Why did earnings fall so sharply in 2004 if sales grew?

Earnings from continuing operations fell 23% to $2.4 billion. The main drivers were a $575 million deferred tax charge tied to planned repatriation of about $9 billion of foreign earnings under the American Jobs Creation Act, $420 million of net litigation charges, higher R&D, and gross margin pressure from a product mix shift as higher-margin products lost exclusivity. Sales growth came from favorable currency effects, since U.S. sales were flat.

How much revenue is at risk from patent expirations?

Management estimates 2005 net sales reductions of $1.4 to $1.5 billion from products that have lost or will lose exclusivity, including MONOPRIL, GLUCOPHAGE XR, GLUCOVANCE, CEFZIL, PARAPLATIN, and TAXOL in Europe. PRAVACHOL ($2.6 billion in 2004 sales) faces U.S. exclusivity loss in April 2006, and its U.S. prescriptions already fell 10% in 2004. The timing and size of these losses remain uncertain.

What is the risk to PLAVIX, the company's largest product?

PLAVIX had 2004 net sales of $3.3 billion. Its U.S. composition-of-matter patent, which runs to 2011, is being challenged by several generic filers, and the company is litigating. The company believes it is very unlikely that generic competition begins before the second half of 2005, but loss of exclusivity would be material to results, cash flows, and possibly financial condition.

Are the legal and regulatory matters likely to affect the company materially?

Management says the aggregate impact of pending lawsuits and investigations, beyond current reserves, is reasonably likely to be material to results of operations and cash flows over the next few years, and may be material to financial condition and liquidity. Matters include the wholesaler-inventory SEC settlement and ongoing investigations, VANLEV and other securities class actions, ERISA litigation, AWP and pricing suits, and product liability claims related to SERZONE, PPA, and hormone therapy.

BMY 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 4, 2005. Cited figures are marked; the original filing is the authoritative source.

Bristol-Myers Squibb's 2004 10-K shows net sales from continuing operations of $19.4 billion^a, up 4%, almost entirely from favorable foreign exchange; U.S. sales were flat at $10.6 billion.

Earnings from continuing operations fell 23% to $2.4 billion^b ($1.21 diluted EPS) from $3.1 billion, driven by a $575 million deferred tax charge tied to planned repatriation of about $9 billion of foreign earnings under the AJCA, $420 million of litigation charges, and rising R&D spending of $2.5 billion (12.9% of sales). Gross margin compressed as exclusivity losses on higher-margin products shifted the product mix. The central investor issue is patent-exclusivity erosion.

PRAVACHOL ($2.6 billion^c) faces U.S. exclusivity loss in April 2006, and the company expects incremental revenue losses of $1.4 to $1.5 billion in 2005 alone. PLAVIX, the largest product at $3.3 billion, is under U.S. patent litigation, and the company says generic entry is very unlikely before the second half of 2005. Management expects earnings growth to resume only in 2007, as in-line and newer products (PLAVIX, AVAPRO/AVALIDE, ABILIFY, REYATAZ, ERBITUX) offset the losses.

The filing also discloses significant legal and regulatory overhang: the 2002 wholesaler-inventory restatement, an SEC consent order with a $150 million^d fund, ongoing SEC and U.S. Attorney investigations, VANLEV and other securities class actions, pricing and Medicaid best-price investigations, and product liability reserves for SERZONE and PPA. Management says the aggregate impact of these matters beyond reserves is reasonably likely to be material to results and cash flows over the next few years.

02—Key points

Key Highlights

Net sales rose 4% to $19.4 billion in 2004, but the increase came entirely from favorable foreign exchange. U.S. sales were flat at $10.6 billion.
Earnings from continuing operations fell 23% to $2.4 billion ($1.21 diluted EPS), reflecting a $575 million deferred tax charge for planned repatriation of about $9 billion under the AJCA, $420 million in net litigation charges, and higher R&D.
PLAVIX ($3.3 billion, up 35%) is the largest product, but its U.S. composition-of-matter patent (expiring 2011) is in litigation; management says generic entry is very unlikely before H2 2005.
PRAVACHOL ($2.6 billion, down 7%) loses U.S. exclusivity in April 2006. Management expects 2005 net sales reductions of $1.4 to $1.5 billion from products losing exclusivity.
Management expects earnings growth to resume in 2007, once in-line and recently launched products (PLAVIX, AVAPRO/AVALIDE, ABILIFY, REYATAZ, ERBITUX) offset exclusivity losses.
R&D spending rose 10% to $2.5 billion (12.9% of sales), focused on ten critical disease areas, with late-stage pipeline candidates including muraglitazar, abatacept, and entecavir.
Significant legal and regulatory overhang: a 2004 SEC consent order, ongoing SEC and U.S. Attorney investigations, securities class actions, and pricing/Medicaid best-price probes. Management says the aggregate impact beyond reserves could be material.

03—Questions

Frequently Asked Questions

Why did earnings fall so sharply in 2004 if sales grew?
Earnings from continuing operations fell 23% to $2.4 billion. The main drivers were a $575 million deferred tax charge tied to planned repatriation of about $9 billion of foreign earnings under the American Jobs Creation Act, $420 million of net litigation charges, higher R&D, and gross margin pressure from a product mix shift as higher-margin products lost exclusivity. Sales growth came from favorable currency effects, since U.S. sales were flat.
How much revenue is at risk from patent expirations?
Management estimates 2005 net sales reductions of $1.4 to $1.5 billion from products that have lost or will lose exclusivity, including MONOPRIL, GLUCOPHAGE XR, GLUCOVANCE, CEFZIL, PARAPLATIN, and TAXOL in Europe. PRAVACHOL ($2.6 billion in 2004 sales) faces U.S. exclusivity loss in April 2006, and its U.S. prescriptions already fell 10% in 2004. The timing and size of these losses remain uncertain.
What is the risk to PLAVIX, the company's largest product?
PLAVIX had 2004 net sales of $3.3 billion. Its U.S. composition-of-matter patent, which runs to 2011, is being challenged by several generic filers, and the company is litigating. The company believes it is very unlikely that generic competition begins before the second half of 2005, but loss of exclusivity would be material to results, cash flows, and possibly financial condition.
Are the legal and regulatory matters likely to affect the company materially?
Management says the aggregate impact of pending lawsuits and investigations, beyond current reserves, is reasonably likely to be material to results of operations and cash flows over the next few years, and may be material to financial condition and liquidity. Matters include the wholesaler-inventory SEC settlement and ongoing investigations, VANLEV and other securities class actions, ERISA litigation, AWP and pricing suits, and product liability claims related to SERZONE, PPA, and hormone therapy.

04—Continue

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