Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

  x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

  ¨

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 “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

At June 30, 2012, there were 1,679,022,076 shares outstanding of the Registrant’s $0.10 par value common stock.

 

 

 


Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

INDEX TO FORM 10-Q

JUNE 30, 2012

 

PART I—FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements:

  

Consolidated Statements of Earnings

     3   

Consolidated Statements of Comprehensive Income

     4   

Consolidated Balance Sheets

     5   

Consolidated Statements of Cash Flows

     6   

Notes to Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4.

  

Controls and Procedures

     42   

PART II—OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     42   

Item 1A.

  

Risk Factors

     42   

Item 2.

  

Issuer Purchases of Equity Securities

     42   

Item 6.

  

Exhibits

     43   

Signatures

     44   


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENTS OF EARNINGS

Dollars and Shares in Millions, Except Per Share Data

(UNAUDITED)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
EARNINGS    2012     2011     2012     2011  

Net Sales

   $ 4,443     $ 5,434     $ 9,694     $ 10,445  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of products sold

     1,245       1,481       2,548       2,824  

Marketing, selling and administrative

     1,004       1,040       2,006       1,968  

Advertising and product promotion

     224       253       418       467  

Research and development

     962       923       1,871       1,858  

Provision for restructuring

     20       40       42       84  

Litigation expense/(recoveries)

                   (172       

Equity in net income of affiliates

     (53     (62     (110     (144

Other (income)/expense

     (18     (31     5       (169
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

     3,384       3,644       6,608       6,888  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Before Income Taxes

     1,059       1,790       3,086       3,557  

Provision for income taxes

     251       483       796       883  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings

     808       1,307       2,290       2,674  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings Attributable to Noncontrolling Interest

     163       405       544       786  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings Attributable to Bristol-Myers Squibb Company

   $ 645     $ 902     $ 1,746     $ 1,888  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Common Share Attributable to Bristol-Myers Squibb Company

        

Basic

   $ 0.38     $ 0.53     $ 1.04     $ 1.11  

Diluted

   $ 0.38     $ 0.52     $ 1.02     $ 1.10  

Dividends declared per common share

   $ 0.34     $ 0.33     $ 0.68     $ 0.66  

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

 

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Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in Millions

(UNAUDITED)

 

                                           
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
COMPREHENSIVE INCOME         2012           2011     2012     2011  

Net Earnings

  $       808     $       1,307     $     2,290     $     2,674  

Other Comprehensive Income/(Loss):

       

Foreign currency translation

    (37     16       (22     28  

Foreign currency translation on net investment hedges

    41       (5     29       (57

Derivatives qualifying as cash flow hedges, net of taxes of $(8) and $15 for the three months ended June 30, 2012 and 2011, respectively; and $(17) and $26 for the six months ended June 30, 2012 and 2011, respectively

    22       (31     27       (57

Derivatives qualifying as cash flow hedges reclassified to net earnings, net of taxes of $4 and $(6) for the three months ended June 30, 2012 and 2011, respectively; and $6 and $(7) for the six months ended June 30, 2012 and 2011, respectively

    (9     12       (15     13  

Pension and postretirement benefits, net of taxes $(5) for the six months ended June 30, 2012

                  14         

Pension and postretirement benefits reclassified to net earnings, net of taxes of $(11) for both the three months ended June 30, 2012 and 2011 and $(23) and $(19) for the six months ended June 30, 2012 and 2011, respectively

    22       18       46       37  

Available for sale securities, net of taxes of $(8) for the three months ended June 30, 2011 and $(1) and $(3) for the six months ended June 30, 2012 and 2011, respectively

    10       15       7       18  

Available for sale securities reclassified to net earnings, net of taxes of $2 for both the three and six months ended June 30, 2012

    2              (8       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income/(Loss)

    51       25       78       (18
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

    859       1,332       2,368       2,656  
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to Noncontrolling Interest

    163       405       544       786  
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income Attributable to Bristol-Myers Squibb Company

  $ 696     $ 927     $ 1,824     $ 1,870  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED BALANCE SHEETS

Dollars in Millions, Except Share and Per Share Data

(UNAUDITED)

 

ASSETS    June 30,
2012
    December 31,
2011
 

Current Assets:

    

Cash and cash equivalents

   $ 2,801     $ 5,776  

Marketable securities

     2,236       2,957  

Receivables

     2,825       3,743  

Inventories

     1,521       1,384  

Deferred income taxes

     1,175       1,200  

Prepaid expenses and other

     455       258  
  

 

 

   

 

 

 

Total Current Assets

     11,013       15,318  
  

 

 

   

 

 

 

Property, plant and equipment

     4,478       4,521  

Goodwill

     6,799       5,586  

Other intangible assets

     4,569       3,124  

Deferred income taxes

     201       688  

Marketable securities

     3,732       2,909  

Other assets

     875       824  
  

 

 

   

 

 

 

Total Assets

   $ 31,667     $ 32,970  
  

 

 

   

 

 

 

LIABILITIES

    

Current Liabilities:

    

Short-term borrowings

   $ 236     $ 115  

Accounts payable

     2,134       2,603  

Accrued expenses

     2,467       2,791  

Deferred income

     357       337  

Accrued rebates and returns

     1,061       1,170  

U.S. and foreign income taxes payable

     138       167  

Dividends payable

     598       597  
  

 

 

   

 

 

 

Total Current Liabilities

     6,991       7,780  
  

 

 

   

 

 

 

Pension, postretirement and postemployment liabilities

     1,543       2,017  

Deferred income

     805       866  

U.S. and foreign income taxes payable

     604       573  

Other liabilities

     703       491  

Long-term debt

     5,209       5,376  
  

 

 

   

 

 

 

Total Liabilities

     15,855       17,103  
  

 

 

   

 

 

 

Commitments and contingencies (Note 16)

    

EQUITY

    

Bristol-Myers Squibb Company Shareholders’ Equity:

    

Preferred stock, $2 convertible series, par value $1 per share: Authorized 10 million shares; issued and outstanding 5,238 in 2012 and 5,268 in 2011, 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 2012 and 2011

     221       220  

Capital in excess of par value of stock

     2,783       3,114  

Accumulated other comprehensive loss

     (2,967     (3,045

Retained earnings

     33,661       33,069  

Less cost of treasury stock – 530 million common shares in 2012 and 515 million in 2011

     (17,600     (17,402
  

 

 

   

 

 

 

Total Bristol-Myers Squibb Company Shareholders’ Equity

     16,098       15,956  

Noncontrolling interest

     (286     (89
  

 

 

   

 

 

 

Total Equity

     15,812       15,867  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 31,667     $ 32,970  
  

 

 

   

 

 

 

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

 

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BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(UNAUDITED)

 

     Six Months Ended June 30,  
     2012     2011  

Cash Flows From Operating Activities:

    

Net earnings

   $ 2,290     $ 2,674  

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Net earnings attributable to noncontrolling interest

     (544     (786

Depreciation

     175       228  

Amortization

     203       168  

Impairment charges

     288       15  

Deferred income tax expense

     80       243  

Stock-based compensation expense

     82       81  

Other

     13       (113

Changes in operating assets and liabilities:

    

Receivables

     544       (328

Inventories

     (170     (246

Accounts payable

     (222     412  

Deferred income

     (48     (98

U.S. and foreign income taxes payable

     75       (117

Other

     (1,245     (559
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,521       1,574  
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Sale and maturities of marketable securities

     3,337       2,445  

Purchases of marketable securities

     (3,426     (4,187

Additions to property, plant and equipment and capitalized software

     (236     (149

Sale of businesses and other investing activities

     15       122  

Purchase of businesses, net of cash acquired

     (2,491       
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (2,801     (1,769
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Short-term borrowings/(repayments)

     121       70  

Long-term debt repayments

     (109     (78

Interest rate swap terminations

     2       89  

Stock option exercises

     314       235  

Common stock repurchases

     (860     (385

Dividends paid

     (1,154     (1,130
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (1,686     (1,199
  

 

 

   

 

 

 

Effect of Exchange Rates on Cash and Cash Equivalents

     (9     26  
  

 

 

   

 

 

 

(Decrease)/Increase in Cash and Cash Equivalents

     (2,975     (1,368

Cash and Cash Equivalents at Beginning of Period

     5,776       5,033  
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 2,801     $ 3,665  
  

 

 

   

 

 

 

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

 

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Note 1. BASIS OF PRESENTATION AND NEW 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 June 30, 2012 and December 31, 2011, the results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011. All intercompany balances and transactions have been eliminated. Material subsequent events are evaluated and disclosed through the report issuance date. These unaudited consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011 included in the Annual Report on 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, based on complex judgments that are considered reasonable, that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and contingent liabilities at the date of the financial statements. The most significant assumptions are employed in estimates used in determining the fair value of intangible assets, restructuring charges and accruals, sales rebate and return accruals including the annual pharmaceutical company fee, legal contingencies, tax assets and tax liabilities, pension and postretirement benefits, inventory obsolescence, potential impairment of long-lived assets, allowances for bad debt, as well as in estimates used in applying the revenue recognition policy. Actual results may differ from estimated results.

Note 2. BUSINESS SEGMENT INFORMATION

BMS operates in a single segment engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of innovative medicines that help patients prevail over serious diseases. A global research and development organization and a global supply chain organization are utilized and responsible for the development and delivery of products to the market. Products are distributed and sold through regional organizations that serve the United States; Europe; Latin America, Middle East and Africa; Japan, Asia Pacific and Canada; and Emerging Markets defined as Brazil, Russia, India, China and Turkey. The business is also supported by global corporate staff functions. Segment information is consistent with the financial information regularly reviewed by the chief operating decision maker, the chief executive officer, for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting future periods.

Net sales of key products were as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
Dollars in Millions    2012      2011      2012      2011  

Plavix* (clopidogrel bisulfate)

   $ 741      $ 1,865      $ 2,434      $ 3,627  

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

     117        251        324        541  

Eliquis (apixaban)

     1                1          

Abilify* (aripiprazole)

     711        706        1,332        1,330  

Reyataz (atazanavir sulfate)

     406        396        764        762  

Sustiva (efavirenz) Franchise

     388        371        774        714  

Baraclude (entecavir)

     357        292        682        567  

Erbitux* (cetuximab)

     179        173        358        338  

Sprycel (dasatinib)

     244        193        475        365  

Yervoy (ipilimumab)

     162        95        316        95  

Orencia (abatacept)

     290        228        544        427  

Nulojix (belatacept)

     3        2        4        2  

Onglyza/Kombiglyze (saxagliptin/saxagliptin and metformin)

     172        112        333        193  

Mature Products and All Other

     672        750        1,353        1,484  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales

   $ 4,443      $ 5,434      $ 9,694      $ 10,445  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 3. ALLIANCES AND COLLABORATIONS

BMS maintains alliances and collaborations with various third parties for the development and commercialization of certain products. Unless otherwise noted, operating results associated with the alliances and collaborations are generally treated as follows: product revenues from BMS sales are included in revenue; royalties, collaboration fees, profit sharing and distribution fees are included in cost of goods sold; post-approval milestone payments to partners are deferred and amortized over the useful life within cost of goods sold; cost sharing reimbursements offset the intended operating expense; payments to BMS attributed to upfront, milestone and other licensing payments are deferred and amortized over the estimated useful life within other income/expense; income and expenses attributed to a collaboration’s non-core activities, such as supply and manufacturing arrangements and compensation for opting-out of commercialization in certain countries, are included in other income/expense; partnerships and joint ventures are either consolidated or accounted for under the equity method of accounting and related cash receipts and distributions are treated as operating cash flow.

See the 2011 Annual Report on Form 10-K for a more complete description of the below agreements, including termination provisions, as well as disclosures of other alliances and collaborations.

Sanofi

BMS has agreements with Sanofi for the codevelopment and cocommercialization of Avapro*/Avalide* and Plavix*. The worldwide alliance operates under the framework of two geographic territories; one in the Americas (principally the U.S., Canada, Puerto Rico and Latin American countries) and Australia and the other in Europe and Asia. Accordingly, two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished product to the individual countries. In general, at the country level, agreements either to copromote (whereby a partnership was formed between the parties to sell each brand) or to comarket (whereby the parties operate and sell their brands independently of each other) are in place. The agreements with Sanofi expire on the later of (i) with respect to Plavix*, 2013 and, with respect to Avapro*/Avalide*, 2012 in the Americas and Australia and 2013 in Europe and Asia, and (ii) the expiration of all patents and other exclusivity rights relating to the products in the applicable territory.

BMS acts as the operating partner and owns a 50.1% majority controlling interest in the territory covering the Americas and Australia and consolidates all country partnership results for this territory with Sanofi’s 49.9% share of the results reflected as a noncontrolling interest. BMS recognizes net sales in this territory and in comarketing countries outside this territory (e.g. Germany, Italy for irbesartan only, Spain and Greece). Sanofi acts as the operating partner and owns a 50.1% majority controlling interest in the territory covering Europe and Asia and BMS has a 49.9% ownership interest in this territory.

BMS and Sanofi have a separate partnership governing the copromotion of irbesartan in the U.S. Sanofi paid BMS $350 million for their acquisition of an interest in the irbesartan license for the U.S. upon formation of the alliance.

Summarized financial information related to this alliance is as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2012     2011     2012     2011  

Territory covering the Americas and Australia:

        

Net sales

   $ 778     $ 2,045     $ 2,595     $ 4,023  

Royalty expense

     141       397       508       755  

Noncontrolling interest – pre-tax

     249       601       854       1,174  

Profit distributions to Sanofi

     (449     (702     (1,058     (1,301

Territory covering Europe and Asia:

        

Equity in net income of affiliates

     (58     (65     (118     (151

Profit distributions to BMS

     62       67       129       127  

Other:

        

Net sales in Europe comarketing countries and other

     80       71       163       145  

Amortization (income)/expense – irbesartan license fee

     (8     (8     (16     (16

Supply activities and development and opt-out royalty (income)/expense

     (39     1       (45     15  
Dollars in Millions                June  30,
2012
    December  31,
2011
 
        

Investment in affiliates – territory covering Europe and Asia

       $ 26     $ 37  

Deferred income – irbesartan license fee

         13       29  

 

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The following is summarized financial information for interests in the partnerships with Sanofi for the territory covering Europe and Asia, which are not consolidated but are accounted for using the equity method:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
Dollars in Millions    2012      2011      2012      2011  

Net sales

   $ 319      $ 382      $ 638      $ 761  

Gross profit

     132        172        270        340  

Net income

     120        142        242        282  

Otsuka

BMS has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote Abilify*, for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder, excluding certain Asia Pacific countries. The U.S. portion of the amended commercialization and manufacturing agreement expires upon the expected loss of product exclusivity in April 2015. Beginning on January 1, 2012, the contractual share of revenue recognized by BMS in the U.S. was reduced from 53.5% in 2011 to 51.5% and will be further reduced in 2013.

In the UK, Germany, France and Spain, BMS receives 65% of third-party net sales. In these countries and the U.S., third-party customers are invoiced by BMS on behalf of Otsuka and alliance revenue is recognized when Abilify* is shipped and all risks and rewards of ownership have been transferred to third-party customers. In certain countries where BMS is presently the exclusive distributor for the product or has an exclusive right to sell Abilify*, BMS recognizes all of the net sales.

BMS purchases the product from Otsuka and performs finish manufacturing for sale to third-party customers by BMS or Otsuka. Under the terms of the amended agreement, BMS paid Otsuka $400 million, which is amortized as a reduction of net sales through the expected loss of U.S. exclusivity in April 2015. The unamortized balance is included in other assets. Otsuka receives a royalty based on 1.5% of total U.S. net sales. Otsuka is responsible for 30% of the U.S. expenses related to the commercialization of Abilify* from 2010 through 2012. BMS also reimburses Otsuka for its contractual share of the annual pharmaceutical company fee related to Abilify*.

BMS and Otsuka also have an oncology collaboration for Sprycel and Ixempra (ixabepilone) (the “Oncology Products”) in the U.S., Japan and the top five markets in the EU. The Company pays a collaboration fee to Otsuka equal to 30% of the first $400 million annual net sales of the Oncology Products in the Oncology Territory, 5% of annual net sales between $400 million and $600 million, and 3% of annual net sales between $600 million and $800 million with additional trailing percentages of annual net sales over $800 million. Otsuka contributes 20% of the first $175 million of certain commercial operational expenses relating to the Oncology Products in the Oncology Territory and 1% of such costs in excess of $175 million.

Summarized financial information related to this alliance is as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2012     2011     2012     2011  

Abilify* net sales, including amortization of extension payment

   $ 711     $ 706     $ 1,332     $ 1,330  

Oncology Products collaboration fee expense

     35       37       67       70  

Royalty expense

     20       18       37       35  

Commercialization expense reimbursement to/(from) Otsuka

     (19     (11     (32     (22

Amortization (income)/expense – extension payment

     17       17       33       33  

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

     2       2       4       4  
Dollars in Millions                June  30,
2012
    December  31,
2011
 
        

Other assets – extension payment

       $ 186     $ 219  

Other intangible assets – upfront, milestone and other licensing payments

         1       5  

Lilly

BMS has an Epidermal Growth Factor Receptor (EGFR) commercialization agreement with Eli Lilly and Company (Lilly) through Lilly’s November 2008 acquisition of ImClone Systems Incorporated (ImClone) for the codevelopment and promotion of Erbitux* and necitumumab (IMC-11F8) in the U.S. which expires as to Erbitux* in September 2018. BMS also has codevelopment and copromotion rights to both products in Canada and Japan. Erbitux* is indicated for use in the treatment of patients with metastatic colorectal cancer and for use in the treatment of squamous cell carcinoma of the head and neck. Under the EGFR agreement, with respect to Erbitux* sales in North America, Lilly receives a distribution fee based on a flat rate of 39% of net sales in North America plus reimbursement of certain royalties paid by Lilly.

 

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

With respect to necitumumab, the companies will share in the cost of developing and potentially commercializing necitumumab in the U.S., Canada and Japan. Lilly maintains exclusive rights to necitumumab in all other markets. BMS will fund 55% of development costs for studies that will be used only in the U.S., 50% for Japan studies and 27.5% for global studies.

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

Summarized financial information related to this alliance is as follows:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions   2012     2011     2012     2011  

Net sales

  $ 179     $ 173     $ 358     $ 338  

Distribution fees and royalty expense

    75       71       149       140  

Research and development expense reimbursement to Lilly – necitumumab

    7       4       8       6  

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

    9       9       19       19  

Commercialization expense reimbursements to/(from) Lilly

    (6     (2     (10     (3

Japan commercialization profit sharing (income)/expense

    (13     (6     (19     (15
Dollars in Millions               June  30,
2012
    December  31,
2011
 

Other intangible assets – upfront, milestone and other licensing payments

  

    $ 230     $ 249  

Gilead

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

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

Summarized financial information related to this alliance is as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
Dollars in Millions    2012      2011      2012      2011  

Net sales

   $ 323      $ 298      $ 645      $ 569  

Equity in net loss of affiliates

     4        3        8        8  

AstraZeneca

BMS maintains two worldwide codevelopment and cocommercialization agreements with AstraZeneca PLC (AstraZeneca) for Onglyza, Kombiglyze (excluding Japan), Komboglyze and Forxiga (dapagliflozin). Onglyza, Kombiglyze (saxagliptin and metformin hydrochloride extended-release) and Komboglyze (saxagliptin and metformin immediate-release marketed in the EU) are indicated for use in the treatment of diabetes. In this document unless specifically noted, we refer to both Kombiglyze and Komboglyze as Kombiglyze. Forxiga is currently being studied for the treatment of diabetes. Onglyza and Forxiga were discovered by BMS. Kombiglyze was codeveloped with AstraZeneca. Both companies jointly develop the clinical and marketing strategy and share commercialization expenses and profits and losses equally on a global basis and also share in development costs. BMS manufactures both products. BMS has opted to decline involvement in cocommercialization in certain countries not in the BMS global commercialization network and instead receive compensation based on net sales recorded by AstraZeneca in these countries. Opt-out compensation recorded by BMS was not material in the three and six months ended June 30, 2012.

BMS received $300 million in upfront, milestone and other licensing payments related to saxagliptin as of June 30, 2012 and $170 million in upfront, milestone and other licensing payments related to dapagliflozin as of June 30, 2012.

 

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Summarized financial information related to this alliance is as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2012     2011     2012     2011  

Net sales

   $ 172     $ 112     $ 333     $ 193  

Profit sharing expense

     77       52       150       90  

Commercialization expense reimbursements to/(from) AstraZeneca

     (7     (10     (19     (19

Research and development expense reimbursements to/(from) AstraZeneca

     6       15       10       29  

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

     (11     (10     (21     (18
Dollars in Millions                June  30,
2012
    December  31,
2011
 

Deferred income – upfront, milestone and other licensing payments

        

Saxagliptin

       $ 217     $ 230  

Dapagliflozin

         134       142  

Following the completion of BMS’s planned acquisition of Amylin Pharmaceuticals, Inc. (Amylin) (see “—Note 4. Acquisitions” for further information), BMS and AstraZeneca Pharmaceuticals LP, a wholly-owned subsidiary of AstraZeneca will enter into collaboration arrangements, based on the framework of the existing diabetes alliance agreements, regarding the development and commercialization of Amylin’s portfolio of products and AstraZeneca will make a payment to Amylin, as a wholly-owned subsidiary of BMS, in the amount of approximately $3.4 billion in cash. Profits and losses arising from the collaboration will be shared equally. In addition, AstraZeneca has the option, exercisable at its sole discretion following the closing of the acquisition, to establish equal governance rights over certain key strategic and financial decisions regarding the collaboration, upon the payment to BMS of an additional $135 million.

Pfizer

BMS and Pfizer Inc. (Pfizer) maintain a worldwide codevelopment and cocommercialization agreement for Eliquis, an anticoagulant discovered by BMS for the prevention and treatment of atrial fibrillation and other arterial thrombotic conditions. Pfizer funds 60% of all development costs under the initial development plan effective January 1, 2007. The companies jointly develop the clinical and marketing strategy and share commercialization expenses and profits equally on a global basis. In certain countries not in the BMS global commercialization network, Pfizer will commercialize Eliquis alone and will pay a royalty to BMS. BMS manufactures the product globally.

BMS has received $559 million in upfront, milestone and other licensing payments for Eliquis as of June 30, 2012.

Summarized financial information related to this alliance is as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2012     2011     2012     2011  

Net sales

   $ 1     $      $ 1     $   

Commercialization expense reimbursement to/(from) Pfizer

     (3     (2     (8     (3

Research and development reimbursements to/(from) Pfizer

     9       (27     11       (56

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

     (9     (8     (19     (16
Dollars in Millions                June 30,
2012
    December 31,
2011
 

Deferred income – upfront, milestone and other licensing payments

       $ 415     $ 434  

 

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Note 4. ACQUISITIONS

Amylin Pharmaceuticals, Inc. Acquisition

On June 29, 2012, BMS entered into an agreement to acquire Amylin Pharmaceuticals, Inc. (Amylin) for $31.00 per share in cash, pursuant to a cash tender offer and second step merger, or an aggregate purchase price of approximately $5.3 billion. BMS will also be assuming Amylin’s net debt and a contractual payment obligation to Eli Lilly & Company, together totaling approximately $1.7 billion. The closing of the transaction is expected to occur during the third quarter of 2012 subject to, among other items, at least a majority of the outstanding shares of Amylin being tendered and customary regulatory approvals. See “—Note 3. Alliances and Collaborations” for further information regarding the agreement to acquire Amylin.

Amylin is a biopharmaceutical company dedicated to the discovery, development and commercialization of innovative medicines for patients with diabetes and other metabolic diseases. Amylin’s primary focus is on the research, development and commercialization of a franchise of GLP-1 agonists for the treatment of type 2 diabetes.

Inhibitex, Inc. Acquisition

On February 13, 2012, BMS completed its acquisition of the outstanding shares of Inhibitex, Inc. (Inhibitex), a clinical-stage biopharmaceutical company focused on developing products to prevent and treat serious infectious diseases. Acquisition costs of $12 million were included in other expense. BMS obtained Inhibitex’s lead asset, INX-189, an oral nucleotide polymerase (NS5B) inhibitor in Phase II development for the treatment of chronic hepatitis C infections. Goodwill generated from this acquisition was primarily attributed to the potential to offer a full portfolio of therapy choices for hepatitis infections as well as to provide additional levels of sustainability to BMS’s virology pipeline.

The purchase price allocation was as follows:

 

Purchase price:

     Dollars in Millions   

Cash

   $ 2,539  

Identifiable net assets:

  

Cash

     46  

Marketable securities

     17  

In-process research and development (IPRD)

     1,875  

Accounts payable

     (23

Accrued expenses

     (10

Deferred income taxes

     (579
  

 

 

 

Total identifiable net assets

     1,326  

Goodwill

   $ 1,213  
  

 

 

 

The fair value of the IPRD was estimated utilizing the income method which risk adjusted the expected future net cash flows estimated to be generated from the compounds based upon estimated probabilities of technical and regulatory success (PTRS). The unit of account for IPRD was a global view that considered all potential jurisdictions and indications. The cash flows were adjusted to present value utilizing a 12.0% discount rate reflecting the risk factors associated with the cash flow streams.

IPRD includes $1.8 billion attributed to INX-189. INX-189 is expected to be most effective when used in combination therapy and it is assumed all market participants would inherently maintain franchise synergies attributed to maximizing the cash flows of their existing virology pipeline assets. The cash flows utilized to value INX-189 include such synergies and also assume initial positive cash flows to commence in 2017, shortly after the expected receipt of regulatory approvals, subject to trial results. The weighted-average PTRS utilized in the INX-189 valuation was 38%. Actual cash flows attributed to IPRD are likely to be different than those assumed.

The results of Inhibitex’s operations are included in the consolidated financial statements from February 13, 2012. Pro forma supplemental financial information is not provided as the impact of the acquisition is not material to operating results. Goodwill, IPRD and all intangible assets valued in this acquisition are non-deductible for tax purposes.

 

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Note 5. RESTRUCTURING

The following is the provision for restructuring:

 

                                   
     Three Months Ended June 30,      Six Months Ended June 30,  
Dollars in Millions    2012      2011      2012      2011  

Employee termination benefits

   $         16      $         25      $         35      $         68  

Other exit costs

     4        15        7        16  
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision for restructuring

   $ 20      $ 40      $ 42      $ 84  
  

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 175 and 215 for the three months ended June 30, 2012 and 2011, respectively, and approximately 295 and 650 for the six months ended June 30, 2012 and 2011, respectively.

The following table represents the activity of employee termination and other exit cost liabilities:

 

               
     Six Months Ended June 30,  
Dollars in Millions    2012     2011  

Liability at January 1

   $         77     $         126  
  

 

 

   

 

 

 

Charges

     46       86  

Changes in estimates

     (4     (2
  

 

 

   

 

 

 

Provision for restructuring

     42       84  

Foreign currency translation

            1  

Spending

     (45     (83
  

 

 

   

 

 

 

Liability at June 30

   $ 74     $ 128  
  

 

 

   

 

 

 

Note 6. INCOME TAXES

The effective income tax rate on earnings was 23.7% for the three months ended June 30, 2012 compared to 27.0% for the three months ended June 30, 2011 and 25.8% for the six months ended June 30, 2012 compared to 24.8% for the six months ended June 30, 2011. The effective tax rate is lower than the U.S. statutory rate of 35% primarily attributable to undistributed earnings of certain foreign subsidiaries that have been considered or are expected to be indefinitely reinvested offshore. If these earnings are repatriated to the U.S. in the future, or if it was 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.

The decrease in the effective tax rate in the three months ended June 30, 2012 was due to:

 

   

Favorable earnings mix between high and low tax jurisdictions compared to the prior period.

Partially offset by:

 

   

An unfavorable impact on the current year rate from the research and development tax credit, which was not extended as of June 30, 2012.

The increase in the effective tax rate in the six months ended June 30, 2012 was due to:

 

   

Lower tax benefits from contingent tax matters primarily related to the effective settlements and remeasurements of uncertain tax positions ($6 million charge in 2012 and $79 million benefit in 2011); and

 

   

An unfavorable impact on the current year rate from the research and development tax credit, which was not extended as of June 30, 2012.

Partially offset by:

 

   

Favorable earnings mix between high and low tax jurisdictions compared to the prior period.

BMS is currently under examination by a number of tax authorities which have proposed adjustments to tax for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. BMS estimates that it is reasonably possible that the total amount of unrecognized tax benefits at June 30, 2012 could decrease in the range of approximately $40 million to $70 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.

 

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Table of Contents

Note 7. EARNINGS PER SHARE

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Amounts in Millions, Except Per Share Data    2012      2011     2012     2011  

Net Earnings Attributable to BMS

   $ 645      $ 902     $ 1,746     $ 1,888  

Earnings attributable to unvested restricted shares

             (2     (2     (4
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Earnings Attributable to BMS common shareholders

   $ 645      $ 900     $ 1,744     $ 1,884  
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share – basic

   $ 0.38      $ 0.53     $ 1.04     $ 1.11  
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding – basic

     1,683        1,707       1,685       1,705  

Contingently convertible debt common stock equivalents

     1        1       1       1  

Incremental shares attributable to share-based compensation plans

     17        14       18       12  
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding – diluted

     1,701        1,722       1,704       1,718  
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share – diluted

   $ 0.38      $ 0.52     $ 1.02     $ 1.10  
  

 

 

    

 

 

   

 

 

   

 

 

 

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

             27       3       39  
  

 

 

    

 

 

   

 

 

   

 

 

 

Note 8. FINANCIAL INSTRUMENTS

Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives. Due to their short-term maturity, the carrying amount of accounts receivables and payable approximate fair value. Cash equivalents primarily consist of highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value.

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

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

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

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

Level 2 inputs include observable prices for similar instruments, quoted prices for identical or similar instruments in markets that are not active, and other observable inputs that can be corroborated by market data for substantially the full term of the assets or liabilities. These instruments include corporate debt securities, commercial paper, Federal Deposit Insurance Corporation (FDIC) insured debt securities, certificates of deposit, money market funds, foreign currency forward contracts, interest rate swap contracts, equity funds and fixed income funds. Additionally, certain corporate debt securities utilize a third-party matrix-pricing model that uses significant inputs corroborated by market data for substantially the full term of the assets. Equity and fixed income funds are primarily invested in publicly traded securities and are valued at the respective net asset value of the underlying investments. There were no significant unfunded commitments or restrictions on redemptions related to equity and fixed income funds as of June 30, 2012. Level 2 derivative instruments are valued using London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) yield curves, less credit valuation adjustments, and observable forward foreign exchange rates at the reporting date. Valuations of derivative contracts may fluctuate considerably from period-to-period due to volatility in underlying foreign currencies and underlying interest rates, which are driven by market conditions and the duration of the contract. Credit adjustment volatility may have a significant impact on the valuation of interest rate swaps due to changes in counterparty credit ratings and credit default swap spreads.

 

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Level 3 unobservable inputs are used when little or no market data is available. Valuation models for the Auction Rate Security (ARS) and Floating Rate Securities (FRS) portfolio are based on expected cash flow streams and collateral values including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The fair value of ARS was determined using an internally developed valuation which was based in part on indicative bids received on the underlying assets of the security and other evidence of fair value. The ARS is a private placement security rated ‘BBB’ by Standard and Poor’s and represents interests in insurance securitizations. Due to the current lack of an active market for FRS and the general lack of transparency into their underlying assets, other qualitative analysis is relied upon to value FRS including discussions with brokers and fund managers, default risk underlying the security and overall capital market liquidity.

Available-For-Sale Securities and Cash Equivalents

The following table summarizes available-for-sale securities at June 30, 2012 and December 31, 2011:

 

     Amortized
Cost
     Gross
Unrealized
Gain in
Accumulated

OCI
     Gross
Unrealized
Loss in
Accumulated

OCI
    Gain/(Loss)
in

Income
     Fair
Value
    

 

Fair Value

 
Dollars in Millions                  Level 1      Level 2      Level 3  

June 30, 2012

                      

Marketable Securities

                      

Certificates of Deposit

   $ 621      $       $      $       $ 621      $       $ 621      $   

Corporate Debt Securities

     4,405        69        (2             4,472                4,472          

Commercial Paper

     546                               546                546          

U.S. Treasury Securities

     150        1                       151        151                  

FDIC Insured Debt Securities

     50                               50                50          

Equity Funds

     50                       3        53                53          

Fixed Income Funds

     45                       1        46                46          

ARS

     9        1                       10                        10  

FRS

     21                (2             19                        19  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Marketable Securities

   $ 5,897      $ 71      $ (4   $ 4      $ 5,968      $ 151      $ 5,788      $ 29  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                      

Marketable Securities

                      

Certificates of Deposit

   $ 1,051      $       $      $       $ 1,051      $       $ 1,051      $   

Corporate Debt Securities

     2,908        60        (3             2,965                2,965          

Commercial Paper

     1,035                               1,035                1,035          

U.S. Treasury Securities

     400        2                       402        402                  

FDIC Insured Debt Securities

     302        1                       303                303          

ARS

     80        12                       92                        92  

FRS

     21                (3             18                        18  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Marketable Securities

   $ 5,797      $ 75      $ (6   $       $ 5,866      $ 402      $ 5,354      $ 110  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the classification of available for sale securities in the consolidated balance sheet:

 

                                             
Dollars in Millions    June 30,
2012
     December 31,
2011
 

Current Marketable Securities

   $ 2,236      $ 2,957  

Non-current Marketable Securities

     3,732        2,909  
  

 

 

    

 

 

 

Total Marketable Securities

   $ 5,968      $ 5,866  
  

 

 

    

 

 

 

Money market funds and other securities aggregating $2,512 million and $5,469 million at June 30, 2012 and December 31, 2011, respectively, were included in cash and cash equivalents and valued using Level 2 inputs. At June 30, 2012, $3,718 million of non-current available for sale corporate debt securities and FRS mature within five years.

The change in fair value for the investments in equity and fixed income funds are recognized in the results of operations and are designed to offset the changes in fair value of certain employee retirement benefits.

 

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The following table summarizes the activity for financial assets utilizing Level 3 fair value measurements:

 

     2012     2011  

Fair value at January 1

   $         110     $         110  

Sales

     (81       
  

 

 

   

 

 

 

Fair value at June 30

   $ 29     $ 110  
  

 

 

   

 

 

 

Qualifying Hedges

The following table summarizes the fair value of outstanding derivatives:

 

          June 30, 2012     December 31, 2011  
Dollars in Millions   

Balance Sheet Location

   Notional      Fair Value
(Level 2)
    Notional      Fair Value
(Level 2)
 

Derivatives designated as hedging instruments:

             

Interest rate swap contracts

   Other assets    $ 573      $ 150     $ 579      $ 135  

Foreign currency forward contracts

   Other assets      1,254        85       1,347        88  

Foreign currency forward contracts

   Accrued expenses      348        (5     480        (29

Cash Flow Hedges—Foreign currency forward contracts are primarily utilized to hedge forecasted intercompany inventory purchase transactions in certain foreign currencies. These forward contracts are designated as cash flow hedges with the effective portion of changes in fair value being temporarily reported in accumulated other comprehensive income (OCI) and recognized in earnings when the hedged item affects earnings. As of June 30, 2012, significant outstanding foreign currency forward contracts were primarily attributed to Euro and Japanese yen foreign currency forward contracts in the notional amount of $746 million and $514 million, respectively.

The net gain on foreign currency forward contracts qualifying for cash flow hedge accounting is expected to be reclassified to cost of products sold within the next two years, including $78 million of pre-tax gains to be reclassified within the next 12 months. Cash flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. Assessments to determine whether derivatives designated as qualifying hedges are highly effective in offsetting changes in the cash flows of hedged items are performed at inception and on a quarterly basis. Any ineffective portion of the change in fair value is included in current period earnings. The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during the three and six months ended June 30, 2012 and 2011.

Net Investment Hedges—Non-U.S. dollar borrowings of €541 million ($677 million) are designated to hedge the foreign currency exposures of the net investment in certain foreign affiliates. These borrowings are designated as net investment hedges and recognized in long-term debt. The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the foreign currency translation component of accumulated OCI 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 adjustment to long-term debt from interest rate swaps that qualify as fair value hedges and other items was as follows:

 

                                             
Dollars in Millions    June 30,
2012
    December 31,
2011
 

Principal Value

   $ 4,533     $ 4,669  

Adjustments to Principal Value:

    

Fair value of interest rate swaps

     150       135  

Unamortized basis adjustment from swap terminations

     547       594  

Unamortized bond discounts

     (21     (22
  

 

 

   

 

 

 

Total

   $ 5,209     $ 5,376  
  

 

 

   

 

 

 

 

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The fair value of long-term debt was $6,294 million at June 30, 2012 and $6,406 million at December 31, 2011 and was valued using Level 2 inputs. Interest payments were $56 million and $32 million for the three months ended June 30, 2012 and 2011, respectively, and $89 million and $63 million for the six months ended June 30, 2012 and 2011, respectively, net of amounts related to interest rate swap contracts.

During the second quarter of 2011, fixed-to-floating interest rate swap agreements of $800 million notional amount and €75 million notional amount were terminated generating total proceeds of $95 million (including accrued interest of $12 million). The basis adjustment from the swap terminations is amortized as interest expense over the remaining life of the underlying debt.

Debt repurchase activity was as follows:

 

     Six Months Ended June 30,  
Dollars in Millions    2012      2011  

Principal amount

   $ 80      $ 71  

Carrying value

     90        88  

Repurchase price

     109        78  

Notional amount of interest rate swaps terminated

     6        34  

Swap termination proceeds

     2        6  

Total (gain)/loss

     19        (10

Note 9. RECEIVABLES

Receivables include:

 

Dollars in Millions    June 30,
2012
    December 31,
2011
 

Trade receivables

   $ 1,738     $ 2,397  

Less allowances

     (115     (147
  

 

 

   

 

 

 

Net trade receivables

     1,623       2,250  

Alliance partners receivables

     873       1,081  

Prepaid and refundable income taxes

     146       256  

Miscellaneous receivables

     183       156  
  

 

 

   

 

 

 

Receivables

   $         2,825     $ 3,743  
  

 

 

   

 

 

 

Receivables are netted with deferred income related to alliance partners until recognition of income. As a result, alliance partner receivables and deferred income were reduced by $1,181 million and $901 million at June 30, 2012 and December 31, 2011, respectively. For additional information regarding alliance partners, see “—Note 3. Alliances and Collaborations.” Non-U.S. receivables sold on a nonrecourse basis were $493 million and $525 million for the six months ended June 30, 2012 and 2011, respectively. In the aggregate, receivables due from three pharmaceutical wholesalers in the U.S. represented 38% and 55% of total trade receivables at June 30, 2012 and December 31, 2011, respectively.

Note 10. INVENTORIES

Inventories include:

 

Dollars in Millions    June 30,
2012
     December 31,
2011
 

Finished goods

   $ 503      $ 478  

Work in process

     755        646  

Raw and packaging materials

     263        260  
  

 

 

    

 

 

 

Inventories

   $         1,521      $ 1,384  
  

 

 

    

 

 

 

Inventories expected to remain on-hand beyond one year are included in non-current assets and were $349 million (including $35 million subject to regulatory approval prior to being sold) at June 30, 2012 and $260 million at December 31, 2011. The status of the regulatory approval process and the probability of future sales were considered in assessing the recoverability of these costs.

 

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Note 11. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment includes:

 

Dollars in Millions    June 30,
2012
    December 31,
2011
 

Land

   $ 111     $ 137  

Buildings

     4,543       4,545  

Machinery, equipment and fixtures

     3,421       3,437  

Construction in progress

     326       262  
  

 

 

   

 

 

 

Gross property, plant and equipment

     8,401       8,381  

Less accumulated depreciation

     (3,923     (3,860
  

 

 

   

 

 

 

Property, plant and equipment

   $         4,478     $ 4,521  
  

 

 

   

 

 

 

Note 12. GOODWILL

Changes in the carrying amount of goodwill during the six months ended June 30, 2012 were as follows:

 

Dollars in Millions       

Balance at January 1, 2012

   $ 5,586  

Inhibitex acquisition

     1,213  
  

 

 

 

Balance at June 30, 2012

   $         6,799  
  

 

 

 

Qualitative factors were assessed in the first quarter in determining whether it was more likely than not that the fair value of our aggregated geographic reporting units exceeded its carrying value. Examples of qualitative factors assessed included our share price, our financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test performed in the prior year. Positive and negative influences of each relevant factor were assessed both individually and in the aggregate and as a result it was concluded that no additional quantitative testing was required.

Note 13. EQUITY

 

Dollars and Shares in Millions    Common Stock      Capital in Excess
of Par Value
of Stock
    Retained
Earnings
    Treasury Stock     Noncontrolling
Interest
 
   Shares      Par Value          Shares     Cost    

Balance at January 1, 2011

     2,205      $ 220      $ 3,682     $ 31,636       501     $ (17,454   $ (75

Net earnings attributable to BMS

                            1,888                       

Cash dividends declared

                            (1,132                     

Stock repurchase program

                                   14       (386       

Employee stock compensation plans

                     (361            (15     649         

Net earnings attributable to noncontrolling interest

                                                 1,186  

Distributions

                                                 (1,319
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

     2,205      $ 220      $ 3,321     $ 32,392       500     $ (17,191   $ (208

Balance at January 1, 2012

     2,205      $ 220      $ 3,114     $ 33,069       515     $ (17,402   $ (89

Net earnings attributable to BMS

                            1,746                       

Cash dividends declared

                            (1,154                     

Stock repurchase program

                                   27       (875       

Employee stock compensation plans

     3        1        (331            (12     677         

Net earnings attributable to noncontrolling interest

                                                 859  

Distributions

                                                 (1,056
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

     2,208      $ 221      $ 2,783     $ 33,661       530     $ (17,600   $ (286
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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In June 2012, the Board of Directors increased its authorization for the repurchase of common stock by $3.0 billion, with $3.3 billion of common stock repurchase capacity remaining as of June 30, 2012. Repurchases may be made either in the open market or through private transactions, including under repurchase plans established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The stock repurchase program does not have an expiration date and is expected to take place over a couple of years. It may be suspended or discontinued at any time.

Noncontrolling interest is primarily related to the partnerships with Sanofi for the territory covering the Americas for net sales of Plavix*. Net earnings attributable to noncontrolling interest are presented net of taxes of $91 million and $204 million for the three months ended June 30, 2012 and 2011, respectively, and $320 million and $400 million for the six months ended June 30, 2012 and 2011, respectively, in the consolidated statements of earnings with a corresponding increase to the provision for income taxes. Distribution of the partnership profits to Sanofi and Sanofi’s funding of ongoing partnership operations occur on a routine basis. The above activity includes the pre-tax income and distributions related to these partnerships.

The accumulated balances related to each component of other comprehensive income/(loss) (OCI), net of taxes, were as follows:

 

Dollars in Millions    Foreign
Currency
Translation
    Derivatives
Qualifying as
Effective Hedges
    Pension and Other
Postretirement
Benefits
    Available
for Sale
Securities
    Accumulated Other
Comprehensive
Income/(Loss)
 

Balance at January 1, 2011

   $ (222   $ (20   $ (2,163   $ 34     $ (2,371

Other comprehensive income/(loss)

     (29     (44     37       18       (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ (251   $ (64   $ (2,126   $ 52     $ (2,389
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012

   $ (238   $ 36     $ (2,905   $ 62     $ (3,045

Other comprehensive income/(loss)

     7       12       60       (1     78  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ (231   $ 48     $ (2,845   $ 61     $ (2,967
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 14. PENSION AND POSTRETIREMENT BENEFIT PLANS

The net periodic benefit cost of defined benefit pension and postretirement benefit plans includes:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     

Pension Benefits

    Other Benefits     Pension Benefits     Other Benefits  
Dollars in Millions    2012     2011     2012     2011     2012     2011     2012     2011  

Service cost – benefits earned during the year

   $ 7     $ 11     $ 2     $ 2     $ 17     $ 21     $ 4     $ 4  

Interest cost on projected benefit obligation

     79       86       5       6       158       170       11       13  

Expected return on plan assets

     (126     (118     (6     (6     (252     (233     (13     (13

Amortization of prior service cost/(benefit)

     (1                          (1            (1     (1

Amortization of net actuarial loss

     32       29       2       1       65       57       6       3  

Curtailments

                                        (1              

Settlements

                                        (2              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit cost

   $ (9   $ 8     $ 3     $ 3     $ (13   $ 12     $ 7     $ 6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contributions to the U.S. pension plans are expected to be approximately $340 million during 2012, of which $319 million was contributed in the six months ended June 30, 2012. Contributions to the international plans are expected to range from $75 million to $90 million in 2012, of which $40 million was contributed in the six months ended June 30, 2012.

The expense attributed to defined contribution plans in the U.S. was $48 million and $47 million for the three months ended June 30, 2012 and 2011, respectively and $96 million and $86 million for the six months ended June 30, 2012 and 2011, respectively.

 

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Note 15. EMPLOYEE STOCK BENEFIT PLANS

Stock-based compensation expense was as follows:

 

                       
    Three Months Ended June 30,        Six Months Ended June 30,     
Dollars in Millions   2012     2011     2012     2011  

Stock options

  $ 2     $ 7     $ 5     $ 13  

Restricted stock

    18       22       37       40  

Market share units

    7       5       13       11  

Long-term performance awards

    13       9       27       17  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 40     $ 43     $ 82     $ 81  
 

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax benefit related to stock-based compensation expense

  $ 14     $ 15     $ 28     $ 28  
 

 

 

   

 

 

   

 

 

   

 

 

 

In the six months ended June 30, 2012, 2.9 million restricted stock units, 1.1 million market share units and 1.7 million long-term performance share units were granted. The weighted-average grant date fair value for restricted stock units, market share units and long-term performance share units granted during the six months ended June 30, 2012 was $32.65, $31.85 and $32.33, respectively.

Substantially all restricted stock units vest ratably over a four year period based on share price performance. Market share units vest ratably over a four year period based on share price performance. The fair value of market share units was estimated on the date of grant using a model applying multiple input variables that determine the probability of satisfying market conditions. Long-term performance share units are determined based on the achievement of annual performance goals, but are not vested until the end of the three year plan period.

Total compensation costs related to nonvested awards not yet recognized and the weighted-average period over which such awards are expected to be recognized at June 30, 2012 were as follows:

 

Dollars in Millions    Stock
    Options    
     Restricted
      Stock      
     Market
Share Units
     Long-Term
Performance
Awards
 

Unrecognized compensation cost

   $ 6      $ 184      $ 46      $ 55  

Expected weighted-average period in years of compensation cost to be recognized

     0.7        2.9        3.1        1.5  

Note 16. 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. 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, 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 sales 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,

 

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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. It is expected the amount of damages will not be material to the Company.

Plavix*—EU

As previously disclosed, in 2007, YES Pharmaceutical Development Services GmbH (YES Pharmaceutical) filed an application for marketing authorization in Germany for an alternate salt form of clopidogrel. This application relied on data from studies that were originally conducted by Sanofi and BMS for Plavix* and were still the subject of data protection in the EU. Sanofi and BMS have filed an action against YES Pharmaceutical and its partners in the administrative court in Cologne objecting to the marketing authorization. This matter is currently pending, although these specific marketing authorizations now have been withdrawn from the market.

Plavix*—Canada (Apotex, Inc.)

On April 22, 2009, Apotex filed an impeachment action against Sanofi in the Federal Court of Canada alleging that Sanofi’s Canadian Patent No. 1,336,777 (the ‘777 Patent) is invalid. On June 8, 2009, Sanofi filed its defense to the impeachment action and filed a suit against Apotex for infringement of the ‘777 Patent. The trial was completed in June 2011 and in December 2011, the Federal Court of Canada issued a decision that the ‘777 Patent is invalid. Sanofi is appealing this decision though generic companies have since entered the market.

OTHER INTELLECTUAL PROPERTY LITIGATION

Abilify*

As previously disclosed, Otsuka has filed patent infringement actions against Teva, Barr Pharmaceuticals, Inc. (Barr), Sandoz Inc. (Sandoz), Synthon Laboratories, Inc (Synthon), Sun Pharmaceuticals (Sun), Zydus Pharmaceuticals USA, Inc. (Zydus), and Apotex relating to U.S. Patent No. 5,006,528, (‘528 Patent) which covers aripiprazole and expires in April 2015 (including the additional six-month pediatric exclusivity period). Aripiprazole is comarketed by the Company and Otsuka in the U.S. as Abilify*. A non-jury trial in the U.S. District Court for the District of New Jersey (NJ District Court) against Teva/Barr and Apotex was completed in August 2010. In November 2010, the NJ District Court upheld the validity and enforceability of the ‘528 Patent, maintaining the main patent protection for Abilify* in the U.S. until April 2015. The NJ District Court also ruled that the defendants’ generic aripiprazole product infringed the ‘528 Patent and permanently enjoined them from engaging in any activity that infringes the ‘528 Patent, including marketing their generic product in the U.S. until after the patent (including the six-month pediatric extension) expires. Sandoz, Synthon, Sun and Zydus are also bound by the NJ District Court’s decision. In December 2010, Teva/Barr and Apotex appealed this decision to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit). In May 2012, the Federal Circuit affirmed the NJ District Court’s decision. In June 2012, Apotex filed a petition for rehearing en banc. It is not possible at this time to determine the outcome of any further appeals of the NJ District Court’s decision. If Otsuka were not to prevail in an appeal, generic competition would likely result in substantial decreases in the sales of Abilify* in the U.S., which would have a material adverse effect on the results of operations and cash flows and could be material to the Company’s financial condition.

Atripla*

In April 2009, Teva filed an abbreviated New Drug Application (aNDA) to manufacture and market a generic version of Atripla*. Atripla* is a single tablet three-drug regimen combining the Company’s Sustiva and Gilead’s Truvada*. As of this time, the Company’s U.S. patent rights covering Sustiva’s composition of matter and method of use have not been challenged. Teva sent Gilead a Paragraph IV certification letter challenging two of the fifteen Orange Book-listed patents for Atripla*. Atripla* is the product of a joint venture between the Company and Gilead. In May 2009, Gilead filed a patent infringement action against Teva in the U.S. District Court for the Southern District of New York (SDNY). In January 2010, the Company received a notice that Teva has amended its aNDA and is challenging eight additional Orange Book-listed patents for Atripla*. In March 2010, the Company and Merck, Sharp & Dohme Corp. (Merck) filed a patent infringement action against Teva also in the SDNY relating to two U.S. Patents which claim crystalline or polymorph forms of efavirenz. In March 2010, Gilead filed two patent infringement actions against Teva in the SDNY relating to six Orange Book-listed patents for Atripla*. Discovery in these matters is ongoing. It is not possible at this time to reasonably assess the outcome of these lawsuits or their impact on the Company.

 

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Baraclude

In August 2010, Teva filed an aNDA to manufacture and market generic versions of Baraclude. The Company received a Paragraph IV certification letter from Teva challenging the one Orange Book-listed patent for Baraclude, U.S. Patent No. 5,206,244, which expires in 2015. In September 2010, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Teva for infringement of the listed patent covering Baraclude, which triggered an automatic 30-month stay of approval of Teva’s aNDA. A trial is expected to take place in the fourth quarter of 2012. In June 2012, the Company filed a patent infringement lawsuit against Sandoz following the receipt of a Paragraph IV certification letter challenging the same Orange-Book listed patent. It is not possible at this time to reasonably assess the outcome of these lawsuits or their impact on the Company.

Sprycel

In September 2010, Apotex filed an aNDA to manufacture and market generic versions of Sprycel. The Company received a Paragraph IV certification letter from Apotex challenging the four Orange Book listed patents for Sprycel, including the composition of matter patent. In November 2010, the Company filed a patent infringement lawsuit in the NJ District Court against Apotex for infringement of the four Orange Book listed patents covering Sprycel, which triggered an automatic 30-month stay of approval of Apotex’s aNDA. In October 2011, the Company received a Paragraph IV notice letter from Apotex informing the Company that it is seeking approval of generic versions of the 80 mg and 140 mg dosage strengths of Sprycel and challenging the same four Orange Book listed patents. In November 2011, BMS filed a patent infringement suit against Apotex on the 80 mg and 140 mg dosage strengths in the NJ District Court. This case has been consolidated with the suit filed in November 2010. Discovery in this matter is ongoing. It is not possible at this time to reasonably assess the outcome of this lawsuit or its impact on the Company.

Sustiva—EU

In January 2012, Teva obtained a European marketing authorization for Efavirenz Teva 600 mg tablets. In February 2012, the Company and Merck filed lawsuits and requests for injunctions against Teva in the Netherlands, Germany and the U.K. for infringement of Merck’s European Patent No. 0582455 and Supplementary Protection Certificates expiring in November 2013. As of April 2012, requests for injunctions have been granted in the U.K. and denied in the Netherlands and Germany. It is not possible at this time to reasonably assess the outcome of these lawsuits or their impact on the Company.

GENERAL COMMERCIAL LITIGATION

Clayworth Litigation

As previously disclosed, the Company, together with a number of other pharmaceutical manufacturers, was named as a defendant in an action filed in California Superior Court in Oakland, James Clayworth et al. v. Bristol-Myers Squibb Company, et al., alleging that the defendants conspired to fix the prices of pharmaceuticals by agreeing to charge more for their drugs in the U.S. than they charge outside the U.S., particularly Canada, and asserting claims under California’s Cartwright Act and unfair competition law. The plaintiffs sought trebled monetary damages, injunctive relief and other relief. In December 2006, the Court granted the Company and the other manufacturers’ motion for summary judgment based on the pass-on defense, and judgment was then entered in favor of defendants. In July 2008, judgment in favor of defendants was affirmed by the California Court of Appeals. In July 2010, the California Supreme Court reversed the California Court of Appeal’s judgment and the matter was remanded to the California Superior Court for further proceedings. In March 2011, the defendants’ motion for summary judgment was granted and judgment was entered in favor of the defendants. The plaintiffs have appealed this decision and an oral argument occurred in June 2012. It is not possible at this time to determine the outcome of the appeal.

Remaining Apotex Matters Related to Plavix*

As previously disclosed, in November 2008, Apotex filed a lawsuit in New Jersey Superior Court entitled, Apotex Inc., et al. v. sanofi-aventis, et al., seeking payment of $60 million, plus interest calculated at the rate of 1% per month from the date of the filing of the lawsuit, until paid, related to the break-up of a March 2006 proposed settlement agreement relating to the-then pending Plavix* patent litigation against Apotex. In April 2011, the New Jersey Superior Court granted the Company’s cross-motion for summary judgment motion and denied Apotex’s motion for summary judgment. Apotex has appealed these decisions. It is not possible at this time to determine the outcome of any appeal from the New Jersey Superior Court’s decisions.

In January 2011, Apotex filed a lawsuit in Florida State Court, Broward County, alleging breach of contract relating to the May 2006 proposed settlement agreement with Apotex relating to the then pending Plavix* patent litigation. Discovery is ongoing.

 

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PRICING, SALES AND PROMOTIONAL PRACTICES LITIGATION AND INVESTIGATIONS

Abilify* Federal Subpoena

In January 2012, the Company received a subpoena from the United States Attorney’s Office for the Southern District of New York requesting information related to, among other things, the sales and marketing of Abilify*. It is not possible at this time to assess the outcome of this matter or its potential impact on the Company.

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 investigating whether certain Abilify* marketing practices violated those respective states’ consumer protection statutes. It is not possible at this time to reasonably assess the outcome of this investigation or its potential impact on the Company.

Abilify* Co-Pay Assistance Litigation

In March 2012, the Company and its partner Otsuka were named as co-defendants in a private class action lawsuit filed by union health and welfare funds in the SDNY. Plaintiffs are challenging the legality of the Abilify* co-pay assistance program under the Federal Antitrust and the Racketeer Influenced and Corrupt Organizations laws, and seeking damages. It is not possible at this time to reasonably assess the outcome of this litigation or its potential impact on the Company.

AWP Litigation

As previously disclosed, the Company, together with a number of other pharmaceutical manufacturers, has been a defendant in a number of private class actions as well as suits brought by the attorneys general of various states. In these actions, plaintiffs allege that defendants caused the Average Wholesale Prices (AWPs) of their products to be inflated, thereby injuring government programs, entities and persons who reimbursed prescription drugs based on AWPs. The Company is a defendant in four state attorneys general suits pending in state courts around the country. Beginning in August 2010, the Company was the defendant in a trial in the Commonwealth Court of Pennsylvania (Commonwealth Court), brought by the Commonwealth of Pennsylvania. In September 2010, the jury issued a verdict for the Company, finding that the Company was not liable for fraudulent or negligent misrepresentation; however, the Commonwealth Court judge issued a decision on a Pennsylvania consumer protection claim that did not go to the jury, finding the Company liable for $28 million and enjoining the Company from contributing to the provision of inflated AWPs. The Company has moved to vacate the decision and the Commonwealth has moved for a judgment notwithstanding the verdict, which the Commonwealth Court denied. The Company and the Commonwealth have appealed the decision to the Pennsylvania Supreme Court. The Company is currently scheduled to proceed to trial in Mississippi in mid-2013.

Qui Tam Litigation

In March 2011, the Company was served with an unsealed qui tam complaint filed by three former sales representatives in California Superior Court, County of Los Angeles. The California Department of Insurance has elected to intervene in the lawsuit. The complaint alleges the Company paid kickbacks to California providers and pharmacies in violation of California Insurance Frauds Prevention Act, Cal. Ins. Code § 1871.7. Discovery is ongoing. It is not possible at this time to reasonably assess the outcome of this lawsuit or its impact on the Company.

PRODUCT LIABILITY LITIGATION

The Company is a party to various product liability lawsuits. 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, more than 1,000 claims are filed in state and federal courts in various states including California, Illinois, New Jersey, New York, Ohio and Pennsylvania. The Company also executed a tolling agreement with respect to unfiled claims by potential additional plaintiffs. The defendants have exercised their right to terminate the tolling agreement effective September 1, 2012. It is not possible at this time to reasonably assess the outcome of these lawsuits or the potential impact on the Company.

 

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Reglan*

The Company is one of a number of defendants in numerous lawsuits, on behalf of approximately 2,500 plaintiffs, claiming personal injury allegedly sustained after using Reglan* or another brand of the generic drug metoclopramide, a product indicated for gastroesophageal reflux and certain other gastrointestinal disorders. The Company, through its generic subsidiary, Apothecon, Inc., distributed metoclopramide tablets manufactured by another party between 1996 and 2000. It is not possible at this time to reasonably assess the outcome of these lawsuits or the potential impact on the Company.

Hormone Replacement Therapy

The Company is one of a number of defendants in a mass-tort litigation in which plaintiffs allege, among other things, that various hormone therapy products, including hormone therapy products formerly manufactured by the Company (Estrace*, Estradiol, Delestrogen* and Ovcon*) cause breast cancer, stroke, blood clots, cardiac and other injuries in women, that the defendants were aware of these risks and failed to warn consumers. The Company has agreed to resolve the claims of approximately 400 plaintiffs. As of June 30, 2012, the Company remains a defendant in approximately 36 actively pending lawsuits in federal and state courts throughout the U.S. All of the Company’s hormone therapy products were sold to other companies between January 2000 and August 2001.

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 the Comprehensive Environmental Response, Compensation and Liability Act (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 $70 million at June 30, 2012, 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).

New Brunswick Facility—Environmental & Personal Injury Lawsuits

Since May 2008, over 250 lawsuits have been filed against the Company in New Jersey Superior Court by or on behalf of current and former residents of New Brunswick, New Jersey who live or have lived adjacent to the Company’s New Brunswick facility. The complaints either allege various personal injuries damages resulting from alleged soil and groundwater contamination on their property stemming from historical operations at the New Brunswick facility, or are claims for medical monitoring. A portion of these complaints also assert claims for alleged property damage. In October 2008, the New Jersey Supreme Court granted Mass Tort status to these cases and transferred them to the New Jersey Superior Court in Atlantic County for centralized case management purposes. The Company intends to defend itself vigorously in this litigation. Discovery is ongoing. In October 2011 and May 2012, over 100 additional cases were filed in New Jersey Superior Court and removed by the Company to United States District Court, District of New Jersey. It is not possible at this time to reasonably assess the outcome of these lawsuits or the potential impact on the Company.

North Brunswick Township Board of Education

As previously disclosed, in October 2003, the Company was contacted by counsel representing the North Brunswick, NJ Board of Education (BOE) regarding a site where waste materials from E.R. Squibb and Sons may have been disposed from the 1940’s through the 1960’s. Fill material containing industrial waste and heavy metals in excess of residential standards was discovered during an expansion project at the North Brunswick Township High School, as well as at a number of neighboring residential properties and adjacent public park areas. In January 2004, the New Jersey Department of Environmental Protection (NJDEP) sent the Company and others an information request letter about possible waste disposal at the site, to which the Company responded in March 2004. The BOE and the Township, as the current owners of the school property and the park, are conducting and jointly financing soil remediation work and ground water investigation work under a work plan approved by NJDEP, and have asked the Company to contribute to the cost. The Company is actively monitoring the clean-up project, including its costs. To date, neither the school board nor the Township has asserted any claim against the Company. Instead, the Company and the local entities have negotiated an agreement to attempt to resolve the matter by informal means, and avoid litigation. A central component of the agreement is the

 

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provision by the Company of interim funding to help defray cleanup costs and assure the work is not interrupted. The Company transmitted interim funding payments in December 2007 and November 2009. The parties commenced mediation in late 2008; however, those efforts were not successful and the parties moved to a binding allocation process. The parties are expected to conduct fact and expert discovery, followed by formal evidentiary hearings and written argument. Hearings likely will be scheduled for late 2012 or early 2013. In addition, in September 2009, the Township and BOE filed suits against several other parties alleged to have contributed waste materials to the site. The Company does not currently believe that it is responsible for any additional amounts beyond the two interim payments totaling $4 million already transmitted. Any additional possible loss is not expected to be material.

OTHER PROCEEDINGS

Italy Investigation

In July 2011, the Public Prosecutor in Florence, Italy (Italian Prosecutor) initiated a criminal investigation against the Company’s subsidiary in Italy (BMS Italy). The allegations against the Company relate to alleged activities of a former employee who left the Company in the 1990s. The Italian Prosecutor has requested as an interim measure that a judicial administrator be appointed to temporarily run the operations of BMS Italy. The Florence Court has not yet ruled on the Italian Prosecutor’s request. It is not possible at this time to assess the outcome of this investigation or its potential impact on the Company.

SEC Germany Investigation

In October 2006, the SEC informed the Company that it had begun a formal inquiry into the activities of certain of the Company’s German pharmaceutical subsidiaries and its employees and/or agents. The SEC’s inquiry encompasses matters formerly under investigation by the German prosecutor in Munich, Germany, which have since been resolved. The Company understands the inquiry concerns potential violations of the Foreign Corrupt Practices Act (FCPA). The Company is cooperating with the SEC.

FCPA Investigation

In March, 2012, the Company received a subpoena from the SEC. The subpoena, issued in connection with an investigation under the FCPA, primarily relates to sales and marketing practices in various countries. The Company is cooperating with the government in its investigation of these matters.

 

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

EXECUTIVE SUMMARY

Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS, the Company, we, our or us) is a global biopharmaceutical company whose mission is to discover, develop and deliver innovative medicines that help patients prevail over serious diseases. We license, manufacture, market, distribute and sell pharmaceutical products on a global basis.

Highlights

The following table is a summary of our financial highlights:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions, except per share data    2012     2011     2012     2011  

Net Sales

   $ 4,443     $ 5,434     $ 9,694     $ 10,445  

Total Expenses

     3,384       3,644       6,608       6,888  

Earnings before Income Taxes

     1,059       1,790       3,086       3,557  

Provision for Income Taxes

     251       483       796       883  

Effective tax rate

     23.7     27.0     25.8     24.8

Net Earnings Attributable to BMS

        

GAAP

     645       902       1,746       1,888  

Non-GAAP

     808       971       1,902       1,971  

Diluted Earnings Per Share

        

GAAP

     0.38       0.52       1.02       1.10  

Non-GAAP

     0.48       0.56       1.12       1.14  

Cash, Cash Equivalents and Marketable Securities

         8,769       10,404  

Our non-GAAP financial measures, including non-GAAP earnings and related earnings per share (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 see “—Non-GAAP Financial Measures” below.

Strategy

Over the past few years, we transformed our Company into a focused biopharmaceutical company. We continue to focus on sustaining our business and building a foundation for the future. We plan to achieve this foundation by growing our newer key marketed products, advancing our pipeline portfolio and managing our costs. We also plan to expand our presence in emerging markets, with a tailored approach to each market. We expect that our portfolio will become increasingly diversified across products and geographies over the next few years.

We face substantial exclusivity losses this year in Plavix* (clopidogrel bifsulfate) and Avapro*/Avalide* (irbesartan/irbesartan-hydrochlorothiazide), which together had more than $8 billion of net sales in 2011, and additional exclusivity losses in the coming years. We have been preparing for this for a number of years. As expected, we are experiencing a rapid, precipitous, and material decline in Plavix* and Avapro*/Avalide* net sales and a reduction in net income and operating cash flow. Such events are the norm in the industry when companies experience the loss of exclusivity of a significant product. We also face significant challenges with an increasingly complex global and regulatory environment and global economic uncertainty, particularly in the EU. We believe our strategy to grow our newer marketed products and our robust research and development (R&D) pipeline, particularly within the therapeutic areas of immuno-oncology, cardiovascular/metabolic disease and virology, position us well for the future.

We continue to expand our biologics capabilities. We still rely significantly on small molecules as our strongest, most reliable starting point for discovering potential new medicines, but large molecules, or biologics, which are derived from recombinant DNA technologies, are becoming increasingly important. Currently, more than one in three of our pipeline compounds are biologics, as are four of our key marketed products, including Yervoy (ipilimumab).

We also continue to support our pipeline with our licensing and acquisitions strategy, which we refer to as our “string of pearls.” In February 2012, we acquired Inhibitex, Inc. (Inhibitex), a clinical-stage biopharmaceutical company focused on developing products to treat serious infectious diseases, including the hepatitis C virus and in June 2012, we entered into an agreement to acquire Amylin

 

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Pharmaceuticals, Inc. (Amylin), a biopharmaceutical company dedicated to the discovery, development and commercialization of innovative medicines for patients with diabetes and other metabolic diseases. Following the expected completion of our acquisition of Amylin, we will enter into collaboration agreements with AstraZeneca Pharmaceuticals LP, a wholly-owned subsidiary of AstraZeneca PLC (AstraZeneca), which build upon our existing alliance, further expanding our collaboration strategy.

Product and Pipeline Developments

We manage our R&D programs on a portfolio basis, investing resources in each stage from early discovery through late-stage development. We continually evaluate our portfolio of R&D assets to ensure that there is an appropriate balance of early-stage and late-stage programs to support future growth. We consider our R&D programs that have entered into Phase III development to be significant, as these programs constitute our late-stage development pipeline. These Phase III development programs include both investigational compounds in Phase III development for initial indications and marketed products that are in Phase III development for additional indications or formulations. Spending on these programs represents approximately 30-40% of our annual R&D expenses. No individual investigational compound or marketed product represented 10% or more of our R&D expenses in any of the last three years. While we do not expect all of our late-stage development programs to make it to market, our late-stage development programs are the R&D programs that could potentially have an impact on our revenue and earnings within the next few years. The following are the recent significant developments in our marketed products and our late-stage pipeline:

Eliquis (apixaban)—an oral Factor Xa inhibitor indicated in the European Union (EU) for the prevention of venous thromboembolic events (VTE) in adult patients who have undergone elective hip or knee replacement surgery and in development for stroke prevention in patients with atrial fibrillation (AF) and the prevention and treatment of venous thomboembolic disorders that is part of our strategic alliance with Pfizer, Inc. (Pfizer)

 

   

In June 2012, the Company and Pfizer announced that the U.S. Food and Drug Administration (FDA) issued a Complete Response Letter (CRL) regarding the New Drug Application for Eliquis for the prevention of stroke and systemic embolism in patients with nonvalvular AF. The CRL requests additional information on data management and verification from the ARISTOTLE trial. The FDA has not requested that the companies complete any new studies.

Forxiga (dapagliflozin)—an oral SGLT2 inhibitor for the treatment of diabetes that is part of our alliance with AstraZeneca

 

   

In June 2012 at the 72nd American Diabetes Association Scientific Sessions, the Company and AstraZeneca announced results from a Phase III clinical study that showed Forxiga 10 mg demonstrated significant reductions in blood sugar levels (glycosylated hemoglobin levels, or HbA1c) compared with placebo at 24 weeks when either agent was added to existing sitagliptin therapy (with or without metformin) in adult patients with type 2 diabetes. The results were maintained over a 24-week extension and similar results were observed when the data were stratified by background therapy. The study also demonstrated significant reductions in total body weight and fasting plasma glucose levels in patients taking Forxiga added to sitigliptin (with or without metformin), with results maintained throughout the duration of the study.

 

   

In April 2012, the Company received a positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP) for Forxiga for the treatment of type 2 diabetes, as an adjunct to diet and exercise, in combination with other glucose-lowering medicinal products including insulin, and as a monotherapy in metformin intolerant patients. The CHMP’s positive opinion is under review by the European Commission which has the authority to approve medicines for the EU.

Brivanib—an investigational anti-cancer agent

 

   

In July 2012, the Company announced that brivanib did not meet its primary overall survival objective based upon a non-inferiority statistical design in the Phase III BRISK-FL clinical trial of brivanib versus sorafenib as first-line treatment in patients with advanced hepatocellular carcinoma.

 

   

In April 2012 at the European Association for the Study of the Liver meeting, the results of a Phase III study of brivanib vs. placebo in patients with advanced hepatocellular carcinoma who failed or were intolerant to sorafenib were presented. The primary endpoint of improving overall survival versus placebo was not met. There were improvements in time to progression, disease control rate and overall response rate indicating anti-tumor activity of brivanib. Brivanib had an acceptable safety profile.

 

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Erbitux* (cetuximab)—a monoclonal antibody designed to exclusively target and block the Epidermal Growth Factor Receptor, which is expressed on the surface of certain cancer cells in multiple tumor types as well as normal cells and is currently indicated for use against colorectal cancer and head and neck cancer. Erbitux* is part of our alliance with Eli Lilly and Company (Lilly).

 

   

In July 2012, the FDA granted full approval of Erbitux* in combination with the chemotherapy regimen FOLFIRI (irinotecan, 5-fluorouracil, leucovorin) for the first-line treatment of patients with KRAS mutation-negative epidermal growth factor receptor-expressing metastatic colorectal cancer as determined by FDA-approved tests for the use.

 

   

In April 2012, the FDA issued a CRL regarding the supplemental Biologics License Application (sBLA) in first-line non-small cell lung cancer which stated that, based on the current data package, the first-line indication for Erbitux* in combination with vinorelbine and cisplatin is not approvable. Lilly and the Company do not plan to resubmit the filing.

Onglyza/Kombiglyze (saxagliptin/once daily combination of saxagliptin and metformin hydrochloride extended-release)—a treatment for type 2 diabetes that is part of our strategic alliance with AstraZeneca

 

   

Marketing authorization for Komboglyze, the twice daily, fixed dose combination of saxagliptin and immediate-release metformin, was granted by the European Commission in November 2011. However, due to a technical manufacturing issue, launch is now not expected until 2013.

Orencia (abatacept)—a fusion protein indicated for rheumatoid arthritis (RA)

 

   

In July 2012, the Marketing Authorization Application for Orencia subcutaneous formulation received a positive opinion from the CHMP for use in treating patients with moderate to severe rheumatoid arthritis. The CHMP’s positive opinion will now be reviewed by the European Commission, which has authority to approve medicines for the European Union.

 

   

In June 2012, at the European League Against Rheumatism Annual European Congress of Rheumatology, the Company announced that AMPLE, a head-to-head trial of 646 patients comparing the subcutaneous formulation of Orencia vs. Humira* (adalimumab), each on a background of methotrexate (MTX), in biologic naïve patients with moderate to severe RA met its primary endpoint (as measured by non-inferiority) demonstrating that Orencia plus MTX achieved comparable rates of efficacy for the American College of Rheumatology criteria of 20 percent response at 1 year of 64.8% vs. 63.4% Humira* plus MTX.

 

   

In May 2012, the Company announced that the FDA had approved the Company’s biologics manufacturing facility in Devens, Massachusetts for commercial production of Orencia.

Nulojix (belatacept)—a fusion protein with novel immunosuppressive activity for the prevention of kidney transplant rejection

 

   

In June 2012 at the 2012 American Transplant Congress, the Company announced new 4-year results from the long-term extensions (LTE) of the BENEFIT and BENEFIT-EXT clinical trials of Nulojix, the first T-cell costimulation blocker indicated for the prophylaxis of organ rejection in adult Epstein-Barr Virus seropositive patients receiving a kidney transplant, in combination with basiliximab induction, mycophenolate mofetil, and corticosteroids. Results showed that the safety profile of Nulojix through year 4 was consistent compared with results at year 3 with no new safety signals being identified, and that the renal function benefit versus cyclosporine was maintained through 4 years in patients enrolled in the LTE from both the BENEFIT and BENEFIT-EXT trials.

RESULTS OF OPERATIONS

Net Sales

The composition of the change in net sales was as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
                   2012 vs. 2011                    2012 vs. 2011  
     Net Sales      Analysis of % Change      Net Sales      Analysis of % Change  
Dollars in Millions    2012      2011      Total
Change
     Volume      Price      Foreign
Exchange
     2012      2011      Total
Change
     Volume      Price      Foreign
Exchange
 

United States

   $ 2,591      $ 3,562        (27)%         (32)%         5%               $ 6,044      $ 6,812        (11)%         (18)%         7%           

Europe

     865        954        (9)%         5%         (4)%         (10)%         1,748        1,822        (4)%         6%         (3)%         (7)%   

Japan, Asia Pacific and Canada

     430        462        (7)%         (3)%         (2)%         (2)%         843        911        (7)%         (5)%         (2)%           

Latin America, the Middle East and Africa

     226        220        3%         6%         3%         (6)%         446        434        3%         4%         3%         (4)%   

Emerging Markets

     254        215        18%         24%                 (6)%         456        421        8%         12%         (1)%         (3)%   

Other

     77        21        **         N/A         N/A                 157        45        **         N/A         N/A           
  

 

 

    

 

 

                

 

 

    

 

 

             

Total

   $ 4,443      $ 5,434        (18)%         (19)%         3%         (2)%       $ 9,694      $ 10,445        (7)%         (10)%         5%         (2)%   
  

 

 

    

 

 

                

 

 

    

 

 

             

 

**

Change in excess of 100%

 

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Our total net sales decreased in 2012 primarily due to declines in sales of Plavix* and Avapro*/Avalide* following the losses of exclusivity of these products in the U.S. and unfavorable foreign exchange, partially offset by higher average net selling prices and continued growth in most key products.

The change in U.S. net sales attributed to volume reflects the recent exclusivity loss of Plavix* and Avapro*/Avalide*, partially offset by increased demand for most key products. The change in U.S. net sales attributed to price was a result of higher average net selling prices for Abilify* (aripiprazole) and Plavix*, partially offset by the reduction in our contractual share of Abilify* net sales. See “—Key Products” for further discussion of sales by key product.

Net sales in Europe decreased primarily due to unfavorable foreign exchange and lower sales of certain mature brands from divestitures and generic competition as well as generic competition for Plavix* and Avapro*/Avalide* partially offset by sales growth of most key products. The change in net sales was negatively impacted by continuing fiscal challenges in many European countries as healthcare payers, including government agencies, have reduced and are expected to continue to reduce healthcare costs through actions that directly or indirectly impose additional price reductions. These measures include, but are not limited to, mandatory discounts, rebates, other price reductions and other restrictive measures.

Net sales in Japan, Asia Pacific and Canada decreased due to generic competition for Plavix* and Avapro*/Avalide* in Canada as well as lower mature brand sales from generic competition and divestitures partially offset by higher demand for Baraclude (entecavir), Sprycel (dasatinib), which recently received first line indication in Japan, and Orencia, which was recently launched in Japan.

Other increased due to additional sales of bulk active pharmaceutical ingredient to our alliance partner as well as enhanced royalty-related revenue.

No single country outside the U.S. contributed more than 10% of total net sales during the three and six months ended June 30, 2012 and 2011.

In general, our business is not seasonal. For information on U.S. pharmaceutical prescriber demand, reference is made to the table within “—Estimated End-User Demand” below, which sets forth a comparison of changes in net sales to the estimated total prescription growth (for both retail and mail order customers) for certain of our key products. U.S. and non-U.S. net sales are categorized based upon the location of the customer.

We recognize revenue net of gross-to-net adjustments that are further described in “—Critical Accounting Policies” in the Company’s 2011 Annual Report on Form 10-K. Our contractual share of Abilify* and Atripla* sales is reflected net of all gross-to-net sales adjustments in gross sales.

The reconciliation of our gross sales to net sales by each significant category of gross-to-net sales adjustments was as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2012     2011     2012     2011  

Gross Sales

   $ 5,024     $ 6,081     $ 10,902     $ 11,680  

Gross-to-Net Sales Adjustments

        

Charge-Backs Related to Government Programs

     (176     (198     (368     (365

Cash Discounts

     (49     (72     (118     (139

Managed Healthcare Rebates and Other Contract Discounts

     (18     (161     (84     (281

Medicaid Rebates

     (100     (132     (203     (267

Sales Returns

     (134     3       (234     (20

Other Adjustments

     (104     (87     (201     (163
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross-to-Net Sales Adjustments

     (581     (647     (1,208     (1,235
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

   $ 4,443     $ 5,434     $ 9,694     $ 10,445  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The activities and ending balances of each significant category of gross-to-net sales reserve adjustments were as follows:

 

Dollars in Millions   Charge-Backs
Related to
Government
Programs
    Cash
Discounts
    Managed
Healthcare
Rebates and
Other Contract
Discounts
    Medicaid
Rebates
    Sales
Returns
    Other
Adjustments
    Total  

Balance at January 1, 2012

  $ (51   $ (28   $ (417   $ (411   $ (161   $ (181   $ (1,249

Provision related to sales made in current period

    (368     (118     (141     (240     (237     (209     (1,313

Provision related to sales made in prior periods

                  57       37       3       8       105  

Returns and payments

    381       132       319       257       34       217       1,340  

Impact of foreign currency translation

                                1       4       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

  $ (38   $ (14   $ (182   $ (357   $ (360   $ (161   $ (1,112
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross-to-net sales adjustments as a percentage of gross sales were 12% and 11% for the three months ended June 30, 2012 and 2011, respectively, and were 11% for both the six months ended June 30, 2012 and 2011. Such changes in rates are primarily a function of changes in sales mix and contractual and legislative discounts and rebates. Gross-to-net sales adjustments decreased due to:

 

   

Managed healthcare rebates and other contract discounts decreased due to a reduction in prior period rebate and discount accruals based upon actual invoices received, the nonrenewal of Plavix* contract discounts in the Medicare Part D program as of January 1, 2012, and the decrease in sales of Plavix* following the loss of exclusivity.

 

   

Medicaid rebates decreased primarily due to a reduction in prior period managed Medicaid accruals based upon actual invoices received.

 

   

The provision for sales returns increased as a result of the loss of exclusivity in the U.S. of Plavix* in May 2012 and Avapro*/Avalide* in March 2012. The sales return reserves for these products in the U.S. were $222 million at June 30, 2012 and were determined after considering several factors including estimated inventory levels in the distribution channels. In accordance with company policy, these products are only eligible to be returned between six months prior to and twelve months after product expiration. Adjustments to these reserves might be required in the future for revised estimates based on actual returns which are not expected to occur until 2014.

 

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Net sales of key products represent 85% and 84% of total net sales for the three months ended June 30, 2012 and 2011, respectively, and 86% of total net sales for both the six months ended June 30, 2012 and 2011. The following table presents U.S. and international net sales by key products, the percentage change from the prior period and the foreign exchange impact when compared to the prior period. Commentary detailing the reasons for significant variances for key products is provided below:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions   2012     2011     %
Change
    % Change
Attributable
to Foreign
Exchange
    2012     2011     %
Change
    % Change
Attributable
to Foreign
Exchange
 

Key Products

               

Plavix* (clopidogrel bisulfate)

  $   741     $   1,865       (60)%             $   2,434     $   3,627       (33)%          

U.S.

    701       1,747       (60)%               2,331       3,388       (31)%          

Non-U.S.

    40       118       (66)%        (2)%        103       239       (57)%        (1)%   

Avapro*/Avalide*

               

(irbesartan/irbesartan-hydrochlorothiazide)

    117       251       (53)%        (2)%        324       541       (40)%        (1)%   

U.S.

    20       133       (85)%               120       293       (59)%          

Non-U.S.

    97       118       (18)%        (5)%        204       248       (18)%        (2)%   

Eliquis (apixaban)

    1       N/A        N/A        N/A        1       N/A        N/A        N/A   

U.S.

    N/A        N/A        N/A        N/A        N/A        N/A        N/A        N/A   

Non-U.S.

    1       N/A        N/A        N/A        1       N/A        N/A        N/A   

Abilify* (aripiprazole)

    711       706       1%        (3)%        1,332       1,330              (2)%   

U.S.

    530       517       3%               970       977       (1)%          

Non-U.S.

    181       189       (4)%        (11)%        362       353       3%        (8)%   

Reyataz (atazanavir sulfate)

    406       396       3%        (4)%        764       762              (3)%   

U.S.

    196       189       4%               383       370       4%          

Non-U.S.

    210       207       1%        (9)%        381       392       (3)%        (7)%   

Sustiva (efavirenz) Franchise

    388       371       5%        (3)%        774       714       8%        (3)%   

U.S.

    256       228       12%               507       443       14%          

Non-U.S.

    132       143       (8)%        (8)%        267       271       (1)%        (6)%   

Baraclude (entecavir)

    357       292       22%        (3)%        682       567       20%        (2)%   

U.S.

    59       51       16%               114       99       15%          

Non-U.S.

    298       241       24%        (3)%        568       468       21%        (2)%   

Erbitux* (cetuximab)

    179       173       3%        (1)%        358       338       6%          

U.S.

    173       167       4%               346       329       5%          

Non-U.S.

    6       6              (3)%        12       9       33%        (2)%   

Sprycel (dasatinib)

    244       193       26%        (6)%        475       365       30%        (4)%   

U.S.

    90       68       32%               183       129       42%          

Non-U.S.

    154       125       23%        (9)%        292       236       24%        (6)%   

Yervoy (ipilimumab)

    162       95       71%        (4)%        316       95       **        (7)%   

U.S.

    121       95       27%               238       95       **          

Non-U.S.

    41       N/A        N/A        N/A        78       N/A        N/A        N/A   

Orencia (abatacept)

    290       228       27%        (3)%        544       427       27%        (2)%   

U.S.

    197       152       30%               366       290       26%          

Non-U.S.

    93       76       22%        (9)%        178       137       30%        (5)%   

Nulojix (belatacept)

    3       2       27%        N/A        4       2       92%        N/A   

U.S.

    2       2                     3       2       50%          

Non-U.S.

    1       N/A        N/A        N/A        1       N/A        N/A        N/A   

Onglyza/Kombiglyze

               

(saxagliptin/saxagliptin and metformin)

    172       112       54%        (4)%        333       193       73%        (3)%   

U.S.

    123       80       54%               241       137       76%          

Non-U.S.

    49       32       53%        (15)%        92       56       64%        (14)%   

Mature Products and All Other

    672       750       (10)%        (5)%        1,353       1,484       (9)%        (3)%   

U.S.

    123       133       (8)%               242       260       (7)%          

Non-U.S.

    549       617       (11)%        (4)%        1,111       1,224       (9)%        (2)%   

 

**

Change in excess of 100%.

 

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Plavix*—a platelet aggregation inhibitor that is part of our alliance with Sanofi

 

   

U.S. net sales decreased primarily due to the loss of exclusivity in May 2012. Estimated total U.S. prescription demand decreased 45% and 26% for the three and six months ended June 30, 2012, respectively. We expect the continued erosion of Plavix* net sales in the U.S.

 

   

International net sales continue to be negatively impacted by generic clopidogrel products in the EU, Canada, and Australia. This has a continuing negative impact on both our net sales and our equity in net income of affiliates from our partnership with Sanofi in Europe and Asia.

Avapro*/Avalide* (known in the EU as Aprovel*/Karvea*)—an angiotensin II receptor blocker for the treatment of hypertension and diabetic nephropathy that is also part of the Sanofi alliance

 

   

U.S. net sales decreased due to the exclusivity loss of Avapro*/Avalide* in March 2012. Total estimated U.S. prescription demand decreased 82% and 55% for the three and six months ended June 30, 2012, respectively.

 

   

International net sales decreased due to lower demand including generic competition in certain EU markets and Canada.

Eliquis—an oral Xa inhibitor for the prevention of VTE in adult patients who have undergone elective hip or knee replacement surgery and in development for the prevention and treatment of venous thromboembolic disorders and stroke prevention in patients with AF that is part of our strategic alliance with Pfizer

 

   

Eliquis has been approved in the EU and several other international countries for VTE prevention with launches continuing in many of those countries.

Abilify*—an antipsychotic agent for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder that is part of our strategic alliance with Otsuka

 

   

U.S. net sales increased during the three months ended June 30, 2012 due to higher average net selling prices and partially offset by the reduction in our contractual share of net sales recognized from 53.5% in 2011 to 51.5% in 2012 and fluctuations in retail buying patterns. During the six months ended June 30, 2012, U.S. net sales decreased as fluctuations in retail buying patterns and the reduction in our contractual share of net sales recognized more than offset higher average net selling prices and increased prescription demand. Estimated total U.S. prescription demand was flat for the three months ended June 30, 2012 and increased 2% for the six months ended June 30, 2012.

 

   

International net sales increased primarily due to higher prescription demand partially offset by unfavorable foreign exchange.

Reyataz—a protease inhibitor for the treatment of HIV

 

   

U.S. net sales increased due to higher average net selling prices. Estimated total U.S. prescription demand decreased 4% and 2% for the three and six months ended June 30, 2012, respectively.

 

   

International net sales increased in the three months ended June 30, 2012 as increased demand attributable to the timing of government purchases in Russia was partially offset by unfavorable foreign exchange. International net sales decreased slightly in the six months ended June 30, 2012 due to unfavorable foreign exchange partially offset by increased demand.

Sustiva 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* (efavirenz 600mg/emtricitabine 200 mg/tenofovir disoproxil fumarate 300 mg), a product sold through a joint venture with Gilead Sciences, Inc. (Gilead)

 

   

U.S. net sales increased due to higher demand in government channels and higher average net selling prices. Estimated total U.S. prescription demand decreased 2% for the three months ended June 30, 2012 and was flat for the six months ended June 30, 2012.

 

   

International net sales decreased in the three months ended June 30, 2012 as sales remained relatively flat and were negatively impacted by unfavorable foreign exchange. International net sales decreased in the six months ended June 30, 2012 as increased demand was more than offset by unfavorable foreign exchange.

Baraclude—an oral antiviral agent for the treatment of chronic hepatitis B

 

   

Worldwide net sales increased primarily due to continued strong demand in international markets.

 

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Erbitux*—a monoclonal antibody designed to exclusively target and block the Epidermal Growth Factor Receptor, which is expressed on the surface of certain cancer cells in multiple tumor types as well as normal cells and is currently indicated for use against colorectal cancer and head and neck cancer. Erbitux* is part of our strategic alliance with Lilly.

 

   

Sold by us almost exclusively in the U.S., net sales increased primarily due to higher demand, including demand from the approval of Erbitux* for the first-line treatment of recurrent locally or regionally advanced metastatic squamous cell carcinoma of the head and neck.

Sprycel—an oral inhibitor of multiple tyrosine kinases, for 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 mesylate) and first-line treatment of adults. Sprycel is part of our strategic alliance with Otsuka.

 

   

U.S. net sales increased due to higher demand and higher average net selling prices. Estimated total U.S. demand increased 37% and 41% for the three and six months ended June 30, 2012, respectively.

 

   

International net sales increased due to higher demand partially offset by unfavorable foreign exchange.

Yervoy—a monoclonal antibody for the treatment of patients with unresectable (inoperable) or metastatic melanoma

 

   

Yervoy was launched in the U.S. in the second quarter of 2011 and continues to be launched in a number of international countries since the second quarter of 2011.

Orencia—a fusion protein indicated for adult patients with moderate to severe rheumatoid arthritis who have had an inadequate response to one or more currently available treatments, such as methotrexate or anti-tumor necrosis factor therapy

 

   

U.S. net sales increased due to demand for the subcutaneous formulation of Orencia launched in the fourth quarter of 2011.

 

   

International net sales increased primarily due to increases in demand partially offset by unfavorable foreign exchange.

Nulojix—a fusion protein with novel immunosuppressive activity targeted at prevention of kidney transplant rejection

 

   

Nulojix was approved and launched in the U.S. and the EU during 2011.

Onglyza/Kombiglyze—a once-daily oral tablet for the treatment of type 2 diabetes that is part of our strategic alliance with AstraZeneca

 

   

U.S. net sales increased primarily due to higher overall demand.

 

   

International net sales increased primarily due to higher overall demand partially offset by unfavorable foreign exchange.

Mature Products and All Other—includes all other products, including those which have lost exclusivity in major markets, over-the-counter brands and royalty-related revenue

 

   

U.S. net sales decreased as the continued generic erosion of certain products was partially offset by higher average net selling prices.

 

   

International net sales decreased due to continued generic erosion of certain brands and unfavorable foreign exchange.

The estimated U.S. prescription change data provided throughout this report includes information only from the retail and mail order channels and does not reflect product demand within other channels such as hospitals, home health care, clinics, federal facilities including Veterans Administration hospitals, and long-term care, among others. The data is provided by Wolters Kluwer Health, except for Sprycel and Orencia subcutaneous formulation, and is based on the Source Prescription Audit. As of December 31, 2011, Sprycel and Orencia subcutaneous formulation demand is based upon information from the Next-Generation Prescription Service version 2.0 of the National Prescription Audit provided by IMS Health (IMS). The data is a product of each respective service providers’ own recordkeeping and projection processes and therefore subject to the inherent limitations of estimates based on sampling and may include a margin of error.

Prior to December 31, 2011, Sprycel demand was calculated based upon data obtained from the IMS National Sales Perspectives Audit. Since management believes information from the IMS National Prescription Audit more accurately reflects subscriber demands trends versus pill data from the IMS National Sales Perspectives Audit, all prior year Sprycel data has been restated to reflect information from the IMS National Prescription Audit.

We continuously seek to improve the quality of our estimates of prescription change amounts and ultimate patient/consumer demand by reviewing the calculation methodologies employed and analyzing internal and third-party data. We expect to continue to review and refine our methodologies and processes for calculation of these estimates and will monitor the quality of our own and third-party data used in such calculations.

 

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We calculated the estimated total U.S. prescription change on a weighted-average basis to reflect that mail order prescriptions include a greater volume of product supplied, compared to retail prescriptions. Mail order prescriptions typically reflect a 90-day prescription whereas retail prescriptions typically reflect a 30-day prescription. The calculation is derived by multiplying mail order prescription data by a factor of approximately three and adding to this the retail prescriptions. We believe that a calculation of estimated total U.S. prescription change based on this weighted-average approach provides a superior estimate of total prescription demand in retail and mail order channels. We use this methodology for our internal demand reporting.

Estimated End-User Demand

The following table sets forth each of our key products sold by the U.S. for the three and six months ended June 30, 2012 compared to the same period in the prior year: (i) change in reported U.S. net sales for each period; (ii) estimated total U.S. prescription change for the retail and mail order channels calculated by us based on third-party data on a weighted-average basis and (iii) months of inventory on hand in the wholesale distribution channel.

 

     Three Months Ended June 30,      Six Months Ended June 30,      At June 30,  
     % Change in U.S.
Net Sales
     % Change in U.S.
Total Prescriptions
     % Change in U.S.
Net Sales
     % Change in U.S.
Total Prescriptions
     Months on Hand  
Dollars in Millions    2012      2011      2012      2011      2012      2011      2012      2011      2012      2011  

Plavix*

     (60)%         17%         (45)%         (4)%         (31)%         12%         (26)%         (4)%         2.2        0.4  

Avapro*/Avalide*

     (85)%         (22)%         (82)%         (40)%         (59)%         (18)%         (55)%         (36)%         1.0        0.5  

Abilify*

     3%         5%                 6%         (1)%         2%         2%         5%         0.4        0.4  

Reyataz

     4%         2%         (4)%         2%         4%                 (2)%         2%         0.4        0.5  

Sustiva Franchise(a)

     12%         7%         (2)%         8%         14%         4%                 8%         0.4        0.5  

Baraclude

     16%         21%         10%         8%         15%         18%         11%         10%         0.4        0.5  

Erbitux*(b)

     4%         (1)%         N/A         N/A         5%         (1)%         N/A         N/A         0.5        0.5  

Sprycel

     32%         62%         37%         23%         42%         61%         41%         22%         0.6        0.6  

Yervoy(b)(d)

     27%         N/A         N/A         N/A         **         N/A         N/A         N/A         0.5        0.3  

Orencia(c)

     30%         11%         N/A         N/A         26%         10%         N/A         N/A         0.4        0.4  

Nulojix(b)(d)

             N/A         N/A         N/A         50%         N/A         N/A