Bristol-Myers Squibb Company — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The company reported one BioPharmaceuticals segment. Mead Johnson, split off in December 2009, is presented as discontinued operations in the 2009 comparison; accordingly, reported total earnings and per-share comparisons are affected.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $4.768 billion | $4.665 billion | $9.575 billion | $8.987 billion |
| Earnings before tax from continuing operations | $1.592 billion | $1.522 billion | $3.044 billion | $2.717 billion |
| Net earnings from continuing operations attributable to BMS | $927 million | $880 million | $1.670 billion | $1.529 billion |
| Diluted EPS from continuing operations | $0.53 | $0.44 | $0.96 | $0.77 |
| Operating cash flow | Not separately provided for the quarter | $1.513 billion | $1.248 billion |
- Q2 sales grew 2%; first-half sales grew 7%. Q2 pretax margin was 33.4%, versus 32.6% a year earlier; continuing-operations net earnings margin was 26.6%, versus 25.1%. First-half pretax and continuing-operations net earnings margins were 31.8% and 24.7%, respectively, versus 30.2% and 23.2%.
- Q2 segment income was $1.180 billion, down 3%; first-half segment income was $2.413 billion, up 6%. Segment income excludes specified items and earnings attributable to sanofi and other noncontrolling interests.
- First-half investing cash outflow was $2.281 billion, including $2.106 billion of net purchases of marketable securities and $210 million of capital expenditures. Financing cash outflow was $981 million, including $1.103 billion of dividends paid and $165 million of share repurchases. Cash and cash equivalents fell by $1.765 billion to $5.918 billion.
- At June 30, cash, cash equivalents and marketable securities totaled $10.249 billion; total debt was $6.538 billion, leaving a reported net cash position of $3.711 billion. Working capital was approximately $7.1 billion. The $2 billion revolving credit facility was undrawn, and the company reported compliance with its covenant.
- Dividends declared were $0.32 per share for Q2 and $0.64 for the first half. The board authorized up to $3 billion of share repurchases; approximately 7.3 million shares were repurchased in Q2 for an aggregate cost of $173 million.
Material changes and operating trends
- U.S. sales increased 4% in Q2 and 8% in the first half; international sales decreased 2% in Q2 but increased 4% in the first half. Growth in PLAVIX U.S. sales and products including BARACLUDE, SPRYCEL and ORENCIA was partly offset by mature-brand declines, international generic competition and pricing pressure.
- Key first-half product trends included PLAVIX sales up 11% overall, BARACLUDE up 33%, SPRYCEL up 35%, ORENCIA up 28%, and ABILIFY up 1%. ABILIFY U.S. sales were pressured by BMS’s contractual revenue share declining from 65% to 58% starting in 2010 and by higher Medicaid rebates.
- Gross-to-net sales adjustments rose to $519 million in Q2 from $396 million, and to $997 million in the first half from $813 million. The company attributed much of the Medicaid rebate increase to healthcare reform; Q2 adjustments were 9.8% of gross sales versus 7.8%.
- First-half diluted EPS from continuing operations increased 25%, while non-GAAP diluted EPS increased 22% to $1.10. Management attributed the EPS increase in part to the lower share count following the Mead Johnson split-off. Non-GAAP results exclude specified items and are not a substitute for GAAP results.
Outlook, commentary, risks and unusual items
- Outlook: No specific full-year revenue or EPS guidance is stated in the supplied filing text. Management said operating cash, existing liquidity and access to capital markets should be sufficient for working capital, capital expenditures, alliances, acquisitions, milestones, dividends and repurchases.
- Healthcare reform: Higher Medicaid rebates reduced net sales by $72 million and $128 million, and pretax income by $55 million and $104 million, for Q2 and the first half, respectively. Management expected quarterly rebate effects to increase during 2010 and estimated the negative impact in 2011 at approximately twice the impact expected in 2010, including Medicare Part D discounts and an annual industry fee. The eventual impact depends on implementation and other factors.
- Patent and product concentration: PLAVIX was the largest product by sales. Management expects a rapid, significant decline in PLAVIX sales, earnings and operating cash flow after anticipated U.S. loss of exclusivity in less than two years. Generic competition was already eroding international sales and affiliate income. The company said litigation outcomes and timing of renewed U.S. generic competition could not be reasonably assessed. ABILIFY generic patent litigation also presents material sales risk; trial was scheduled for August 2010.
- Restructuring and divestiture: Sale of the Latina, Italy manufacturing operation produced a $215 million loss in the first half, comprising a $200 million impairment and $15 million of closing adjustments and fees. The company may incur additional costs under an obligation to fund a portion of the buyer’s future restructuring costs, capped at €19 million. Total first-half restructuring-related charges were $332 million.
- Cost program: Management targeted $2.5 billion of annual cost savings and avoidance by the end of 2012 and expected to achieve approximately 90% on an annualized run-rate basis by the end of 2010. Management cautioned that run-rate savings do not directly correspond to reported results.
- Pipeline and collaboration: The FDA requested 36-month data and other information for belatacept; BMS expected to respond by Q4 2010. The apixaban AVERROES trial closed early after an interim analysis indicated efficacy. BMS terminated its XL184 collaboration, recorded a $17 million R&D expense and was released from specified potential milestone payments.
- Other notable exposures: The filing disclosed numerous litigation and investigation matters, including PLAVIX-related cases, product-liability claims and a Foreign Corrupt Practices Act inquiry. Estimated BMS responsibility for certain environmental sites was $65 million. Greek hospital receivables of $51 million were reclassified to long-term assets after the government proposed repayment notes; a $9 million discount charge was recorded.
- Tax and reporting items: The Q2 effective tax rate was 20.4%, versus 23.2%, including a $66 million tax benefit from remeasurement of a contingent matter and a $59 million out-of-period tax adjustment. The company said the adjustment was not material to current or prior periods. First-half tax expense also included a $21 million healthcare-reform-related charge.
Important facts for investors to verify
- PLAVIX U.S. patent status, litigation developments and the timing and commercial effect of generic entry; also monitor continuing international generic erosion.
- Actual healthcare-reform rebate, discount and fee costs against management’s 2010 and 2011 expectations.
- Whether the $2.5 billion productivity savings target is achieved and how much translates into reported operating results.
- Pipeline milestones and regulatory outcomes, particularly belatacept, apixaban and SPRYCEL, and the commercial contribution of newer products.
- Cash conversion, marketable-security composition and valuation, debt and distributions to alliance partners; also track material litigation, environmental and manufacturing-related contingencies.
- Comparability of 2010 results with 2009 given the Mead Johnson split-off, reduced share count, specified items and tax adjustments.