These pro forma results have been prepared for comparative purposes only, and include certain adjustments such as additional amortization expense as a result of intangibles arising from the purchase, and increased interest expense on acquisition debt. The pro forma results are not necessarily indicative of the results of operations which actually would have resulted had the purchase been in effect at the beginning of the respective periods or of future results.
Report of Independent Accountants| | To the Board of Directors |
| | and Stockholders of |
| | Bristol-Myers Squibb Company |
We have reviewed the accompanying consolidated balance sheet of Bristol-Myers Squibb Company and its subsidiaries as of September 30, 2001, and the related consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2001 and 2000 and the consolidated statement of cash flows for the nine-month periods ended September 30, 2001 and 2000. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000, and the related consolidated statements of earnings, comprehensive income and retained earnings and of cash flows for the year then ended (not presented herein), and in our report dated January 24, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2000, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
| | PricewaterhouseCoopers LLP |
| | New York, New York |
| | October 23, 2001, except as to the discussion of the ImClone transaction described in the first and second paragraphs of Note 8, which is as of November 1, 2001 |
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Third Quarter Results of Operations
Sales for the third quarter of 2001 increased 4% (7% excluding foreign exchange) over the prior year to $4,743 million. excluding the impact of generic competition in the U.S. for TAXOL* and BUSPAR*, sales would have increased 11% (14% excluding foreign exchange). The consolidated sales growth resulted from a 5% increase due to volume, a 2% increase due to changes in selling prices and a 3% decrease due to foreign exchange rate fluctuations. U.S. sales increased 5% and international sales increased 1% (9% excluding foreign exchange).
Worldwide pharmaceutical sales increased 6% (8% excluding foreign exchange). U.S. pharmaceutical sales increased 7% and international pharmaceutical sales increased 2% (10% excluding foreign exchange).
GLUCOPHAGE (metformin), is the leading branded oral medication for treatment of non-insulin dependent (type 2) diabetes. The entire GLUCOPHAGE franchise continued its strong growth rate, with sales increasing 44% to $702 million. GLUCOPHAGE sales increased 16% to $505 million while sales of GLUCOVANCE, launched in August 2000, and GLUCOPHAGE XR, launched in October 2000, were $95 million and $102 million, respectively.
Worldwide sales of PRAVACHOL*, a cholesterol-lowering agent, increased 26% to $561 million, benefiting from the early withdrawal from the market of a competitor product in August 2001.
Sales of PLAVIX, a platelet aggregation inhibitor, continued their strong growth, increasing 64% to $384 million, driven in part by the positive results of the CURE study (Clopidogrel in Unstable angina to prevent Recurrent ischemic Events), which were published in the New England Journal of Medicine in August 2001. In September 2001, the U.S. Food and Drug Administration (FDA) granted a priority review for the supplemental New Drug Application the Company filed for PLAVIX based on the CURE study, which demonstrated that initiating therapy with clopidogrel early, on top of standard therapy including aspirin, and continuing its use long-term, significantly reduces the risk of heart attack, stroke and cardiovascular death by 20 percent in patients with acute coronary syndrome compared with patients who received standard therapy alone.
Sales of AVAPRO, an angiotensin II receptor blocker for the treatment of hypertension, increased 37% to $137 million. In September 2001, the FDA granted a priority review for the supplemental New Drug Application filed in the U.S. based on the results of the PRIME study (Program for Irbersartan Mortality and Morbidity Evaluations), which demonstrated that Avapro protects against the progression of kidney disease in people with hypertension and type 2 diabetes. AVAPRO and PLAVIX are cardiovascular products that were launched from Bristol-Myers Squibb and Sanofi-Synthelabo.
Sales of TAXOL* (paclitaxel), the Company's leading anti-cancer agent, decreased 33% to $279 million. International sales increased 2% (11% excluding foreign exchange) to $159 million, led by strong sales growth in Japan while domestic sales decreased 54% to $120 million, due to generic competition.
Sales of TEQUIN*, a quinolone antibiotic, increased 54% to $80 million in the quarter.
Sales of VIDEX*, an anti-retroviral agent, increased 34% to $67 million due to increased sales of VIDEX EC* enteric-coated beadlets, launched in 2000.
Sales of BUSPAR*, an anti-anxiety agent, declined 84% to $28 million from $175 million in the same period of 2000, due to generic competition.
Sales of Oncology Therapeutics Network (OTN), a specialty distributor of anti-cancer medicines and related products, increased 34% to $366 million.
ENFAMIL*, the Company's largest-selling infant formula, recorded sales of $189 million, an increase of 6% from the prior year.
Sales of ostomy products increased 6% (11% excluding foreign exchange) to $112 million while sales of modern wound care products increased 5% (10% excluding foreign exchange) to $63 million.
Operating Expenses
Total expenses for the quarter ended September 30, 2001, excluding non-recurring items, as a percentage of sales, improved to 64.7% from 66.5% in 2000 primarily due to cost efficiencies and cost effectiveness.
In the third quarter 2001, the Company recorded non-recurring items, including a gain on the sale of three pharmaceutical products and the licensing rights to CORGARD*, of $240 million before taxes and a pre-tax charge of $240 million for termination of a contract sales force in the U.S. and closure of certain overseas manufacturing facilities, and for settlement of a litigation against Mead Johnson. In the third quarter 2000, the Company recorded a restructuring charge to earnings from continuing operations of $386 million before taxes.
Cost of products sold, as a percentage of sales, increased to 28.1% from 26.3% in 2000 due to increased sales of lower margin products from OTN and a decline in TAXOL* and BUSPAR* sales resulting from generic competition. Marketing, selling, administrative and other expenses, as a percentage of sales, declined to 19.8% in the quarter from 21.9% in 2000 as a result of cost efficiencies and cost effectiveness as well as sales force reductions. Expenditures for advertising and promotion in support of new and existing products declined 15% to $302 million from $356 million in 2000 due to a reduction in support for TAXOL* and BUSPAR*.
Research and development expenditures increased 4% to $496 million from $479 million in 2000. Pharmaceutical research and development spending as a percentage of pharmaceutical sales, was 12.5%, essentially the same as prior year levels.
In November 2001, the Company and Otsuka Pharmaceutical Co., Ltd. announced that a New Drug Application (NDA) was submitted to the U.S. Food and Drug Administration (FDA) for aripiprazole, an investigational novel drug for the treatment of schizophrenia. A filing to market aripiprazole in Europe, with the European Medicines Evaluation Agency (EMEA), is anticipated later this year. Also in November 2001, the FDA approved TEQUIN* for short-course (5-day) regimen in the treatment of acute bacterial exacerbation of chronic bronchitis. In addition, the Company and ImClone Systems Incorporated announced that ImClone completed its Biologics License Application (BLA) submission to the FDA for approval of ERBITUX (formerly known as IMC-C225) for the treatment of irinotecan-refractory colorectal cancer. Bristol-Myers Squibb and ImClone have entered into an agreement to co-develop and co-promote ERBITUX in the U.S., Canada and Japan.
Earnings
Earnings before income taxes, as reported, were $1,675 compared to $1,141 million in 2000. Net earnings increased to $1,231 million from $893 million in 2000 and diluted earnings per share increased to $.63 from $.45. Excluding the non-recurring items, earnings before income taxes increased 10% to $1,675 million from $1,527 million in 2000. On this basis, net earnings increased 9% to $1,231 million compared with $1,133 million in 2000. Basic earnings per share increased 10% to $.64 from $.58 in 2000 and diluted earnings per share increased 11% to $.63 from $.57 in 2000.
The effective income tax rate on earnings before income taxes was 26.5% compared with 21.7% in 2000. Excluding the non-recurring items, the effective tax rate on earnings before income taxes increased to 26.5% from 25.8% in 2000 as a result of lower production of TAXOL* and BUSPAR*.
Discontinued Operations
Clairol sales decreased 4% (3% excluding foreign exchange) to $462 million. Domestic sales decreased 3% while international sales decreased 5% (a 3% decrease excluding foreign exchange).
On August 6, 2001, the Company distributed to its shareholders all the shares of Zimmer Holdings in a tax-free spin-off.
Net earnings from discontinued operations were $14 million compared with $103 million for the third quarter of 2000. This decline is primarily the result of an additional tax provision of $53 million recorded in the quarter related to certain Zimmer international jurisdictions.
Nine Months Results of Operations
Sales for the first nine months of 2001 increased 5% (8% excluding foreign exchange) over the prior year to $14,141 million. Excluding the impace of generic competition in the U.S. TAXOL* and BUSPAR* sales would have increased 10% (13% excluding foreign exchange). The consolidated sales growth resulted from a 6% increase due to volume, a 2% increase due to changes in selling prices, and a 3% decrease due to foreign exchange rate fluctuations. U.S. sales increased 8% and international sales remained at prior year levels (a 7% increase excluding foreign exchange).
Worldwide pharmaceutical sales increased 7% (10% excluding foreign exchange). U.S. pharmaceutical sales increased 10% and international pharmaceutical sales remained at prior year levels (a 7% increase excluding foreign exchange).
The entire GLUCOPHAGE franchise continued its strong growth rate, with sales increasing 44% to $2,022 million. GLUCOPHAGE sales increased 14% to $1,541 million while GLUCOVANCE, launched in August 2000, and GLUCOPHAGE XR, launched in October 2000, had sales of $255 million and $226 million, respectively.
Worldwide sales of PRAVACHOL* increased 15% (19% excluding foreign exchange) to $1,516 million. Sales of PLAVIX increased 52% to $999 million. Sales of TAXOL* (paclitaxel) decreased 23% to $934 million. International sales increased 6% (15% excluding foreign exchange) to $476 million while domestic sales decreased 40% to $458 million, due to generic competition. Sales of PARAPLATIN* increased 10% to $530 million. Sales of AVAPRO increased 29% to $359 million. Sales of TEQUIN* were $208 million compared with $89 million in the same period of 2000. Sales of VIDEX*, an anti-retroviral agent, increased 35% to $195 million due to increased sales of VIDEX EC* enteric-coated beadlets launched in 2000.
Sales of Oncology Therapeutics Network (OTN) were $1,044 million, an increase of 35% over the prior year.
ENFAMIL*, the Company's largest-selling infant formula, recorded sales of $572 million, an increase of 5% from the prior year.
Sales of ostomy products increased 5% (11% excluding foreign exchange) to $330 million while sales of modern wound care products increased 6% (12% excluding foreign exchange) to $184 million.
Operating Expenses
In the first nine months of 2001, the Company recorded non-recurring items, including a gain on the sale of three pharmaceutical products and the licensing rights to CORGARD*, of $240 million before taxes and a pre-tax charge of $240 million for termination of a contract sales force in the U.S. and closure of certain overseas manufacturing facilities, and for settlement of litigation against Mead Johnson. In the first nine months of 2000, the Company recorded restructuring charges of $508 million before taxes. The Company also recorded a pre-tax gain on sale of businesses of $160 million.
Total expenses for the nine months ended September 30, 2001, as a percentage of sales, excluding the non-recurring items, improved to 65.6% from 67.4% in 2000 primarily due to cost efficiencies and cost effectiveness.
Cost of products sold, as a percentage of sales, increased to 28.0% from 25.8% in 2000 due to increased sales of lower margin products from OTN and a decline in TAXOL* and BUSPAR* sales. Marketing, selling, administrative and other expenses, as a percentage of sales, declined to 19.7% in the first nine months of 2001 from 22.1% in 2000 as a result of productivity, cost efficiencies and cost effectiveness. Expenditures for advertising and promotion declined 11% to $1,103 million from $1,239 million in 2000 primarily due to reduced spending on, TAXOL* and BUSPAR*. Research and development expenditures increased 9% to $1,499 million from $1,375 million in 2000 as the Company increased its investment in late stage compounds. Pharmaceutical research and development spending increased 11% over the prior year, and as a percentage of pharmaceutical sales, was 12.8% in the first nine months of 2001 and 12.5% in the first nine months of 2000.
Earnings
Earnings before income taxes, as reported, were $4,863 million compared with $4,032 million in 2000. Excluding the non-recurring items, earnings before income taxes increased 11% to $4,863 million from $4,380 million in 2000. On this basis, net earnings increased 10% to $3,576 million compared with $3,240 million in 2000. Basic earnings per share increased 12% to $1.84 from $1.65 in 2000 and diluted earnings per share increased 12% to $1.82 from $1.62 in 2000.
The effective income tax rate on earnings before income taxes was 26.5% compared with 24.9% in 2000. Excluding the non-recurring items, the effective tax rate on earnings before income taxes increased to 26.5% from 26.0% in 2000, as a result of lower production of TAXOL* and BUSPAR*.
Discontinued Operations
Clairol sales increased 1% (2% excluding foreign exchange) to $1,412 million. Domestic sales increased 2% while international sales decreased 2% (a 2% increase excluding foreign exchange).
Net earnings from discontinued operations were $206 million compared with $281 million for the first nine months of 2000. In 2001, earnings before income taxes include a pre-tax charge of $29 million in costs related to Zimmer as well as an additional $53 million tax provision related to certain Zimmer international jurisdictions.
Financial Position
The balance sheet at September 30, 2001 and the statement of cash flows for the nine months then ended reflect the Company's strong financial position. Net Cash Provided by Operating Activities increased to $3,436 million in 2001 from $2,832 million in 2000. Net assets of discontinued operations of $463 million are included in the balance sheet at September 30, 2001.
Short-Term borrowings were $1,734 million at September 30, 2001 increasing from $162 million at December 31, 2000. This increase is a result of commercial paper issued in connection with the DuPont transaction.
Long-Term Debt increased to $6,259 million from $1,336 million at December 31, 2000, as a result of the financing for the DuPont Pharmaceuticals and ImClone transactions. In September 2001, the Company issued $5 billion of debt securities of which $2.5 billion mature in 2006, and the remaining $2.5 billion mature in 2011. In connection with this financing, Moody's and Standard & Poor's reaffirmed the Company's AAA credit rating.
As a result of the Company's investment in manufacturing and research facilities, additions to fixed assets for the nine months ended September 30, 2001 increased to $687 million from $331 million during the same period of 2000. Internally generated funds continue to be the Company's primary source for financing expenditures for new plant and equipment.
Cash flows from operating and investing activities of Discontinued Operations for the nine months ended September 30, 2001 were $295 million.
During the nine months ended September 30, 2001, the Company purchased 24 million shares of its common stock at a cost of $1.3 billion. Also, the Company announced a $2 billion increase in the amount authorized for the stock repurchase program from $12 billion to $14 billion.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141 "Business Combinations", No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that companies use the purchase method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. Under the new rules, goodwill and indefinite-lived intangible assets will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The elimination of goodwill amortization prior to the DuPont Pharmaceuticals and ImClone transactions will not have a material effect on the Company's consolidated financial statements. Goodwill associated with the DuPont Pharmaceuticals and ImClone transactions and all future business combinations will not be amortized, but instead be reviewed for impairment at least annually.
Also, in June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No 143 "Accounting for Asset Retirement Obligations" effective for fiscal years beginning after June 15, 2002. SFAS No 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The adoption of this accounting requirement will not have a material effect on the Company's consolidated financial statements.
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses accounting models for use in determining impairment of long lived assets and the appropriate methodology for recording and impairment loss. The implementation of this accounting requirement is not expected to have a material effect upon adoption on the Company's consolidated financial statements.
Forward-Looking Information
This Form 10-Q Quarterly Report, and other written and oral statements that the Company makes from time to time, contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, statements relating to goals, plans and projections with respect to the Company's financial position, results of operations, market position, product development and business strategy. These statements may be identified by the fact that they use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include, among other things, market factors, competitive product development, governmental regulations and legislation, patent positions and litigation. Certain factors that may affect the Company's operations and prospects are discussed in Exhibit 99 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various lawsuits, claims and proceedings of a nature considered ordinary and routine to its business are pending against the Company and certain of its subsidiaries. The most significant of these are reported in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and material developments in such matters are described below.
TAXOL* LITIGATION
In 1997 and 1998, the Company filed several lawsuits alleging that a number of generic drug companies infringed its patents covering methods of administering paclitaxel when they filed abbreviated new drug applications seeking regulatory approval to sell paclitaxel. These actions were consolidated for discovery in the United States District Court for the District of New Jersey ("District Court"). The Company did not assert a monetary claim against any of the defendants, but sought to prevent the defendants from marketing paclitaxel in a manner that violates the Company's patents.
The defendants asserted that they did not infringe the Company's patents and that these patents are invalid and unenforceable. Some defendants also asserted counterclaims seeking damages for alleged antitrust and unfair competition violations. The Company believed its patents were valid when it filed the suits and the counterclaims asserted are believed to be without merit. Since the filing of the suits five private actions have been filed by parties alleging antitrust, consumer protection and similar claims relating to the Company's action to obtain and enforce patent rights. The Federal Trade Commission and the Attorney General of the State of Florida have each initiated investigations relating to paclitaxel. At this time, neither agency has brought any claims against the Company relating to paclitaxel, nor have they indicated whether any such claims will be brought. The Company is cooperating in these investigations.
In early 2000 the District Court invalidated most claims of the Company's patents. On April 20, 2001, the United States Court of Appeals for the Federal Circuit affirmed the District Court's summary judgment of invalidity of all but two claims of the patents at issue. Those two claims relate to the low dose, three-hour administration of paclitaxel in which the patient is given a specified regimen of premedicants before the administration of paclitaxel. The appellate court remanded those two claims to the District Court for further proceedings.
In September 2000, one of the defendants received final approval from the United States Food and Drug Administration for its Abbreviated New Drug Application for paclitaxel and is marketing the product. Additional final approvals have since been announced by the United States Food and Drug Administration and sales of additional generic products have begun. On November 6, 2001, the United States Appeals Court for the District of Columbia Circuit,in a case brought by a company not affiliated with Bristol-Myers Squibb against the FDA, ruled the FDA approval order was "arbitrary and capricious" and directed the lower court to vacate it. The Court stated, "We frankly do not know what recourse is left to the FDA or other government agencies to take any steps that would affect the marketing of generic versions of Taxol."
The Company is considering its options with respect to the two remaining claims of its patents. It is not possible at this time to make a reasonable assessment as to the final outcome of these lawsuits and investigations. Nor is it possible to reasonably estimate the impact those litigation's and investigations might have if the Company were not to prevail.
BUSPAR*
On November 21, 2000, the Company obtained a patent, U.S. Patent No. 6,150,365 ( "'365 patent"), relating to a method of using BuSpar* or buspirone. The Company timely submitted information relating to the '365 patent to the FDA for listing in an FDA publication commonly known as the "Orange Book", and the FDA thereafter listed the patent in the Orange Book.
Delisting Suits. Generic drug manufacturers sued the FDA and the Company to compel the delisting of the '365 patent from the Orange Book. Although one district court declined to order the delisting of the '365 patent, another ordered the Company to cause the delisting of the patent from the Orange Book. The Company complied with the court's order but appealed the decision to the United States Court of Appeals for the Federal Circuit, which ruled that it was improper for the district court to order the Company to delist its patent from the Orange Book. It is not possible at this time to predict what impact, if any, this decision will have on sales of Buspar*.
Patent Suits. The Company is seeking to enforce the '365 patent in actions against two generic drug manufacturers.
Antitrust Suits. Following the delisting of the '365 patent from the Orange Book, a number of purchasers of buspirone and several generic drug makers filed lawsuits against the Company alleging that it improperly triggered statutory marketing exclusivity. The central issue raised by these cases is whether the Company improperly caused the listing of the '365 patent in the Orange Book. Plaintiffs seek declaratory judgment, damages, disgorgement and injunctive relief.
Multidistrict Litigation (MDL) proceedings. The Judicial Panel on MDL granted the Company's motions to have all of the patent and antitrust cases consolidated in a single forum.
Government Investigations. The Federal Trade Commission and a number of state attorneys general have initiated investigations concerning the listing of the '365 patent in the Orange Book. The Company is cooperating in these investigations.
It is not possible at this time to make a reasonable assessment as to the final outcome of these lawsuits and investigations. Nor is it possible to reasonably estimate the impact these litigations and investigations might have if the Company were not to prevail.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (listed by number corresponding to the Exhibit Table of Item 601 in Regulation S-K).
Exhibit Number and Description Page
