10-Q 1 bmy-20130630x10q.htm 10-Q BMY-2013.06.30-10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             
Commission file number:              1-1136
 
 BRISTOL-MYERS SQUIBB COMPANY
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
22-0790350
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
345 Park Avenue, New York, N.Y. 10154
(Address of principal executive offices) (Zip Code)
 
(212) 546-4000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
At June 30, 2013, there were 1,646,323,647 shares outstanding of the Registrant’s $0.10 par value common stock.

 




BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
JUNE 30, 2013
 





PART I—FINANCIAL INFORMATION
Item  1. FINANCIAL STATEMENTS
BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
Dollars and Shares in Millions, Except Per Share Data
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
EARNINGS
2013
 
2012
 
2013
 
2012
Net Sales
$
4,048

 
$
4,443

 
$
7,879

 
$
9,694

Cost of products sold
1,108

 
1,245

 
2,171

 
2,548

Marketing, selling and administrative
1,042

 
1,004

 
2,036

 
2,006

Advertising and product promotion
218

 
224

 
407

 
418

Research and development
951

 
962

 
1,881

 
1,871

Other (income)/expense
199

 
(51
)
 
180

 
(235
)
Total Expenses
3,518

 
3,384

 
6,675

 
6,608

 
 
 
 
 
 
 
 
Earnings Before Income Taxes
530

 
1,059

 
1,204

 
3,086

Provision for income taxes

 
251

 
51

 
796

Net Earnings
530

 
808

 
1,153

 
2,290

Net Earnings/(Loss) Attributable to Noncontrolling Interest
(6
)
 
163

 
8

 
544

Net Earnings Attributable to BMS
$
536

 
$
645

 
$
1,145

 
$
1,746

 
 
 
 
 
 
 
 
Earnings per Common Share
 
 
 
 
 
 
 
Basic
$
0.33

 
$
0.38

 
$
0.70

 
$
1.04

Diluted
$
0.32

 
$
0.38

 
$
0.69

 
$
1.02

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.35

 
$
0.34

 
$
0.70

 
$
0.68

The accompanying notes are an integral part of these consolidated financial statements.

3




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in Millions
(UNAUDITED)

 
Three Months Ended
 June 30,
 
Six Months Ended
June 30,
COMPREHENSIVE INCOME
2013
 
2012
 
2013
 
2012
Net Earnings
$
530

 
$
808

 
$
1,153

 
$
2,290

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges
(3
)
 
13

 
38

 
12

Pension and postretirement benefits
697

 
22

 
724

 
60

Available for sale securities
(50
)
 
12

 
(46
)
 
(1
)
Foreign currency translation
(33
)
 
4

 
(34
)
 
7

Other Comprehensive Income/(Loss)
611

 
51

 
682

 
78

 
 
 
 
 
 
 
 
Comprehensive Income
1,141

 
859

 
1,835

 
2,368

Comprehensive Income/(Loss) Attributable to Noncontrolling Interest
(6
)
 
163

 
8

 
544

Comprehensive Income Attributable to BMS
$
1,147

 
$
696

 
$
1,827

 
$
1,824

The accompanying notes are an integral part of these consolidated financial statements.

4




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Share and Per Share Data(UNAUDITED) 
ASSETS
June 30,
2013
 
December 31,
2012
Current Assets:
 
 
 
Cash and cash equivalents
$
1,821

 
$
1,656

Marketable securities
978

 
1,173

Receivables
3,406

 
3,083

Inventories
1,785

 
1,657

Deferred income taxes
1,960

 
1,597

Prepaid expenses and other
536

 
355

Total Current Assets
10,486

 
9,521

Property, plant and equipment
5,228

 
5,333

Goodwill
7,646

 
7,635

Other intangible assets
8,370

 
8,778

Deferred income taxes
195

 
203

Marketable securities
3,223


3,523

Other assets
1,104

 
904

Total Assets
$
36,252

 
$
35,897

 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
Short-term borrowings and current portion of long-term debt
$
764

 
$
826

Accounts payable
2,346

 
2,202

Accrued expenses
2,423

 
2,573

Deferred income
986

 
825

Accrued rebates and returns
1,017

 
1,054

Income taxes payable
212

 
193

Dividends payable
606

 
606

Total Current Liabilities
8,354

 
8,279

Pension, postretirement and postemployment liabilities
826

 
1,882

Deferred income
4,146

 
4,024

Income taxes payable
644

 
648

Deferred income taxes
818

 
383

Other liabilities
649

 
475

Long-term debt
6,442

 
6,568

Total Liabilities
21,879

 
22,259

 
 
 
 
Commitments and contingencies (Note 17)

 

 
 
 
 
EQUITY
 
 
 
 
 
 
 
Bristol-Myers Squibb Company Shareholders’ Equity:
 
 
 
Preferred stock, $2 convertible series, par value $1 per share: Authorized 10 million shares; issued
 
 
 
and outstanding 4,485 in 2013 and 5,117 in 2012, liquidation value of $50 per share

 

Common stock, par value of $0.10 per share: Authorized 4.5 billion shares; 2.2 billion issued in
 
 
 
both 2013 and 2012
221

 
221

Capital in excess of par value of stock
1,975

 
2,694

Accumulated other comprehensive loss
(2,520
)
 
(3,202
)
Retained earnings
32,715

 
32,733

Less cost of treasury stock – 562 million common shares in 2013 and 570 million in 2012
(18,020
)
 
(18,823
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
14,371

 
13,623

Noncontrolling interest
2

 
15

Total Equity
14,373

 
13,638

Total Liabilities and Equity
$
36,252

 
$
35,897

The accompanying notes are an integral part of these consolidated financial statements.

5




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
(UNAUDITED)

 
Six Months Ended June 30,
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
1,153

 
$
2,290

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Net earnings attributable to noncontrolling interest
(8
)
 
(544
)
Depreciation and amortization, net
402

 
287

Deferred income taxes
(335
)
 
80

Stock-based compensation
95

 
82

Impairment charges
4

 
288

Other
(11
)
 
13

Changes in operating assets and liabilities:
 
 
 
Receivables
(404
)
 
544

Inventories
(173
)
 
(170
)
Accounts payable
203

 
(222
)
Deferred income
619

 
43

Income taxes payable
(31
)
 
75

Other
(432
)
 
(1,245
)
Net Cash Provided by Operating Activities
1,082

 
1,521

Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
1,278

 
3,337

Purchases of marketable securities
(850
)
 
(3,426
)
Additions to property, plant and equipment and capitalized software
(213
)
 
(236
)
Sale of businesses and other investing activities
3

 
15

Purchases of businesses, net of cash acquired

 
(2,491
)
Net Cash Provided by/(Used in) Investing Activities
218

 
(2,801
)
Cash Flows From Financing Activities:
 
 
 
Net change in short-term borrowings
(79
)
 
121

Proceeds from issuance of long-term debt
12

 

Long-term debt repayments

 
(109
)
Interest rate swap terminations

 
2

Issuance of common stock
443

 
314

Common stock repurchases
(380
)
 
(860
)
Dividends
(1,155
)
 
(1,154
)
Net Cash Used in Financing Activities
(1,159
)
 
(1,686
)
Effect of Exchange Rates on Cash and Cash Equivalents
24

 
(9
)
Increase/(Decrease) in Cash and Cash Equivalents
165

 
(2,975
)
Cash and Cash Equivalents at Beginning of Period
1,656

 
5,776

Cash and Cash Equivalents at End of Period
$
1,821

 
$
2,801

The accompanying notes are an integral part of these consolidated financial statements.

6





Note 1. BASIS OF PRESENTATION

Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS or the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) and United States (U.S.) generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q. These consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the financial position at June 30, 2013 and December 31, 2012, and the results of operations for the three and six months ended June 30, 2013 and 2012, and cash flows for the six months ended June 30, 2013 and 2012. All intercompany balances and transactions have been eliminated. Material subsequent events are evaluated and disclosed through the report issuance date. These unaudited consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 included in the Annual Report on Form 10-K.

Certain prior period amounts have been reclassified to conform to the current period presentation. The presentation of depreciation and amortization in the consolidated statements of cash flows includes the depreciation of property, plant and equipment, the amortization of intangible assets and deferred income. The provision for restructuring, equity in net income of affiliates, and litigation expense, net, previously presented separately on the consolidated statements of earnings, are currently presented as components of other (income)/expense.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be indicative of full year operating results. The preparation of financial statements requires the use of management estimates and assumptions. The most significant assumptions are employed in estimates used in determining the fair value and potential impairment of intangible assets; sales rebate and return accruals; legal contingencies; income taxes; and pension and postretirement benefits. Actual results may differ from estimated results.

Note 2. BUSINESS SEGMENT INFORMATION

BMS operates in a single segment engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of innovative medicines that help patients prevail over serious diseases. A global research and development organization and supply chain organization are utilized and responsible for the development and delivery of products to the market. Regional commercial organizations distribute and sell the products. The business is also supported by global corporate staff functions. Segment information is consistent with the financial information regularly reviewed by the chief executive officer for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting future periods.
 
Net sales of key products were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Virology
 
 
 
 
 
 
 
Baraclude (entecavir)
$
371

 
$
357

 
$
737

 
$
682

Reyataz (atazanavir sulfate)
431

 
406

 
792

 
764

Sustiva (efavirenz) Franchise
411

 
388

 
798

 
774

Oncology
 
 
 
 
 
 
 
Erbitux* (cetuximab)
171

 
179

 
333

 
358

Sprycel (dasatinib)
312

 
244

 
599

 
475

Yervoy (ipilimumab)
233

 
162

 
462

 
316

Neuroscience
 
 
 
 
 
 
 
Abilify* (aripiprazole)
563

 
711

 
1,085

 
1,332

Metabolics
 
 
 
 
 
 
 
Bydureon* (exenatide extended-release for injectable suspension)
66

 
 N/A

 
118

 
 N/A

Byetta* (exenatide)
104

 
 N/A

 
189

 
 N/A

Forxiga (dapagliflozin)
5

 
 N/A

 
8

 
 N/A

Onglyza/Kombiglyze (saxagliptin/saxagliptin and metformin)
240

 
172

 
442

 
333

Immunoscience
 
 
 
 
 
 
 
Nulojix (belatacept)
6

 
3

 
11

 
4

Orencia (abatacept)
352

 
290

 
672

 
544

Cardiovascular
 
 
 
 
 
 
 
Avapro*/Avalide* (irbesartan/irbesartan-hydrochlorothiazide)
56

 
117

 
102

 
324

Eliquis (apixaban)
12

 
1

 
34

 
1

Plavix* (clopidogrel bisulfate)
44

 
741

 
135

 
2,434

 
 
 
 
 
 
 
 
Mature Products and All Other
671

 
672

 
1,362

 
1,353

Net Sales
$
4,048

 
$
4,443

 
$
7,879

 
$
9,694

*
Indicates brand names of products which are trademarks not owned or wholly owned by BMS. Specific trademark ownership information can be found at the end of this quarterly report on Form 10-Q.

7




Note 3. ALLIANCES AND COLLABORATIONS

BMS enters into alliance and collaboration arrangements with third parties for the development and commercialization of certain products. Both parties are active participants in the alliance operating activities and exposed to significant risks and rewards depending on the commercial success of the activities. BMS may either in-license intellectual property owned by the other party or out-license its intellectual property to the other party. These arrangements also typically include research, development, manufacturing, and/or commercial activities and can cover a single investigational compound or marketed product or multiple compounds and/or products in various life cycle stages.

When BMS is the principal in the customer sale, 100% of product sales are recognized. Otherwise, only BMS’s contractual share of alliance revenue is reported in net sales.
Payments between collaboration partners are presented in operating results based on the nature of the arrangement, including its contractual terms, the nature of the payments and the applicable accounting guidance. Upfront and contingent milestone payments made by BMS prior to product approval are immediately expensed and those payments made after product approval are amortized over the shorter of the contractual term or estimated life of the product. Upfront and contingent milestones received by BMS are amortized over the shorter of the contractual term or estimated life of the product. Other activities between BMS and its collaboration partners are presented in operating results as follows:

Payments from collaboration partners to BMS for supply arrangements, royalties, co-promotional and collaboration fees are presented in net sales when BMS’s collaboration partner is the principal in the customer sale.
Payments from BMS to collaboration partners for supply arrangements, royalties, profit sharing and distribution fees and the amortization of upfront or contingent milestone payments made upon or after regulatory approval are included in cost of products sold.
Cost reimbursement payments between the parties for commercial expenses are included in marketing, selling, administrative, advertising and product promotion expenses.
Upfront and contingent milestone payments from BMS to collaboration partners prior to regulatory approval and cost reimbursement payments between the parties are included in research and development expenses.
The amortization of upfront and contingent milestone payments from collaboration partners to BMS prior to regulatory approval, equity in net income of affiliates and other payments that are related to non-core activities are included in other (income)/expense.

All payments between BMS and its collaboration partners are presented in cash flows from operating activities, including profit distributions when the activities are conducted through a separate and distinct legal entity or partnership.

See the 2012 Annual Report on Form 10-K for a more complete description of the below agreements, including termination provisions.
Otsuka

BMS has a worldwide commercialization agreement, excluding certain Asian countries, with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote Abilify*, for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder. The U.S. portion of the commercialization and manufacturing agreement was amended in 2009 and further amended in 2012, and it expires upon the expected loss of product exclusivity in April 2015. The agreement expires in all EU countries in June 2014 and in each other non-U.S. country where we have the exclusive right to sell Abilify*, the agreement expires on the later of April 2015 or loss of exclusivity in any such country.

Otsuka is the principal in most third-party net sales. Therefore, net sales recognized for Abilify* include only BMS’s contractual share of total net sales to third party customers. In the U.S., BMS’s contractual share was 51.5% in 2012. Beginning January 1, 2013, BMS’s contractual share changed to the percentages of total U.S. net sales set forth in the table below. BMS recognizes revenue based on the weighted-average forecast of expected annual net sales (currently estimated at 34.3%).
 
Share as a % of U.S. Net Sales
$0 to $2.7 billion
50%
$2.7 billion to $3.2 billion
20%
$3.2 billion to $3.7 billion
7%
$3.7 billion to $4.0 billion
2%
$4.0 billion to $4.2 billion
1%
In excess of $4.2 billion
20%


8




In the United Kingdom, Germany, France, Spain, and beginning on March 1, 2013 in Italy, BMS’s contractual share of third-party net sales is 65%. In these countries and the U.S., third-party customers are invoiced by BMS on behalf of Otsuka and alliance revenue is recognized when Abilify* is shipped and all risks and rewards of ownership have been transferred to third-party customers. BMS recognizes all of the net sales in certain countries where it is the exclusive distributor for the product or has an exclusive right to sell Abilify*.

BMS purchases the active pharmaceutical ingredient from Otsuka and completes the manufacture of the product for sale to third-party customers by BMS or Otsuka. Under the terms of the 2009 U.S. amendment, BMS paid Otsuka $400 million in 2009, which is amortized as a reduction of net sales through the expected loss of U.S. exclusivity in April 2015. The unamortized balance is included in other assets. Otsuka receives a royalty based on 1.5% of total U.S. net sales, which is included in cost of products sold. Otsuka was responsible for 30% of the U.S. expenses related to the commercialization of Abilify* from 2010 through 2012. Under the 2012 U.S. amendment, Otsuka assumed responsibility for providing and funding all sales force efforts effective January 2013. In consideration, BMS paid Otsuka $27 million in January 2013, and is responsible for funding certain operating expenses up to $82 million in 2013, $56 million in 2014 and $8 million in 2015. In the EU, Otsuka reimbursed BMS for the sales force effort it provided through March 31, 2013. Otsuka assumed responsibility for providing and funding sales force efforts in the EU effective April 2013.

BMS and Otsuka also have an oncology collaboration for Sprycel and Ixempra (ixabepilone) (the “Oncology Products”) in the U.S., Japan and the EU (the Oncology Territory). A collaboration fee, included in cost of products sold, is paid to Otsuka based on the following percentages of annual net sales of Sprycel and Ixempra:
 
% of Net Sales
 
2010 – 2012
 
2013 – 2020
$0 to $400 million
30%
 
65%
$400 million to $600 million
5%
 
12%
$600 million to $800 million
3%
 
3%
$800 million to $1.0 billion
2%
 
2%
In excess of $1.0 billion
1%
 
1%

During these annual periods, Otsuka contributes 20% of the first $175 million of certain commercial operational expenses relating to the Oncology Products in the Oncology Territory and 1% of such costs in excess of $175 million.

Summarized financial information related to this alliance is as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Abilify* net sales, net of amortization of extension payment
$
563

 
$
711

 
$
1,085

 
$
1,332

Oncology Products collaboration fee expense
76

 
35

 
146

 
67

Royalty expense
23

 
20

 
40

 
37

Reimbursement of operating expenses to/(from) Otsuka
8

 
(19
)
 
2

 
(32
)
Amortization (income)/expense – extension payment
17

 
17

 
33

 
33

Amortization (income)/expense – upfront, milestone and other
 
 
 
 
 
 
 
licensing payments

 
2

 

 
4

Dollars in Millions
June 30,
2013
 
December 31,
2012
Other assets – extension payment
$
120

 
$
153


AstraZeneca

BMS and AstraZeneca have a diabetes alliance consisting of three worldwide codevelopment and commercialization agreements. One collaboration covers Onglyza, Kombiglyze XR (saxagliptin and metformin hydrochloride extended-release), and Komboglyze (saxagliptin and metformin immediate-release marketed in the EU); a second collaboration covers Forxiga; and a third collaboration, entered into in August 2012, covers Amylin’s portfolio of products (Bydureon*, Byetta*, Symlin* (pramlintide acetate) and metreleptin, which is currently in development). The agreements for saxagliptin exclude Japan. In this document unless specifically noted, we refer to both Kombiglyze and Komboglyze as Kombiglyze. Onglyza and Forxiga were discovered by BMS. Kombiglyze was codeveloped with AstraZeneca. Bydureon*, Byetta*, Symlin* and metreleptin were discovered by Amylin, LLC (Amylin), a wholly-owned subsidiary of BMS since August 2012. BMS is the principal in third party customer net sales, except in Japan. Both companies jointly develop the clinical and marketing strategy and share commercialization expenses and profits and losses equally on a global basis and also share in development costs, with the exception of Forxiga development costs in Japan, which are borne by AstraZeneca subject to a pre-agreed clinical plan. Additional trials will be shared equally.


9




In 2012, BMS received preliminary proceeds of $3.6 billion from AstraZeneca as consideration for entering into the Amylin-related collaboration including $73 million included in accrued expenses that is expected to be reimbursed back to AstraZeneca in the third quarter of 2013. The remaining $3.5 billion is accounted for as deferred income and amortized as a reduction to cost of products sold on a pro-rata basis over the estimated useful lives of the related long-lived assets assigned in the purchase price allocation (primarily intangible assets with a weighted-average estimated useful life of 12 years and property, plant and equipment with a weighted-average estimated useful life of 15 years). The net proceeds that BMS received from AstraZeneca as consideration for entering into the collaboration are subject to certain adjustments including the right to receive an additional $135 million when AstraZeneca exercises its option for equal governance rights over certain key strategic and financial decisions regarding the collaboration, which it has indicated it intends to do pending required anti-trust approvals in certain international markets. BMS is entitled to reimbursements for 50% of capital expenditures related to Amylin. BMS and AstraZeneca agreed to share in certain tax attributes related to the Amylin collaboration. The preliminary proceeds of $3.6 billion that BMS received from AstraZeneca included $207 million related to sharing of certain tax attributes.
With respect to the other collaborations, BMS has received $300 million in upfront, milestone and other licensing payments related to saxagliptin to date and could receive up to an additional $300 million for sales-based milestones. BMS has also received $250 million in upfront, milestone and other licensing payments related to dapagliflozin to date, and could potentially receive up to an additional $150 million for development and regulatory milestones and up to an additional $390 million for sales-based milestones.
Summarized financial information related to these alliances is as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
431

 
$
172

 
$
789

 
$
333

Profit sharing expense
178

 
77

 
324

 
150

Commercialization expense reimbursements to/(from) AstraZeneca
(82
)
 
(7
)
 
(139
)
 
(19
)
Research and development expense reimbursements to/(from) AstraZeneca
(22
)
 
6

 
(39
)
 
10

Amortization (income)/expense – upfront, milestone and other licensing
 
 
 
 
 
 
 
receipts recognized in:
 
 
 
 
 
 
 
Cost of products sold
(74
)
 

 
(149
)
 

Other (income)/expense
(8
)
 
(11
)
 
(15
)
 
(21
)
Upfront, milestone and other licensing receipts:
 
 
 
 
 
 
 
Dapagliflozin

 

 
80

 

Dollars in Millions
June 30,
2013
 
December 31,
2012
Deferred income – upfront, milestone and other licensing receipts
 
 
 
Amylin-related products
$
3,279

 
$
3,423

Saxagliptin
200

 
208

Dapagliflozin
199

 
206


Gilead

BMS and Gilead Sciences, Inc. (Gilead) have a joint venture in the U.S., for the U.S. and Canada, and in Europe to develop and commercialize Atripla* (efavirenz 600 mg/ emtricitabine 200 mg/ tenofovir disoproxil fumarate 300 mg), a once-daily single tablet three-drug regimen for the treatment of human immunodeficiency virus (HIV) infection, combining Sustiva, a product of BMS, and Truvada* (emtricitabine and tenofovir disoproxil fumarate), a product of Gilead.

Net sales recognized for Atripla* include only the bulk efavirenz component of Atripla*. They are deferred until the combined product is sold to third-party customers and are based on the relative ratio of the average respective net selling prices of Truvada* and Sustiva.

Summarized financial information related to this alliance is as follows: 

Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
346

 
$
323

 
$
670

 
$
645

Equity in net loss of affiliates
4

 
4

 
8

 
8


10




Lilly

BMS has an Epidermal Growth Factor Receptor (EGFR) commercialization agreement with Eli Lilly and Company (Lilly) through Lilly’s November 2008 acquisition of ImClone Systems Incorporated (ImClone) for the codevelopment and promotion of Erbitux* in the U.S. which expires in September 2018. BMS also has codevelopment and copromotion rights in Canada and Japan. Erbitux* is indicated for use in the treatment of patients with metastatic colorectal cancer and for use in the treatment of squamous cell carcinoma of the head and neck. BMS is the principal in third party customer sales in North America. Under the EGFR agreement, with respect to Erbitux* sales in North America, BMS pays Lilly a distribution fee based on a flat rate of 39% of net sales in North America plus a share of certain royalties paid by Lilly.

In Japan, BMS shares rights to Erbitux* under an agreement with Lilly and Merck KGaA and receives 50% of the pre-tax profit from Merck KGaA’s net sales of Erbitux* in Japan which is further shared equally with Lilly.

In March 2013, the Company and Lilly terminated the global codevelopment and cocommercialization arrangement for necitumumab (IMC-11F8), with all rights returning to Lilly. Discovered by ImClone, necitumumab is a fully human monoclonal antibody that was part of the alliance between the Company and Lilly.

BMS is amortizing $500 million of license acquisition costs associated with the EGFR commercialization agreement through 2018.

Summarized financial information related to this alliance is as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
171

 
$
179

 
$
333

 
$
358

Distribution fees and royalty expense
71

 
75

 
138

 
149

Research and development expense reimbursement to Lilly – necitumumab

 
7

 

 
8

Amortization (income)/expense – upfront, milestone and other licensing
 
 
 
 
 
 
 
payments
10

 
9

 
19

 
19

Japan commercialization fee (income)/expense
(8
)
 
(13
)
 
(12
)
 
(19
)
Dollars in Millions
June 30,
2013
 
December 31,
2012
Other intangible assets – upfront, milestone and other licensing payments
$
192

 
$
211


Prior to BMS’s acquisition of Amylin on August 8, 2012, Amylin had entered into a settlement and termination agreement with Lilly regarding their collaboration for the global development and commercialization of Byetta* and Bydureon* (exenatide products) under which the parties agreed to transition full responsibility of these products to Amylin. The transition of the U.S. operations was completed by the time of the acquisition. The transition of non-U.S. operations of the exenatide products in a majority of markets was completed on April 1, 2013 terminating Lilly’s exclusive right to non-U.S. commercialization of the exenatide products. BMS is responsible for any non-U.S. losses incurred by Lilly during 2012 and 2013 up to a maximum of $60 million. Revised estimates related to this obligation resulted in $21 million of other income during the three and six months ended June 30, 2013.

Sanofi

In September 2012, BMS and Sanofi restructured the terms of the codevelopment and cocommercialization agreements for Plavix*, a platelet aggregation inhibitor, and Avapro*/Avalide*, an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy. Effective January 1, 2013, Sanofi assumed essentially all of the worldwide operations of the alliance with the exception of Plavix* in the U.S. and Puerto Rico. The alliance for Plavix* in these markets will continue unchanged through December 2019 under the same terms as in the original alliance arrangements described below. In exchange for the rights being assumed by Sanofi, BMS will receive quarterly royalties from January 1, 2013 until December 31, 2018 and a terminal payment from Sanofi of $200 million at the end of 2018.

Beginning in 2013, all royalties received from Sanofi in the territory covering the Americas and Australia, opt-out markets, and former development royalties are presented in net sales, including $56 million and $107 million in the three and six months ended June 30, 2013, respectively. Development and opt-out royalties were recognized in other (income)/expense in 2012. Royalties attributed to the territory covering Europe and Asia continue to be earned by the territory partnership and are included in equity in net income of affiliates. Additionally, equity in net income of affiliates for the six months ended June 30, 2013 includes $22 million of profit that was deferred prior to the restructuring of the agreement. Net sales attributed to the supply of irbesartan active pharmaceutical ingredient to Sanofi were $33 million and $30 million for the three months ended June 30, 2013 and 2012, respectively, and $51 million and $68 million for the six months ended June 30, 2013 and 2012, respectively. The supply arrangement for irbesartan expires in 2015.


11




Prior to the restructuring, BMS’s worldwide alliance with Sanofi for the codevelopment and cocommercialization of Avapro*/Avalide* and Plavix* operated under the framework of two geographic territories: one in the Americas (principally the U.S., Canada, Puerto Rico and Latin American countries) and Australia, and the other in Europe and Asia. These two territory partnerships managed central expenses, such as marketing, research and development and royalties, and supply of finished product to individual countries. BMS acted as the operating partner and owned a 50.1% majority controlling interest in the territory covering the Americas and Australia and consolidates all country partnership results for this territory with Sanofi’s 49.9% share of the results reflected as a noncontrolling interest. BMS also recognized net sales in comarketing countries outside this territory (e.g. Italy for irbesartan only, Germany, Greece and Spain). Sanofi acted as the operating partner and owned a 50.1% majority controlling interest in the territory covering Europe and Asia and BMS has a 49.9% ownership interest in this territory.

Summarized financial information related to this alliance is as follows: 

Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
100

 
$
858

 
$
237

 
$
2,758

Royalty expense

 
141

 
2

 
508

Equity in net income of affiliates
(54
)
 
(58
)
 
(94
)
 
(118
)
Other (income)/expense
(4
)
 
(47
)
 
(14
)
 
(61
)
Noncontrolling interest – pre-tax
(1
)
 
249

 
23

 
854

 
 
 
 
 
 
 
 
Distributions to Sanofi
(22
)
 
(449
)
 
(22
)
 
(1,058
)
Distributions to BMS
21

 
62

 
52

 
129

Dollars in Millions
June 30,
2013
 
December 31,
2012
Investment in affiliates – territory covering Europe and Asia
$
51

 
$
9

Noncontrolling interest
(29
)
 
(30
)

The following is summarized financial information for interests in the partnerships with Sanofi for the territory covering Europe and Asia, which are not consolidated but are accounted for using the equity method: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
128

 
$
319

 
$
177

 
$
638

Gross profit
104

 
132

 
141

 
270

Net income
102

 
120

 
138

 
242


Pfizer

BMS and Pfizer Inc. (Pfizer) maintain a worldwide codevelopment and cocommercialization agreement for Eliquis, an anticoagulant discovered by BMS. Eliquis was approved in the European Union (EU) for the prevention of venous thromboembolic events in adult patients who have undergone elective hip or knee replacement surgery in May 2011 and was approved in the EU in November 2012 and in the U.S. and Japan in December 2012 to reduce the risk of stroke and systemic embolism in patients with nonvalvular atrial fibrillation. Pfizer funds between 50% and 60% of all development costs depending on the study. The companies jointly develop the clinical and marketing strategy and share commercialization expenses and profits equally on a global basis. In certain countries not in the BMS global commercialization network, Pfizer will commercialize Eliquis alone and will pay BMS compensation based on a percentage of net sales. BMS manufactures the product and is the principal in third party customer sales.

BMS received $684 million in upfront, milestone and other licensing payments for Eliquis to date, and could receive up to an additional $200 million for development and regulatory milestones.


12




Summarized financial information related to this alliance is as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
12

 
$
1

 
$
34

 
$
1

Profit sharing expense
6

 

 
16

 

Commercialization expense reimbursement to/(from) Pfizer
(5
)
 
(3
)
 
(17
)
 
(8
)
Research and development reimbursements to/(from) Pfizer
2

 
9

 
9

 
11

Amortization (income)/expense – upfront, milestone and other
 
 
 
 
 
 
 
licensing receipts
(9
)
 
(9
)
 
(19
)
 
(19
)
 
 
 
 
 
 
 
 
Upfront, milestone and other licensing receipts

 

 
125

 

Dollars in Millions
June 30,
2013
 
December 31,
2012
Deferred income – upfront, milestone and other licensing receipts
$
503

 
$
397


Reckitt Benckiser Group plc

In May 2013, BMS and Reckitt Benckiser Group plc (Reckitt) entered into a three year collaboration regarding several over-the-counter-products sold primarily in Mexico and Brazil. Net sales of these products were approximately $100 million in 2012. Reckitt received the right to sell, distribute and market the products through May 2016 and will have certain responsibilities related to regulatory matters in the covered territory. BMS will receive royalties on net sales of the products and will also exclusively supply certain of the products to Reckitt pursuant to a supply agreement at cost plus a markup. Certain limited assets, including the market authorizations and certain employees directly attributed to the business, were transferred to Reckitt at the start of the collaboration period. BMS retained ownership of all other assets related to the business including the trademarks covering the products.

BMS also granted Reckitt an option to acquire the trademarks, inventory and certain other assets exclusively related to the products at the end of the collaboration at a price determined based on a multiple of sales (plus the cost of any remaining inventory held by BMS at the time). If the option is not exercised, all assets previously transferred to Reckitt will revert back to BMS. The option may be exercised by Reckitt between May and November 2015, in which case closing would be expected to occur in May 2016.

Upfront collaboration proceeds of $485 million received by BMS were allocated to the rights transferred to Reckitt ($376 million) and the fair value of the option ($109 million). The allocation was based on the estimated fair value of the option after considering various market factors, including an analysis of any estimated excess of the fair value of the business over the potential purchase price if the option is exercised. The fair value of the option was determined using Level 3 inputs and included in other liabilities. Changes in the estimated fair value of the option liability are recognized in other (income)/expense and were not material in the three and six months ended June 30, 2013. The remaining $376 million is recognized as alliance revenue throughout the collaboration period. Alliance revenue, including product supply and royalties, was $30 million during the three and six months ended June 30, 2013. Transaction fees of $11 million were included in other expense.

The Medicines Company

In February 2013, BMS and The Medicines Company entered into a two year collaboration for Recothrom, a recombinant thrombin for use as a topical hemostat to control non-arterial bleeding during surgical procedures (previously acquired by BMS in connection with its acquisition of ZymoGenetics in 2010). Net sales of Recothrom were $67 million in 2012. The Medicines Company received the right to sell, distribute and market Recothrom on a global basis for two years, and will have certain responsibilities related to regulatory matters. BMS will exclusively supply Recothrom to The Medicines Company pursuant to a supply agreement at cost plus a markup and will also receive royalties on net sales of Recothrom. Certain employees directly attributed to the business and certain assets were transferred to The Medicines Company at the start of the collaboration period, including the Recothrom Biologics License Application and related regulatory assets. BMS retained all other assets related to Recothrom including the patents, trademarks and inventory.

BMS also granted The Medicines Company an option to acquire the patents, trademarks, inventory and certain other assets exclusively related to Recothrom at a price determined based on a multiple of sales plus the cost of any remaining inventory held by BMS at that time. If the option is not exercised, all assets previously transferred to The Medicines Company revert back to BMS. The option may be exercised by The Medicines Company between February and August 2014, in which case closing would be expected to occur in February 2015.


13




Upfront collaboration proceeds of $115 million received by BMS were allocated to the rights transferred to The Medicines Company ($80 million) and the fair value of the option ($35 million). The allocation was based on the estimated fair value of the option after considering various market factors, including an analysis of any estimated excess of the fair value of the business over the potential purchase price if the option is exercised. The fair value of the option was determined using Level 3 inputs and included in other liabilities. Changes in the estimated fair value of the option liability are recognized in other (income)/expense and were not material in the three and six months ended June 30, 2013. The remaining $80 million is recognized as alliance revenue throughout the collaboration period. Alliance revenue, including royalties and product supply, was $22 million and $30 million during the three and six months ended June 30, 2013.

Valeant

In October 2012, BMS and PharmaSwiss SA, a wholly-owned subsidiary of Valeant Pharmaceuticals International Inc. (Valeant) entered into a collaboration for certain mature brand products in Europe. Valeant received the right to sell, distribute, and market the products in Europe through December 31, 2014 and will have certain responsibilities related to regulatory matters in the covered territory. During the collaboration term, BMS will exclusively supply the products to Valeant pursuant to a supply agreement at cost plus a markup.

BMS also granted Valeant an option to acquire the trademarks and intellectual property exclusively related to the products at a price determined based on a multiple of sales. If the option is not exercised, all rights transferred to Valeant revert back to BMS. The option may be exercised by Valeant between January and June 2014, in which case closing would be expected to occur in December 2014.

Upfront collaboration proceeds of $79 million received by BMS were allocated to the rights transferred to Valeant ($61 million) and the fair value of the option to purchase the remaining assets ($18 million). The allocation was based on the estimated fair value of the option after considering various market factors, including an analysis of any estimated excess of the fair value of the business over the potential purchase price if the option is exercised. The fair value of the option was determined using Level 3 inputs and included in other liabilities. Changes in the estimated fair value of the option liability are recognized in other (income)/expense and were not material for the three and six months ended June 30, 2013. The remaining $61 million is recognized as alliance revenue throughout the collaboration period. Alliance revenue, including product supply was $19 million and $30 million during the three and six months ended June 30, 2013.



Note 4. OTHER (INCOME)/EXPENSE
Other (income)/expense includes:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Interest expense
$
50

 
$
41

 
$
100

 
$
83

Investment income
(28
)
 
(22
)
 
(53
)
 
(58
)
Provision for restructuring
173

 
20

 
206

 
42

Litigation charges/(recoveries)
(22
)
 
22

 
(22
)
 
(150
)
Equity in net income of affiliates
(50
)
 
(53
)
 
(86
)
 
(110
)
Out-licensed intangible asset impairment

 

 

 
38

Gain on sale of product lines, businesses and assets

 
(3
)
 
(1
)
 
(3
)
Other income received from alliance partners, net
(32
)
 
(83
)
 
(89
)
 
(129
)
Pension settlements
101

 

 
101

 

Other
7

 
27

 
24

 
52

Other (income)/expense
$
199

 
$
(51
)
 
$
180

 
$
(235
)


Note 5. RESTRUCTURING

The following is the provision for restructuring:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Employee termination benefits
$
172

 
$
16

 
$
201

 
$
35

Other exit costs
1

 
4

 
5

 
7

Provision for restructuring
$
173

 
$
20

 
$
206

 
$
42



14




Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 890 and 175 for the three months ended June 30, 2013 and 2012, respectively, and approximately 1,135 and 295 for the six months ended June 30, 2013 and 2012, respectively. Termination benefits in the second quarter of 2013 were primarily related to workforce reductions in several European countries.

The following table represents the activity of employee termination and other exit cost liabilities:
Dollars in Millions
2013
 
2012
Liability at January 1
$
167

 
$
77

Charges
209

 
46

Changes in estimates
(3
)
 
(4
)
Provision for restructuring
206

 
42

Foreign currency translation
1

 

Spending
(130
)
 
(45
)
Liability at June 30
$
244

 
$
74



Note 6. INCOME TAXES

 
Three months ended June 30,
 
Six months ended June 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Earnings Before Income Taxes
$
530

 
$
1,059

 
$
1,204

 
$
3,086

Provision for income taxes

 
251

 
51

 
796

Effective tax rate

 
23.7
%
 
4.2
%
 
25.8
%

Changes in the effective tax rates resulted primarily from discrete tax benefits attributable to restructuring, impairment, pension settlement and other charges; favorable earnings mix between high and low tax jurisdictions attributable to lower Plavix* sales, and to a lesser extent, an internal transfer of intellectual property in the fourth quarter of 2012. The retroactive reinstatement of the R&D tax credit and look thru exception for the full year 2012 of $43 million was recognized in the first quarter of 2013.

The effective tax rate is lower than the U.S. statutory rate of 35% primarily attributable to undistributed earnings of certain foreign subsidiaries that have been considered or are expected to be indefinitely reinvested offshore. These undistributed earnings primarily relate to operations in Ireland and Puerto Rico, which operate under favorable tax grants not scheduled to expire prior to 2023. If these undistributed earnings are repatriated to the U.S. in the future, or if it were determined that such earnings are to be remitted in the foreseeable future, additional tax provisions would be required. Reforms to U.S. tax laws related to foreign earnings have been proposed and if adopted, may increase taxes, which could reduce the results of operations and cash flows.

BMS is currently audited by a number of tax authorities and significant disputes may arise related to issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. BMS estimates that it is reasonably possible that the total amount of unrecognized tax benefits at June 30, 2013 could decrease in the range of approximately $355 million to $385 million in the next twelve months as a result of the settlement of certain tax audits and other events resulting in the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also reasonably possible that new issues will be raised by tax authorities which may require adjustments to the amount of unrecognized tax benefits; however, an estimate of such adjustments cannot reasonably be made at this time. BMS believes that it has adequately provided for all open tax years by tax jurisdiction.


15




Note 7. EARNINGS PER SHARE
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Amounts in Millions, Except Per Share Data
2013
 
2012
 
2013
 
2012
Net Earnings Attributable to BMS
$
536

 
$
645

 
$
1,145

 
$
1,746

Earnings attributable to unvested restricted shares

 

 

 
(2
)
Net Earnings Attributable to BMS common shareholders
$
536

 
$
645

 
$
1,145

 
$
1,744

 
 
 
 
 
 
 
 
Earnings per share – basic
$
0.33

 
$
0.38

 
$
0.70

 
$
1.04

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
1,644

 
1,683

 
1,641

 
1,685

Contingently convertible debt common stock equivalents
1

 
1

 
1

 
1

Incremental shares attributable to share-based compensation plans
15

 
17

 
16

 
18

Weighted-average common shares outstanding – diluted
1,660

 
1,701

 
1,658

 
1,704

 
 
 
 
 
 
 
 
Earnings per share – diluted
$
0.32

 
$
0.38

 
$
0.69

 
$
1.02

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average equivalent shares – stock incentive plans

 

 

 
3



Note 8. FINANCIAL INSTRUMENTS

Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives. The carrying amount of receivables and accounts payable approximates fair value due to their short-term maturity.

Changes in exchange rates and interest rates create exposure to market risk. Certain derivative financial instruments are used when available on a cost-effective basis to hedge the underlying economic exposure. These instruments qualify as cash flow, net investment and fair value hedges upon meeting certain criteria, including effectiveness of offsetting hedged exposures. Changes in fair value of derivatives that do not qualify for hedge accounting are recognized in earnings as they occur. Derivative financial instruments are not used for trading purposes.

Financial instruments are subject to counterparty credit risk which is considered as part of the overall fair value measurement. Counterparty credit risk is monitored on an ongoing basis and is mitigated by limiting amounts outstanding with any individual counterparty, utilizing conventional derivative financial instruments and only entering into agreements with counterparties that meet high credit quality standards.
The consolidated financial statements would not be materially impacted if any counterparty failed to perform according to the terms of its agreement. Collateral is not required by any party whether derivatives are in an asset or liability position under the terms of the agreements.

Fair Value Measurements – The fair values of financial instruments are classified into one of the following categories:

Level 1 inputs utilize non-binding quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. These instruments include U.S. treasury securities.

Level 2 inputs utilize observable prices for similar instruments, non-binding quoted prices for identical or similar instruments in markets that are not active, and other observable inputs that can be corroborated by market data for substantially the full term of the assets or liabilities. These instruments include corporate debt securities, certificates of deposit, money market funds, foreign currency forward contracts, interest rate swap contracts, forward starting interest rate swap contracts, equity funds, fixed income funds and long-term debt. Additionally, certain corporate debt securities utilize a third-party matrix pricing model that uses significant inputs corroborated by market data for substantially the full term of the assets. Equity and fixed income funds are primarily invested in publicly traded securities and are valued at the respective net asset value of the underlying investments. There were no significant unfunded commitments or restrictions on redemptions related to equity and fixed income funds as of June 30, 2013. Level 2 derivative instruments are valued using London Interbank Offered Rate yield curves, less credit valuation adjustments, and observable forward foreign exchange rates at the reporting date. Valuations of derivative contracts may fluctuate considerably from period-to-period due to volatility in underlying foreign currencies and underlying interest rates, which are driven by market conditions and the duration of the contract. Credit adjustment volatility may have a significant impact on the valuation of interest rate swaps due to changes in counterparty credit ratings and credit default swap spreads.


16




Level 3 unobservable inputs are used when little or no market data is available. Valuation models for the Auction Rate Security (ARS) and Floating Rate Security (FRS) portfolio are based on expected cash flow streams and collateral values including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The fair value of the ARS was determined using an internally developed valuation which was based in part on indicative bids received on the underlying assets of the security and other evidence of fair value. The ARS is a private placement security rated ‘BBB-’ by Standard and Poor’s as of June 30, 2013 and represents interests in insurance securitizations. Due to the current lack of an active market for FRS and the general lack of transparency into their underlying assets, other qualitative analysis is relied upon to value FRS including discussions with brokers and fund managers, default risk underlying the security and overall capital markets liquidity. The fair value of written options to sell the assets of certain businesses in connection with collaboration agreements, (see “—Note 3. Alliances and Collaborations” for further discussion) is based on an option pricing methodology that considers revenue and profitability projections, volatility, discount rates, and potential exercise price assumptions. The fair value of these options was $162 million and $18 million at June 30, 2013 and December 31, 2012, respectively.

Available-For-Sale Securities and Cash Equivalents

The following table summarizes available-for-sale securities:
Dollars in Millions
Amortized
Cost
 
Gross
Unrealized
Gain in
Accumulated
OCI
 
Gross
Unrealized
Loss in
Accumulated
OCI
 
Gain/(Loss)
in
Income
 
Fair
Value
 

Fair Value
Level 1
 
Level 2
 
Level 3
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
123

 
$

 
$

 
$

 
$
123

 
$

 
$
123

 
$

Corporate debt securities
3,919

 
35

 
(16
)
 

 
3,938

 

 
3,938

 

Equity funds
52

 

 

 
11

 
63

 

 
63

 

Fixed income funds
47

 

 

 
(1
)
 
46

 

 
46

 

ARS and FRS
29

 
3

 
(1
)
 

 
31

 

 

 
31

Total Marketable Securities
$
4,170

 
$
38

 
$
(17
)
 
$
10

 
$
4,201

 
$

 
$
4,170

 
$
31

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
34

 
$

 
$

 
$

 
$
34

 
$

 
$
34

 
$

Corporate debt securities
4,305

 
72

 

 

 
4,377

 

 
4,377

 

U.S. Treasury securities
150

 

 

 

 
150

 
150

 

 

Equity funds
52

 

 

 
5

 
57

 

 
57

 

Fixed income funds
47

 

 

 

 
47

 

 
47

 

ARS and FRS
29

 
3

 
(1
)
 

 
31

 

 

 
31

Total Marketable Securities
$
4,617

 
$
75

 
$
(1
)
 
$
5

 
$
4,696

 
$
150

 
$
4,515

 
$
31


The following table summarizes the classification of available for sale securities in the consolidated balance sheet: 
Dollars in Millions
June 30,
2013
 
December 31,
2012
Current Marketable Securities
$
978

 
$
1,173

Non-current Marketable Securities
3,223

 
3,523

Total Marketable Securities
$
4,201

 
$
4,696


Money market funds and other securities aggregating to $1,472 million and $1,288 million at June 30, 2013 and December 31, 2012, respectively, were included in cash and cash equivalents and valued using Level 2 inputs.

At June 30, 2013, $3,212 million of non-current available for sale corporate debt securities mature within five years. Auction rate securities of $11 million mature beyond 10 years.

The change in fair value for the investments in equity and fixed income funds are recognized in other (income)/expense and are designed to offset the changes in fair value of certain employee retirement benefits.


17




The following table summarizes the activity for financial assets utilizing Level 3 fair value measurements:
 Dollars in Millions
2013
 
2012
Fair value at January 1
$
31

 
$
110

Sales

 
(81
)
Fair value at June 30
$
31

 
$
29


Qualifying Hedges
The following table summarizes the fair value of outstanding derivatives:
 

 
June 30, 2013
 
December 31, 2012
Dollars in Millions
Balance Sheet Location
 
Notional
 
Fair Value
(Level 2)
 
Notional
 
Fair Value
(Level 2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other assets
 
$
573

 
$
89

 
$
573

 
$
146

Interest rate swap contracts
Accrued expenses
 
1,150

 
(18
)
 

 

Foreign currency forward contracts
Other assets
 
757

 
79

 
735

 
59

Foreign currency forward contracts
Accrued expenses
 
560

 
(10
)
 
916

 
(30
)
Forward starting interest rate swap contracts
Other assets
 
255

 
21

 

 


Cash Flow Hedges — Foreign currency forward contracts are primarily utilized to hedge forecasted intercompany inventory purchase transactions in certain foreign currencies. These contracts are designated as cash flow hedges with the effective portion of changes in fair value being temporarily reported in accumulated other comprehensive loss and recognized in earnings when the hedged item affects earnings. The net gains on foreign currency forward contracts are expected to be reclassified to cost of products sold within the next two years, including $53 million of pre-tax gains to be reclassified within the next 12 months. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the Euro ($666 million) and Japanese yen ($382 million) at June 30, 2013.

BMS entered into an aggregate $255 million notional amount of forward starting interest rate swap contracts maturing in December 2013 with several financial institutions to hedge the variability of probable forecasted interest expense. The Company designated these contracts as cash flow hedges, with effective changes in fair value recorded net of tax in accumulated other comprehensive loss.

Cash flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. Assessments to determine whether derivatives designated as qualifying hedges are highly effective in offsetting changes in the cash flows of hedged items are performed at inception and on a quarterly basis. Any ineffective portion of the change in fair value is included in current period earnings. The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during the three and six months ended June 30, 2013 and 2012.

Net Investment Hedges — Non-U.S. dollar borrowings of €541 million ($708 million) are designated to hedge the foreign currency exposures of the net investment in certain foreign affiliates. These borrowings are designated as net investment hedges and recognized in long-term debt. The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the foreign currency translation component of accumulated other comprehensive loss with the related offset in long-term debt.

Fair Value Hedges — Fixed-to-floating interest rate swap contracts are designated as fair value hedges and are used as part of an interest rate risk management strategy to create an appropriate balance of fixed and floating rate debt. The swaps and underlying debt for the benchmark risk being hedged are recorded at fair value. When the underlying swap is terminated prior to maturity, the fair value basis adjustment to the underlying debt instrument is amortized into earnings as an adjustment to interest expense over the remaining term of the debt.

Fixed-to-floating interest rate swap contracts were executed to convert $650 million notional amount of 0.875% Notes Due 2017 and $500 million notional amount of 5.45% Notes Due 2018 from fixed rate debt to variable rate debt.

18





Long-term debt and the current portion of long-term debt includes:
Dollars in Millions
June 30,
2013
 
December 31,
2012
Principal Value
$
6,635

 
$
6,631

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
71

 
146

Unamortized basis adjustment from interest rate swap contract terminations
470

 
509

Unamortized bond discounts
(54
)
 
(54
)
Total
$
7,122

 
$
7,232

 
 
 
 
Current portion of long-term debt
$
680

 
$
664

Long-term debt
6,442

 
6,568


The fair value of debt was $7,722 million at June 30, 2013 and $8,285 million at December 31, 2012 and was valued using Level 2 inputs. Interest payments were $105 million and $89 million for the six months ended June 30, 2013 and 2012, respectively, net of amounts related to interest rate swap contracts.

The average amount of commercial paper outstanding was $253 million at a weighted-average interest rate of 0.13% during the six months ended June 30, 2013. The maximum month-end amount of commercial paper outstanding during the six months ended June 30, 2013 was $600 million. No commercial paper borrowings were outstanding at June 30, 2013 or December 31, 2012.

There were no debt repurchases in 2013. Debt repurchase activity for 2012 was as follows:
 
Six Months Ended
Dollars in Millions
June 30, 2012
Principal amount
$
80

Carrying value
90

Repurchase price
109

Notional amount of interest rate swaps terminated
6

Swap termination proceeds
2

Total loss
19



Note 9. RECEIVABLES

Receivables include: 
Dollars in Millions
June 30,
2013
 
December 31,
2012
Trade receivables
$
1,949

 
$
1,812

Less allowances
(98
)
 
(104
)
Net trade receivables
1,851

 
1,708

Alliance receivables
1,015

 
857

Prepaid and refundable income taxes
357

 
319

Other
183

 
199

Receivables
$
3,406

 
$
3,083


Receivables are netted with deferred income related to alliance partners until recognition of income. As a result, alliance partner receivables and deferred income were reduced by $1,111 million and $1,056 million at June 30, 2013 and December 31, 2012, respectively. For additional information regarding alliance partners, see “—Note 3. Alliances and Collaborations.” Non-U.S. receivables sold on a nonrecourse basis were $505 million and $493 million for the six months ended June 30, 2013 and 2012, respectively. In the aggregate, receivables due from our three largest pharmaceutical wholesalers in the U.S. represented 39% and 37% of total trade receivables at June 30, 2013 and December 31, 2012, respectively.







19





Note 10. INVENTORIES

Inventories include:
Dollars in Millions
June 30, 2013
 
December 31, 2012
Finished goods
$
597

 
$
572

Work in process
858

 
814

Raw and packaging materials
330

 
271

Inventories
$
1,785

 
$
1,657


Inventories expected to remain on-hand beyond one year are included in other assets and were $350 million at June 30, 2013 and $424 million at December 31, 2012.


Note 11. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment includes: 
Dollars in Millions
June 30, 2013
 
December 31, 2012
Land
$
113

 
$
114

Buildings
5,041

 
4,963

Machinery, equipment and fixtures
3,895

 
3,695

Construction in progress
344

 
611

Gross property, plant and equipment
9,393

 
9,383

Less accumulated depreciation
(4,165
)
 
(4,050
)
Property, plant and equipment
$
5,228

 
$
5,333


Depreciation expense was $219 million and $175 million for the six months ended June 30, 2013 and 2012, respectively.


Note 12. OTHER INTANGIBLE ASSETS

Other intangible assets include: 
Dollars in Millions
June 30, 2013
 
December 31, 2012
Licenses
$
1,154

 
$
1,160

Developed technology rights
8,827

 
8,827

Capitalized software
1,192

 
1,200

In-process research and development
668

 
668

Gross other intangible assets
11,841

 
11,855

Less accumulated amortization
(3,471
)
 
(3,077
)
Total other intangible assets
$
8,370

 
$
8,778


Amortization expense was $431 million and $203 million for the six months ended June 30, 2013 and 2012, respectively.

20






Note 13. DEFERRED INCOME

Deferred income includes: 
Dollars in Millions
June 30, 2013
 
December 31, 2012
Upfront, milestone and other licensing payments
$
4,666

 
$
4,346

Atripla* deferred revenue
364

 
339

Gain on sale-leaseback transactions
85

 
99

Other
17

 
65

Total deferred income
$
5,132

 
$
4,849

 
 
 
 
Current portion
$
986

 
$
825

Non-current portion
4,146

 
4,024


For further information pertaining to upfront, milestone and other licensing payments, see “—Note 3. Alliances and Collaborations.”

Amortization of deferred income was $248 million and $91 million for the six months ended June 30, 2013 and 2012, respectively.


Note 14. EQUITY


Common Stock
 
Capital in  Excess
of Par Value
of Stock
 
Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interest
Dollars and Shares in Millions
Shares
 
Par Value
 
Shares
 
Cost
 
Balance at January 1, 2012
2,205

 
$
220

 
$
3,114

 
$
33,069

 
515

 
$
(17,402
)
 
$
(89
)
Net earnings

 

 

 
1,746

 

 

 
859

Cash dividends declared

 

 

 
(1,154
)
 

 

 

Stock repurchase program

 

 

 

 
27

 
(875
)
 

Employee stock compensation plans
3

 
1

 
(331
)
 

 
(12
)
 
677

 

Distributions

 

 

 

 

 

 
(1,056
)
Balance at June 30, 2012
2,208

 
$
221

 
$
2,783

 
$
33,661

 
530

 
$
(17,600
)
 
$
(286
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
2,208

 
$
221

 
$
2,694

 
$
32,733

 
570

 
$
(18,823
)
 
$
15

Net earnings

 

 

 
1,145

 

 

 
21

Cash dividends declared

 

 

 
(1,163
)
 

 

 

Stock repurchase program

 

 

 

 
10

 
(364
)
 

Employee stock compensation plans

 

 
(719
)
 

 
(18
)
 
1,167

 

Distributions

 

 

 

 

 

 
(34
)
Balance at June 30, 2013
2,208

 
$
221

 
$
1,975

 
$
32,715

 
562

 
$
(18,020
)
 
$
2


Treasury stock is recognized at the cost to reacquire the shares. Shares issued from treasury are recognized utilizing the first-in first-out method.

In May 2010, the Board of Directors authorized the repurchase of up to $3.0 billion of common stock and in June 2012 increased its authorization for the repurchase of common stock by an additional $3.0 billion. Repurchases may be made either in the open market or through private transactions, including under repurchase plans established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The stock repurchase program does not have an expiration date and may be suspended or discontinued at any time.

Noncontrolling interest in 2012 is primarily related to the partnerships with Sanofi for the territory covering the Americas for net sales of Plavix*. Net earnings attributable to noncontrolling interest are presented net of taxes of $1 million and $90 million for the three months ended June 30, 2013 and 2012, respectively, and $13 million and $319 million for the six months ended June 30, 2013 and 2012, respectively, in the consolidated statements of earnings with a corresponding increase to the provision for income taxes. Distribution of the partnership profits to Sanofi and Sanofi's funding of ongoing partnership operations occur on a routine basis. The above activity includes the pre-tax income and distributions related to these partnerships.

21





The components of other comprehensive income/(loss) were as follows: 
 
2013
 
2012
 
Pretax
 
Tax
 
After tax
 
Pretax
 
Tax
 
After tax
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges :(a)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains
$
30

 
$
(10
)
 
$
20

 
$
30

 
$
(8
)
 
$
22

Reclassified to net earnings
(34