10-Q 1 bmy-20150930x10q.htm FORM 10-Q 10-Q


 
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, 2015
 
 
¨
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, 2015, there were 1,668,286,317 shares outstanding of the Registrant’s $0.10 par value common stock.

 




BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
SEPTEMBER 30, 2015
 





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
2015
 
2014
 
2015
 
2014
Net product sales
$
3,552

 
$
2,843

 
$
10,183

 
$
8,420

Alliance and other revenues
517

 
1,078

 
2,090

 
3,201

Total Revenues
$
4,069

 
$
3,921

 
$
12,273

 
$
11,621

 
 
 
 
 
 
 
 
Cost of products sold
1,097

 
1,007

 
2,957

 
2,966

Marketing, selling and administrative
983

 
1,029

 
2,845

 
2,937

Advertising and product promotion
193

 
171

 
495

 
521

Research and development
1,132

 
983

 
4,004

 
3,345

Other (income)/expense
(323
)
 
(277
)
 
(515
)
 
(589
)
Total Expenses
3,082

 
2,913

 
9,786

 
9,180

 
 
 
 
 
 
 
 
Earnings Before Income Taxes
987

 
1,008

 
2,487

 
2,441

Provision for Income Taxes
257

 
276

 
668

 
439

Net Earnings
730

 
732

 
1,819

 
2,002

Net Earnings Attributable to Noncontrolling Interest
24

 
11

 
57

 
11

Net Earnings Attributable to BMS
$
706

 
$
721

 
$
1,762

 
$
1,991

 
 
 
 
 
 
 
 
Earnings per Common Share
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.43

 
$
1.06

 
$
1.20

Diluted
$
0.42

 
$
0.43

 
$
1.05

 
$
1.19

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.37

 
$
0.36

 
$
1.11

 
$
1.08



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in Millions
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
COMPREHENSIVE INCOME
2015
 
2014
 
2015
 
2014
Net Earnings
$
730

 
$
732

 
$
1,819

 
$
2,002

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges
(46
)
 
57

 
(49
)
 
49

Pension and postretirement benefits
(131
)
 
(407
)
 
131

 
(508
)
Available-for-sale securities
(16
)
 
(22
)
 
(22
)
 
(7
)
Foreign currency translation
(29
)
 
(8
)
 
(30
)
 
2

Other Comprehensive Income/(Loss)
(222
)
 
(380
)
 
30

 
(464
)
 
 
 
 
 
 
 
 
Comprehensive Income
508

 
352

 
1,849

 
1,538

Comprehensive Income Attributable to Noncontrolling Interest
24

 
11

 
57

 
11

Comprehensive Income Attributable to BMS
$
484

 
$
341

 
$
1,792

 
$
1,527

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


3




BRISTOL-MYERS SQUIBB COMPANY
CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Share and Per Share Data(UNAUDITED) 
ASSETS
September 30,
2015
 
December 31,
2014
Current Assets:
 
 
 
Cash and cash equivalents
$
3,975

 
$
5,571

Marketable securities
1,438

 
1,864

Receivables
3,908

 
3,390

Inventories
1,130

 
1,560

Deferred income taxes
1,731

 
1,644

Prepaid expenses and other
529

 
470

Assets held-for-sale
215

 
109

Total Current Assets
12,926

 
14,608

Property, plant and equipment
4,249

 
4,417

Goodwill
6,952

 
7,027

Other intangible assets
1,544

 
1,753

Deferred income taxes
719

 
915

Marketable securities
4,627


4,408

Other assets
762

 
621

Total Assets
$
31,779

 
$
33,749

 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
Short-term borrowings
$
642

 
$
590

Accounts payable
1,249

 
2,487

Accrued expenses
2,330

 
2,459

Deferred income
963

 
1,167

Accrued rebates and returns
1,159

 
851

Income taxes payable
179

 
262

Dividends payable
636

 
645

Total Current Liabilities
7,158

 
8,461

Pension, postretirement and postemployment liabilities
902

 
1,115

Deferred income
630

 
770

Income taxes payable
716

 
560

Other liabilities
468

 
618

Long-term debt
6,632

 
7,242

Total Liabilities
16,506

 
18,766

 
 
 
 
Commitments and contingencies (Note 19)

 

 
 
 
 
EQUITY
 
 
 
 
 
 
 
Bristol-Myers Squibb Company Shareholders’ Equity:
 
 
 
Preferred stock, $2 convertible series, par value $1 per share: Authorized 10 million shares; issued
 
 
 
and outstanding 4,178 in 2015 and 4,212 in 2014, 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 2015
 
 
 
and 2014
221

 
221

Capital in excess of par value of stock
1,413

 
1,507

Accumulated other comprehensive loss
(2,395
)
 
(2,425
)
Retained earnings
32,446

 
32,541

Less cost of treasury stock – 540 million common shares in 2015 and 547 million in 2014
(16,606
)
 
(16,992
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
15,079

 
14,852

Noncontrolling interest
194

 
131

Total Equity
15,273

 
14,983

Total Liabilities and Equity
$
31,779

 
$
33,749

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

4




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

 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
1,819

 
$
2,002

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Net earnings attributable to noncontrolling interest
(57
)
 
(11
)
Depreciation and amortization, net
300

 
364

Deferred income taxes
51

 
(57
)
Stock-based compensation
176

 
147

Impairment charges
24

 
386

Pension settlements and amortization
178

 
206

Other adjustments
306

 
(562
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(586
)
 
26

Inventories
231

 
(162
)
Accounts payable
(1,218
)
 
63

Deferred income
153

 
404

Income taxes payable
77

 
82

Other changes
(233
)
 
(312
)
Net Cash Provided by Operating Activities
1,221

 
2,576

Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
2,449

 
2,771

Purchases of marketable securities
(2,283
)
 
(4,811
)
Additions to property, plant and equipment and capitalized software
(535
)
 
(335
)
Divestitures and other proceeds
673

 
3,453

Acquisitions and other payments
(892
)
 
(213
)
Net Cash Provided by/(Used in) Investing Activities
(588
)
 
865

Cash Flows From Financing Activities:
 
 
 
Short-term borrowings, net
54

 
45

Issuance of long-term debt
1,268

 

Repayments of long-term debt
(1,957
)
 
(676
)
Interest rate swap contract terminations
(2
)
 
(4
)
Issuances of common stock
231

 
229

Dividends
(1,859
)
 
(1,800
)
Net Cash Used in Financing Activities
(2,265
)
 
(2,206
)
Effect of Exchange Rates on Cash and Cash Equivalents
36

 
30

Increase/(Decrease) in Cash and Cash Equivalents
(1,596
)
 
1,265

Cash and Cash Equivalents at Beginning of Period
5,571

 
3,586

Cash and Cash Equivalents at End of Period
$
3,975

 
$
4,851

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

5





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, 2015 and December 31, 2014, and the results of operations for the three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014. All intercompany balances and transactions have been eliminated. 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, 2014 included in the Annual Report on Form 10-K (2014 Form 10-K).

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; estimated selling prices used in multiple element arrangements; and pension and postretirement benefits. Actual results may differ from estimated results.

Certain prior period amounts were reclassified to conform to the current period presentation. Pension settlements and amortization previously presented in Other in the consolidated statements of cash flows are now presented separately.

In April 2015, the Financial Accounting Standards Board (FASB) issued amended guidance on the presentation of debt issuance costs. The new guidance requires debt issuance costs to be presented as a reduction to the carrying value of debt in the balance sheet, consistent with debt discounts. The guidance becomes effective on January 1, 2016, with early adoption permitted on a retrospective basis. The adoption of this standard will not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued a new standard related to revenue recognition, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective. In July 2015, the FASB decided to delay the effective date by one year to January 1, 2018. Early adoption is permitted no earlier than 2017. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application in retained earnings. The Company is assessing the potential impact of the new standard on financial reporting and has not yet selected a transition method.

In April 2014, the FASB issued amended guidance on the use and presentation of discontinued operations in an entity's consolidated financial statements. The new guidance restricts the presentation of discontinued operations to business circumstances when the disposal of business operations represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The guidance became effective on January 1, 2015.

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 responsible for the discovery, development, manufacturing and supply of products. Regional commercial organizations market, 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.
Product revenues were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
 
2015
 
2014
Virology
 
 
 
 
 
 
 
Baraclude (entecavir)
$
320

 
$
325

 
$
1,003

 
$
1,100

Hepatitis C Franchise(a)
402

 
49

 
1,145

 
49

Reyataz (atazanavir sulfate) Franchise
270

 
338

 
867

 
1,044

Sustiva (efavirenz) Franchise(b)
333

 
357

 
940

 
1,037

Oncology
 
 
 
 
 
 
 
Erbitux* (cetuximab)
167

 
187

 
501

 
542

Opdivo (nivolumab)
305

 
1

 
467

 
1

Sprycel (dasatinib)
411

 
385

 
1,191

 
1,095

Yervoy (ipilimumab)
240

 
350

 
861

 
942

Neuroscience
 
 
 
 
 
 
 
Abilify* (aripiprazole)(c)
46

 
449

 
707

 
1,544

Immunoscience
 
 
 
 
 
 
 
Orencia (abatacept)
484

 
444

 
1,345

 
1,209

Cardiovascular
 
 
 
 
 
 
 
Eliquis (apixaban)
466

 
216

 
1,258

 
493

Mature Products and All Other(d)
625

 
820

 
1,988

 
2,565

Total Revenues
$
4,069

 
$
3,921

 
$
12,273

 
$
11,621

*
Indicates brand names of products which are trademarks not owned or wholly owned by BMS. Specific trademark ownership information is included at the end of this quarterly report on Form 10-Q.
(a)
Includes Daklinza (daclatasvir) revenues of $330 million and $38 million for the three months ended September 30, 2015 and 2014, respectively, and $892 million and $38 million for the nine months ended September 30, 2015 and 2014, respectively. Additionally, includes Sunvepra (asunaprevir) revenues of $72 million and $11 million for the three months ended September 30, 2015 and 2014, respectively, and $253 million and $11 million for the nine months ended September 30, 2015 and 2014, respectively.
(b)
Includes alliance and other revenue of $296 million and $309 million for the three months ended September 30, 2015 and 2014, respectively, and $823 million and $894 million for the nine months ended September 30, 2015 and 2014, respectively.
(c)
Includes alliance and other revenue of $19 million and $410 million for the three months ended September 30, 2015 and 2014, respectively, and $597 million and $1,350 million for the nine months ended September 30, 2015 and 2014, respectively. BMS's U.S. commercialization rights to Abilify* expired on April 20, 2015.
(d)
Includes Diabetes Alliance revenues of $53 million and $42 million for the three months ended September 30, 2015 and 2014, respectively, and $171 million and $248 million for the nine months ended September 30, 2015 and 2014, respectively. See "—Note 3. Alliances" for further information on the diabetes business divestiture.

Note 3. ALLIANCES

BMS enters into collaboration arrangements with third parties for the development and commercialization of certain products. Although each of these arrangements is unique in nature, both parties are active participants in the operating activities of the collaboration and are 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 commercial product or multiple compounds and/or products in various life cycle stages. The rights and obligations of the parties can be global or limited to geographic regions. We refer to these collaborations as alliances and our partners as alliance partners. Several key products such as Abilify*, Orencia, Sprycel, Sustiva (Atripla*), Eliquis, Erbitux* and Opdivo, as well as products comprising the diabetes alliance discussed in the 2014 Form 10-K and certain mature and other brands are included in alliance arrangements.


6




Selected financial information pertaining to our alliances was as follows, including net product sales when BMS is the principal in the third-party customer sale for products subject to the alliance. Expenses summarized below do not include all amounts attributed to the activities for the products in the alliance, but only the payments between the alliance partners or the related amortization if the payments were deferred or capitalized.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
 
2015
 
2014
Revenues from alliances:
 
 
 
 
 
 
 
Net product sales
$
981

 
$
816

 
$
3,203

 
$
2,493

Alliance and other revenues
496

 
958

 
2,003

 
2,909

Total Revenues
$
1,477

 
$
1,774

 
$
5,206

 
$
5,402

 
 
 
 
 
 
 
 
Payments to/(from) alliance partners:
 
 
 
 
 
 
 
Cost of products sold
$
445

 
$
338

 
$
1,257

 
$
1,016

Marketing, selling and administrative
(14
)
 
31

 
(15
)
 
34

Advertising and product promotion
18

 
6

 
41

 
73

Research and development
89

 
33

 
277

 
13

Other (income)/expense
(173
)
 
(411
)
 
(622
)
 
(964
)
 
 
 
 
 
 
 
 
Noncontrolling interest, pre-tax
17

 
7

 
45

 
18


Selected Alliance Balance Sheet information:
 
 
 
Dollars in Millions
September 30,
2015
 
December 31,
2014
Receivables - from alliance partners
$
838

 
$
888

Accounts payable - to alliance partners
446

 
1,479

Deferred income from alliances
1,495

 
1,493


BMS entered into certain licensing and alliance agreements in 2015 (including options to license or acquire the related assets) which individually did not materially impact the consolidated financial statements. Upfront payments for these new agreements charged to research and development expenses were $266 million during the nine months ended September 30, 2015 (including $86 million in the third quarter of 2015). The prior period amounts disclosed in research and development expenses for upfront payments to alliance partners were revised to include similar type of payments.

Specific information pertaining to each of our significant alliances is discussed in our 2014 Form 10-K, including their nature and purpose, the significant rights and obligations of the parties, and specific accounting policy elections. Significant developments and updates related to alliances during the nine months ended September 30, 2015 are set forth below.

AstraZeneca

In February 2014, BMS and AstraZeneca terminated their alliance agreements and BMS sold to AstraZeneca substantially all of the diabetes business comprising the alliance. The divestiture included the shares of Amylin and the resulting transfer of its Ohio manufacturing facility; the intellectual property related to Onglyza*/Kombiglyze* and Farxiga*/Xigduo* (including BMS's interest in the out-licensing agreement for Onglyza* in Japan); and the purchase of BMS’s manufacturing facility located in Mount Vernon, Indiana in the third quarter of 2015. Amylin's portfolio of products included Bydureon*, Byetta*, Symlin* and Myalept*. Substantially all employees dedicated to the diabetes business were transferred to AstraZeneca. The sale of the business has been completed in all jurisdictions.

The stock and asset purchase agreement contains multiple elements to be delivered subsequent to the closing of the transaction, including the China diabetes business that was part of the alliance (transferred during the third quarter of 2014), the Mount Vernon, Indiana manufacturing facility (transferred during the third quarter of 2015) and the activities under the development and supply agreements. Each of these elements was determined to have a standalone value. As a result, a portion of the consideration received at closing was allocated to the undelivered elements using the relative selling price method after determining the best estimated selling price for each element. The remaining amount of consideration was included in the calculation for the gain on sale of the diabetes business. Contingent milestone and royalty payments are similarly allocated among the underlying elements if and when the amounts are determined to be payable to BMS. Amounts allocated to the sale of the business are immediately recognized in the results of operations. Amounts allocated to the other elements are recognized in the results of operations only to the extent each element has been delivered.


7




BMS received proceeds of $179 million in the third quarter of 2015 for the transfer of the Mount Vernon, Indiana manufacturing facility and related inventories resulting in a gain of $79 million for the amounts allocated to the delivered elements. In September 2015, BMS transferred a percentage of its future royalty rights on Amylin net product sales (Bydureon*, Byetta*, Symlin* and Myalept*) in the U.S. to CPPIB Credit Europe S.A.R.L., a Luxembourg private limited liability company (CPPIB). The transferred rights represent approximately 70% of potential future royalties BMS is entitled to in 2019 to 2025. In exchange for the transfer, BMS will receive an additional tiered-based royalty on Amylin net product sales in the U.S. from CPPIB in 2016 through 2018, which will be included in other income when earned.

Summarized financial information related to the AstraZeneca alliances was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
 
2015
 
2014
Revenues from AstraZeneca alliances:
 
 
 
 
 
 
 
Net product sales
$

 
$
2

 
$
10

 
$
163

Alliance and other revenues
53

 
40

 
161

 
85

Total Revenues
$
53

 
$
42

 
$
171

 
$
248

 
 
 
 
 
 
 
 
Payments to/(from) AstraZeneca:
 
 
 
 
 
 
 
Cost of products sold:
 
 
 
 
 
 
 
Profit sharing
$

 
$
1

 
$

 
$
78

 
 
 
 
 
 
 
 
Cost reimbursements to/(from) AstraZeneca recognized in:
 
 
 
 
 
 
 
Cost of products sold

 

 

 
(9
)
Marketing, selling and administrative

 

 

 
(7
)
Advertising and product promotion

 

 

 
(4
)
Research and development

 
(1
)
 

 
(10
)
 
 
 
 
 
 
 
 
Other (income)/expense:
 
 
 
 
 
 
 
Amortization of deferred income
(31
)
 
(23
)
 
(80
)
 
(57
)
Provision for restructuring

 

 

 
(2
)
Royalties
(28
)
 
(46
)
 
(190
)
 
(184
)
Transitional services
(3
)
 
(18
)
 
(8
)
 
(83
)
Gain on sale of business
(79
)
 
(292
)
 
(83
)
 
(539
)
 
 
 
 
 
 
 
 
Selected Alliance Cash Flow information:
 
 
 
 
 
 
 
Deferred income
23

 
19

 
32

 
308

Divestitures and other proceeds
251

 
208

 
349

 
3,415

Selected Alliance Balance Sheet information:
 
 
 
Dollars in Millions
September 30,
2015
 
December 31,
2014
Deferred income attributed to:
 
 
 
Assets not yet transferred to AstraZeneca
$

 
$
176

Services not yet performed for AstraZeneca
170

 
226

Otsuka

As described in the 2014 Form 10-K, BMS receives a share of U.S. net sales of Abilify* based on a tiered structure and recognizes revenues based on the expected annual contractual share using a forecast of net sales for the year (50% in 2015 and 33% in 2014). BMS's U.S. commercialization rights to Abilify* expired on April 20, 2015. In February 2015, BMS terminated the co-promotion agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka) in Japan only with respect to Sprycel. The termination is not expected to have a material impact on future results.


8




Lilly

BMS had an Epidermal Growth Factor Receptor (EGFR) commercialization agreement with Eli Lilly and Company (Lilly) through Lilly’s subsidiary ImClone for the co-development and promotion of Erbitux* in the U.S., Canada and Japan. Under the EGFR agreement, both parties actively participated in a joint executive committee and various other operating committees and shared responsibilities for research and development using resources in their own infrastructures. With respect to Erbitux*, Lilly manufactured bulk requirements for cetuximab in its own facilities and filling and finishing was performed by a third party for which BMS had oversight responsibility. BMS had exclusive distribution rights in North America and was responsible for promotional efforts in North America although Lilly had the right to co-promote in the U.S. at their own expense. BMS was the principal in third-party customer sales in North America and paid Lilly a distribution fee for 39% of Erbitux* net sales in North America plus a share of certain royalties paid by Lilly. BMS’s rights and obligations with respect to the commercialization of Erbitux* in North America would have expired in September 2018.

In October 2015, BMS transferred its rights to Erbitux* in North America to Lilly in exchange for future royalties as described below. The transferred rights include, but are not limited to, full commercialization and manufacturing responsibilities. The transaction will be accounted for as a business divestiture in the fourth quarter and result in a non-cash charge of approximately $170 million for intangible assets directly related to the business and an allocation of goodwill.

BMS will receive royalties through September 2018, which will be included in other income when earned. The royalty rates applicable to North America are 38% on Erbitux* net sales up to $165 million in 2015, $650 million in 2016, $650 million in 2017 and $480 million in 2018, plus 20% on net sales in excess of those amounts in each of the respective years.

BMS shared rights to Erbitux* in Japan under an agreement with Lilly and Merck KGaA and received 50% of the pre-tax profit from Merck KGaA’s net sales of Erbitux* in Japan which was further shared equally with Lilly. BMS transferred its co-commercialization rights in Japan to Merck KGaA in the second quarter of 2015 in exchange for future royalties through 2032 which is included in other income when earned.

Pfizer

As described in the 2014 Form 10-K, BMS has an alliance with Pfizer, Inc. (Pfizer) to co-develop and co-promote Eliquis in most countries on a worldwide basis. BMS transferred full commercialization rights to Pfizer in certain smaller markets effective in the third quarter of 2015 in order to simplify operations. BMS will supply the product to Pfizer at cost plus a percentage of the net sales to end-customers in these markets. This change in the alliance arrangement is not expected to impact our pre-tax income. BMS retained co-promotional rights in the U.S., significant markets in Europe, as well as Canada, Australia, China, Japan and South Korea.

The Medicines Company

As described in the 2014 Form 10-K, BMS had an alliance with The Medicines Company for Recothrom on a global basis. The Medicines Company exercised its option to acquire the business for $132 million, resulting in a gain of $59 million (including $35 million fair value of the option) in February 2015.

Valeant

As described in the 2014 Form 10-K, BMS had an alliance with Valeant Pharmaceuticals International, Inc. (Valeant) for certain mature brands in Europe. Valeant exercised its option to acquire the business for $61 million, resulting in a gain of $88 million (including $34 million fair value of the option) in January 2015.

Reckitt

As described in the 2014 Form 10-K, BMS has an alliance with Reckitt Benckiser Group plc (Reckitt) covering certain BMS over-the-counter products sold primarily in Mexico and Brazil. In July 2015, Reckitt notified BMS that it was exercising its option to acquire all remaining rights in such products for those markets, the related inventory and BMS's manufacturing facility located in Mexico at a price determined primarily based upon a multiple of sales from May 2014 through May 2016. The closing is expected to occur in May 2016 subject to obtaining customary regulatory approvals. During 2015, a $123 million credit was included in other income (including $87 million in the third quarter of 2015) to decrease the fair value of the option due to the strengthening of the U.S dollar against local currencies. The anticipated proceeds are expected to approximate the fair value of the assets to be transferred.


9




Promedior

In September 2015, BMS purchased a warrant that gives BMS the exclusive right to acquire Promedior, Inc. (Promedior), a biotechnology company whose lead asset, PRM-151, is being developed for the treatment of idiopathic pulmonary fibrosis (IPF) and myelofibrosis (MF). The warrant is exercisable upon completion of the IPF or MF Phase II clinical studies being conducted by Promedior, which is expected to occur in 2017. The upfront payment allocated to the warrant was $84 million and included in research and development expenses in the third quarter of 2015. The remaining $66 million of the $150 million upfront payment was allocated to Promedior’s obligation to complete the Phase II studies which will be amortized over the expected period of the Phase II studies. The allocation was determined using level 3 inputs. Following BMS's review of the Phase II clinical study results, if BMS elects to exercise the warrant it will be obligated to pay an additional $300 million (if based on the IPF study results) or $250 million (if based on the MF study results), plus additional aggregate consideration of up to $800 million for contingent development and regulatory approval milestone payments in the U.S. and Europe.

Note 4. ACQUISITIONS AND OTHER DIVESTITURES

In April 2015, BMS acquired all of the outstanding shares of Flexus Biosciences, Inc. (Flexus), a privately held biotechnology company focused on the discovery and development of novel anti-cancer therapeutics. The acquisition provides BMS with full rights to F001287, a preclinical small molecule IDO1-inhibitor targeted immunotherapy. In addition, BMS acquired Flexus' IDO/TDO discovery program which includes its IDO-selective, IDO/TDO dual and TDO-selective compounds. The consideration includes an upfront payment of $800 million (plus acquisition costs) and contingent development and regulatory milestone payments up to $450 million. No significant Flexus processes were acquired, therefore the transaction was accounted for as an asset acquisition because Flexus was determined not to be a business as that term is defined in ASC 805 - Business Combinations. The consideration was allocated to F001287 and the IDO/TDO discovery program resulting in $800 million of research and development expenses and to net operating losses and tax credit carryforwards resulting in $14 million of deferred tax assets.

In addition to transactions discussed in "—Note 3. Alliances", BMS divested the Ixempra* business and several other businesses or product lines in 2015. These transactions generated net proceeds of $121 million resulting in pre-tax gains of $136 million (including a $40 million deferred gain from 2014). Additional contingent proceeds will be recognized in earnings when received. Revenues and pre-tax earnings related to these businesses were not material.

Note 5. ASSETS HELD-FOR-SALE

Assets held-for-sale were related to the Erbitux* business in North America comprising an alliance with Lilly and the business comprising an alliance with Reckitt at September 30, 2015 and to the businesses comprising alliances with The Medicines Company and Valeant at December 31, 2014. The allocation of goodwill was based on the relative fair value of the applicable businesses to the Company's reporting unit.

The following table provides the assets classified as held-for-sale:
Dollars in Millions
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Inventories
$
20

 
$
38

Property, plant and equipment
14

 

Goodwill
66

 
19

Other intangible assets
126

 
52

Accrued rebates and returns
(11
)
 

Assets held-for-sale
$
215

 
$
109


10




Note 6. OTHER (INCOME)/EXPENSE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
 
2015
 
2014
Interest expense
$
41

 
$
50

 
$
141

 
$
150

Investment income
(18
)
 
(20
)
 
(74
)
 
(71
)
Provision for restructuring
10

 
35

 
50

 
72

Litigation charges/(recoveries)
(2
)
 
10

 
14

 
19

Equity in net income of affiliates
(19
)
 
(12
)
 
(67
)
 
(81
)
Out-licensed intangible asset impairment

 
18

 
13

 
18

Gain on sale of product lines, businesses and assets
(208
)
 
(315
)
 
(370
)
 
(567
)
Other alliance and licensing income
(187
)
 
(102
)
 
(472
)
 
(354
)
Pension curtailments, settlements and special termination benefits
48

 
28

 
111

 
137

Loss on debt redemption

 

 
180

 
45

Other
12

 
31

 
(41
)
 
43

Other (income)/expense
$
(323
)
 
$
(277
)
 
$
(515
)
 
$
(589
)

Note 7. RESTRUCTURING

The following is the provision for restructuring:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
 
2015
 
2014
Employee termination benefits
$
9

 
$
34

 
$
45

 
$
68

Other exit costs
1

 
1

 
5

 
4

Provision for restructuring
$
10

 
$
35

 
$
50

 
$
72


Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 60 and 360 for the three months ended September 30, 2015 and 2014, respectively, and approximately 685 and 760 for the nine months ended September 30, 2015 and 2014, respectively. Employee termination costs in the aggregate of approximately $100 million are expected to be incurred in 2015 primarily related to specialty care transformation initiatives designed to create a more simplified organization across all functions and geographic markets. Subject to local regulations, costs will not be recognized until completion of discussions with works councils.

The following table represents the activity of employee termination and other exit cost liabilities:
Dollars in Millions
2015
 
2014
Liability at January 1
$
156

 
$
102

Charges
55

 
79

Changes in estimates
(5
)
 
(7
)
Provision for restructuring
50

 
72

Foreign currency translation
(11
)
 
(1
)
Payments
(100
)
 
(73
)
Liability at September 30
$
95

 
$
100


11




Note 8. INCOME TAXES

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
 
2015
 
2014
Earnings Before Income Taxes
$
987

 
$
1,008

 
$
2,487

 
$
2,441

Provision for Income Taxes
257

 
276

 
668

 
439

Effective tax rate
26.0
%
 
27.4
%
 
26.9
%
 
18.0
%

The effective tax rate is typically lower than the U.S. statutory rate of 35% primarily because of 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 Switzerland, Ireland and Puerto Rico. 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 operates under a favorable tax grant in Puerto Rico not scheduled to expire prior to 2023.

The effective tax rates were also impacted by discrete items, particularly research and development charges resulting from acquisitions not deductible for tax purposes including $800 million for Flexus in the second quarter of 2015 and $148 million for iPierian in the second quarter of 2014. Other discrete items include the tax impact resulting from several business divestitures in both periods, including the diabetes business in 2014.

BMS is currently being 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, 2015 could decrease in the range of approximately $280 million to $340 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 9. EARNINGS PER SHARE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Amounts in Millions, Except Per Share Data
2015
 
2014
 
2015
 
2014
Net Earnings Attributable to BMS used for Basic and Diluted EPS Calculation
$
706

 
$
721

 
$
1,762

 
$
1,991

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
1,668

 
1,658

 
1,666

 
1,656

Contingently convertible debt common stock equivalents

 
1

 

 
1

Incremental shares attributable to share-based compensation plans
10

 
11

 
11

 
11

Weighted-average common shares outstanding – diluted
1,678

 
1,670

 
1,677

 
1,668

 
 
 
 
 
 
 
 
Earnings per Common Share:
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.43

 
$
1.06

 
$
1.20

Diluted
$
0.42

 
$
0.43

 
$
1.05

 
$
1.19


12




Note 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
September 30, 2015
 
December 31, 2014
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
$

 
$
3,435

 
$

 
$
3,435

 
$

 
$
5,051

 
$

 
$
5,051

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
263

 

 
263

 

 
896

 

 
896

Commercial paper

 
100

 

 
100

 

 

 

 

Corporate debt securities

 
5,591

 

 
5,591

 

 
5,259

 

 
5,259

Equity funds

 
88

 

 
88

 

 
94

 

 
94

Fixed income funds

 
11

 

 
11

 

 
11

 

 
11

Auction Rate Securities (ARS)

 

 
12

 
12

 

 

 
12

 
12

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts

 
46

 

 
46

 

 
46

 

 
46

Forward starting interest rate swap contracts

 
11

 

 
11

 

 

 

 

Foreign currency forward contracts

 
59

 

 
59

 

 
118

 

 
118

Equity investments
68

 

 

 
68

 
36

 

 

 
36

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts

 

 

 

 

 
(3
)
 

 
(3
)
Forward starting interest rate swap contracts

 
(9
)
 

 
(9
)
 

 

 

 

Foreign currency forward contracts

 
(9
)
 

 
(9
)
 

 

 

 

Written option liabilities

 

 

 

 

 

 
(198
)
 
(198
)
Contingent consideration liability

 

 
(8
)
 
(8
)
 

 

 
(8
)
 
(8
)

As further described in "Note 10. Financial Instruments and Fair Value Measurements" in our 2014 Form 10-K, our fair value estimates use inputs that are either (1) quoted prices for identical assets or liabilities in active markets (Level 1 inputs), (2) observable prices for similar assets or liabilities in active markets or for identical or similar assets or liabilities in markets that are not active (Level 2 inputs) or (3) unobservable inputs (Level 3 inputs).

The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:
 
2015
 
2014
Dollars in Millions
ARS
 
Written option liabilities
 
Contingent consideration liability
 
ARS
 
Written option liabilities
 
Contingent consideration liability
Fair value at January 1
$
12

 
$
(198
)
 
$
(8
)
 
$
12

 
$
(162
)
 
$
(8
)
Settlements and other

 
75

 

 

 

 

Changes in fair value

 
123

 

 

 
(36
)
 

Fair value at September 30
$
12

 
$

 
$
(8
)
 
$
12

 
$
(198
)
 
$
(8
)


13




Available-for-sale Securities

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
 
Fair Value
 
 
September 30, 2015
 
 
 
 
 
 
 
 
Certificates of deposit
$
263

 
$

 
$

 
$
263

 
Commercial paper
100

 

 

 
100

 
Corporate debt securities
5,570

 
32

 
(11
)
 
5,591

 
ARS
9

 
3

 

 
12

 
Equity investments
75

 
7

 
(14
)
 
68

 
Total
$
6,017

 
$
42

 
$
(25
)
 
$
6,034

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Certificates of deposit
$
896

 
$

 
$

 
$
896

 
Corporate debt securities
5,237

 
30

 
(8
)
 
5,259

 
ARS
9

 
3

 

 
12

 
Equity investments
14

 
22

 

 
36

 
Total
$
6,156

 
$
55

 
$
(8
)
 
$
6,203


Available-for-sale securities included in current marketable securities were $1,339 million as of September 30, 2015 and $1,759 million as of December 31, 2014. As of September 30, 2015, all non-current available-for-sale securities mature within five years, except for ARS. Equity investments of $68 million are included in other assets as of September 30, 2015.

Fair Value Option for Financial Assets

Investments in equity and fixed income funds offsetting changes in fair value of certain employee retirement benefits were included in current marketable securities. Investment income resulting from the change in fair value for the investments in equity and fixed income funds was not significant.

Qualifying Hedges
The following table summarizes the fair value of outstanding derivatives:
 
 
 
September 30, 2015
 
December 31, 2014
Dollars in Millions
Balance Sheet Location
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
Other assets
 
$
1,750

 
$
46

 
$
847

 
$
46

Interest rate swap contracts
Other liabilities
 

 

 
1,050

 
(3
)
Forward starting interest rate swap contracts
Other assets
 
500

 
11

 

 

Forward starting interest rate swap contracts
Other liabilities
 
250

 
(9
)
 

 

Foreign currency forward contracts
Prepaid expenses and other
 
766

 
47

 
1,323

 
106

Foreign currency forward contracts
Other assets
 
60

 
12

 
100

 
12

Foreign currency forward contracts
Accrued expenses
 
770

 
(9
)
 

 


Cash Flow Hedges — Foreign currency forward contracts are used to hedge forecasted intercompany inventory purchase transactions, primarily in non-U.S. markets, as well as hedge other foreign currency transactions. The effective portion of changes in fair value for contracts designated as cash flow hedges are temporarily reported in accumulated other comprehensive loss and included in earnings when the hedged item affects earnings. The net gains on foreign currency forward contracts are expected to be reclassified to net earnings (primarily included in cost of products sold) within the next two years. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro ($478 million) and the Japanese yen ($734 million) at September 30, 2015. The fair value of a foreign currency forward contract attributed to the Japanese yen (notional amount of $445 million) not designated as a cash flow hedge was $2 million and was included in accrued expenses at September 30, 2015.


14




In 2015, BMS entered into $750 million of forward starting interest rate contracts maturing in March 2017 to hedge the variability of probable forecasted interest expense. The contracts are designated as cash flow hedges with the effective portion of fair value changes included in other comprehensive income.

The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during the nine months ended September 30, 2015 and 2014. 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.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1,064 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 included in long-term debt. The effective portion of foreign exchange gains or losses on the remeasurement of the debt is included 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.

The notional amount of fixed-to-floating interest rate swap contracts terminated in 2015 was $147 million, generating proceeds of $28 million (including accrued interest of $1 million). Additional contracts were terminated in connection with debt redemptions in 2015.

Long-term debt includes:
Dollars in Millions
September 30,
2015
 
December 31,
2014
Principal Value
$
6,367

 
$
6,804

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
46

 
43

Unamortized basis adjustment from interest rate swap contract terminations
277

 
454

Unamortized bond discounts
(58
)
 
(59
)
Total
$
6,632

 
$
7,242


The fair value of debt was $6,935 million at September 30, 2015 and $8,045 million at December 31, 2014 and was valued using Level 2 inputs. Interest payments were $158 million and $131 million for the nine months ended September 30, 2015 and 2014, respectively, net of amounts related to interest rate swap contracts.

In May 2015, BMS issued senior unsecured notes in a registered public offering. The notes rank equally in right of payment with all of BMS's existing and future senior unsecured indebtedness. BMS may redeem the notes, in whole or in part, at any time at a predetermined redemption price. BMS also terminated forward starting interest rate swap contracts entered into during 2015, resulting in an unrealized loss in OCI. The following table summarizes the note issuances:
Amounts in Millions
Euro
 
U.S. dollars
Principal Value:
 
 
 
1.000% Euro Notes due 2025
575

 
$
643

1.750% Euro Notes due 2035
575

 
643

Total
1,150

 
$
1,286

 
 
 
 
Proceeds net of discount and deferred loan issuance costs
1,133

 
$
1,268

 
 
 
 
Forward starting interest rate swap contracts terminated:
 
 
 
Notional amount
500

 
$
559

Unrealized loss
(16
)
 
(18
)

15




During the second quarter of 2015, the Company repurchased $500 million of long-term debt through a cash tender offer and redeemed €1.0 billion ($1.1 billion) of long-term debt following the issuance of new senior unsecured notes. In connection with the debt redemption activities, certain interest rate swap contracts were entered into and terminated during the second quarter of 2015. Debt redemption activity was as follows:
 
Nine Months Ended September 30,
Dollars in Millions
2015
 
2014
Principal amount
$
1,624

 
$
582

Carrying value
1,795

 
633

Debt redemption price
1,957

 
676

Notional amount of interest rate swap contracts terminated
735

 
500

Interest rate swap contract termination payments
11

 
4

Loss on debt redemption(a)
180

 
45


(a)
Including acceleration of debt issuance costs, loss on interest rate lock contract and other related fees.

Note 11. RECEIVABLES

Dollars in Millions
September 30,
2015
 
December 31,
2014
Trade receivables
$
2,844

 
$
2,193

Less allowances
(130
)
 
(93
)
Net trade receivables
2,714

 
2,100

Alliance receivables
838

 
888

Prepaid and refundable income taxes
175

 
178

Other
181

 
224

Receivables
$
3,908

 
$
3,390


Non-U.S. receivables sold on a nonrecourse basis were $327 million and $684 million for the nine months ended September 30, 2015 and 2014, respectively. Receivables from three pharmaceutical wholesalers in the U.S. aggregated 45% and 36% of total trade receivables at September 30, 2015 and December 31, 2014.

Note 12. INVENTORIES

Dollars in Millions
September 30,
2015
 
December 31,
2014
Finished goods
$
355

 
$
500

Work in process
561

 
856

Raw and packaging materials
214

 
204

Inventories
$
1,130

 
$
1,560


Inventories expected to remain on-hand beyond one year (including $77 million for inventory pending regulatory approval) are included in other assets and were $277 million at September 30, 2015 and $232 million at December 31, 2014.

16




Note 13. PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
September 30,
2015
 
December 31,
2014
Land
$
107

 
$
109

Buildings
4,442

 
4,830

Machinery, equipment and fixtures
3,313

 
3,774

Construction in progress
605

 
353

Gross property, plant and equipment
8,467

 
9,066

Less accumulated depreciation
(4,218
)
 
(4,649
)
Property, plant and equipment
$
4,249

 
$
4,417


The Mount Vernon, Indiana manufacturing facility was transferred to AstraZeneca in the third quarter of 2015 in connection with the sale of the diabetes business. The facility’s gross property, plant and equipment was $415 million on the date of transfer ($182 million net of accumulated depreciation). See "—Note 3. Alliances" for further discussion on the sale of the diabetes business.

A fully depreciated bulk manufacturing facility ceased use in the third quarter of 2015 resulting in a $369 million reduction to gross property, plant and equipment and accumulated depreciation.

Depreciation expense was $393 million and $412 million for the nine months ended September 30, 2015 and 2014, respectively.

Note 14. OTHER INTANGIBLE ASSETS

Dollars in Millions
September 30,
2015
 
December 31,
2014
Licenses
$
534

 
$
1,090

Developed technology rights
2,357

 
2,358

Capitalized software
1,292

 
1,254

In-process research and development (IPRD)
280

 
280

Gross other intangible assets
4,463

 
4,982

Less accumulated amortization
(2,919
)
 
(3,229
)
Total other intangible assets
$
1,544

 
$
1,753


Licenses of $500 million ($126 million net of accumulated amortization) were reclassified to assets held-for-sale during the second quarter of 2015 as a result of the expected transfer of the Erbitux* North American business to Lilly. See "—Note 5. Assets Held-For-Sale" for further discussion.

Amortization expense was $140 million and $222 million for the nine months ended September 30, 2015 and 2014, respectively.

17




Note 15. DEFERRED INCOME
Dollars in Millions
September 30,
2015
 
December 31,
2014
Alliances (Note 3)
$
1,495

 
$
1,493

Gain on sale-leaseback transactions
31

 
45

Other
67

 
399

Total deferred income
$
1,593

 
$
1,937

 
 
 
 
Current portion
$
963

 
$
1,167

Non-current portion
630

 
770


Alliances include unamortized amounts for upfront, milestone and other licensing receipts, revenue deferrals attributed to the Gilead alliance and deferred income for the undelivered elements of the diabetes business divestiture. Other deferrals included $300 million invoiced for Daklinza under an early access program in France as of December 31, 2014, that was deferred until final pricing was obtained from the French government in the second quarter of 2015.
Amortization of deferred income was $233 million and $270 million for the nine months ended September 30, 2015 and 2014, respectively.

Note 16. 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, 2014
2,208

 
$
221

 
$
1,922

 
$
32,952

 
559

 
$
(17,800
)
 
$
82

Net earnings

 

 

 
1,991

 

 

 
11

Cash dividends declared

 

 

 
(1,796
)
 

 

 

Employee stock compensation plans

 

 
(407
)
 

 
(9
)
 
646

 

Debt conversion

 

 
(16
)
 

 
(1
)
 
35

 

Distributions

 

 

 

 

 

 
(35
)
Balance at September 30, 2014
2,208

 
$
221

 
$
1,499

 
$
33,147

 
549

 
$
(17,119
)
 
$
58

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
2,208

 
$
221

 
$
1,507

 
$
32,541

 
547

 
$
(16,992
)
 
$
131

Net earnings

 

 

 
1,762

 

 

 
73

Cash dividends declared

 

 

 
(1,857
)
 

 

 

Employee stock compensation plans

 

 
(94
)
 

 
(7
)
 
384

 

Debt conversion

 

 

 

 

 
2

 

Distributions

 

 

 

 

 

 
(10
)
Balance at September 30, 2015
2,208

 
$
221

 
$
1,413

 
$
32,446

 
540

 
$
(16,606
)
 
$
194



18




The components of other comprehensive income/(loss) were as follows:
 
2015
 
2014
 
Pretax
 
Tax
 
After tax
 
Pretax
 
Tax
 
After tax
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:(a)
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/(losses)
$
(34
)
 
$
14

 
$
(20
)
 
$
96

 
$
(31
)
 
$
65

Reclassified to net earnings
(39
)
 
13

 
(26
)
 
(13
)
 
5

 
(8
)
Derivatives qualifying as cash flow hedges
(73
)
 
27

 
(46
)
 
83

 
(26
)
 
57

Pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Actuarial losses
(272
)
 
96

 
(176
)
 
(679
)
 
236

 
(443
)
Amortization(b)
20

 
(6
)
 
14

 
26

 
(8
)
 
18

Settlements(c)
48

 
(17
)
 
31

 
28

 
(10
)
 
18

Pension and postretirement benefits
(204