Bristol-Myers Squibb Company — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2012. BMS is a global biopharmaceutical company reporting as one segment. Results reflect major U.S. exclusivity losses for Plavix and Avapro/Avalide, the August acquisition of Amylin, and discontinuation of the acquired hepatitis C candidate BMS-986094.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $3.736 billion | $5.345 billion | $13.430 billion | $15.790 billion |
| Net earnings/(loss) attributable to BMS | $(711) million | $969 million | $1.035 billion | $2.857 billion |
| GAAP diluted EPS | $(0.43) | $0.56 | $0.61 | $1.66 |
| Non-GAAP diluted EPS | $0.41 | $0.61 | $1.52 | $1.75 |
| Operating cash flow | Not separately stated | Not separately stated | $6.105 billion | $3.272 billion |
Margins and expenses. Cost of products sold was 26.4% of sales in Q3 and 26.3% for the first nine months (gross margins of approximately 73.6% and 73.7%, respectively). Q3 total expenses were $4.995 billion, including a $1.830 billion pre-tax impairment charge for BMS-986094; pretax loss was $1.259 billion. The Q3 effective tax benefit rate was 43.4%; the nine-month effective tax rate was 13.7%.
Cash, liquidity and debt. At September 30, cash, cash equivalents and marketable securities totaled $6.628 billion, versus $11.642 billion at year-end 2011. Debt was $7.359 billion, including current debt, yielding a reported net debt position of $731 million versus net cash of $6.151 billion at year-end. Working capital was $1.083 billion, down from $7.538 billion. BMS had $6.105 billion of operating cash flow, but this included $3.570 billion of deferred income received from AstraZeneca for the Amylin collaboration. Investing cash use was $7.004 billion, including $7.530 billion for business acquisitions; financing cash use was $3.375 billion. Dividends paid were $1.725 billion and share repurchases were $1.911 billion during the nine months.
Material changes versus the prior comparable period
- Q3 sales fell 30% year over year; nine-month sales fell 15%. Management attributed the decline primarily to generic competition following U.S. exclusivity losses for Plavix in May and Avapro/Avalide in March 2012, with foreign exchange also weighing on results.
- Plavix Q3 sales declined 96% to $64 million; Avapro/Avalide declined 56% to $95 million. U.S. net sales overall fell 43% in Q3 and 22% for the nine months.
- Several growth products partly offset the declines: Q3 sales rose 25% for Sprycel, 48% for Yervoy, 32% for Orencia and 40% for Onglyza/Kombiglyze. Amylin products contributed $75 million in Q3 sales after acquisition.
- Q3 GAAP results moved from profit to loss, primarily reflecting the $1.830 billion BMS-986094 impairment. Non-GAAP diluted EPS also declined, to $0.41 from $0.61.
- Cash and investments decreased substantially and debt increased following the acquisitions of Amylin and Inhibitex. BMS received $3.8 billion of preliminary AstraZeneca collaboration proceeds related to Amylin, largely recorded as deferred income.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no clear numerical full-year earnings or revenue guidance. Management said it expects to build growth through newer marketed products, pipeline development, cost management and expansion in emerging markets, while cautioning that product exclusivity losses are causing rapid, material declines in sales, earnings and operating cash flow.
- Pipeline and regulatory uncertainty: BMS discontinued BMS-986094 in the interest of patient safety after a serious safety issue in a Phase II study. The company recorded the $1.830 billion impairment. The FDA’s review goal date for Eliquis for stroke prevention in atrial fibrillation was March 17, 2013; Forxiga’s U.S. NDA resubmission was expected in mid-2013. These were expectations, not approvals.
- Acquisitions and alliance changes: Amylin was acquired for approximately $5.3 billion in cash, with additional assumed obligations; BMS also acquired Inhibitex. BMS and Sanofi agreed to restructure their alliance effective January 1, 2013, with Sanofi assuming most worldwide operations, subject to certain regulatory approvals. BMS expected quarterly royalties through 2018 and a $200 million terminal payment in 2018 under the revised arrangement.
- Legal and regulatory contingencies: The filing describes extensive patent, product-liability, commercial, environmental and government matters. Outcomes and potential losses were often not reasonably estimable. Notable matters include more than 2,000 Plavix personal-injury claims, Byetta litigation, a Baraclude generic-patent trial awaiting decision, and SEC/FCPA inquiries into sales and marketing practices. BMS reported a $71 million estimated share of future CERCLA site costs.
- Other risks: European austerity measures, pricing pressure, foreign exchange and generic competition could further affect sales. BMS noted that reduced factoring capacity and sovereign-debt risks could increase European credit exposure; net receivables in Greece, Portugal, Italy and Spain were approximately $233 million. Most cash held outside the U.S. was expected to remain indefinitely reinvested offshore.
- Controls: Disclosure controls were deemed effective. Because of the Amylin acquisition, management had not completed its assessment of Amylin’s internal controls over financial reporting and intended to do so within one year of acquisition.
Most important facts for investors to verify
- How quickly Plavix and Avapro/Avalide generic erosion affects sales, cash generation and the remaining sales-return reserves.
- Whether newer products—particularly Sprycel, Yervoy, Orencia and diabetes products—can offset legacy-product losses, including the pace and economics of Amylin integration.
- The underlying, recurring cash-generation level after separating the $3.570 billion deferred collaboration receipt from operating cash flow.
- Pipeline and regulatory milestones for Eliquis and Forxiga, and any further safety or development setbacks.
- Debt, liquidity and offshore cash availability, as well as the potential financial effects of legal, environmental and government investigations.
- The final Amylin purchase-price allocation and completion of the acquired business’s internal-control assessment.