BRISTOL MYERS SQUIBB CO annual report, FY2010

Business context and reporting period

Bristol-Myers Squibb Company (BMS) filed this Form 10-K for the fiscal year ended December 31, 2010. The filing reports one segment, BioPharmaceuticals, and describes its transformation into a focused biopharmaceutical company. The requested “2010 Q4” is not a separate filing period; this annual report includes full-year results and unaudited quarterly data.

Financial performance and position

Unless stated otherwise, amounts are in U.S. dollars and millions. Continuing-operations figures exclude divested businesses.

Metric20102009Change or context
Net sales$19,484$18,808Up 4%; U.S. sales rose 6% to $12,613, while non-U.S. sales declined 1% to $6,871.
Gross margin$14,207; 72.9% of sales$13,668; 72.7% of salesReported gross margin increased.
Segment income$4,642$4,492Up 3%, supported by sales growth and lower commercial spending.
Pre-tax earnings from continuing operations$6,071$5,602Up 8%; 31.2% of sales versus 29.8%.
Net earnings attributable to BMS from continuing operations$3,102$3,239Down 4%; diluted EPS rose to $1.79 from $1.63, aided by fewer shares outstanding.
Non-GAAP diluted EPS from continuing operations$2.16$1.85Up 17%; excludes specified items identified by BMS.
Research and development$3,566$3,647About 18.3% of 2010 sales; spending remains substantial.
Operating cash flow$4,491$4,065Up from prior year.

Full-year net earnings attributable to BMS were $3,102 in 2010 versus $10,612 in 2009, when discontinued operations included a $7,157 after-tax gain from the Mead Johnson split-off. The fourth quarter of 2010 recorded net sales of $5,111 and continuing-operations earnings attributable to BMS of $483, or diluted EPS of $0.28; fourth-quarter 2009 included the Mead Johnson transaction and is not directly comparable.

At year-end, cash, cash equivalents and marketable securities totaled $9,982, total debt was $5,445, and the reported net cash position was $4,537. Working capital was approximately $6.5 billion. BMS repurchased $750 of debt principal for $855, paid $2,202 in dividends, acquired ZymoGenetics for $829 net of cash acquired, and spent $576 on common-stock repurchases. The company reported $424 of capital expenditures.

Material changes versus the prior comparable period

  • Sales growth reflected increases in PLAVIX, the HIV portfolio, BARACLUDE, ORENCIA, SPRYCEL and recently launched ONGLYZA/KOMBIGLYZE. BARACLUDE sales rose 27% and SPRYCEL rose 37%; ORENCIA rose 22%.
  • PLAVIX sales increased 8% overall, but non-U.S. sales declined 13% amid generic competition. BMS identifies PLAVIX as approximately 34% of 2010 net sales.
  • Mature products and all other sales fell 14%; AVAPRO/AVALIDE fell 8%, and ERBITUX fell 3%. ABILIFY sales decreased 1% overall, including a 6% decline in U.S. sales, reflecting a lower contractual share of U.S. sales.
  • Medicaid rebates and other gross-to-net adjustments increased; total adjustments rose to $2,197 from $1,747. Medicaid rebates were $453 versus $229.
  • Marketing, selling and administrative expense declined 7% and advertising and promotion declined 14%. R&D expense decreased 2%, although management cited increased investment to support the maturing pipeline.
  • Cash and cash equivalents declined to $5,033 from $7,683, while marketable securities rose to $4,949 from $2,200. Total cash and securities increased slightly. Long-term debt declined to $5,328 from $6,130.

Outlook, management commentary, risks and unusual items

Management emphasized sustaining marketed products, advancing the late-stage pipeline, controlling costs, maintaining financial strength, and pursuing selective licensing and acquisition opportunities. BMS said it had achieved its productivity initiative target of $2.5 billion in annualized cost savings and cost avoidance; the company cautioned that this run-rate measure does not directly reconcile to reported results.

  • 2011 expectations: BMS forecast an incremental negative EPS impact of approximately $0.15 from U.S. healthcare reform, including about $250 million in Medicare Part D coverage-gap discounts and about $250 million in additional operating expense for the annual pharmaceutical-company fee. It expected a 2011 common dividend of $1.32 per share. The filing does not provide a clear overall 2011 revenue or earnings guidance range.
  • Pipeline and approvals: 2011 milestones included potential decisions or filings for YERVOY, ELIQUIS, NULOJIX, dapagliflozin and ORENCIA. These outcomes and timing were uncertain. The ELIQUIS APPRAISE-2 trial was stopped due to increased bleeding; the necitumumab INSPIRE trial stopped enrollment following safety concerns involving thromboembolism.
  • Patent exposure: BMS expected U.S. exclusivity for PLAVIX and AVAPRO/AVALIDE to expire in 2012, with potentially rapid sales declines. The company also faced patent challenges affecting ABILIFY, ATRIPLA, BARACLUDE, REYATAZ and SPRYCEL.
  • Manufacturing and supply: The FDA issued a warning letter concerning GMP practices at the Manati, Puerto Rico facility; BMS said remediation and inspection readiness were in progress. In January 2011, BMS and sanofi recalled certain AVALIDE lots in several markets. Supply could be affected indefinitely; 2010 sales in the affected countries were $355 million.
  • Unusual items and comparability: 2010 included $236 million of impairment and loss on sale of manufacturing operations, $207 million of tax expense related to foreign earnings previously considered permanently reinvested offshore, and $633 million of after-tax specified items in the non-GAAP reconciliation. In 2009, BMS recorded the large Mead Johnson split-off gain and $360 million of gains from sales of mature brands.
  • Other risks and contingencies: The filing describes ongoing patent, product-liability, pricing, antitrust, tax, environmental and government matters; BMS generally could not estimate the outcomes or potential losses. Estimated environmental remediation costs were $68 million. Potential future R&D milestone payments under agreements totaled approximately $5.4 billion, generally contingent on milestones being achieved.

Most important facts for investors to verify

  • Whether the AVALIDE recall and Manati remediation disrupt supply, approvals or revenue beyond the periods described.
  • PLAVIX and AVAPRO/AVALIDE sales exposure and the timing and commercial impact of their expected 2012 U.S. exclusivity losses.
  • Progress, safety outcomes and regulatory decisions for key pipeline assets, particularly ELIQUIS, YERVOY, NULOJIX, dapagliflozin and necitumumab.
  • Whether rising rebates, healthcare reform fees and European pricing pressure exceed the assumptions underlying management’s stated outlook.
  • The reconciliation of GAAP and non-GAAP earnings, including the recurring nature of excluded items and the 2009 discontinued-operations gain.
  • Potential cash demands from legal and tax contingencies, pension funding, and contingent alliance and development milestones.