Bristol-Myers Squibb Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars unless noted.
Business context and reporting period
BMS is a global biopharmaceutical company operating in one BioPharmaceuticals segment. Its portfolio is concentrated in oncology, cardiovascular and immunoscience medicines. The company’s strategy prioritizes growth brands, especially Opdivo and Eliquis, while investing in a broader pipeline. The six prioritized brands represented approximately 86% of 2018 revenue.
Key financial metrics
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total revenue | $22.561 billion | $20.776 billion | Up 9% |
| Net product sales | $21.581 billion | $19.258 billion | Up 12% |
| Net earnings attributable to BMS | $4.920 billion | $1.007 billion | 2017 was heavily reduced by tax-reform charges |
| Diluted GAAP EPS | $3.01 | $0.61 | Up from tax-distorted 2017 comparison |
| Diluted non-GAAP EPS | $3.98 | $3.01 | Up $0.97; excludes specified items |
| Gross margin | Approximately 71.0% | Approximately 70.7% | Calculated from reported gross margin and revenue |
| Operating cash flow | $5.940 billion | $5.275 billion | Up $665 million |
| Capital expenditures | $951 million | $1.055 billion | 2019 expected at approximately $800 million |
| Cash, equivalents and marketable securities | $10.659 billion | $9.292 billion | Year-end balances |
| Short- and long-term debt | $7.349 billion | $7.962 billion | 2018 net cash position was $3.310 billion |
| Cash dividends paid | $2.613 billion | $2.577 billion | 2018 declared dividend was $1.61 per common share |
Fourth-quarter 2018 revenue was $5.973 billion, versus $5.449 billion in fourth-quarter 2017. Quarterly net earnings were $1.158 billion versus a $2.329 billion loss; diluted EPS was $0.71 versus a loss of $1.42 per share. The 2017 quarter included substantial tax-reform charges.
Material changes versus the prior comparable period
- Growth was led by Opdivo revenue of $6.735 billion, up 36%, and Eliquis revenue of $6.438 billion, up 32%. Orencia rose 9%; Sprycel was approximately flat.
- Established brands weakened: hepatitis C franchise revenue fell 96% to $17 million; Sustiva fell 61%, Reyataz 39%, and Baraclude 29%, reflecting competition and loss of exclusivity.
- Gross product sales increased 18%, but gross-to-net deductions rose 38% to $8.593 billion. Deductions equaled 28% of gross product sales versus 24% in 2017, primarily reflecting payer rebates and discounts, including for Eliquis.
- GAAP earnings benefited from the comparison with 2017’s $2.9 billion tax-reform charge. The effective tax rate was 17.1% in 2018 versus 81.0% in 2017; therefore, GAAP EPS growth is not a clean measure of underlying operating improvement.
- R&D expense was $6.345 billion, down 2%. It included $1.135 billion of license and asset acquisition charges, including $1.05 billion for Nektar collaboration rights. Marketing, selling and administrative expense declined 4% to $4.551 billion.
- Other income, net, included a $512 million loss on equity investments, including a $534 million fair-value adjustment related to Nektar. Operating cash flow rose, while cash used in investing activities increased to $874 million, in part due to Nektar-related investment and acquisition payments.
Outlook, commentary, risks and unusual items
- Outlook: Management emphasized continued growth from prioritized brands, product launches, pipeline investment and biologics manufacturing. The filing provides no clear numerical 2019 revenue or EPS guidance. Capital expenditures were expected to be approximately $800 million in 2019 and $600 million in 2020.
- Celgene transaction: Announced January 3, 2019, the proposed acquisition was valued at approximately $74 billion based on the January 2 share price. Consideration includes $50 cash and one BMS share per Celgene share, plus a contingent value right of up to $9 cash tied to regulatory milestones. BMS expected closing near the end of third-quarter 2019, subject to shareholder, regulatory and other conditions.
- Financing and integration: Planned funding included up to $33.5 billion of acquisition debt financing and assumption of approximately $19.9 billion of Celgene debt. BMS warned that increased leverage, possible rating downgrades, integration costs, dilution and failure to realize synergies could constrain financial flexibility. The transaction was expected to dilute 2019 GAAP EPS, although management anticipated non-GAAP EPS accretion.
- Pipeline and competition: Opdivo remains central to the growth strategy and faces intense immuno-oncology competition. Clinical setbacks included CheckMate-451 and CheckMate-331 failing their primary overall-survival endpoints. Future study results, regulatory decisions and competitors’ progress could affect sales and valuation.
- Pension and restructuring: BMS planned to terminate its principal U.S. pension plan, with the transaction expected in third-quarter 2019 and an estimated $1.5–$2.0 billion non-cash pretax settlement charge. Restructuring charges were $268 million in 2018; the broader plan was expected to total $1.5–$2.0 billion through 2020.
- Legal and environmental matters: The filing describes product-liability, patent, pricing and shareholder matters, including lawsuits related to the Celgene transaction. BMS estimated its share of environmental remediation costs at $62 million. It could not estimate potential losses for certain litigation, including an Australian government claim concerning Plavix for which a decision was expected in 2019.
- Other exposures: Key risks include product concentration, generic and biosimilar competition, pricing and rebate pressure, clinical or regulatory failure, manufacturing or supplier disruptions, foreign-exchange exposure, and legal, tax and cybersecurity risks. Royalties generated approximately $1.7 billion of pretax income in 2018, creating exposure if those streams decline.
Most important facts for investors to verify
- Whether the Celgene acquisition closed on the anticipated terms and timetable, and the resulting debt, ratings, integration costs, synergies and per-share impact.
- Whether Opdivo and Eliquis growth, and other prioritized-brand performance, offset continuing erosion in established products and competitive pressure.
- How gross-to-net deductions, payer access and pricing affect net sales and margins, particularly as U.S. rebates increased.
- Results and regulatory outcomes for major Opdivo studies, and whether pipeline investment produces approved, commercially successful medicines.
- The actual timing and accounting impact of the pension-plan termination, restructuring program and related cash requirements.
- Developments in material litigation, environmental remediation, patent challenges and contingent obligations.