10-Q 1 bmy-20130930x10q.htm 10-Q BMY-2013.09.30-10Q


 
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 SEPTEMBER 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 September 30, 2013, there were 1,646,542,902 shares outstanding of the Registrant’s $0.10 par value common stock.

 




BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
SEPTEMBER 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 September 30,
 
Nine Months Ended September 30,
EARNINGS
2013
 
2012
 
2013
 
2012
Net Sales
$
4,065

 
$
3,736

 
$
11,944

 
$
13,430

Cost of products sold
1,175

 
987

 
3,346

 
3,535

Marketing, selling and administrative
980

 
1,071

 
3,016

 
3,077

Advertising and product promotion
194

 
167

 
601

 
585

Research and development
893

 
951

 
2,774

 
2,822

Impairment charge for BMS-986094 intangible asset

 
1,830

 

 
1,830

Other (income)/expense
5

 
(11
)
 
185

 
(246
)
Total Expenses
3,247

 
4,995

 
9,922

 
11,603

 
 
 
 
 
 
 
 
Earnings/(Loss) Before Income Taxes
818

 
(1,259
)
 
2,022

 
1,827

Provision for/(benefit from) income taxes
126

 
(546
)
 
177

 
250

Net Earnings/(Loss)
692

 
(713
)
 
1,845

 
1,577

Net Earnings/(Loss) Attributable to Noncontrolling Interest

 
(2
)
 
8

 
542

Net Earnings/(Loss) Attributable to BMS
$
692

 
$
(711
)
 
$
1,837

 
$
1,035

 
 
 
 
 
 
 
 
Earnings/(Loss) per Common Share
 
 
 
 
 
 
 
Basic
$
0.42

 
$
(0.43
)
 
$
1.12

 
$
0.62

Diluted
$
0.42

 
$
(0.43
)
 
$
1.11

 
$
0.61

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.35

 
$
0.34

 
$
1.05

 
$
1.02

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 September 30,
 
Nine Months Ended September 30,
COMPREHENSIVE INCOME
2013
 
2012
 
2013
 
2012
Net Earnings/(Loss)
$
692

 
$
(713
)
 
$
1,845

 
$
1,577

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges
(31
)
 
(39
)
 
7

 
(27
)
Pension and postretirement benefits
232

 
24

 
956

 
84

Available for sale securities
14

 
38

 
(32
)
 
37

Foreign currency translation
(7
)
 

 
(41
)
 
7

Other Comprehensive Income/(Loss)
208

 
23

 
890

 
101

 
 
 
 
 
 
 
 
Comprehensive Income/(Loss)
900

 
(690
)
 
2,735

 
1,678

Comprehensive Income/(Loss) Attributable to Noncontrolling Interest

 
(2
)
 
8

 
542

Comprehensive Income/(Loss) Attributable to BMS
$
900

 
$
(688
)
 
$
2,727

 
$
1,136

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
September 30,
2013
 
December 31,
2012
Current Assets:
 
 
 
Cash and cash equivalents
$
1,771

 
$
1,656

Marketable securities
951

 
1,173

Receivables
3,673

 
3,083

Inventories
1,640

 
1,657

Deferred income taxes
2,036

 
1,597

Prepaid expenses and other
556

 
355

Total Current Assets
10,627

 
9,521

Property, plant and equipment
5,236

 
5,333

Goodwill
7,646

 
7,635

Other intangible assets
8,176

 
8,778

Deferred income taxes
195

 
203

Marketable securities
3,623


3,523

Other assets
1,301

 
904

Total Assets
$
36,804

 
$
35,897

 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
Short-term borrowings and current portion of long-term debt
$
680

 
$
826

Accounts payable
2,466

 
2,202

Accrued expenses
2,277

 
2,573

Deferred income
1,003

 
825

Accrued rebates and returns
1,034

 
1,054

Income taxes payable
208

 
193

Dividends payable
611

 
606

Total Current Liabilities
8,279

 
8,279

Pension, postretirement and postemployment liabilities
773

 
1,882

Deferred income
4,198

 
4,024

Income taxes payable
739

 
648

Deferred income taxes
904

 
383

Other liabilities
665

 
475

Long-term debt
6,532

 
6,568

Total Liabilities
22,090

 
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 4,445 in 2013 and 5,189 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
1,966

 
2,694

Accumulated other comprehensive loss
(2,312
)
 
(3,202
)
Retained earnings
32,826

 
32,733

Less cost of treasury stock – 561 million common shares in 2013 and 570 million in 2012
(17,975
)
 
(18,823
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
14,726

 
13,623

Noncontrolling interest
(12
)
 
15

Total Equity
14,714

 
13,638

Total Liabilities and Equity
$
36,804

 
$
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)

 
Nine Months Ended September 30,
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
1,845

 
$
1,577

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Net earnings attributable to noncontrolling interest
(8
)
 
(542
)
Depreciation and amortization, net
582

 
482

Deferred income taxes
(409
)
 
(737
)
Stock-based compensation
140

 
108

Impairment charges
6

 
2,118

Proceeds from Amylin diabetes collaboration

 
3,570

Other
(11
)
 
21

Changes in operating assets and liabilities:
 
 
 
Receivables
(563
)
 
643

Inventories
(8
)
 
(135
)
Accounts payable
301

 
(321
)
Deferred income
702

 
100

Income taxes payable
128

 
82

Other
(570
)
 
(861
)
Net Cash Provided by Operating Activities
2,135

 
6,105

Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
1,520

 
4,384

Purchases of marketable securities
(1,448
)
 
(3,501
)
Additions to property, plant and equipment and capitalized software
(337
)
 
(373
)
Sale of businesses and other investing activities
8

 
16

Purchases of businesses, net of cash acquired

 
(7,530
)
Net Cash Used in Investing Activities
(257
)
 
(7,004
)
Cash Flows From Financing Activities:
 
 
 
Short-term borrowings, net
488

 
20

Proceeds from issuance of long-term debt
12

 
1,950

Long-term debt repayments
(597
)
 
(2,108
)
Interest rate swap terminations

 
2

Issuance of common stock
483

 
397

Common stock repurchases
(433
)
 
(1,911
)
Dividends
(1,732
)
 
(1,725
)
Net Cash Used in Financing Activities
(1,779
)
 
(3,375
)
Effect of Exchange Rates on Cash and Cash Equivalents
16

 
1

Increase/(Decrease) in Cash and Cash Equivalents
115

 
(4,273
)
Cash and Cash Equivalents at Beginning of Period
1,656

 
5,776

Cash and Cash Equivalents at End of Period
$
1,771

 
$
1,503

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

6





Note 1. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS

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 September 30, 2013 and December 31, 2012, and the results of operations for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 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 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.

In July 2013, the Financial Accounting Standards Board issued an update that clarified existing guidance on the presentation of unrecognized tax benefits when various qualifying tax benefit carryforwards exist, including when the unrecognized tax benefit should be presented as a reduction to deferred tax assets or as a liability. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. BMS is currently evaluating the financial statement impact of this guidance.


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 September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Virology
 
 
 
 
 
 
 
Baraclude (entecavir)
$
378

 
$
346

 
$
1,115

 
$
1,028

Reyataz (atazanavir sulfate)
375

 
363

 
1,167

 
1,127

Sustiva (efavirenz) Franchise
389

 
370

 
1,187

 
1,144

Oncology
 
 
 
 
 
 
 
Erbitux* (cetuximab)
183

 
173

 
516

 
531

Sprycel (dasatinib)
316

 
263

 
915

 
738

Yervoy (ipilimumab)
238

 
179

 
700

 
495

Neuroscience
 
 
 
 
 
 
 
Abilify* (aripiprazole)
569

 
676

 
1,654

 
2,008

Metabolics
 
 
 
 
 
 
 
Bydureon* (exenatide extended-release for injectable suspension)
87

 
20

 
205

 
20

Byetta* (exenatide)
106

 
55

 
295

 
55

Forxiga (dapagliflozin)
7

 
N/A

 
15

 
N/A

Onglyza/Kombiglyze (saxagliptin/saxagliptin and metformin)
211

 
178

 
653

 
511

Immunoscience
 
 
 
 
 
 
 
Nulojix (belatacept)
7

 
3

 
18

 
7

Orencia (abatacept)
375

 
307

 
1,047

 
851

Cardiovascular
 
 
 
 
 
 
 
Avapro*/Avalide* (irbesartan/irbesartan-hydrochlorothiazide)
71

 
95

 
173

 
419

Eliquis (apixaban)
41

 

 
75

 
1

Plavix* (clopidogrel bisulfate)
42

 
64

 
177

 
2,498

 
 
 
 
 
 
 
 
Mature Products and All Other
670

 
644

 
2,032

 
1,997

Net Sales
$
4,065

 
$
3,736

 
$
11,944

 
$
13,430

*
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.


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.

Payments between collaboration partners are accounted for and presented in operating results based on the specific nature of the arrangement, including its contractual terms, the nature of the payments and the applicable accounting guidance. The most common activities between BMS and its collaboration partners are presented in operating results as follows:

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.
Cost reimbursement payments between the parties are recognized as incurred and included in marketing, selling, administrative, advertising and product promotion expenses, or research and development expenses, as applicable.
Upfront and contingent milestone payments from collaboration partners to BMS for products are typically deferred and amortized over the shorter of the contractual term or the periods in which the related products are expected to contribute to future cash flows. The amortization is presented consistent with the nature of the payment under the arrangement.
Upfront payments for approved products and approval milestone payments from BMS to collaboration partners are capitalized and amortized over the shorter of the contractual term or the periods in which the related products are expected to contribute to future cash flows. The amortization is included in cost of products sold.
Upfront and contingent milestone payments from BMS to collaboration partners prior to regulatory approval are expensed as incurred and included in research and development expenses.
Payments from BMS to collaboration partners for profit sharing, royalties and other sales-based fees are included in cost of products sold as incurred.
Equity in net income of affiliates is included in other (income)/expense.
All payments between BMS and its collaboration partners are presented in cash flows from operating activities.

7




Each of our collaboration arrangements is unique in nature and specific information pertaining to each of our significant collaborations is discussed below. 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 European Union (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 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. An assessment of BMS's expected annual contractual share is completed each quarterly reporting period (determined to be 34.1% in the third quarter of 2013).
Annual U.S. Net Sales
BMS 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%

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 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.


8




Summarized financial information related to this alliance is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Abilify* net sales, net of amortization of extension payment
$
569

 
$
676

 
$
1,654

 
$
2,008

Oncology fee – Cost of products sold
68

 
36

 
214

 
103

Royalties – Cost of products sold
21

 
18

 
61

 
55

Cost reimbursements to/(from) Otsuka(a)
(13
)
 
(2
)
 
(11
)
 
(34
)
Amortization:
 
 
 
 
 
 
 
Net sales reduction
16

 
16

 
49

 
49

Cost of products sold

 
1

 

 
5

Dollars in Millions
September 30,
2013
 
December 31,
2012
Other assets – extension payment
$
104

 
$
153


(a)
Primarily included in marketing, selling and administrative expenses.

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 dapagliflozin; 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) as well as certain assets owned by Amylin, including a manufacturing facility. Dapagliflozin is marketed as Forxiga outside the U.S. The agreements for saxagliptin exclude Japan. In this document unless specifically noted, we refer to both Kombiglyze and Komboglyze as Kombiglyze. Onglyza and dapagliflozin 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 for Onglyza and Amylin's portfolio of products 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 dapagliflozin development costs in Japan, which are borne by AstraZeneca subject to a pre-agreed clinical plan. Additional development costs will be shared equally.

In 2012, BMS received proceeds of $3.6 billion from AstraZeneca, $3.5 billion of which was a non-refundable, upfront payment in consideration for entering into the Amylin-related collaboration and the remaining $73 million was for tax sharing attributes expected to be reimbursed back to AstraZeneca in the fourth quarter of 2013 (included in accrued expenses at September 30, 2013 and December 31, 2012). In the third quarter of 2013, AstraZeneca exercised its option for equal governance rights over certain key strategic and financial decisions regarding the Amylin-related collaboration. A receivable for the $135 million option fee was recognized at September 30, 2013 (received in October 2013). The $3.5 billion non-refundable upfront fee and $135 million option fee are 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 predominant elements included in the collaboration (primarily intangible assets related to Bydureon* with an estimated useful life of 13 years, Byetta* with an estimated useful life of 7 years, Symlin* with an estimated life of 9 years, metreleptin with an estimated useful life of 12 years, and, to a lesser degree, the manufacturing plant with an estimated useful life of 15 years). AstraZeneca is entitled to share in the proceeds from the sale of any of the assets related to the collaboration. 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.

With respect to the other collaborations, BMS has received $300 million in non-refundable upfront, milestone and other licensing payments related to Onglyza to date and could receive up to an additional $300 million for sales-based milestones. BMS has also received $250 million in non-refundable 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. Amortization of the Onglyza and dapagliflozin deferred income is included in other income.


9




Summarized financial information related to these alliances is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
430

 
$
266

 
$
1,219

 
$
599

Profit sharing – Cost of products sold
170

 
118

 
494

 
268

Cost reimbursements to/(from) AstraZeneca:
 
 
 
 
 
 
 
Commercialization expenses(a)
(53
)
 
(43
)
 
(172
)
 
(62
)
Research and development
(17
)
 
(17
)
 
(56
)
 
(7
)
Amortization:
 
 
 
 
 
 
 
Cost of products sold
(78
)
 
(50
)
 
(227
)
 
(50
)
Other (income)/expense
(8
)
 
(9
)
 
(23
)
 
(30
)
 
 
 
 
 
 
 
 
Non-refundable upfront, milestone and other licensing receipts:
 
 
 
 
 
 
 
Amylin-related products

 
3,570

 

 
3,570

Dapagliflozin

 

 
80

 

Dollars in Millions
September 30,
2013
 
December 31,
2012
Deferred income – Non-refundable upfront, milestone and other licensing receipts
 
 
 
Amylin-related products
$
3,342

 
$
3,423

Onglyza
195

 
208

Dapagliflozin
196

 
206


(a)
Primarily included in marketing, selling and administrative expenses.

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* which is based on the relative ratio of the average respective net selling prices of Truvada* and Sustiva. The net sales are deferred and the related alliance receivable is not recognized until the combined product is sold to third-party customers.

Summarized financial information related to this alliance is as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
328

 
$
305

 
$
998

 
$
950

Equity in net loss of affiliates
4

 
6

 
12

 
14


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. Lilly has the right to copromote at their own expense. BMS also has codevelopment and copromotion rights in Canada and Japan. Erbitux* is indicated for use in the treatment of patients with certain types of 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.

10




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 September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
183

 
$
173

 
$
516

 
$
531

Distribution fees and royalties – Cost of products sold
76

 
71

 
214

 
220

Cost reimbursements to/(from) Lilly(a)

 
5

 

 
13

Amortization – Cost of products sold
9

 
9

 
28

 
28

Japan commercialization fee – Other (income)/expense
(8
)
 
(9
)
 
(20
)
 
(28
)
Dollars in Millions
September 30,
2013
 
December 31,
2012
Other intangible assets – Non-refundable upfront, milestone and other licensing payments
$
183

 
$
211


(a)
Primarily included in research and development expenses.

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.

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 $53 million and $160 million in the three and nine months ended September 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 nine months ended September 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 $43 million and $29 million for the three months ended September 30, 2013 and 2012, respectively, and $94 million and $97 million for the nine months ended September 30, 2013 and 2012, respectively. The supply arrangement for irbesartan expires in 2015.

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.

11




Summarized financial information related to this alliance is as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
113

 
$
159

 
$
350

 
$
2,917

Royalties – Cost of products sold

 
19

 
2

 
527

Equity in net income of affiliates
(46
)
 
(45
)
 
(140
)
 
(163
)
Other (income)/expense

 
(61
)
 
(14
)
 
(122
)
Noncontrolling interest – pre-tax
(4
)
 
(7
)
 
19

 
847

 
 
 
 
 
 
 
 
Distributions (to)/from Sanofi – Noncontrolling interest
(11
)
 
290

 
(33
)
 
(768
)
Distributions from Sanofi – Investment in affiliates
51

 
54

 
103

 
183

Dollars in Millions
September 30,
2013
 
December 31,
2012
Investment in affiliates – territory covering Europe and Asia
$
46

 
$
9

Noncontrolling interest
(44
)
 
(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 September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
111

 
$
248

 
$
288

 
$
886

Gross profit
91

 
132

 
232

 
402

Net income
90

 
116

 
228

 
358


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 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 $754 million in non-refundable upfront, milestone and other licensing payments for Eliquis to date, and could receive up to an additional $130 million for development and regulatory milestones. Amortization of deferred income is included in other income.

Summarized financial information related to this alliance is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Net sales
$
41

 
$

 
$
75

 
$
1

Profit sharing – Cost of products sold
19

 

 
35

 

Cost reimbursements to/(from) Pfizer:
 
 
 
 
 
 
 
Commercialization expenses(a)
(4
)
 
(6
)
 
(21
)
 
(14
)
Research and development
(6
)
 
(1
)
 
3

 
10

Amortization – Other (income)/expense
(11
)
 
(10
)
 
(30
)
 
(29
)
 
 
 
 
 
 
 
 
Non-refundable upfront, milestone and other licensing receipts
70

 

 
195

 

Dollars in Millions
September 30,
2013
 
December 31,
2012
Deferred income – Non-refundable upfront, milestone and other licensing receipts
$
562

 
$
397


(a)
Primarily included in marketing, selling and administrative expenses.


12




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.

Non-refundable 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 to purchase the remaining assets ($109 million) using the best estimate of the selling price for these elements 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 nine months ended September 30, 2013. The amount allocated to the rights transferred to Reckitt is recognized as alliance revenue throughout the collaboration period. Alliance revenue, including product supply and royalties, was $43 million and $73 million during the three and nine months ended September 30, 2013, respectively.

The Medicines Company

In February 2013, BMS and The Medicines Company entered into a two year collaboration regarding 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, Inc 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 in the covered territory. 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 will 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.

Non-refundable 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 to purchase the remaining assets ($35 million) using the best estimate of the selling price for these elements 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 nine months ended September 30, 2013. The amount allocated to the rights transferred is recognized as alliance revenue throughout the collaboration period. Alliance revenue, including product supply and royalties, was $21 million and $51 million during the three and nine months ended September 30, 2013, respectively.

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 will 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.

13




Non-refundable 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) using the best estimate of the selling price for these elements 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 nine months ended September 30, 2013. The amount allocated to the rights to transfer is recognized as alliance revenue throughout the collaboration period. Alliance revenue, including product supply was $13 million and $43 million during the three and nine months ended September 30, 2013, respectively.



Note 4. OTHER (INCOME)/EXPENSE
Other (income)/expense includes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Interest expense
$
46

 
$
48

 
$
146

 
$
131

Investment income
(23
)
 
(27
)
 
(76
)
 
(85
)
Provision for restructuring
6

 
29

 
212

 
71

Litigation charges/(recoveries)
17

 
50

 
(5
)
 
(100
)
Equity in net income of affiliates
(42
)
 
(40
)
 
(128
)
 
(150
)
Out-licensed intangible asset impairment

 

 

 
38

Gain on sale of product lines, businesses and assets

 

 
(1
)
 
(3
)
Other income received from alliance partners, net
(31
)
 
(96
)
 
(120
)
 
(225
)
Pension settlements
37

 
3

 
138

 
3

Other
(5
)
 
22

 
19

 
74

Other (income)/expense
$
5

 
$
(11
)
 
$
185

 
$
(246
)


Note 5. RESTRUCTURING

The following is the provision for restructuring:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Employee termination benefits
$
4

 
$
21

 
$
205

 
$
56

Other exit costs
2

 
8

 
7

 
15

Provision for restructuring
$
6

 
$
29

 
$
212

 
$
71


Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 150 and 185 for the three months ended September 30, 2013 and 2012, respectively, and approximately 1,285 and 480 for the nine months ended September 30, 2013 and 2012, respectively. Termination benefits in 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
223

 
77

Changes in estimates
(11
)
 
(6
)
Provision for restructuring
212

 
71

Foreign currency translation
2

 
(1
)
Amylin acquisition

 
26

Spending
(191
)
 
(66
)
Liability at September 30
$
190

 
$
107


14




Note 6. INCOME TAXES

 
Three months ended September 30,
 
Nine months ended September 30,
Dollars in Millions
2013
 
2012
 
2013
 
2012
Earnings/(Loss) Before Income Taxes
$
818

 
$
(1,259
)
 
$
2,022

 
$
1,827

Provision for/(benefit from) income taxes
126

 
(546
)
 
177

 
250

Effective tax rate
15.4
%
 
(43.4
)%
 
8.8
%
 
13.7
%

Changes in the effective tax rates resulted primarily from discrete tax benefits attributable to higher impairment charges in 2012 (including a $1.8 billion impairment charge in the third quarter of 2012); favorable earnings mix between high and low tax jurisdictions attributable to lower Plavix* sales in 2013; and to a lesser extent, an internal transfer of intellectual property in the fourth quarter of 2012 and higher charges for contingent tax matters in the third quarter of 2013. 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 September 30, 2013 could decrease in the range of approximately $400 million to $450 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.


Note 7. EARNINGS/(LOSS) PER SHARE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Amounts in Millions, Except Per Share Data
2013
 
2012
 
2013
 
2012
Net Earnings/(Loss) Attributable to BMS
$
692

 
$
(711
)
 
$
1,837

 
$
1,035

Earnings attributable to unvested restricted shares

 

 

 
(1
)
Net Earnings/(Loss) Attributable to BMS common shareholders
$
692

 
$
(711
)
 
$
1,837

 
$
1,034

 
 
 
 
 
 
 
 
Earnings/(Loss) per share – basic
$
0.42

 
$
(0.43
)
 
$
1.12

 
$
0.62

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
1,646

 
1,666

 
1,643

 
1,679

Contingently convertible debt common stock equivalents
1

 

 
1

 
1

Incremental shares attributable to share-based compensation plans
15

 

 
15

 
17

Weighted-average common shares outstanding – diluted
1,662

 
1,666

 
1,659

 
1,697

 
 
 
 
 
 
 
 
Earnings/(Loss) per share – diluted
$
0.42

 
$
(0.43
)
 
$
1.11

 
$
0.61

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

 

 

 
2


Contingently convertible debt common stock equivalents and incremental share-based compensation plans of 17 million were excluded from the per share calculation for the three months ended September 30, 2012 because of the net loss in that period.



15




Note 8. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives.

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 September 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.

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 September 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.


16




Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
September 30, 2013
 
December 31, 2012
Dollars in Millions
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents - Money market and other securities
$

 
$
1,459

 
$

 
$
1,459

 
$

 
$
1,288

 
$

 
$
1,288

Marketable securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
99

 

 
99

 

 
34

 

 
34

Corporate debt securities

 
4,350

 

 
4,350

 

 
4,377

 

 
4,377

U.S. Treasury securities

 

 

 

 
150

 

 

 
150

Equity funds

 
68

 

 
68

 

 
57

 

 
57

Fixed income funds

 
46

 

 
46

 

 
47

 

 
47

ARS and FRS

 

 
11

 
11

 

 

 
31

 
31

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts

 
88

 

 
88

 

 
146

 

 
146

Foreign currency forward contracts

 
48

 

 
48

 

 
59

 

 
59

Forward starting interest rate swap contracts

 
25

 

 
25

 

 

 

 

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts

 
(10
)
 

 
(10
)
 

 

 

 

Foreign currency forward contracts

 
(33
)
 

 
(33
)
 

 
(30
)
 

 
(30
)
Written option liabilities*

 

 
(162
)
 
(162
)
 

 

 
(18
)
 
(18
)

*
Written option liabilities are included in other liabilities. See "Note 3. Alliances and Collaborations" for further information.

The following table summarizes the activity for financial assets utilizing Level 3 fair value measurements:
 
2013
 
2012
Dollars in Millions
Written option liabilities
 
ARS and FRS
 
Written option liabilities
 
ARS and FRS
Fair value at January 1
$
(18
)
 
$
31

 
$

 
$
110

Additions from new collaborations
(144
)
 

 

 

Sales

 
(20
)
 

 
(81
)
Fair value at September 30
$
(162
)
 
$
11

 
$

 
$
29


Marketable Securities

The following table summarizes marketable securities:
 
Dollars in Millions
Amortized
Cost
 
Gross
Unrealized
Gain in
Accumulated
OCI
 
Gross
Unrealized
Loss in
Accumulated
OCI
 
Gain/(Loss)
in
Income
 
Fair Value
 
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
99

 
$

 
$

 
$

 
$
99

 
Corporate debt securities
4,315

 
45

 
(10
)
 

 
4,350

 
Equity funds
52

 

 

 
16

 
68

 
Fixed income funds
47

 

 

 
(1
)
 
46

 
ARS
9

 
2

 

 

 
11

 
Total Marketable Securities
$
4,522

 
$
47

 
$
(10
)
 
$
15

 
$
4,574

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
34

 
$

 
$

 
$

 
$
34

 
Corporate debt securities
4,305

 
72

 

 

 
4,377

 
U.S. Treasury securities
150

 

 

 

 
150

 
Equity funds
52

 

 

 
5

 
57

 
Fixed income funds
47

 

 

 

 
47

 
ARS and FRS
29

 
3

 
(1
)
 

 
31

 
Total Marketable Securities
$
4,617

 
$
75

 
$
(1
)
 
$
5

 
$
4,696


17




The following table summarizes the classification of marketable securities in the consolidated balance sheet: 
Dollars in Millions
September 30,
2013
 
December 31,
2012
Current Marketable Securities
$
951

 
$
1,173

Non-current Marketable Securities
3,623

 
3,523

Total Marketable Securities
$
4,574

 
$
4,696


At September 30, 2013, $3,612 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 partially offset the changes in fair value of certain employee retirement benefits.

Qualifying Hedges
The following table summarizes the fair value of outstanding derivatives:
 
 
 
September 30, 2013
 
December 31, 2012
Dollars in Millions
Balance Sheet Location
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other assets
 
$
873

 
$
88

 
$
573

 
$
146

Interest rate swap contracts
Other liabilities
 
1,150

 
(10
)
 

 

Foreign currency forward contracts
Prepaid expenses and other
 
335

 
41

 

 

Foreign currency forward contracts
Other assets
 
88

 
7

 
735

 
59

Foreign currency forward contracts
Accrued expenses
 
725

 
(31
)
 
916

 
(30
)
Foreign currency forward contracts
Other liabilities
 
130

 
(2
)
 

 

Forward starting interest rate swap contracts
Prepaid expenses and other
 
305

 
25

 

 


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 $12 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 ($596 million) and Japanese yen ($342 million) at September 30, 2013.

BMS entered into an aggregate $305 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 nine months ended September 30, 2013 and 2012.

Net Investment Hedges — Non-U.S. dollar borrowings of €541 million ($732 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 in 2013 to convert $650 million notional amount of 0.875% Notes Due 2017, $500 million notional amount of 5.45% Notes Due 2018 and $300 million notional amount of 2.00% Notes Due 2022 from fixed rate debt to variable rate debt.

18




Long-term debt and the current portion of long-term debt includes:
Dollars in Millions
September 30,
2013
 
December 31,
2012
Principal Value
$
6,082

 
$
6,631

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
78

 
146

Unamortized basis adjustment from interest rate swap contract terminations
454

 
509

Unamortized bond discounts
(52
)
 
(54
)
Total
$
6,562

 
$
7,232

 
 
 
 
Current portion of long-term debt
$
30

 
$
664

Long-term debt
6,532

 
6,568


The fair value of debt was $7,109 million at September 30, 2013 and $8,285 million at December 31, 2012 and was valued using Level 2 inputs. Interest payments were $158 million and $125 million for the nine months ended September 30, 2013 and 2012, respectively, net of amounts related to interest rate swap contracts.

The $597 million principal amount of our 5.25% Notes Due 2013 matured and was repaid in the third quarter of 2013. Net proceeds of $1,950 million were received from the issuance of senior unsecured notes in the third quarter of 2012, net of a $36 million discount and $14 million of deferred loan issuance costs. Substantially all of the $2.0 billion debt obligations assumed in the acquisition of Amylin were repaid in the third quarter of 2012, including a promissory note with Lilly with respect to a revenue sharing obligation and Amylin senior notes due 2014.

The average amount of commercial paper outstanding was $297 million at a weighted-average interest rate of 0.12% during the nine months ended September 30, 2013. The maximum month-end amount of commercial paper outstanding during the nine months ended September 30, 2013 was $820 million. Commercial paper borrowings of $470 million were outstanding at September 30, 2013. No commercial paper borrowings were outstanding at December 31, 2012.

There were no debt repurchases in 2013. Debt repurchase activity for 2012, including repayment of the Amylin debt obligations, was as follows:
 
Nine Months Ended
Dollars in Millions
September 30, 2012
Principal amount
$
2,052

Carrying value
2,081

Repurchase price
2,108

Notional amount of interest rate swaps terminated
6

Swap termination proceeds
2

Total loss
27



Note 9. RECEIVABLES

Receivables include:
Dollars in Millions
September 30,
2013
 
December 31,
2012
Trade receivables
$
1,931

 
$
1,812

Less allowances
(92
)
 
(104
)
Net trade receivables
1,839

 
1,708

Alliance receivables
1,244

 
857

Prepaid and refundable income taxes
310

 
319

Other
280

 
199

Receivables
$
3,673

 
$
3,083


Non-U.S. receivables sold on a nonrecourse basis were $728 million and $734 million for the nine months ended September 30, 2013 and 2012, respectively. In the aggregate, receivables due from our three largest pharmaceutical wholesalers in the U.S. represented 35% and 37% of total trade receivables at September 30, 2013 and December 31, 2012, respectively.



19




Note 10. INVENTORIES

Inventories include:
Dollars in Millions
September 30,
2013
 
December 31,
2012
Finished goods
$
531

 
$
572

Work in process
810

 
814

Raw and packaging materials
299

 
271

Inventories
$
1,640

 
$
1,657


Inventories expected to remain on-hand beyond one year are included in other assets and were $455 million at September 30, 2013 and $424 million at December 31, 2012.


Note 11. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment includes: 
Dollars in Millions
September 30,
2013
 
December 31,
2012
Land
$
112

 
$
114

Buildings
5,083

 
4,963

Machinery, equipment and fixtures
3,932

 
3,695

Construction in progress
387

 
611

Gross property, plant and equipment
9,514

 
9,383

Less accumulated depreciation
(4,278
)
 
(4,050
)
Property, plant and equipment
$
5,236

 
$
5,333


Depreciation expense was $333 million and $274 million for the nine months ended September 30, 2013 and 2012, respectively.


Note 12. OTHER INTANGIBLE ASSETS

Other intangible assets include:
Dollars in Millions
September 30,
2013
 
December 31,
2012
Licenses
$
1,155

 
$
1,160

Developed technology rights
8,827

 
8,827

Capitalized software
1,215

 
1,200

In-process research and development (IPRD)
668

 
668

Gross other intangible assets
11,865

 
11,855

Less accumulated amortization
(3,689
)
 
(3,077
)
Total other intangible assets
$
8,176

 
$
8,778


During the third quarter of 2012, the Company discontinued development of BMS-986094 (formerly INX-189) in the interest of patient safety and recognized a non-cash, pre-tax impairment charge of $1.8 billion related to the IPRD intangible asset.

Amortization expense was $647 million and $394 million for the nine months ended September 30, 2013 and 2012, respectively.

20




Note 13. DEFERRED INCOME

Deferred income includes:
Dollars in Millions
September 30,
2013
 
December 31,
2012
Upfront, milestone and other licensing payments
$
4,734

 
$
4,346

Atripla* deferred revenue
373

 
339

Gain on sale-leaseback transactions
78

 
99

Other
16

 
65

Total deferred income
$
5,201

 
$
4,849

 
 
 
 
Current portion
$
1,003

 
$
825

Non-current portion
4,198

 
4,024


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

Amortization of deferred income was $398 million and $186 million for the nine months ended September 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

 

 

 
1,035

 

 

 
854

Cash dividends declared