BRISTOL MYERS SQUIBB CO quarterly report, Q2 FY2018

Bristol Myers Squibb — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2018. Unaudited results are presented under U.S. GAAP; amounts are in millions of dollars except per-share data. BMS operates as one specialty biopharmaceutical segment.

Financial performance

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Total revenue	$5,704	$5,144	$10,897	$10,073
Net earnings attributable to BMS	$373	$916	$1,859	$2,490
Diluted GAAP EPS	$0.23	$0.56	$1.13	$1.50
Diluted non-GAAP EPS	$1.01	$0.74	$1.95	$1.58
Operating cash flow	Not provided for quarter	Not provided for quarter	$2,232	$2,445

• Q2 revenue rose 11%; first-half revenue rose 8%. Net product sales increased 14% in Q2 and 12% in the first half. Management attributed growth chiefly to prioritized brands Opdivo and Eliquis, with foreign exchange contributing 3 percentage points to first-half revenue growth.
• Q2 gross profit was approximately $4,079, or a derived gross margin of 71.5% of revenue; first-half gross profit was approximately $7,688, or 70.6%. These calculations use reported revenue less cost of products sold.
• Despite revenue growth, Q2 net earnings attributable to BMS fell 59% year over year and first-half earnings fell 25%. Derived net margins were approximately 6.5% for Q2 and 17.1% for the first half. Non-GAAP diluted EPS increased 36% in Q2 and 23% in the first half; these adjusted measures exclude specified items and are not GAAP results.
• Key product trends: first-half Opdivo sales increased 35% to $3,138 and Eliquis increased 39% to $3,156. Established brands faced erosion: Hepatitis C franchise sales fell 95%, Sustiva 58%, and Reyataz 37%.
• First-half R&D expense rose 24% to $3,685, including $1,050 of Nektar license and asset-acquisition expense. Marketing, selling and administrative expense declined 7% to $2,111; cost of products sold increased 13% to $3,209.

Liquidity, debt and cash flows

• At June 30, cash and cash equivalents were $4,999 and marketable securities totaled $3,193. Total cash, cash equivalents and securities were $8,192, against short- and long-term debt of $7,387, yielding reported net cash of $805, down from $1,330 at year-end 2017.
• First-half operating cash flow was $2,232, down $213 from the prior-year period. Investing used $391 and financing used $2,237; cash declined $422 to $4,999.
• Cash outflows included $1,307 in dividends and $320 in share repurchases during the first half. BMS declared dividends of $0.80 per share for the period, versus $0.78 a year earlier.
• Management said existing liquidity, operating cash generation and U.S. commercial-paper capacity should cover normal cash requirements for at least the next few years, including dividends, capital spending, milestones, working capital, tax payments and $1.25 billion of debt maturing in 2019. No revolving-credit borrowings were outstanding; facilities totaled $5.0 billion.

Material changes, outlook and notable items

• The $1.85 billion Nektar transaction included $1.05 billion allocated to collaboration rights and expensed in R&D, and $800 million allocated to an equity investment. BMS also committed to potential milestone payments of up to $1.8 billion. A $407 million fair-value adjustment on the Nektar investment contributed to the quarter’s equity-investment losses; total Q2 loss on equity investments in other income was $356 million.
• Other income was a net expense of $4 in Q2 2018, compared with net income of $586 in Q2 2017. The comparison reflects, among other items, investment losses and lower royalty/licensing income in 2018, versus $481 million of litigation settlement income and $470 million of Biogen and Roche upfront licensing fees in 2017.
• Gross-to-net deductions rose faster than gross product sales: first-half deductions were $3,777, up 34%, and increased to 27% of gross sales from 23%. BMS cited U.S. Eliquis payer-formulary discounts as a key factor.
• Capital expenditures were expected to be approximately $1.0 billion in 2018 and $900 million in 2019. Management reported expected 2018 restructuring charges of approximately $150 million, in addition to accelerated depreciation from site exits. The broader restructuring plan is expected to cost $1.5 billion to $2.0 billion through 2020.
• The filing provides no specific full-year revenue or EPS guidance. Management cited continued investment in R&D and strategic priorities, including oncology, immunoscience, cardiovascular disease and fibrosis. It also noted that cost savings from transformation initiatives are being redeployed.
• Risks include competitive and generic erosion, pricing and rebate pressure, clinical and regulatory outcomes, alliance and pipeline execution, foreign exchange, tax examinations and interpretation of U.S. tax reform, and litigation. The filing says risk factors were not materially changed from the 2017 Form 10-K. Environmental remediation liabilities were estimated at $65 million; several other legal matters had no estimable potential-loss range in the filing.
• Notable pipeline developments included FDA approval of Opdivo plus Yervoy for certain advanced kidney cancer patients and FDA acceptance for priority review of an Opdivo application in small-cell lung cancer. The filing also disclosed a negative EU committee opinion on the Opdivo/Yervoy kidney-cancer combination, which BMS planned to challenge through re-examination.

Important facts for investors to verify

• Whether Opdivo and Eliquis growth can offset continued erosion in established brands and competition in key markets.
• How U.S. rebates and other gross-to-net deductions affect realized pricing, particularly for Eliquis, and whether deductions continue to outpace gross sales.
• The ongoing earnings and cash-flow effects of the Nektar collaboration, equity valuation changes, and future milestone commitments.
• Progress against pipeline and regulatory milestones, including the EU kidney-cancer review and the small-cell lung cancer application.
• Cash availability and debt-maturity planning, including the 2019 maturity, repatriation-tax payments and planned capital spending.
• Developments in tax audits and material litigation, including the Australian Plavix damages claim and product-liability proceedings.