BMS Swings to a US$134 mil. loss in Q4 2006 on Generic Challenges, Charges

Q4 2006: A Torrid End to a Difficult Year

Bristol-Myers Squibb (BMS) pulled few surprises in its fourth quarter and full year 2006 financial results, which were released yesterday as the company's much publicised exposure to generic challenges dragged significantly on its top line. BMS's earnings for the fourth quarter did slightly beat Wall Street forecasts, but this was mainly because it recorded a large tax credit for the quarter rather than spreading it out over the year.

BMS posted fourth quarter worldwide net sales of US$4.2 billion, a 16% year-on-year decrease from the comparable 2005 quarter. One of the main drivers of this loss was the impact of the at-risk launch of generic Plavix (clopidogrel), following the disastrous collapse of a settlement agreement between BMS, its partner for the drug, France's Sanofi-Aventis, and the Canadian generic drug-maker Apotex. Another major factor was the loss of patent exclusivity on the cholesterol buster Pravachol (pravastatin) in major markets.

These weak top-line figures compounded a poor earnings performance from BMS. This was also driven by the company recording a US$353 million charge for increasing its litigation reserves towards a proposed US$499 million settlement, following a federal probe into its pricing and sales practises, as well as US$220 million in early debt retirement costs. As a result, BMS posted a net loss for the last quarter of the year of US$134 million, compared to a net income of US$499 million in the comparable 2005 period.

BMS's Generic-Hit Portfolio

BMS's core pharmaceuticals business felt the full force of patent expirations and generic challenges in the fourth quarter and full year 2006. Notable sufferers among BMS's franchise were of course Plavix, and also the company's one time block-buster Pravachol, which began to experience the full impact of generic challenges in major markets. Worryingly, only a handful of positives could be drawn from BMS's more mature products. Included in this select group were the anti-psychotic Abilify (aripiprazole), HIV/AIDS treatments Reyataz (atanazavir) and Sustiva (efavirenz), and the cancer drug Erbitux (cetuximab).

As a result, BMS continues to look towards the future for significant revenue growth, The company believes this will come both from its burgeoning pipeline and from its newer products. BMS posted promising sales of Baraclude (entecavir), Orencia (abatacept) and Sprycel (dasatinib) of US$36 million, US$32 million and US$14 million in the fourth quarter respectively. These are all products that are new to the market.

Outlook and Implications

Looking to the Future

BMS has had sufficient time to reconcile itself with the problems of generic challenges to its portfolio, and although the Plavix debacle has proven yet another setback for the New York drug-maker, it continues to try to look towards a positive future. In a press release, BMS's interim CEO Jim Cornelius said that the company "remains focused on executing [its] strategy and building shareholder value" and that he expects to see a "return to sales and earnings growth beginning this year".

The main foundation of this hope of course is the future of BMS's Plavix sales. On a positive note, the 53% drop in sales that the drug experienced in the last quarter of 2006 is a significant improvement from the more-than 70% of sales that the company was losing to generic competition in earlier quarters. This improvement comes as stocks of generic Plavix in distribution channels begin to be depleted. Despite this, BMS noted that it is still unable to fully determine the impact that Apotex's generic Plavix will ultimately have on its business, as this is dependent on a number of factors. These include the extent to which the launch of Apotex's generic will affect the pricing for Plavix, the outcome of patent litigation with Apotex over Plavix, and the timing of any renewed generic competition to the product either from Apotex or from other generic manufacturers.

However, even if Plavix sales stabilise and return to growth in the medium-term, BMS believes that its new products and pipeline should soon begin to recharge its revenues. The futures of recently-launched Baraclude, Orencia and Sprycel are particularly crucial to this hope. Another potential growth driver is the promising virology franchise. BMS recorded that total sales of its non-nucleoside reverse transcriptase inhibitor, Sustiva (efavirenz) which is for treating HIV/AIDS, increased in the fourth quarter of 2006 by 31% y/y compared to the same 2005 quarter. Sales of this product hit US$222 million in the fourth quarter 2006, and should continue to grow strongly throughout 2007, due to sales of bulk efavirenz to Gilead for use in the promising new combination therapy Atripla (efavirenz/emtricabine/tenofovir).

Guidance for 2007

BMS estimates that reductions in net sales for its products that have lost exclusivity in previous years will begin to moderate in 2007, settling in the range between US$900 million and US$1.0 billion. This represents a significant improvement over the US$1.4 billion and US$1.3 billion in revenue losses that the company recorded due to generic competition in 2005 and 2004 respectively. As a result, BMS does expect to see earnings growth in 2007, assuming the absence of renewed or additional generic competition. BMS reported yesterday that it forecasts earnings guidance for fully-diluted earnings-per-share to be in the range US$1.12 and US$1.22.

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