BRISTOL MYERS SQUIBB CO quarterly report, Q2 FY2011

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Bristol-Myers Squibb Company — Q2 2011 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011. Unaudited results; amounts below are in U.S. dollars unless noted. BMS operates as a single BioPharmaceuticals segment.

Financial performance and liquidity

  • Q2 revenue: Net sales of $5.434 billion, up 14% year over year. Growth reflected volume (+5%), pricing (+5%) and foreign exchange (+4%). U.S. sales rose 15%; Europe rose 16% and Japan/Asia Pacific/Canada rose 15%.
  • Q2 earnings: Earnings before taxes were $1.790 billion, up from $1.592 billion. Consolidated net earnings were $1.307 billion; earnings attributable to BMS were $902 million, down from $927 million. Diluted EPS was $0.52 versus $0.53; non-GAAP diluted EPS was $0.56 versus $0.54.
  • Six-month results: Net sales were $10.445 billion, up 9%; BMS-attributable earnings were $1.888 billion versus $1.670 billion, and diluted EPS was $1.10 versus $0.96. Non-GAAP diluted EPS was $1.14 versus $1.10.
  • Costs and margins: Q2 cost of products sold increased 16% to $1.481 billion, faster than sales growth; gross margin was approximately 72.7%, compared with 73.2% in Q2 2010. R&D expense rose 12% to $923 million. The filing does not provide a standalone operating-margin figure.
  • Cash flow: Six-month operating cash flow was $1.574 billion, compared with $1.513 billion. Investing activities used $1.769 billion, principally reflecting net purchases of marketable securities; financing activities used $1.199 billion, including $1.130 billion in dividends and $385 million in share repurchases. Cash and equivalents declined to $3.665 billion from $5.033 billion at year-end.
  • Liquidity and debt: Cash, cash equivalents and marketable securities totaled $10.404 billion, versus $9.982 billion at December 31, 2010. Reported net cash position was $4.885 billion. Long-term debt was $5.332 billion and short-term borrowings were $187 million. Working capital was approximately $7.4 billion; the $2 billion revolving credit facility had no outstanding borrowings.

Material changes and operating developments

  • Product performance was mixed: Q2 sales increased for PLAVIX (15%), ABILIFY (12%), BARACLUDE (31%), SPRYCEL (46%), ORENCIA (28%) and ONGLYZA/KOMBIGLYZE (to $112 million). AVAPRO/AVALIDE sales fell 18%; mature products and all other sales fell 4%.
  • PLAVIX U.S. sales increased despite prescription demand declining 4%, reflecting higher average selling prices. AVALIDE demand and sales were affected by supply shortages following recalls. U.S. YERVOY sales were $95 million following its Q2 launch; NULOJIX launched in the U.S. in June.
  • Higher costs included a $121 million first-half estimate for BMS’s share of the U.S. pharmaceutical company fee and an $88 million first-quarter YERVOY license amendment payment. Q2 effective tax rate rose to 27.0% from 20.4%; the prior-year comparison included favorable tax benefits.

Outlook, commentary, risks and unusual items

  • Management expects a rapid, material decline in PLAVIX sales, earnings and operating cash flow after anticipated U.S. loss of exclusivity in May 2012, and a similar AVAPRO/AVALIDE sales decline after anticipated U.S. loss of exclusivity in March 2012. BMS reported no specific full-year EPS guidance in the provided filing text.
  • For 2011, BMS expected U.S. healthcare reform to reduce net sales by approximately $250 million through Medicare Part D coverage-gap discounts and increase marketing, selling and administrative expense by approximately $250 million through the pharmaceutical company fee. The company estimated a $0.25 EPS impact from healthcare reform in 2011 and said these provisions could have greater impact later in the year.
  • Pipeline and approvals: ELIQUIS was approved in the EU for VTE prevention; positive Phase III atrial-fibrillation results were reported, with U.S. and European filings expected in the second half of 2011. NULOJIX received U.S. and EU approvals. The FDA advisory committee voted against recommending dapagliflozin approval; the companies planned to continue discussions with the FDA, with an October 28, 2011 PDUFA date.
  • Patent exposure is significant: PLAVIX’s U.S. patent protection was described as extending to May 17, 2012, subject to the stated pediatric exclusivity. A $442 million damages award against Apotex was under appeal; the appeal hearing occurred in July 2011 and the outcome was pending. Generic competition and patent challenges also affect other products, including ABILIFY, BARACLUDE, REYATAZ and SPRYCEL.
  • Other contingencies include multiple product-liability, commercial, pricing and environmental matters. BMS estimated its share of future CERCLA site costs at $68 million; it said outcomes or loss ranges for a number of lawsuits could not be reasonably assessed. Unrecognized tax benefits could decrease by approximately $210–$240 million over the next 12 months, subject to audit settlements and other events.
  • Subsequent event: BMS agreed in July 2011 to acquire Amira Pharmaceuticals for approximately $325 million plus working-capital adjustments and potential milestones of up to $150 million; closing was expected in Q3, subject to customary approvals.
  • Management said cash from operations, existing cash and securities, and capital-market borrowings were expected to cover anticipated needs. It also identified European pricing and economic conditions, regulatory changes, and the approaching PLAVIX and AVAPRO/AVALIDE exclusivity losses as risks to future results and financial flexibility.

Most important facts for investors to verify

  • Timing and commercial impact of PLAVIX and AVAPRO/AVALIDE exclusivity losses, including generic entry and related litigation outcomes.
  • Whether newer products and pipeline programs, particularly ELIQUIS, YERVOY, NULOJIX and dapagliflozin, achieve expected approvals, adoption and economics.
  • Underlying sales trends versus price, foreign exchange and alliance revenue-sharing effects; also monitor gross-to-net rebates and the AVALIDE recall-related supply and returns effects.
  • Cash generation, working-capital movements, capital returns and the effect of the planned Amira acquisition and healthcare-reform costs.
  • Material developments in legal, tax, product-liability and environmental contingencies, including the pending PLAVIX damages appeal.