01—Abstract
Summary
Summary of the 10-K filed February 12, 2016. Cited figures are marked; the original filing is the authoritative source.
Bristol-Myers Squibb's 2015 10-K shows a company in transition toward a focused specialty biopharmaceutical model.
Total revenues rose 4% to $16.56 billiona (about 7% lower on a constant-currency basis), with growth driven by the Hepatitis C franchise (including $170 million of previously deferred French revenue), Opdivo, and Eliquis, partly offset by Abilify's loss of U.S. and EU rights, Baraclude/Reyataz/Sustiva erosion, and foreign exchange. GAAP diluted EPS fell to $0.93 from $1.20, driven by a $1.68 billion of license and asset acquisition charges (including Flexus, Cardioxyl, and Five Prime) and higher R&D of $5.9 billion, up 31%. Non-GAAP diluted EPS rose to $2.01 from $1.85, so the GAAP decline reflects one-time acquired R&D costs rather than deterioration in baseline operations.
Balance sheet and cash flow were weaker. Operating cash flow fell to $1.83 billionb from $3.15 billion, reflecting alliance payment timing, upfront licensing payments, and lower factoring. Cash and marketable securities declined to $8.9 billion from $11.8 billion, and the company now has a net cash position of $2.2 billion, down from $4.0 billion.
Dividends of $2.5 billionc were covered by non-GAAP earnings but not by operating cash flow in 2015. Management signaled that Opdivo and Eliquis will become increasingly important revenue drivers, while the pending sale of the HIV pipeline to ViiV Healthcare and the 2016 Erbitux North America transfer to Lilly will reduce some future revenue and royalty streams.
Key risks for investors include the rapid revenue erosion typical of U.S. generic and biosimilar entry, the expected sharp decline in Japanese Hepatitis C revenue in 2016 due to competition, the challenge to Eliquis's composition-of-matter patent via inter partes review, the EPO revocation of the Sprycel patent in Europe, and the pending Merck PD-1 patent litigation over Keytruda. Royalties of about $675 milliond in pretax income make the company sensitive to the durability of third-party royalty streams.
02—Key points
Key Highlights
- Revenue grew 4% to $16.56B in 2015, led by Hepatitis C (Daklinza, $1.6B), Opdivo ($942M), and Eliquis ($1.86B, up 140%), while constant-currency revenue fell 7%
- GAAP diluted EPS declined to $0.93 from $1.20, but non-GAAP EPS rose to $2.01 from $1.85, reflecting $2.3B of pretax specified items, mainly $1.68B of license and asset acquisition charges
- R&D spending rose 31% to $5.9B, including $800M for Flexus and $350M for Five Prime upfront payments, with Opdivo the only product above 10% of R&D spend
- Operating cash flow fell 42% to $1.83B, and net cash dropped to $2.2B from $4.0B, with cash and marketable securities at $8.9B
- Opdivo received multiple FDA and EU approvals in 2015, including NSCLC, RCC, and first-line melanoma with Yervoy, and in January 2016 the Opdivo+Yervoy approval was expanded to all BRAF statuses
- Strategic portfolio pruning continued: the HIV pipeline is being sold to ViiV ($350M upfront), Erbitux North America was transferred to Lilly for royalties, and Abilify rights expired
- Key patent risks include the Eliquis IPR petition (composition patent expires 2023), the EPO revocation of the Sprycel EU patent in January 2016, and ongoing Keytruda litigation
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 12, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $16.56B$15.88B | +4.3% |
| Cost of Revenue | $3.91B$3.93B | −0.6% |
| Gross Profit | $12.65B$11.95B | +5.9% |
| R&D Expenses | $5.92B$4.53B | +30.6% |
| SG&A Expenses | $4.84B$4.82B | +0.4% |
| Operating Expenses | $14.48B$13.50B | +7.3% |
| Interest Expense | $184.00M$203.00M | −9.4% |
| Net Income | $1.56B$2.00B | −21.9% |
| EPS (Basic) | $0.94$1.21 | −22.3% |
| EPS (Diluted) | $0.93$1.20 | −22.5% |
| Shares Outstanding (Basic) | 1.67B1.66B | +0.6% |
| Shares Outstanding (Diluted) | 1.68B1.67B | +0.5% |
05—Questions
Frequently Asked Questions
Why did GAAP EPS decline in 2015 even though revenue grew?
GAAP diluted EPS fell to $0.93 from $1.20 mainly because of higher R&D expense from upfront payments for acquisitions and licenses of investigational compounds, which are expensed as incurred because they are treated as asset acquisitions rather than business combinations. Those charges totaled about $1.68 billion. Non-GAAP EPS, which excludes these specified items, rose to $2.01 from $1.85.
How sustainable is Bristol-Myers Squibb's revenue base as key products face competition?
Revenue is concentrated in several products. Orencia, Eliquis, Sprycel, and the Hepatitis C franchise each contributed about 10% or more of 2015 revenue. Opdivo and Eliquis are expected to become larger contributors. Risks include Baraclude's U.S. generic entry in 2014, Hepatitis C competition in Japan expected in 2016, Eliquis's composition-of-matter patent challenge, and Sprycel's EU patent revocation. The company also notes that U.S. generic declines are typically steep and rapid.
Is the dividend covered by cash generation?
Dividends paid were $2.5 billion in 2015. Operating cash flow was $1.83 billion, below the dividend, so the gap was covered by existing cash and marketable securities. Non-GAAP net earnings of $3.4 billion comfortably exceed dividends, but cash conversion weakened due to timing of alliance payments, upfront licensing costs, and lower factoring. Investors should monitor whether operating cash flow recovers toward earnings levels.
What does the pending HIV divestiture and Erbitux transfer mean for future results?
The HIV pipeline sale to ViiV Healthcare includes a $350 million upfront payment, up to $1.1 billion in development and regulatory milestones, up to $4.3 billion in sales milestones, and future royalties, with closing expected in the first half of 2016. The Erbitux North America transfer to Lilly exchanged sales for royalties, with rates of 38% declining through 2018, and was associated with a $171 million non-cash charge. Both moves reduce some near-term product revenue but are intended to focus resources on core therapeutic areas.
What are the main legal and patent risks disclosed?
Key matters include a Patent Office inter partes review of the Eliquis composition-of-matter patent (a decision on whether to initiate was expected in February 2016), the EPO revocation of the Sprycel EU patent (under appeal), ongoing PD-1 patent litigation against Merck's Keytruda in multiple jurisdictions, and product liability suits involving Plavix, Byetta, and Reglan. The company also disclosed a $14.7 million SEC settlement related to FCPA violations. The outcomes are generally not predictable, and management says they could be material.
06—Continue