01—Abstract
Summary
Summary of the 10-K filed February 25, 2019. Cited figures are marked; the original filing is the authoritative source.
Bristol-Myers Squibb's 2018 10-K shows a company in transition.
Total revenues rose 9% to $22.6 billiona, driven by Opdivo (up 36% to $6.7 billion) and Eliquis (up 32% to $6.4 billion). Together these growth brands and the other prioritized brands made up about 86% of 2018 revenues, though established brands such as HIV products, Baraclude and Daklinza continued to erode. GAAP diluted EPS was $3.01, up from $0.61 in 2017, which was depressed by U.S. tax reform charges.
Non-GAAP diluted EPS rose to $3.98b from $3.01, reflecting higher revenues, royalty income and a lower effective tax rate. GAAP results were also affected by $1.1 billion of license and asset acquisition charges (including $1.05 billion for the Nektar collaboration) and a $534 million Nektar equity-investment fair value loss. The dominant forward-looking event is the pending acquisition of Celgene, announced January 3, 2019.
The deal is valued at roughly $74 billionc and will be financed with about $33.5 billion of acquisition debt and assumed Celgene debt of about $19.9 billion. Investors should weigh the expected 2019 GAAP EPS dilution against expected non-GAAP accretion, the anticipated ratings downgrades, and the contingent value rights tied to regulatory milestones. The filing also flags a $2.2 billion termination fee exposure, a securities class action, and a Starboard Value proxy nomination of five directors.
Long-term risks are concentrated in patent expirations and competition. Opdivo's estimated U.S. loss of exclusivity is 2028 and Eliquis's is 2026, with the Eliquis composition-of-matter patent term extended to November 2026.
Eliquis and Opdivo must keep growing to offset erosion in the established brands. Other watch items include the planned 2019 closing of the UPSA divestiture for $1.6 billiond, the pension plan termination with a $1.5 to $2.0 billion non-cash charge expected in Q3 2019, and CheckMate-227 data readouts expected in 2019.
02—Key points
Key Highlights
- Revenue grew 9% to $22.56B in 2018 (U.S. +11%, Europe +13%, Rest of World -4%), with Opdivo ($6.7B, +36%) and Eliquis ($6.4B, +32%) as the main drivers.
- GAAP diluted EPS was $3.01 versus $0.61 in 2017, which included $2.9B of 2017 tax reform charges; non-GAAP diluted EPS rose 32% to $3.98 from $3.01.
- Net cash position improved to $3.3B (from $1.3B), with cash and marketable securities of $10.7B against $7.4B of total debt.
- Pending Celgene acquisition (~$74B) is financed with ~$33.5B of acquisition debt plus ~$19.9B of assumed Celgene debt, and is expected to close at the end of Q3 2019 subject to shareholder and regulatory approvals.
- Patent cliffs loom: Eliquis LOE estimated 2026 and Opdivo 2028 in the U.S.; Sprycel U.S. 2020; Reyataz and Sustiva already lost exclusivity in the U.S. in 2017.
- Royalty and licensing income of about $1.7B pre-tax in 2018 supports pre-tax earnings; GTN adjustments rose to 28% of gross sales (36% in the U.S.), a pricing pressure indicator.
- Dividend increased to $1.61 per share (from $1.57), and $1.3B of debt matures in 2019; the Q4 2018 buyback was minimal, with $1.35B remaining under the authorization.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 25, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $22.56B$20.78B | +8.6% |
| Cost of Revenue | $6.47B$6.07B | +6.6% |
| Gross Profit | $16.09B$14.68B | +9.6% |
| R&D Expenses | $6.33B$6.47B | −2.1% |
| SG&A Expenses | $4.55B$4.75B | −4.2% |
| Operating Expenses | $16.59B$15.64B | +6.1% |
| Interest Expense | $183.00M$196.00M | −6.6% |
| Net Income | $4.92B$1.01B | +388.6% |
| EPS (Basic) | $3.01$0.61 | +393.4% |
| EPS (Diluted) | $3.01$0.61 | +393.4% |
| Shares Outstanding (Basic) | 1.63B1.65B | −0.7% |
| Shares Outstanding (Diluted) | 1.64B1.65B | −0.9% |
05—Questions
Frequently Asked Questions
How does the pending Celgene acquisition change BMS's financial profile?
BMS expects the Celgene deal to be dilutive to 2019 GAAP EPS, mainly from intangible amortization, interest and integration costs, while expecting it to be accretive to non-GAAP EPS. Total debt would rise sharply: about $33.5B of acquisition financing plus $19.9B of assumed Celgene debt. Management expects rating agencies to downgrade BMS (Moody's has placed it under review and S&P has placed it on CreditWatch negative). Celgene holders will receive $50 in cash plus one BMS share per Celgene share, plus one contingent value right worth up to $9.00 in cash on future regulatory milestones. A termination fee of up to $2.2B could be payable under certain circumstances.
What are the biggest risks to BMS's revenue growth over the next several years?
Concentration is the main risk: six prioritized brands made up about 86% of 2018 revenues. Opdivo and Eliquis carry much of the growth, so any setback to either would weigh heavily. Loss of exclusivity is also a major issue. Eliquis faces generic challenges from 25 filers (settlements do not change the projected 2026 LOE), and Opdivo's estimated U.S. LOE is 2028. Established brands such as HIV products, Baraclude and Daklinza are already declining. Opdivo's late-stage data have mixed results, including the failed CheckMate-451 (SCLC) and CheckMate-331 studies, and CheckMate-227 data are expected in 2019.
Why did GAAP EPS swing so much between 2017 and 2018?
The 2017 GAAP EPS of $0.61 was depressed by a roughly $2.9B tax charge from the Tax Cuts and Jobs Act, including a $2.6B one-time deemed repatriation tax, which accounted for about $1.76 per share. In 2018, GAAP EPS of $3.01 was reduced by specified items, including $1.1B of license and asset acquisition charges (mostly the Nektar upfront payment) and a $534M loss on the Nektar equity investment. Excluding these items, non-GAAP EPS rose to $3.98 from $3.01, driven by higher revenue, royalty income and a lower effective tax rate of 17.1% (versus 81.0% in 2017, which was distorted by the tax reform charge).
How strong is BMS's balance sheet and cash generation?
BMS generated $5.9B of operating cash flow in 2018, up from $5.3B in 2017, and paid $2.6B in dividends. Cash, cash equivalents and marketable securities were $10.7B at year-end, against $7.4B of debt, for a net cash position of $3.3B. Credit ratings are A2 (Moody's) and A+ (S&P). The balance sheet will change materially after the Celgene deal closes, given the new debt load. The company also carries a $2.1B deemed repatriation tax payable over eight years and a large pension obligation that is being terminated, with a $1.5B to $2.0B non-cash charge expected in Q3 2019.
What drove the decline in U.S. Opdivo and Eliquis pricing, and how much pricing pressure is there?
Gross-to-net adjustments rose to $8.6B in 2018 (28% of gross product sales, up from 24% in 2017), with U.S. GTN at 36%. The increase was driven by higher Medicaid and Medicare rebates and by Eliquis's high GTN rate, reflecting competitive pressure to hold formulary positions. Average U.S. net selling prices were flat in 2018 after charge-backs, rebates and discounts, meaning volume growth rather than price has driven U.S. revenue. Management highlights ongoing policy risk from the 340B program, the Medicare Part D coverage gap discount (rising to 70% in 2019), the branded drug fee (falling to $2.8B in 2019) and state drug-pricing laws.
06—Continue