10-Q 1 bmy-20170331x10q.htm FORM 10-Q Document


 
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 MARCH 31, 2017
 
 
¨
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  ¨   Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 March 31, 2017, there were 1,647,434,458 shares outstanding of the Registrant’s $0.10 par value common stock.
 




BRISTOL-MYERS SQUIBB COMPANY
INDEX TO FORM 10-Q
MARCH 31, 2017
 





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

 
Three Months Ended March 31,
EARNINGS
2017
 
2016
Net product sales
$
4,580

 
$
3,964

Alliance and other revenues
349

 
427

Total Revenues
4,929

 
4,391

 
 
 
 
Cost of products sold
1,259

 
1,052

Marketing, selling and administrative
1,074

 
1,068

Research and development
1,288

 
1,136

Other (income)/expense
(647
)
 
(520
)
Total Expenses
2,974

 
2,736

 
 
 
 
Earnings Before Income Taxes
1,955

 
1,655

Provision for Income Taxes
429

 
449

Net Earnings
1,526

 
1,206

Net Earnings/(Loss) Attributable to Noncontrolling Interest
(48
)
 
11

Net Earnings Attributable to BMS
$
1,574

 
$
1,195

 
 
 
 
Earnings per Common Share
 
 
 
Basic
$
0.95

 
$
0.72

Diluted
$
0.94

 
$
0.71

 
 
 
 
Cash dividends declared per common share
$
0.39

 
$
0.38



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in Millions
(UNAUDITED)

 
Three Months Ended March 31,
COMPREHENSIVE INCOME
2017
 
2016
Net Earnings
$
1,526

 
$
1,206

Other Comprehensive Income/(Loss), net of taxes and reclassifications to earnings:
 
 
 
Derivatives qualifying as cash flow hedges
(29
)
 
(86
)
Pension and postretirement benefits
83

 
(161
)
Available-for-sale securities
6

 
13

Foreign currency translation
29

 
9

Other Comprehensive Income/(Loss)
89

 
(225
)
 
 
 
 
Comprehensive Income
1,615

 
981

Comprehensive Income/(Loss) Attributable to Noncontrolling Interest
(48
)
 
11

Comprehensive Income Attributable to BMS
$
1,663

 
$
970

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
March 31,
2017
 
December 31,
2016
Current Assets:
 
 
 
Cash and cash equivalents
$
3,910

 
$
4,237

Marketable securities
2,199

 
2,113

Receivables
5,494

 
5,543

Inventories
1,384

 
1,241

Prepaid expenses and other
628

 
570

Total Current Assets
13,615

 
13,704

Property, plant and equipment
5,020

 
4,980

Goodwill
6,875

 
6,875

Other intangible assets
1,276

 
1,385

Deferred income taxes
2,618

 
2,996

Marketable securities
2,685


2,719

Other assets
848

 
1,048

Total Assets
$
32,937

 
$
33,707

 
 
 
 
LIABILITIES
 
 
 
Current Liabilities:
 
 
 
Short-term debt obligations
$
1,197

 
$
992

Accounts payable
1,503

 
1,664

Accrued liabilities
4,777

 
5,271

Deferred income
837

 
762

Income taxes payable
180

 
152

Total Current Liabilities
8,494

 
8,841

Deferred income
528

 
547

Income taxes payable
948

 
973

Pension and other liabilities
1,195

 
1,283

Long-term debt
7,237

 
5,716

Total Liabilities
18,402

 
17,360

 
 
 
 
Commitments and contingencies (Note 17)

 

 
 
 
 
EQUITY
 
 
 
Bristol-Myers Squibb Company Shareholders’ Equity:
 
 
 
Preferred stock

 

Common stock
221

 
221

Capital in excess of par value of stock
1,337

 
1,725

Accumulated other comprehensive loss
(2,414
)
 
(2,503
)
Retained earnings
33,658

 
33,513

Less cost of treasury stock
(18,386
)
 
(16,779
)
Total Bristol-Myers Squibb Company Shareholders’ Equity
14,416

 
16,177

Noncontrolling interest
119

 
170

Total Equity
14,535

 
16,347

Total Liabilities and Equity
$
32,937

 
$
33,707

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)

 
Three Months Ended March 31,
 
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
Net earnings
$
1,526

 
$
1,206

Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:
 
 
 
Depreciation and amortization, net
193

 
65

Deferred income taxes
(70
)
 
(246
)
Stock-based compensation
45

 
47

Impairment charges
78

 
19

Pension settlements and amortization
52

 
39

Divestiture gains and royalties
(276
)
 
(507
)
Asset acquisition charges

 
100

Other adjustments
33

 
(10
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(246
)
 
(424
)
Inventories
(71
)
 
(44
)
Accounts payable
(114
)
 
(77
)
Deferred income
74

 
235

Income taxes payable
414

 
52

Other
(777
)
 
(683
)
Net Cash Provided by/(Used in) Operating Activities
861

 
(228
)
Cash Flows From Investing Activities:
 
 
 
Sale and maturities of marketable securities
1,163

 
1,760

Purchase of marketable securities
(1,204
)
 
(523
)
Capital expenditures
(291
)
 
(242
)
Divestiture and other proceeds
241

 
439

Acquisition and other payments
(112
)
 
(8
)
Net Cash Provided by/(Used in) Investing Activities
(203
)
 
1,426

Cash Flows From Financing Activities:
 
 
 
Short-term borrowings, net
192

 
(33
)
Issuance of long-term debt
1,488

 

Repurchase of common stock
(2,000
)
 
(231
)
Dividends
(655
)
 
(641
)
Other
(38
)
 
(45
)
Net Cash Used in Financing Activities
(1,013
)
 
(950
)
Effect of Exchange Rates on Cash and Cash Equivalents
28

 
11

Increase/(Decrease) in Cash and Cash Equivalents
(327
)
 
259

Cash and Cash Equivalents at Beginning of Period
4,237

 
2,385

Cash and Cash Equivalents at End of Period
$
3,910

 
$
2,644

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 prepared these unaudited consolidated financial statements following the requirements of the SEC and U.S. 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 Quarterly Report on Form 10-Q, which include all adjustments necessary for a fair presentation of the financial position at March 31, 2017 and December 31, 2016 and the results of operations and cash flows for the three months ended March 31, 2017 and 2016. All intercompany balances and transactions have been eliminated. These financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 included in the 2016 Form 10-K. Refer to the Summary of Abbreviated Terms at the end of this Quarterly Report on Form 10-Q for terms used throughout the document.

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, judgments and assumptions. The most significant assumptions are estimates used in determining sales rebate and return accruals; legal contingencies; income taxes; determining if an acquisition or divestiture is a business or an asset; and pension and postretirement benefits. Actual results may differ from estimates.

Certain prior period amounts were reclassified to conform to the current period presentation. The consolidated statements of cash flows previously presented interest rate swap contract terminations and issuance of common stock as separate line items within cash flows from financing activities which are now presented as components of other financing activities. The reclassifications provide a more concise financial statement presentation and additional information is disclosed in the notes if material.

Recently Adopted Accounting Standards
Share-based Payment Transactions
Amended guidance for share-based payment transactions was adopted in the first quarter of 2017. Net excess tax benefits of approximately $20 million were recognized prospectively as a reduction of tax expense rather than capital in excess of par value of stock. Net excess tax benefits are also presented as an operating cash flow rather than a financing cash flow and cash payments to tax authorities in connection with shares withheld for statutory tax withholding requirements are presented as a financing cash flow rather than an operating cash flow. The changes in cash flow presentation were applied retrospectively and increased operating cash flows and decreased financing cash flows by $99 million in the first quarter of 2017 and $158 million in the first quarter of 2016.

Income Tax Accounting for Intra-entity Transfers of Assets Other Than Inventory
Amended guidance on income tax accounting for intra-entity transfers of assets other than inventory was early adopted in the first quarter of 2017 on a modified retrospective approach. The amended guidance requires tax consequences of these transfers be recognized in the period the transfer takes place. Net reductions to prepaid and deferred tax assets pertaining to pre-2017 internal transfers of intellectual property of $787 million were adjusted through retained earnings as a cumulative effect of an accounting change which will reduce the annual tax expense by $86 million beginning in 2017. In addition, the tax consequences of additional internal transfers of intellectual property that may occur in the future will be included in income tax expense upon transfer and not amortized in subsequent periods.

Recently Issued Accounting Standards
Presentation of Net Periodic Pension and Postretirement Benefits
In March 2017, the FASB issued amended guidance requiring all net periodic benefit components for defined benefit pension and other postretirement plans other than service costs to be recorded outside of income from operations (other income). The guidance is effective in 2018 on a retrospective basis with early adoption permitted. The Company expects that annual cost of products sold; marketing selling and administrative; and research and development expenses will increase by approximately $150 million in the aggregate with a corresponding offset in other income.


6




In addition, the following recently issued accounting standards have not been adopted. Refer to the 2016 Form 10-K for additional information and their potential impacts.
Accounting Standard Update
Effective Date
Revenue from Contracts with Customers
January 1, 2018
Recognition and Measurement of Financial Assets and Liabilities
January 1, 2018
Definition of a Business
January 1, 2018
Leases
January 1, 2019
Financial Instruments - Measurement of Credit Losses
January 1, 2020
Goodwill Impairment Testing
January 1, 2020

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 and the composition of total revenues were as follows:
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Prioritized Brands
 
 
 
Opdivo
$
1,127

 
$
704

Eliquis
1,101

 
734

Orencia
535

 
475

Sprycel
463

 
407

Yervoy
330

 
263

Empliciti
53

 
28

Established Brands
 
 
 
Hepatitis C Franchise
162

 
427

Baraclude
282

 
291

Sustiva Franchise
184

 
273

Reyataz Franchise
193

 
221

Other Brands
499

 
568

Total Revenues
$
4,929

 
$
4,391

 
 
 
 
Net product sales
$
4,580

 
$
3,964

Alliance revenues
297

 
409

Other revenues
52

 
18

Total Revenues
$
4,929

 
$
4,391



7




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. Products sold through alliance arrangements in certain markets include Opdivo, Eliquis, Orencia, Sprycel, Yervoy, Empliciti, Sustiva (Atripla*) and certain other brands.

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 March 31,
Dollars in Millions
2017
 
2016
Revenues from alliances:
 
 
 
Net product sales
$
1,576

 
$
1,231

Alliance revenues
297

 
409

Total Revenues
$
1,873

 
$
1,640

 
 
 
 
Payments to/(from) alliance partners:
 
 
 
Cost of products sold
$
624

 
$
476

Marketing, selling and administrative
(9
)
 
1

Research and development

 
33

Other (income)/expense
(246
)
 
(253
)
 
 
 
 
Noncontrolling interest, pretax
2

 
2

 
Selected Alliance Balance Sheet information:
 
 
 
Dollars in Millions
March 31,
2017
 
December 31,
2016
Receivables - from alliance partners
$
897

 
$
903

Accounts payable - to alliance partners
600

 
555

Deferred income from alliances(a)
1,251

 
1,194

(a)
Includes unamortized upfront, milestone and other licensing proceeds, revenue deferrals attributed to Atripla* and undelivered elements of diabetes business divestiture proceeds. Amortization of deferred income (primarily related to alliances) was $20 million and $82 million for the three months ended March 31, 2017 and 2016, respectively.
    
Specific information pertaining to each of our significant alliances is discussed in our 2016 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 three months ended March 31, 2017 are set forth below.

AstraZeneca
BMS received $100 million from AstraZeneca as additional contingent consideration for the diabetes business divestiture upon achievement of a regulatory approval milestone in the first quarter of 2017 (included in other income).

F-Star Alpha
In the first quarter of 2017, BMS discontinued development of FS102 (an anti-HER2 antibody fragment) which was in Phase I development for the treatment of breast and gastric cancer. BMS will not exercise its option to purchase F-Star Alpha which was previously consolidated by BMS as a variable interest entity. As a result, an IPRD charge of $75 million was included in R&D expense and attributed to noncontrolling interest.

8




Note 4. LICENSING ARRANGEMENTS

CytomX
In April 2017, BMS added up to eight additional targets to its strategic collaboration with CytomX to discover novel therapies using CytomX’s proprietary Probody platform. As part of the original May 2014 collaboration to discover, develop and commercialize Probody therapeutics, BMS selected four oncology targets, including CTLA-4. Pursuant to the expanded agreement, CytomX will grant BMS exclusive worldwide rights to develop and commercialize Probody therapeutics for up to eight additional targets. BMS paid CytomX $75 million for the rights to the initial four targets which was expensed as R&D prior to 2017. BMS will pay $200 million to CytomX for access to the eight additional targets in May 2017 which will be included in R&D expense in the second quarter of 2017. BMS will also reimburse CytomX for certain research costs over the collaboration period, pay up to $448 million upon achievement of contingent development, regulatory and sales milestone events for each collaboration target and future royalties if a product is approved and commercialized.
Biogen
In April 2017, BMS agreed to out-license to Biogen exclusive rights to develop and commercialize BMS-986168, an anti-eTau compound in development for Progressive Supranuclear Palsy. Upon closing, Biogen will pay $300 million to BMS which will be included in other income. BMS will also be entitled to contingent development, regulatory and sales based milestone payments of up to $410 million if achieved as well as future royalties if the product is ultimately approved and commercialized. BMS originally acquired the rights to this compound in 2014 through its acquisition of iPierian. Biogen will assume all of BMS’s remaining obligations to the former stockholders of iPierian. The transaction is expected to close in the second quarter of 2017 upon obtaining customary regulatory approvals.

Roche
In April 2017, BMS agreed to out-license to Roche exclusive rights to develop and commercialize BMS-986089, an anti-myostatin adnectin in development for Duchenne Muscular Dystrophy. Upon closing, Roche will pay $170 million to BMS which will be included in other income. BMS will also be entitled to contingent development and regulatory milestone payments of up to $205 million if achieved and future royalties if the product is ultimately approved and commercialized. The transaction is expected to close in the second quarter of 2017 upon obtaining customary regulatory approvals.

Note 5. OTHER (INCOME)/EXPENSE
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Interest expense
$
45

 
$
43

Investment income
(33
)
 
(24
)
Provision for restructuring
164

 
4

Litigation and other settlements(a)
(484
)
 
43

Equity in net income of affiliates
(18
)
 
(26
)
Divestiture gains
(127
)
 
(270
)
Royalties and licensing income
(199
)
 
(254
)
Transition and other service fees
(7
)
 
(53
)
Pension charges
33

 
22

Intangible asset impairments

 
15

Other
(21
)
 
(20
)
Other (income)/expense
$
(647
)
 
$
(520
)
(a)
Includes BMS's share of a patent-infringement litigation settlement of $481 million related to Merck's PD-1 antibody Keytruda*.

9




Note 6. RESTRUCTURING

In October 2016, the Company announced a restructuring plan to evolve and streamline its operating model and expects to incur charges in connection with employee workforce reductions and early site exits. The charges are expected to be incurred through 2020, range between $1.5 billion to $2.0 billion and consist of employee termination benefit costs, contract termination costs, plant and equipment accelerated depreciation and impairment charges and other site shutdown costs. Cash outlays in connection with these actions are expected to be approximately 40% to 50% of the total charges. Charges of approximately $310 million have been recognized for these actions since the announcement (approximately $220 million for the three months ended March 31, 2017), primarily resulting from employee workforce reductions and accelerated depreciation from expected early site exits. Restructuring charges are recognized upon meeting certain criteria, including finalization of committed plans, reliable estimates and discussions with local works councils in certain markets.

Other restructuring charges recognized prior to the above actions were primarily related to specialty care transformation initiatives designed to create a more simplified organization across all functions and geographic markets. In addition, accelerated depreciation and other charges were incurred in connection with early exits of a manufacturing site in Ireland and R&D site in the U.S.

Employee workforce reductions were approximately 900 and 100 for the three months ended March 31, 2017 and 2016, respectively, across all geographic regions for manufacturing, selling, administrative and R&D personnel.

The following tables summarize the charges and activity related to the restructuring actions:
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Employee termination costs
$
161

 
$
4

Other termination costs
3

 

Provision for restructuring
164

 
4

Accelerated depreciation
70

 
14

Asset impairments
2

 

Other shutdown costs

 
3

Total charges
$
236

 
$
21

         
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Cost of products sold
$

 
$
4

Research and development
72

 
13

Other (income)/expense
164

 
4

Total charges
$
236

 
$
21

 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Liability at January 1
$
114

 
$
125

Charges
170

 
8

Change in estimates
(6
)
 
(4
)
Provision for restructuring
164

 
4

Foreign currency translation
1

 

Spending
(44
)
 
(33
)
Liability at March 31
$
235

 
$
96


10




Note 7. INCOME TAXES
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Earnings Before Income Taxes
$
1,955

 
$
1,655

Provision for Income Taxes
429

 
449

Effective tax rate
21.9
%
 
27.1
%

The effective tax rate is lower than the U.S. statutory rate of 35% primarily attributable to undistributed earnings of certain foreign subsidiaries in low tax jurisdictions 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. Due to complexities in the tax laws and assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes that would have to be provided. 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.

Jurisdictional tax rates and other tax impacts attributed to R&D charges, divestiture transactions and other discrete pretax items increased the effective tax rate by 1.7% and 4.4% in the three months ended March 31, 2017 and 2016, respectively, including non-deductible R&D asset acquisition charges and goodwill allocated to business divestitures. The tax impact for discrete items are reflected immediately and are not considered in estimating the annual effective tax rate.

The adoption of the amended guidance for intra-entity transfers of assets other than inventory and share-based payment transactions reduced the effective tax rate by 2.1% in the three months ended March 31, 2017. Refer to "—Note 1. Basis of Presentation and Recently Issued Accounting Standards" for additional information.

BMS is currently under examination by a number of tax authorities which have proposed or are considering proposing material adjustments to tax positions for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. It is reasonably possible that the total amount of unrecognized tax benefits at March 31, 2017 could decrease in the range of approximately $255 million to $315 million in the next twelve months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits may result in the payment of additional taxes, adjustment of certain deferred taxes and/or 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.

Note 8. EARNINGS PER SHARE
 
Three Months Ended March 31,
Amounts in Millions, Except Per Share Data
2017
 
2016
Net Earnings Attributable to BMS used for Basic and Diluted EPS Calculation
$
1,574

 
$
1,195

 
 
 
 
Weighted-average common shares outstanding – basic
1,662

 
1,669

Incremental shares attributable to share-based compensation plans
9

 
11

Weighted-average common shares outstanding – diluted
1,671

 
1,680

 
 
 
 
Earnings per Common Share:
 
 
 
Basic
$
0.95

 
$
0.72

Diluted
$
0.94

 
$
0.71


11




Note 9. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
March 31, 2017
 
December 31, 2016
Dollars in Millions
Level 1
 
Level 2
 
Level 1
 
Level 2
Cash and cash equivalents - Money market and other securities
$

 
$
3,256

 
$

 
$
3,532

Marketable securities:
 
 
 
 
 
 
 
Certificates of deposit

 
419

 

 
27

Commercial paper

 
480

 

 
750

Corporate debt securities

 
3,869

 

 
3,947

Equity funds

 
109

 

 
101

Fixed income funds

 
7

 

 
7

Derivative assets

 
29

 

 
75

Equity investments
30

 

 
24

 

Derivative liabilities

 
(24
)
 

 
(30
)

As further described in "Note 9. Financial Instruments and Fair Value Measurements" in our 2016 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). There were no Level 3 financial assets or liabilities as of March 31, 2017 and December 31, 2016.

Available-for-sale Securities

The following table summarizes available-for-sale securities:
 
March 31, 2017
 
December 31, 2016
Dollars in Millions
Amortized Cost
 
Gross Unrealized
 
 
 
Amortized Cost
 
Gross Unrealized
 
 
 
Gains
 
Losses
 
Fair Value
 
 
Gains
 
Losses
 
Fair Value
Certificates of deposit
$
419

 
$

 
$

 
$
419

 
$
27

 
$

 
$

 
$
27

Commercial paper
480

 

 

 
480

 
750

 

 

 
750

Corporate debt securities
3,864

 
11

 
(6
)
 
3,869

 
3,945

 
10

 
(8
)
 
3,947

Equity investments
31

 
4

 
(5
)
 
30

 
31

 

 
(7
)
 
24

Total
$
4,794

 
$
15

 
$
(11
)
 
$
4,798

 
$
4,753

 
$
10

 
$
(15
)
 
$
4,748

Dollars in Millions
March 31,
2017
 
December 31,
2016
Current marketable securities(a)
$
2,199

 
$
2,113

Non-current marketable securities(b)
2,685

 
2,719

Other assets
30

 
24

Total
$
4,914

 
$
4,856

(a)
The fair value option for financial assets was elected for investments in equity and fixed income funds. The fair value of these investments were $116 million at March 31, 2017 and $108 million at December 31, 2016 and included in current marketable securities.
(b)
All non-current marketable securities mature within five years as of March 31, 2017 and December 31, 2016.

12




Qualifying Hedges and Non-Qualifying Derivatives
The following table summarizes the fair value of outstanding derivatives:
 
March 31, 2017
 
December 31, 2016
 
Asset(a)
 
Liability(b)
 
Asset(a)
 
Liability(b)
Dollars in Millions
Notional
 
Fair Value
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$
1,505

 
$
(5
)
 
$
750

 
$
1

 
$
755

 
$
(3
)
Forward starting interest rate swap contracts

 

 

 

 
500

 
8

 
250

 
(11
)
Foreign currency forward contracts
507

 
29

 
536

 
(17
)
 
967

 
66

 
198

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
71

 

 
137

 
(2
)
 
106

 

 
360

 
(7
)
(a)
Included in prepaid expenses and other and other assets.
(b)
Included in accrued liabilities and pension and other liabilities.

Cash Flow Hedges — The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro ($584 million) and Japanese yen ($252 million) at March 31, 2017. BMS terminated forward starting interest rate swap contracts in the first quarter of 2017 with an aggregate notional value of $750 million. The proceeds and related gain were not material.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1,026 million) are designated to hedge euro currency exposures of the net investment in certain foreign affiliates.

Fair Value Hedges — The notional amount of fixed-to-floating interest rate swap contracts terminated was $500 million in 2016 generating proceeds of $43 million (including accrued interest).

Debt Obligations
Short-term debt obligations includes:
Dollars in Millions
March 31,
2017
 
December 31,
2016
Bank drafts and short-term borrowings
$
448

 
$
243

Current portion of long-term debt
749

 
749

Total
$
1,197

 
$
992


Long-term debt and the current portion of long-term debt includes:
Dollars in Millions
March 31,
2017
 
December 31,
2016
Principal Value
$
7,800

 
$
6,261

Adjustments to Principal Value:
 
 
 
Fair value of interest rate swap contracts
(5
)
 
(2
)
Unamortized basis adjustment from swap terminations
280

 
287

Unamortized bond discounts and issuance costs
(89
)
 
(81
)
Total
$
7,986

 
$
6,465

 
 
 
 
Current portion of long-term debt
$
749

 
$
749

Long-term debt
7,237

 
5,716


The fair value of debt was $8,411 million at March 31, 2017 and $6,932 million at December 31, 2016 valued using Level 2 inputs. Interest payments were $43 million and $33 million for the three months ended March 31, 2017 and 2016, respectively, net of amounts related to interest rate swap contracts.


13




On February 27, 2017, 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 prior to maturity at a predetermined redemption price. The following table summarizes the note issuances:
Amounts in Millions
2017
Principal Value:
 
1.600% Notes due 2019
$
750

3.250% Notes due 2027
750

Total
$
1,500

 
 
Proceeds net of discount and deferred loan issuance costs
$
1,488


Note 10. RECEIVABLES
Dollars in Millions
March 31,
2017
 
December 31,
2016
Trade receivables
$
4,247

 
$
3,948

Less charge-backs and cash discounts
(123
)
 
(126
)
Less bad debt allowances
(41
)
 
(48
)
Net trade receivables
4,083

 
3,774

Alliance receivables
897

 
903

Prepaid and refundable income taxes
243

 
627

Other
271

 
239

Receivables
$
5,494

 
$
5,543


Non-U.S. receivables sold on a nonrecourse basis were $120 million and $159 million for the three months ended March 31, 2017 and 2016, respectively. Receivables from our three largest pharmaceutical wholesalers in the U.S. represented 65% and 66% of total trade receivables at March 31, 2017 and December 31, 2016, respectively.

Note 11. INVENTORIES
Dollars in Millions
March 31,
2017
 
December 31,
2016
Finished goods
$
415

 
$
310

Work in process
1,038

 
988

Raw and packaging materials
230

 
264

Total inventories
$
1,683

 
$
1,562

 
 
 
 
Inventories
$
1,384

 
$
1,241

Other assets
299

 
321


Other assets include inventory pending regulatory approval of $58 million at March 31, 2017 and $54 million at December 31, 2016 and other amounts expected to remain on-hand beyond one year.

Note 12. PROPERTY, PLANT AND EQUIPMENT
Dollars in Millions
March 31,
2017
 
December 31,
2016
Land
$
107

 
$
107

Buildings
4,952

 
4,930

Machinery, equipment and fixtures
3,324

 
3,287

Construction in progress
938

 
849

Gross property, plant and equipment
9,321

 
9,173

Less accumulated depreciation
(4,301
)
 
(4,193
)
Property, plant and equipment
$
5,020

 
$
4,980


Depreciation expense was $166 million and $103 million for the three months ended March 31, 2017 and 2016, respectively.

14




Note 13. OTHER INTANGIBLE ASSETS
Dollars in Millions
March 31,
2017
 
December 31,
2016
Licenses
$
564

 
$
564

Developed technology rights
2,357

 
2,357

Capitalized software
1,344

 
1,441

IPRD
32

 
107

Gross other intangible assets
4,297

 
4,469

Less accumulated amortization
(3,021
)
 
(3,084
)
Other intangible assets
$
1,276

 
$
1,385


Amortization expense was $47 million and $44 million for the three months ended March 31, 2017 and 2016, respectively.

Note 14. ACCRUED LIABILITIES
Dollars in Millions
 
March 31,
2017
 
December 31,
2016
Rebates and returns
 
$
1,677

 
$
1,680

Dividends
 
646

 
660

Research and development
 
620

 
718

Employee compensation and benefits
 
361

 
818

Branded Prescription Drug Fee
 
257

 
234

Restructuring
 
182

 
90

Royalties
 
181

 
246

Pension and postretirement benefits
 
41

 
44

Litigation and other settlements
 
36

 
43

Other
 
776

 
738

Accrued liabilities
 
$
4,777

 
$
5,271


Note 15. EQUITY
 
Common Stock
 
Capital in  Excess
of Par Value
of Stock
 
Accumulated Other Comprehensive Loss
 
Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interest
Dollars and Shares in Millions
Shares
 
Par Value
 
Shares
 
Cost
 
Balance at January 1, 2016
2,208

 
$
221

 
$
1,459

 
$
(2,468
)
 
$
31,613

 
539

 
$
(16,559
)
 
$
158

Net earnings

 

 

 

 
1,195

 

 

 
11

Other comprehensive loss

 

 

 
(225
)
 

 

 

 

Cash dividends

 

 

 

 
(632
)
 

 

 

Stock repurchase program

 

 

 

 

 
4

 
(231
)
 

Stock compensation

 

 
44

 

 

 
(4
)
 
(31
)
 

Distributions

 

 

 

 

 

 

 
(4
)
Balance at March 31, 2016
2,208

 
$
221

 
$
1,503

 
$
(2,693
)
 
$
32,176

 
539

 
$
(16,821
)
 
$
165

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
2,208

 
$
221

 
$
1,725

 
$
(2,503
)
 
$
33,513

 
536

 
$
(16,779
)
 
$
170

Accounting change - cumulative effect(a)

 

 

 

 
(787
)
 

 

 

Adjusted balance at January 1, 2017
2,208

 
$
221

 
$
1,725

 
$
(2,503
)
 
$
32,726

 
536

 
$
(16,779
)
 
$
170

Net earnings

 

 

 

 
1,574

 

 

 
11

Other comprehensive income

 

 

 
89

 

 

 

 

Cash dividends

 

 

 

 
(642
)
 

 

 

Stock repurchase program

 

 
(400
)
 

 

 
29

 
(1,600
)
 

Stock compensation

 

 
12

 

 

 
(4
)
 
(7
)
 

Variable interest entity

 

 

 

 

 

 

 
(59
)
Distributions

 

 

 

 

 

 

 
(3
)
Balance at March 31, 2017
2,208

 
$
221

 
$
1,337

 
$
(2,414
)
 
$
33,658

 
561

 
$
(18,386
)
 
$
119

(a)
Refer to "—Note 1. Basis of Presentation and Recently Issued Accounting Standards" for additional information.
    

15




BMS has a stock repurchase program authorized by its Board of Directors allowing for repurchases in the open market or through private transactions, including plans established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The stock repurchase program does not have an expiration date and may be suspended or discontinued at any time. Treasury stock is recognized at the cost to reacquire the shares. Shares issued from treasury are recognized utilizing the first-in first-out method.

In February 2017, BMS executed accelerated share repurchase agreements to repurchase an aggregate $2 billion of common stock as part of our existing share repurchase authorization. The agreements were funded through a combination of debt and cash. Approximately 29 million shares of BMS common stock, representing approximately 80% of the notional amount of the agreements, were delivered to BMS and included in treasury stock. The agreements are expected to settle during the second quarter of 2017, upon which additional shares of common stock may be delivered to BMS or, under certain circumstances, BMS may be required to make a cash payment or may elect to deliver shares of BMS common stock to the counterparties. The total number of shares to be delivered or the amount of such payment, as well as the final average price per share, will be based on the volume-weighted average price, less a discount, of BMS common stock during the term of the transaction. 

The components of other comprehensive income/(loss) were as follows:
 
2017
 
2016
 
Pretax
 
Tax
 
After tax
 
Pretax
 
Tax
 
After tax
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses
$
(18
)
 
$
7

 
$
(11
)
 
$
(126
)
 
$
42

 
$
(84
)
Reclassified to net earnings(a)
(22
)
 
4

 
(18
)
 
(4
)
 
2

 
(2
)
Derivatives qualifying as cash flow hedges
(40
)
 
11

 
(29
)
 
(130
)
 
44

 
(86
)
Pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Actuarial gains/(losses)
58

 
(18
)
 
40

 
(292
)
 
103

 
(189
)
Amortization(b)
19

 
3

 
22

 
17

 
(3
)
 
14

Curtailments and settlements(c)
33

 
(12
)
 
21

 
22

 
(8
)
 
14

Pension and postretirement benefits
110

 
(27
)
 
83

 
(253
)
 
92

 
(161
)
Available-for-sale securities
9

 
(3
)
 
6

 
27

 
(14
)
 
13

Foreign currency translation
21

 
8

 
29

 
2

 
7

 
9

 
$
100

 
$
(11
)
 
$
89

 
$
(354
)
 
$
129

 
$
(225
)

(a)
Included in cost of products sold
(b)
Included in cost of products sold, research and development and marketing, selling and administrative expenses
(c)
Included in other (income)/expense

The accumulated balances related to each component of other comprehensive loss, net of taxes, were as follows:
Dollars in Millions
March 31,
2017
 
December 31, 2016
Derivatives qualifying as cash flow hedges
$
9

 
$
38

Pension and other postretirement benefits
(2,014
)
 
(2,097
)
Available-for-sale securities
(1
)
 
(7
)
Foreign currency translation
(408
)
 
(437
)
Accumulated other comprehensive loss
$
(2,414
)
 
$
(2,503
)

Note 16. PENSION AND POSTRETIREMENT BENEFIT PLANS

The net periodic benefit cost/(credit) of defined benefit pension plans includes:
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
Service cost – benefits earned during the year
$
6

 
$
6

Interest cost on projected benefit obligation
48

 
51

Expected return on plan assets
(103
)
 
(104
)
Amortization of prior service credits
(1
)
 
(1
)
Amortization of net actuarial loss
21

 
19

Curtailments and settlements
33

 
22

Special termination benefits

 
1

Net periodic benefit cost/(credit)
$
4

 
$
(6
)

16




Pension settlement charges were recognized after determining that the annual lump sum payments will likely exceed the annual interest and service costs for the primary and certain other U.S. pension plans. The charges included the acceleration of a portion of unrecognized actuarial losses. Non-current pension liabilities were $490 million at March 31, 2017 and $600 million at December 31, 2016. Defined contribution plan expense in the U.S. was $44 million and $42 million for the three months ended March 31, 2017 and 2016, respectively.

Note 17. LEGAL PROCEEDINGS AND CONTINGENCIES
The Company and certain of its subsidiaries are involved in various lawsuits, claims, government investigations and other legal proceedings that arise in the ordinary course of business. These claims or proceedings can involve various types of parties, including governments, competitors, customers, suppliers, service providers, licensees, employees, or shareholders, among others. The resolution of these matters often develops over a long period of time and expectations can change as a result of new findings, rulings, appeals or settlement arrangements. The Company recognizes accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. These matters involve patent infringement, antitrust, securities, pricing, sales and marketing practices, environmental, commercial, contractual rights, licensing obligations, health and safety matters, consumer fraud, employment matters, product liability and insurance coverage. Legal proceedings that are material or that the Company believes could become material are described below.
Although the Company believes it has substantial defenses in these matters, there can be no assurance that there will not be an increase in the scope of pending matters or that any future lawsuits, claims, government investigations or other legal proceedings will not be material. Unless otherwise noted, the Company is unable to assess the outcome of the respective litigation nor is it able to provide an estimated range of potential loss. Furthermore, failure to enforce our patent rights would likely result in substantial decreases in the respective product revenues from generic competition.
INTELLECTUAL PROPERTY
Plavix* — Australia
As previously disclosed, Sanofi was notified that, in August 2007, GenRx Proprietary Limited (GenRx) obtained regulatory approval of an application for clopidogrel bisulfate 75mg tablets in Australia. GenRx, formerly a subsidiary of Apotex Inc. (Apotex), has since changed its name to Apotex. In August 2007, Apotex filed an application in the Federal Court of Australia (the Federal Court) seeking revocation of Sanofi’s Australian Patent No. 597784 (Case No. NSD 1639 of 2007). Sanofi filed counterclaims of infringement and sought an injunction. On September 21, 2007, the Federal Court granted Sanofi’s injunction. A subsidiary of the Company was subsequently added as a party to the proceedings. In February 2008, a second company, Spirit Pharmaceuticals Pty. Ltd., also filed a revocation suit against the same patent. This case was consolidated with the Apotex case, and a trial occurred in April 2008. On August 12, 2008, the Federal Court of Australia held that claims of Patent No. 597784 covering clopidogrel bisulfate, hydrochloride, hydrobromide, and taurocholate salts were valid. The Federal Court also held that the process claims, pharmaceutical composition claims, and claim directed to clopidogrel and its pharmaceutically acceptable salts were invalid. The Company and Sanofi filed notices of appeal in the Full Court of the Federal Court of Australia (Full Court) appealing the holding of invalidity of the claim covering clopidogrel and its pharmaceutically acceptable salts, process claims, and pharmaceutical composition claims which have stayed the Federal Court’s ruling. Apotex filed a notice of appeal appealing the holding of validity of the clopidogrel bisulfate, hydrochloride, hydrobromide, and taurocholate claims. A hearing on the appeals occurred in February 2009. On September 29, 2009, the Full Court held all of the claims of Patent No. 597784 invalid. In November 2009, the Company and Sanofi applied to the High Court of Australia (High Court) for special leave to appeal the judgment of the Full Court. In March 2010, the High Court denied the Company and Sanofi’s request to hear the appeal of the Full Court decision. The case has been remanded to the Federal Court for further proceedings related to damages sought by Apotex. The Australian government has intervened in this matter and is also seeking damages for alleged losses experienced during the period when the injunction was in place. The Company and Apotex have settled the Apotex case, and the case has been dismissed. The Australian government's claim is still pending and a trial has been scheduled for August 2017. It is not possible at this time to predict the outcome of the Australian government’s claim or its impact on the Company.
Sprycel - European Union
In May 2013, Apotex, Actavis Group PTC ehf, Generics [UK] Limited (Mylan) and an unnamed company filed oppositions in the EPO seeking revocation of European Patent No. 1169038 (the ‘038 patent) covering dasatinib, the active ingredient in Sprycel. The ‘038 patent is scheduled to expire in April 2020 (excluding potential term extensions). On January 20, 2016, the Opposition Division of the EPO revoked the ‘038 patent. In May 2016, the Company appealed the EPO’s decision to the EPO Board of Appeal. In February 2017, the EPO Board of Appeal upheld the Opposition Division's decision, and revoked the ‘038 patent. Orphan drug exclusivity and data exclusivity for Sprycel in the EU expired in November 2016. The EPO Board of Appeal's decision does not affect the validity of our other Sprycel patents within and outside Europe, including different patents that cover the monohydrate form of dasatinib and the use of dasatinib to treat chronic myelogenous leukemia (CML). Additionally, in February 2017, the EPO Board of Appeal reversed and remanded an invalidity decision on European Patent No. 1610780 and its claim to the use of dasatinib to treat CML, which the EPO's Opposition Division had revoked in October 2012. The Company intends to take appropriate legal actions to protect Sprycel. We may experience a decline in European revenues in the event that generic dasatinib product enters the market.

17




Anti-PD-1 Antibody Patent Oppositions and Litigation
On January 20, 2017, BMS and Ono announced the companies have signed a global patent license agreement with Merck to settle all patent-infringement litigation related to Merck’s PD-1 antibody Keytruda* (pembrolizumab). The agreement resulted in the dismissal with prejudice of all patent litigation between the companies pertaining to Keytruda*. BMS and Ono had asserted in litigation that Merck’s sale of Keytruda* infringed the companies’ patents relating to the use of PD-1 antibodies to treat cancer in the U.S., Europe (UK, Netherlands, France, Germany, Ireland, Spain and Switzerland), Australia and Japan.
As part of the agreement, Merck made an initial payment of $625 million to BMS and Ono, of which BMS received $481 million. Merck is also obligated to pay ongoing royalties on global sales of Keytruda* of 6.5% from January 1, 2017 through December 31, 2023, and 2.5% from January 1, 2024 through December 31, 2026. Under the agreement, the companies have also granted certain rights to each other under their respective patent portfolios pertaining to PD-1. Payments and royalties are shared between BMS and Ono on a 75/25 percent allocation, respectively after adjusting for each parties' legal fees. 
In September 2015, Dana-Farber Cancer Institute (Dana-Farber) filed a complaint in Massachusetts federal court seeking to correct the inventorship of five related U.S. patents directed to methods of treating cancer using a PD-1 antibody. Specifically, Dana-Farber is seeking to add two scientists as inventors to these patents.
Eliquis Patent Litigation
In February, March and April 2017, twenty-five generic companies sent the Company Paragraph-IV certification letters informing the Company that they had filed abbreviated new drug applications (ANDAs) seeking approval of generic versions of Eliquis. As a result, the three Eliquis patents listed in the FDA Orange Book have now been challenged, including a composition of matter patent claiming apixaban specifically and a formulation patent. In April 2017, the Company, along with its partner Pfizer, initiated patent lawsuits under the Hatch-Waxman Act against all generic filers in federal district courts in Delaware and West Virginia.
PRICING, SALES AND PROMOTIONAL PRACTICES LITIGATION
Plavix* State Attorneys General Lawsuits
The Company and certain affiliates of Sanofi are defendants in consumer protection and/or false advertising actions brought by several states relating to the sales and promotion of Plavix*. It is not possible at this time to reasonably assess the outcome of these lawsuits or their potential impact on the Company.
PRODUCT LIABILITY LITIGATION
The Company is a party to various product liability lawsuits. Plaintiffs in these cases seek damages and other relief on various grounds for alleged personal injury and economic loss. As previously disclosed, in addition to lawsuits, the Company also faces unfiled claims involving its products.
Plavix*
As previously disclosed, the Company and certain affiliates of Sanofi are defendants in a number of individual lawsuits in various state and federal courts claiming personal injury damage allegedly sustained after using Plavix*. Currently, over 5,300 claims involving injury plaintiffs as well as claims by spouses and/or other beneficiaries, are filed in state and federal courts in various states including California, New Jersey, Delaware and New York. In February 2013, the Judicial Panel on Multidistrict Litigation granted the Company and Sanofi’s motion to establish a multi-district litigation (MDL) to coordinate Federal pretrial proceedings in Plavix* product liability and related cases in New Jersey Federal Court. It is not possible at this time to reasonably assess the outcome of these lawsuits or the potential impact on the Company.
Byetta*
Amylin, a former subsidiary of the Company, and Lilly are co-defendants in product liability litigation related to Byetta*. To date, there are over 500 separate lawsuits pending on behalf of approximately 2,000 active plaintiffs (including pending settlements), which include injury plaintiffs as well as claims by spouses and/or other beneficiaries, in various courts in the U.S. The Company has agreed in principle to resolve over 15 of these claims. The majority of these cases have been brought by individuals who allege personal injury sustained after using Byetta*, primarily pancreatic cancer and pancreatitis, and, in some cases, claiming alleged wrongful death. The majority of cases were pending in Federal Court in San Diego in an MDL or in a coordinated proceeding in California Superior Court in Los Angeles (JCCP). In November 2015, the defendants' motion for summary judgment based on federal preemption was granted in both the MDL and the JCCP. The plaintiffs in the MDL have appealed to the U.S. Court of Appeals for the Ninth Circuit and the JCCP plaintiffs have appealed to the California Court of Appeal. Amylin has product liability insurance covering a substantial number of claims involving Byetta* and any additional liability to Amylin with respect to Byetta* is expected to be shared between the Company and AstraZeneca. It is not possible to reasonably predict the outcome of any lawsuit, claim or proceeding or the potential impact on the Company.

18




Abilify*
The Company and Otsuka are co-defendants in product liability litigation related to Abilify. Plaintiffs allege Abilify caused them to engage in compulsive gambling and other impulse control disorders. There have been over 160 cases filed in state and federal courts and several additional cases are pending in Canada. The Judicial Panel on Multidistrict Litigation has consolidated the federal court cases for pretrial purposes in the United States District Court for the Northern District of Florida.
Eliquis
The Company and Pfizer are co-defendants in product liability litigation related to Eliquis. Plaintiffs assert claims, including claims for wrongful death, as a result of bleeding they allege was caused by their use of Eliquis. There have been over 130 cases filed in state and federal courts in the United States and two cases filed in Canada. The Judicial Panel on Multidistrict Litigation has consolidated the federal court cases for pretrial purposes in the United States District Court for the Southern District of New York.
SHAREHOLDER DERIVATIVE LITIGATION
Since December 2015, three shareholder derivative lawsuits were filed in New York state court against certain officers and directors of the Company. The plaintiffs allege, among other things, breaches of fiduciary duty surrounding the Company’s previously disclosed October 2015 civil settlement with the Securities and Exchange Commission of alleged Foreign Corrupt Practices Act violations in China in which the Company agreed to a payment of approximately $14.7 million in disgorgement, penalties and interest. Two of the lawsuits have been dismissed, and the Company has filed a motion to dismiss the remaining lawsuit.
GOVERNMENT INVESTIGATIONS
Like other pharmaceutical companies, the Company and certain of its subsidiaries are subject to extensive regulation by national, state and local government agencies in the U.S. and other countries in which BMS operates. As a result, the Company, from time to time, is subject to various governmental inquiries and investigations. It is possible that criminal charges, substantial fines and/or civil penalties, could result from government investigations. The most significant investigations conducted by government agencies, of which the Company is aware, are listed below.
Abilify* State Attorneys General Investigation
In March 2009, the Company received a letter from the Delaware Attorney General’s Office advising of a multi-state coalition (Coalition) investigating whether certain Abilify* marketing practices violated those respective states’ consumer protection statutes. The Company and the Executive Committee of the Coalition have reached a settlement in this matter, and all but one of the states (New Mexico) that are members of the Coalition are participating in the settlement. Consent decrees were entered into with all participating states in December 2016 and settlement payments have been issued to all participating states.
ENVIRONMENTAL PROCEEDINGS
As previously reported, the Company is a party to several environmental proceedings and other matters, and is responsible under various state, federal and foreign laws, including CERCLA, for certain costs of investigating and/or remediating contamination resulting from past industrial activity at the Company’s current or former sites or at waste disposal or reprocessing facilities operated by third parties.
CERCLA Matters
With respect to CERCLA matters for which the Company is responsible under various state, federal and foreign laws, the Company typically estimates potential costs based on information obtained from the U.S. Environmental Protection Agency, or counterpart state or foreign agency and/or studies prepared by independent consultants, including the total estimated costs for the site and the expected cost-sharing, if any, with other “potentially responsible parties,” and the Company accrues liabilities when they are probable and reasonably estimable. The Company estimated its share of future costs for these sites to be $63 million at December 31, 2016, which represents the sum of best estimates or, where no best estimate can reasonably be made, estimates of the minimal probable amount among a range of such costs (without taking into account any potential recoveries from other parties). The $63 million includes the estimated costs for any additional probable loss associated with the previously disclosed North Brunswick Township High School Remediation Site.

19




Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY
Bristol-Myers Squibb Company is a global specialty biopharmaceutical company whose mission is to discover, develop and deliver innovative medicines that help patients prevail over serious diseases. Our strategy is to combine the resources, scale and capability of a pharmaceutical company with the speed and focus on innovation of the biotech industry. Our four strategic priorities are to drive business performance, continue to build a strong franchise in IO, maintain a diversified portfolio both within and outside of IO, and continue our disciplined approach to capital allocation, including establishing partnerships and collaborations as an essential component of successfully delivering transformational medicines to patients. Refer to the Summary of Abbreviated Terms at the end of this Quarterly Report on Form 10-Q for terms used throughout the document.

Our revenues increased by 12% for the three months ended March 31, 2017 as a result of higher demand for our prioritized brands including Opdivo and Eliquis partially offset by increased competition for established brands, primarily Daklinza. The increase in GAAP EPS from $0.71 in 2016 to $0.94 in 2017 was due to higher revenues and the patent-infringement litigation settlement related to Merck's PD-1 antibody Keytruda* partially offset by higher restructuring related charges and lower divestiture related income. After adjusting for litigation settlements, divestiture gains and other specified items, non-GAAP EPS increased from $0.74 in 2016 to $0.84 in 2017.

 
Three Months Ended March 31,
Dollars in Millions, except per share data
2017
 
2016
Total Revenues
$
4,929

 
$
4,391

 
 
 
 
Diluted Earnings Per Share
 
 
 
GAAP
0.94

 
0.71

Non-GAAP
0.84

 
0.74


Our non-GAAP financial measures, including non-GAAP earnings and related EPS information, are adjusted to exclude specified items which represent certain costs, expenses, gains and losses and other items impacting the comparability of financial results. For a detailed listing of all specified items and further information and reconciliations of non-GAAP financial measures refer to “—Non-GAAP Financial Measures.”

Significant Product and Pipeline Approvals

The following is a summary of significant approvals received in 2017.
Product
Date
Approval
Opdivo
March 2017
Approval for the treatment of recurrent or metastatic HNC in Japan, received by our alliance partner, Ono.
February 2017
FDA approval for the treatment of patients with previously treated locally advanced or metastatic urothelial carcinoma, a type of bladder cancer.
Refer to "—Product and Pipeline Developments" for all of the developments in our marketed products and late-stage pipeline in 2017.

Acquisition and Licensing Arrangements
Acquisition and licensing transactions allow us to focus our resources behind our growth opportunities that drive the greatest long-term value. We are focused on the following core therapeutic areas: oncology, including IO, immunoscience, cardiovascular and fibrosis. Significant transactions entered into in 2017 are summarized below:

CytomX
In April 2017, BMS and CytomX, a biopharmaceutical company developing investigational Probody therapeutics for the treatment of cancer, expanded their 2014 strategic collaboration to discover novel therapies that will include up to eight additional targets using CytomX’s proprietary Probody platform. As part of the original May 2014 collaboration to discover, develop and commercialize Probody therapeutics, BMS selected four oncology targets, including CTLA-4. In the collaboration to date, BMS has progressed the CTLA-4 Probody therapeutic to Investigational New Drug-enabling studies and the three other programs are in the lead discovery and optimization phase. Under the terms of the expanded agreement, CytomX will grant BMS exclusive worldwide rights to develop and commercialize Probody therapeutics for up to six additional oncology targets and two non-oncology targets.

20




RESULTS OF OPERATIONS

Regional Revenues
 
Three Months Ended March 31,
 
Total Revenues
 
2017 vs. 2016
Dollars in Millions
2017
 
2016
 
Total Change
 
Foreign Exchange(b)
United States
$
2,738

 
$
2,537

 
8
 %
 

Europe
1,146

 
870

 
32
 %
 
(5
)%
Rest of the World
925

 
840

 
10
 %
 
1
 %
Other(a)
120

 
144

 
(17
)%
 
N/A

Total
$
4,929

 
$
4,391

 
12
 %
 
(1
)%

(a)
Other revenues include royalties and alliance-related revenues for products not sold by our regional commercial organizations.
(b)
Foreign exchange impacts were derived by applying the prior period average currency rates to the current period sales.
U.S. revenues increased due to higher demand for Eliquis and Opdivo partially offset by lower demand for Daklinza and Sustiva due to increased competition. Average U.S. net selling prices increased by approximately 3% after charge-backs, rebates and discounts. Refer to “—Product Revenues” below for additional information.
Europe and Rest of the World revenues increased due to higher demand for Opdivo and Eliquis. No single country outside the U.S. contributed more than 10% of total revenues during the three months ended March 31, 2017 and 2016. Our business is typically not seasonal.

GTN Adjustments
The reconciliation of gross product sales to net product sales by each significant category of GTN adjustments was as follows (excluding alliance and other revenues such as Atripla*):

Three Months Ended March 31,
Dollars in Millions
2017
 
2016
 
% Change
Gross product sales
$
5,862

 
$
4,966

 
18
%
GTN adjustments:
 
 
 
 
 
Charge-backs and cash discounts
(438
)
 
(352
)
 
24
%
Medicaid and Medicare rebates
(384
)
 
(260
)
 
48
%
Other rebates, returns, discounts and adjustments
(460
)
 
(390
)
 
18
%
Total GTN adjustments
(1,282
)
 
(1,002
)
 
28
%
Net product sales
$
4,580

 
$
3,964

 
16
%
 
 
 
 
 
 
GTN adjustments percentage
22
%
 
20
%
 
2
%
U.S.
28
%
 
25
%
 
3
%
Non-U.S.
12
%
 
12
%
 

Reductions to provisions for product sales made in prior periods resulting from changes in estimates were $49 million and $31 million in the three months ended March 31, 2017 and 2016, respectively. Changes to GTN adjustments are primarily a function of changes in product sales volume, regional and payer channel mix, contractual and legislative discounts and rebates (primarily Eliquis).

21




Product Revenues
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
 
% Change
Prioritized Brands
 
 
 
 
 
Opdivo
$
1,127

 
$
704

 
60
 %
U.S.
761

 
594

 
28
 %
Non-U.S.
366

 
110

 
**

 
 
 
 
 
 
Eliquis
1,101

 
734

 
50
 %
U.S.
699

 
468

 
49
 %
Non-U.S.
402

 
266

 
51
 %
 
 
 
 
 
 
Orencia
535

 
475

 
13
 %
U.S.
362

 
321

 
13
 %
Non-U.S.
173

 
154

 
12
 %
 
 
 
 
 
 
Sprycel
463

 
407

 
14
 %
U.S.
247

 
210

 
18
 %
Non-U.S.
216

 
197

 
10
 %
 
 
 
 
 
 
Yervoy
330

 
263

 
25
 %
U.S.
243

 
199

 
22
 %
Non-U.S.
87

 
64

 
36
 %
 
 
 
 
 
 
Empliciti
53

 
28

 
89
 %
U.S.
36

 
28

 
29
 %
Non-U.S.
17

 

 
N/A

 
 
 
 
 
 
Established Brands
 
 
 
 
 
Hepatitis C Franchise
162

 
427

 
(62
)%
U.S.
42

 
259

 
(84
)%
Non-U.S.
120

 
168

 
(29
)%
 
 
 
 
 
 
Baraclude
282

 
291

 
(3
)%
U.S.
14

 
17

 
(18
)%
Non-U.S.
268

 
274

 
(2
)%
 
 
 
 
 
 
Sustiva Franchise
184

 
273

 
(33
)%
U.S.
153

 
228

 
(33
)%
Non-U.S.
31

 
45

 
(31
)%
 
 
 
 
 
 
Reyataz Franchise
193

 
221

 
(13
)%
U.S.
88

 
120

 
(27
)%
Non-U.S.
105

 
101

 
4
 %
 
 
 
 
 
 
Other Brands
499

 
568

 
(12
)%
U.S.
93

 
93

 

Non-U.S.
406

 
475

 
(15
)%
**    Change in excess of 100%

22



Opdivo (nivolumab) — a fully human monoclonal antibody that binds to the PD-1 on T and NKT cells that has been approved for several anti-cancer indications including melanoma, head and neck, lung, kidney, bladder and blood and continues to be investigated across other tumor types and disease areas.
U.S. revenues increased due to higher demand. We expect increased competition for Opdivo in 2017.
International revenues increased due to higher demand as a result of launches of additional indications and approvals in new countries.
Eliquis (apixaban) — an oral Factor Xa inhibitor, targeted at stroke prevention in adult patients with non-valvular atrial fibrillation and the prevention and treatment of venous thromboembolic disorders.
U.S. and international revenues increased due to higher demand resulting from increased commercial acceptance of novel oral anticoagulants and market share gains.
Orencia (abatacept) — a fusion protein indicated for adult patients with moderate to severe active RA and is also indicated for reducing signs and symptoms in certain pediatric patients with moderately to severely active polyarticular juvenile idiopathic arthritis.
U.S. revenues increased due to higher average net selling prices and demand.
International revenues increased due to higher demand.
Sprycel (dasatinib) — an oral inhibitor of multiple tyrosine kinase indicated for the first-line treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia in chronic phase and the treatment of adults with chronic, accelerated, or myeloid or lymphoid blast phase chronic myeloid leukemia with resistance or intolerance to prior therapy, including Gleevec* (imatinib meslylate).
U.S. revenues increased due to higher demand and average net selling prices.
International revenues increased due to higher demand.
Yervoy (ipilimumab) — a monoclonal antibody for the treatment of patients with unresectable or metastatic melanoma.
U.S. revenues increased due to higher demand and average net selling prices.
International revenues increased due to higher demand.
Empliciti (elotuzumab) — a humanized monoclonal antibody for the treatment of multiple myeloma.
Empliciti was launched in the U.S. in December 2015, in the EU in May 2016 and in Japan in September 2016.
Hepatitis C Franchise — Daklinza (daclatasvir) - an NS5A replication complex inhibitor; Sunvepra (asunaprevir) - an NS3 protease inhibitor; and beclabuvir - an NS5B inhibitor.
U.S. and international revenues decreased due to lower demand resulting from increased competition.
Baraclude (entecavir) — an oral antiviral agent for the treatment of chronic hepatitis B.
International revenues remained relatively flat.
Sustiva (efavirenz) Franchise — a non-nucleoside reverse transcriptase inhibitor for the treatment of HIV, which includes Sustiva, an antiretroviral drug, and bulk efavirenz, which is also included in the combination therapy, Atripla*.
U.S. revenues continued to decrease due to lower demand resulting from increased competition. The loss of exclusivity for Sustiva is expected in December 2017 which may result in the termination of the joint venture agreement with Gilead and may further reduce revenues beyond 2017.
International revenues continued to decrease due to Sustiva's loss of exclusivity in Europe.
Reyataz (atazanavir sulfate) Franchise — Includes Reyataz - a protease inhibitor for the treatment of HIV and Evotaz (atazanavir 300 mg and cobicistat 150 mg) - a combination therapy containing Reyataz and Tybost* (cobicistat).
U.S. revenues continued to decrease due to lower demand resulting from increased competition. The loss of exclusivity is expected in December 2017 and we may experience a higher decline in revenues in future periods due to generic competition.
International revenues increased due to the timing of government purchases in certain countries partially offset by lower demand resulting from increased competition.
Other Brands — includes all other products, including those which have lost exclusivity in major markets, OTC brands and royalty revenue.
International revenues decreased due to out-licensing and divestiture of certain other brands.

23




Estimated End-User Demand
Pursuant to the SEC Consent Order described in our 2016 Annual Report on Form 10-K, we monitor inventory levels on hand in the U.S. wholesaler distribution channel and outside of the U.S. in the direct customer distribution channel. We are obligated to disclose products with levels of inventory in excess of one month on hand or expected demand, subject to a de minimis exception. Estimated levels of inventory in the distribution channel in excess of one month on hand for the following products were not material to our results of operations as of the dates indicated. No U.S. products had estimated levels of inventory in the distribution channel in excess of one month on hand at March 31, 2017. Below are international products that had estimated levels of inventory in the distribution channel in excess of one month at December 31, 2016.
Dafalgan, an analgesic product sold principally in Europe, had 1.1 months of inventory on hand internationally at direct customers compared to 1.2 months of inventory on hand at September 30, 2016. The level of inventory on hand was primarily due to the ordering patterns of pharmacists in France.
Fervex, a cold and flu product, had 2.6 months of inventory on hand at direct customers compared to 4.8 months of inventory on hand at September 30, 2016. The level of inventory on hand was attributable to France to support product seasonality.
Perfalgan, an analgesic product, had 3.0 months of inventory on hand internationally at direct customers compared to 2.4 months of inventory on hand at September 30, 2016. The level of inventory on hand was primarily in the Gulf Countries due to extended delivery lead time.
In the U.S., we generally determine our months on hand estimates using inventory levels of product on hand and the amount of out-movement provided by our three largest wholesalers and our distributors. Our three largest wholesalers account for approximately 95% of total gross sales of U.S. products. Factors that may influence our estimates include generic competition, wholesaler purchases in light of increases in wholesaler list prices, new product launches, new warehouse openings by wholesalers and new customer stockings by wholesalers. In addition, these estimates are calculated using third-party data, which may be impacted by their recordkeeping processes.

Our non-U.S. businesses have significantly more direct customers. Information on available direct customer product level inventory and corresponding out-movement information and the reliability of third-party demand information varies widely. We limit our direct customer sales channel inventory reporting to where we can influence demand. When this information does not exist or is otherwise not available, we have developed a variety of methodologies to estimate such data, including using historical sales made to direct customers and third-party market research data related to prescription trends and end-user demand. Given the difficulties inherent in estimating third-party demand information, we evaluate our methodologies to estimate direct customer product level inventory and to calculate months on hand on an ongoing basis and make changes as necessary. Factors that may affect our estimates include generic competition, seasonality of products, price increases, new product launches, new warehouse openings by direct customers, new customer stockings by direct customers and expected direct customer purchases for governmental bidding situations. As a result, all of the information required to estimate months on hand in the direct customer distribution channel for non-U.S. businesses for the quarter ended March 31, 2017 is not available prior to the filing of this quarterly report on Form 10-Q. We will disclose any product with inventory levels in excess of one month on hand or expected demand for the current quarter, subject to a de minimis exception, in the next quarterly report on Form 10-Q.

Expenses
 
Three Months Ended March 31,
Dollars in Millions
2017
 
2016
 
% Change
Cost of products sold
$
1,259

 
$
1,052

 
20
%
Marketing, selling and administrative
1,074

 
1,068

 
1
%
Research and development
1,288

 
1,136

 
13
%
Other (income)/expense
(647
)
 
(520
)
 
24
%
Total Expenses
$
2,974

 
$
2,736

 
9
%

Cost of products sold increased due to higher Eliquis profit sharing of approximately $175 million.

Research and development expenses increased due to higher IPRD impairment charges, accelerated depreciation and expansion of Opdivo development programs and capabilities partially offset by lower license and asset acquisition charges.
IPRD impairment charges were $75 million in 2017 for FS102 which was part of our alliance with F-Star Alpha.
Accelerated depreciation was $70 million in 2017 and $13 million in 2016 as a result of the expected exit of additional R&D sites in the U.S. Accelerated depreciation results from the reduction in the estimated useful lives of the related assets for each site at various dates through 2020 and is expected to approximate $270 million in 2017.
License and asset acquisition charges were $50 million in 2017 and $125 million in 2016 including a $100 million milestone payment to former shareowners of Flexus in 2016.


24




Other income increased due to higher litigation and other settlements partially offset by higher restructuring charges and lower divestiture gains.
Litigation and other settlements were income of $484 million