BRISTOL MYERS SQUIBB CO quarterly report, Q3 FY2016

Bristol-Myers Squibb Company — Q3 2016 Form 10-Q

Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016, compared with the same 2015 periods. BMS is a global specialty biopharmaceutical company operating as one reportable segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Total revenue	$4,922	$4,069	$14,184	$12,273
Net earnings attributable to BMS	$1,202	$706	$3,563	$1,762
Diluted GAAP EPS	$0.72	$0.42	$2.12	$1.05
Diluted non-GAAP EPS	$0.77	$0.39	$2.20	$1.63
Effective tax rate	22.1%	26.0%	25.3%	26.9%

• Q3 revenue increased 21% year over year; nine-month revenue increased 16%. Net product sales rose 26% and 27%, respectively, while nine-month alliance revenue declined from $2,003 million to $1,229 million.
• Opdivo sales were $920 million for Q3 and $2,464 million for the nine months; Eliquis sales were $884 million and $2,395 million. Nine-month Eliquis and Opdivo growth were partly offset by declines in Abilify, Erbitux, mature products and several virology products.
• Q3 earnings growth reflected higher revenue. For the nine months, management cited higher revenue, divestiture gains and royalties, and lower R&D asset-acquisition charges; higher Eliquis profit sharing and Opdivo-related expenses were offsets. GAAP results also include significant specified gains and charges, so non-GAAP figures are not a substitute for GAAP results.
• Gross product sales increased 31% in both periods, while gross-to-net deductions rose 50% in Q3 and 54% year to date. The filing attributes this mainly to higher sales, payer mix, and rebates and discounts.

Cash flow, liquidity and debt

• Nine-month operating cash flow was $1,422 million, versus $1,221 million in 2015. Investing activities provided $1,464 million, compared with $588 million used in 2015; financing activities used $1,855 million, versus $2,265 million used. The increase in cash flow from operations was partly offset by approximately $1.5 billion of higher income-tax payments.
• Capital expenditures were $844 million year to date. Operating cash flow less capital expenditures was approximately $578 million; this is a simple calculation, not a company-reported non-GAAP measure.
• At September 30, cash, cash equivalents and marketable securities totaled $8,595 million; total short- and long-term debt was $6,826 million, leaving a reported net cash position of $1,769 million. Cash and equivalents were $3,432 million, compared with $2,385 million at year-end 2015.
• Current assets were $13,204 million and current liabilities $8,996 million. BMS reported no borrowings under its two revolving credit facilities. A $750 million principal debt maturity is due in August 2017.
• Most cash and marketable securities were held outside the U.S. in low-tax jurisdictions and expected to remain indefinitely reinvested; repatriation may incur restrictions, withholding taxes and additional U.S. tax. Management said available liquidity, operating cash flow and U.S. commercial paper capacity should meet normal cash needs for at least the next few years.

Material changes, outlook and notable items

• Revenue growth was led by Opdivo and Eliquis. U.S. revenue rose 35% year to date, while Rest of the World revenue fell 8%, partly due to competition in hepatitis C and foreign exchange. The loss of U.S. Abilify commercialization rights and transfer of North American Erbitux rights also affected comparisons.
• CheckMate-026, a Phase III trial of first-line Opdivo monotherapy for advanced non-small cell lung cancer, failed to meet its primary progression-free-survival endpoint. BMS said it would continue studying Opdivo in first-line lung cancer, including combination regimens; management stated its overall strategy was unchanged.
• BMS expects approximately $1.5–$2.0 billion of pre-tax restructuring and other charges to implement its operating-model changes, with 40%–50% expected to require cash. Charges were expected to begin in Q4 2016 and mostly be incurred by 2020. The company expected non-GAAP operating expenses to remain roughly flat with 2016 levels through 2020, while GAAP expenses could initially rise.
• Capital expenditures were expected to be approximately $1.3 billion in 2016 and $1.0 billion in 2017, including investment in biologics manufacturing. The filing does not provide a clear full-year revenue or EPS guidance figure.
• Other notable items include 2016 divestitures of the Reckitt Benckiser OTC business and investigational HIV medicines, producing gains and potential future milestone and royalty proceeds; and acquisitions of Padlock and Cormorant, with contingent payments of up to $450 million and $485 million, respectively.
• Approximately $265 million of Opdivo sales in France remained deferred pending final government price negotiations. Resolution may affect when revenue is recognized.

Risks and contingencies

• Management disclosed material litigation and investigations, including more than 5,300 filed Plavix product-liability claims, Byetta-related litigation and ongoing patent disputes involving Opdivo-related anti-PD-1 intellectual property. The company generally said outcomes and potential losses could not be reasonably estimated.
• The company estimated its share of future CERCLA environmental costs at $61 million. It also reported tax examinations and said unrecognized tax benefits could decrease by approximately $265–$325 million over the next 12 months, with possible tax payments, deferred-tax adjustments or tax benefits.
• Key business risks include clinical and regulatory uncertainty, competition and loss of exclusivity, product pricing and reimbursement pressure, rebate accrual estimates, foreign exchange, and dependence on alliance products and partners. BMS reported no material changes to the risk factors in its 2015 Form 10-K.

Important facts for investors to verify

• Whether Opdivo sales and pipeline progress offset the commercial and financial effects of the CheckMate-026 failure and intensifying competition.
• The sustainability and quality of reported earnings, including the contribution of divestiture gains, royalties, deferred French Opdivo revenue and other specified items.
• Trends in gross-to-net deductions, receivables and collection timing; trade receivables from the three largest U.S. wholesalers represented 63% of total trade receivables at quarter-end.
• The actual cost, cash requirements, timing and savings from the planned restructuring, and delivery of the company’s capital-spending and non-GAAP expense expectations.
• Developments in material patent, product-liability, government and tax matters, for which potential outcomes or losses may be difficult to estimate.