Bristol-Myers Squibb Company — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Unaudited results are compared with the corresponding 2008 periods. BMS reported two segments: BioPharmaceuticals and Mead Johnson Nutrition, in which BMS retained an 83.1% ownership interest following Mead Johnson’s February 2009 IPO. Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $5,384 | $5,203 | $10,399 | $10,094 |
| Gross margin | 73% | 68% | 72% | 68% |
| Earnings from continuing operations before tax | $1,741 | $1,221 | $3,125 | $2,428 |
| Net earnings from continuing operations | $1,298 | $963 | $2,219 | $1,840 |
| Net earnings attributable to BMS | $983 | $764 | $1,621 | $1,425 |
| Diluted EPS attributable to BMS | $0.49 | $0.38 | $0.81 | $0.71 |
| Operating cash flow | Not separately presented for the quarter | $1,248 | $1,889 |
Sales grew 3% in both comparison periods; reported growth included a 5% unfavorable foreign-exchange effect. U.S. sales rose 12% in Q2 and 11% in the first half, while non-U.S. sales fell 7% in both periods. Growth in key medicines and improved gross margins were partly offset internationally by currency effects and generic competition. Q2 and first-half earnings attributable to BMS rose 29% and 14%, respectively.
- Products: Q2 sales increased for PLAVIX ($1,539; +11%), ABILIFY ($643; +22%), BARACLUDE ($179; +32%), SPRYCEL ($107; +41%) and ORENCIA ($148; +40%). ERBITUX sales declined 12% to $173. Mead Johnson sales were $719, down 1% reported but up 5% excluding foreign exchange.
- Margins and costs: Management attributed margin improvement to manufacturing efficiencies and PTI savings, favorable product mix, pricing and foreign exchange. Q2 cost of products sold was 27.1% of sales versus 32.1% a year earlier; marketing, selling and administrative expense was 20.0% versus 22.4%.
- Cash and debt: At June 30, cash and equivalents were $7,507; current and non-current marketable securities totaled $1,596; total debt was $6,359. BMS reported net financial assets of $2,744, versus $1,714 at year-end 2008. Working capital was approximately $7.8 billion. Cash declined $469 in the first half to $7,507.
- Liquidity and capital allocation: First-half operating cash flow was $1,248, down from $1,889. Investing cash outflow was $1,364, principally reflecting $1,103 of net marketable-security purchases and $365 of capital expenditures. Financing cash outflow was $355, including $1,231 of dividends; Mead Johnson’s IPO generated $782 of net proceeds. The quarterly dividend declared was $0.31 per share.
Material changes and unusual items
- BioPharmaceuticals segment results increased 46% in Q2 and 39% in the first half; Mead Johnson segment results declined 20% and 22%, respectively. The Mead Johnson IPO reduced BMS’s ownership and contributed to lower reported segment earnings, along with intercompany interest expense.
- First-half research and development expense rose 9% to $1,752, including $174 of upfront and milestone payments, versus $51 in 2008. Litigation expense was $132 versus $2, including a $125 reserve related to securities litigation.
- The effective tax rate rose to 25.4% in Q2 from 21.1%, and to 29.0% for the first half from 24.2%. Comparisons were affected by a $91 tax benefit from an IRS audit settlement in Q2 2008 and, in 2009, Mead Johnson separation-related tax effects and other audit settlements.
- First-half other income included gains on sales of product lines and businesses; Q2 included an $11 gain on a debt buyback and swap terminations. The company also recorded a $25 pension curtailment charge. The U.S. retirement-plan amendment generated a $295 after-tax reduction to accumulated other comprehensive loss and is expected to lower future retiree benefit costs.
Outlook, risks and contingencies
- Outlook: The filing provides no specific full-year sales or earnings guidance. Management said existing cash, marketable securities, expected operating cash flows and available borrowing capacity were expected to meet operating, investment, alliance, acquisition and dividend needs. BMS targets $2.5 billion of annual productivity savings and cost avoidance by 2012; estimated PTI charges are $1.3–$1.6 billion, including $806 million incurred to date.
- Medarex: On July 22, 2009, after quarter-end, BMS announced an agreement to acquire Medarex for approximately $2.4 billion, funded from existing cash. Closing was expected in Q3, subject to tender and regulatory conditions.
- PLAVIX exposure: U.S. patent protection was upheld through November 2011, but several generic challenges remained pending. BMS said an adverse outcome could lead to renewed or additional generic competition, materially affecting sales, earnings and cash flows. Generic competition was already affecting European sales.
- Other legal matters: A securities-litigation settlement of $125 million was reached in principle, subject to court approval. BMS also disclosed ongoing intellectual-property, pricing, product-liability and environmental matters; it estimated its share of future CERCLA site costs at approximately $60 million. The ultimate outcomes of pending matters are uncertain.
- Other exposures: BMS held $94 million of auction-rate securities and $96 million of floating-rate securities classified as Level 3 in the fair-value hierarchy, requiring significant unobservable valuation inputs. Approximately $4.6 billion of potential future R&D milestone payments were contingent on development or regulatory achievements and were not recorded as liabilities. Moody’s outlook was negative; S&P and Fitch outlooks were stable.
Investor verification points
- Assess how much earnings growth reflects durable product demand and cost savings versus pricing, mix, foreign exchange and one-time items.
- Track U.S. PLAVIX patent litigation and the timing and potential impact of generic entry; also monitor EU competition.
- Review the cash-flow decline and working-capital movements, including pension funding and the $400 million ABILIFY agreement payment.
- Confirm the Medarex acquisition’s completion, cash funding and subsequent effects on liquidity and R&D commitments.
- Monitor the securities-litigation settlement, tax audits and other legal contingencies, as well as valuation and recovery assumptions for Level 3 securities.