 2006 and 2007.
• Deferred Tax Assets: Verify the realizability of foreign tax credit and research tax credit carryforwards, which may require valuation allowances if PLAVIX* sales decline permanently.
• Regulatory Compliance: Review updates on the DPA and SEC Consent Order compliance, specifically regarding the ongoing investigation into the PLAVIX* settlement negotiations.
• Inventory Levels: Review the "months on hand" inventory data for PLAVIX* and other key products to assess channel stuffing or destocking trends.