Bristol-Myers Squibb Company(which may be referred to as Bristol-Myers Squibb, BMS, the Company, we, our or us) is a global specialty care 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. The comparability of total revenues and earnings to the prior year periods was impacted by the reduction in our share of Abilify* (aripiprazole) revenues from 51.5% in 2012 to 34.0% in 2013, the acquisition of Amylin and expanded diabetes alliance arrangement with AstraZeneca in 2012, the loss of exclusivity of Plavix* in 2012, and a $1.8 billionintangible asset impairment charge in 2012. As we transitioned away from Plavix* and Avapro*/Avalide*, we continued to grow our key brands. We also shifted our strategic focus in early-stage research and development and advanced our immuno-oncology portfolio, our hepatitis C portfolio and the rest of our late-stage pipeline. In February 2014, BMS sold to AstraZeneca the diabetes business of BMS which comprised our global alliance with them, including all rights and ownership to Onglyza (saxagliptin), Forxiga (dapagliflozin), Bydureon* (exenatide extended-release for injectable suspension), Byetta* (exenatide), Symlin* (pramlintide acetate) and metreleptin. AstraZeneca paid $2.7 billionto BMS at closing, a $600 millionmilestone in February 2014for the approval of Farxiga (dapagliflozin) in the U.S., and will make contingent regulatory and sales-based milestone payments of up to $800 millionand royalty payments based on net sales through 2025. See "Item 8. Financial Statements-Note 5. Assets Held-For-Sale" for further discussion.
The following table summarizes our financial information:
Year Ended December 31, Dollars in Millions, except per share data 2013 2012 2011 Total Revenues
$ 16,385 $ 17,621 $ 21,244Total Expenses 13,494 15,281 14,263 Earnings before Income Taxes 2,891 2,340 6,981 Provision for/(Benefit from) Income Taxes 311 (161 )
Effective tax/(benefit) rate 10.8 % (6.9 )%
Net Earnings Attributable to BMS GAAP 2,563 1,960 3,709 Non-GAAP 3,019 3,364 3,921 Diluted Earnings Per Share GAAP 1.54 1.16 2.16 Non-GAAP 1.82 1.99 2.28
Our non-GAAP financial measures, including non-GAAP earnings and related EPS information, are adjusted to exclude specified items which represent certain costs, expenses, gains and losses and other items impacting the comparability of financial results. For a detailed listing of all specified items and further information and reconciliations of non-GAAP financial measures see "-Non-GAAP Financial Measures" below. Business Environment The pharmaceutical/biotechnology industry is highly competitive and subject to numerous government regulations. Many competitive factors may significantly affect revenues of our products, including product efficacy, safety, price, demand, competition and cost-effectiveness; marketing effectiveness; market access; product labeling; quality control and quality assurance of our manufacturing operations; and research and development of new products. To successfully compete in the healthcare industry, we must demonstrate that our products offer medical benefits and cost advantages. Our new product introductions often compete with other products already on 35 -------------------------------------------------------------------------------- the market in the same therapeutic category, in addition to potential competition of new products that competitors may introduce in the future. We manufacture branded products, which are priced higher than generic products. Generic competition is one of our key challenges. In the pharmaceutical/biotechnology industry, the majority of an innovative product's commercial value is usually realized during its market exclusivity period. Afterwards, it is no longer protected by a patent and is subject to new competing products in the form of generic brands. Upon exclusivity loss, we can experience a significant reduction of that product's sales in a short period of time. Competitors seeking approval of biological products under a full Biologics License Application (BLA) must file their own safety and efficacy data and address the challenges of biologics manufacturing, involving more complex processes and costs than those of other pharmaceutical operations. Under the U.S. healthcare legislation enacted in 2010, there is an abbreviated path for regulatory approval of biosimilar versions of biological products. This path for approval of biosimilar products under the U.S. healthcare legislation significantly affects the regulatory data exclusivity for biological products. The legislation provides a regulatory mechanism allowing for regulatory approval of biologic drugs similar to (but not necessarily generic copies of) innovative drugs on the basis of less extensive data than required by a full BLA. It is not possible at this time to reasonably assess the impact of the U.S. biosimilar legislation on the Company. Globally, the healthcare industry is subject to various government-imposed regulations authorizing prices or price controls that will continue to impact our total revenues. In
March 2010, the U.S. government enacted healthcare reform legislation, signing into law the Patient Protection and Affordable Care Act (HR 3590) and a reconciliation bill containing a package of changes to the healthcare bill. We will continue to experience additional financial costs and certain other changes to our business as healthcare law provisions become effective. The aggregate financial impact of U.S. healthcare reform over the next few years depends on a number of factors, including but not limited to pending implementation guidance, potential changes in sales volume eligible for the new rebates, discounts or fees, and the expected increase in the number of people with healthcare coverage from the Patient Protection and Affordable Care Act. In many regions outside the U.S., we operate in environments of government-mandated, cost-containment programs, or under other regulatory bodies or groups exerting downward pressure on pricing. For example, pricing freedom is limited in the United Kingdom( UK) by the operation of a profit control plan and in Germanyby the operation of a reference price system. Many European countries have continuing fiscal challenges as healthcare payers, including government agencies, have reduced and are expected to continue to reduce the cost of healthcare through actions that directly or indirectly impose additional price restrictions. Companies also face significant delays in market access for new products as more than two years can elapse after drug approval before new medicines are available in some countries. The growth of Managed Care Organizations (MCOs) in the U.S. significantly impacted competition in the healthcare industry. MCOs seek to reduce healthcare expenditures for participants through volume purchases and long-term contractual discounts with various pharmaceutical providers. Because of the market potential created by the large pool of participants, marketing prescription drugs to MCOs is an important part of our strategy. Companies compete for inclusion in MCO formularies and we generally are successful in having our key products included. We believe that developments in the managed care industry, including on going consolidation, continue to have a downward pressure on prices. Pharmaceutical and biotechnology production processes are complex, highly regulated and vary widely by product. Shifting or adding manufacturing capacity is usually a lengthy process requiring significant capital expenditures and regulatory approvals. Biologics manufacturing involves more complex processes than those of traditional pharmaceutical operations. As biologics become a larger percentage of our product portfolio, we will continue to maintain supply arrangements with third-party manufacturers and incur substantial investments to increase our internal capacity to produce biologics on a commercial scale. The United States Food and Drug Administration(FDA) approved our large scale multi-product bulk biologics manufacturing facility in Devens, Massachusettsin May 2012and we continue to make capital investments in the facility.
We maintain a competitive position in the market and strive to uphold this position, depending on our success in discovering, developing and delivering innovative, cost-effective products to help patients prevail over serious diseases.
We are the subject of a number of significant pending lawsuits, claims, proceedings and investigations. It is not possible at this time to reasonably assess the final outcomes of these investigations or litigations. For additional discussion of legal matters, see "Item 8. Financial Statements-Note 22. Legal Proceedings and Contingencies."
Since 2007, we have been transforming BMS into a leading-edge biopharma company focused exclusively on discovering, developing, and delivering innovative medicines that address serious unmet medical needs. We continue to evolve driven by this fundamental objective as we grow our marketed products and progress our pipeline. 36
-------------------------------------------------------------------------------- We are focused on four core therapeutic areas: oncology, virology, immunology, and specialty cardiovascular disease. Within oncology, we are pioneering innovative medicines in the area of immuno-oncology which unlock the body's own immune system to battle cancer. Yervoy (ipilimumab), our first immuno-oncology agent, was introduced in 2011 for the treatment of metastatic melanoma and we continue to invest significantly in our deep pipeline of innovative medicines in this area covering a broad array of cancers. We are evolving our commercial model and growing our marketed product portfolio in a manner consistent with our overall strategy. In oncology, we are building on the success of Yervoy, which yielded 2013 revenues of nearly
$1 billion, and other products such as Sprycel (dasatinib) and Erbitux* (cetuximab). Beyond oncology, we continue to support key brands in our virology franchise such as Reyataz (atazanavir sulfate) and Baraclude (entecavir) (together accounting for approximately $3 billionin revenues in 2013), in addition to investing in Orencia (abatacept), the key brand in our immunology portfolio, which accounted for approximately $1.4 billionin revenues in 2013. Additionally, we are strongly committed to Eliquis (apixaban), a novel oral anti-coagulant, which launched globally in 2013. In February 2014, we divested our diabetes portfolio which allows us to further accelerate the evolution of our business model into a leading specialty care biopharma company. This transaction also allows us to focus our resources behind our growth opportunities that drive the greatest long-term value.
Looking ahead, we will continue to implement our biopharma strategy by driving the growth of key brands, executing new product launches, investing in our pipeline, maintaining a culture of continuous improvement, and pursuing disciplined capital allocation, including through business development.
Product and Pipeline Developments We manage our research and development (R&D) programs on a portfolio basis, investing resources in each stage of research and development 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 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 30-45% 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: Hepatitis C Portfolio - (Daclatasvir - a NS5A replication complex inhibitor in development; Asunaprevir - a NS3 protease inhibitor in development; BMS-791325 - a NS5B non-nucleoside polymerase inhibitor in development)
(EMA) has validated the marketing authorization application (MAA) for the use
of daclatasvir for the treatment of adults with chronic hepatitis C with
compensated liver disease, including genotype 1, 2, 3 and 4. The application
seeks the approval of daclatasvir for use in combination with other agents,
including sofosbuvir, for the treatment of chronic hepatitis C. The EMA's
validation marks the start of an accelerated regulatory review process.
Application (NDA) to
submission was based on results from a Phase III study demonstrating that the
24-week, all-oral regimen of daclatasvir and asunaprevir achieved an overall
sustained virologic response 24 weeks after the end of treatment of 84.7% in
Japanese patients with chronic hepatitis genotype 1b who were either
interferon ineligible/intolerant or non-responders (null and partial) to
24-week triple direct-acting antiviral treatment regimens of daclatasvir,
asunaprevir, and BMS-791325 showed high rates of sustained virologic response
of up to 94% in treatment-naÏve, genotype 1 chronic hepatitis C patients, at
time points ranging from 4 to 36 weeks post-treatment. The
this triple-DAA regimen as a Breakthrough Therapy for the treatment of chronic hepatitis C.
Baraclude (entecavir) - an oral antiviral agent for the treatment of chronic hepatitis B
additional six month period of exclusivity to market Baraclude. 37
invalidated the composition of matter patent covering Baraclude, which was
scheduled to expire in 2015. See "Item 8. Financial Statements-Note 22. Legal
Proceedings and Contingencies" for further discussion. The Company is
prepared to take legal action in the event that Teva Pharmaceutical
resolution of the Company's appeal.
Sustiva (efavirenz) - a non-nucleoside reverse transcriptase inhibitor for the treatment of Human Immunodeficiency Virus (HIV)
additional six-month period of exclusivity to market Sustiva. Exclusivity for
Sustiva in the U.S. is now scheduled to expire in
Nivolumab - a fully human monoclonal antibody that binds to the programmed death receptor-1 (PD-1) on T and NKT cells that is being investigated as an anti-cancer treatment.
lung cancer cohort (n=129) of the expanded Phase I dose-ranging study (003)
of nivolumab. Results showed sustained activity in heavily pre-treated
patients with non-small-cell lung cancer as defined by one- and two-year
survival rates of 42% and 24%, respectively, across dose cohorts.
dose-ranging Phase I trial evaluating the safety and anti-tumor activity of
nivolumab combined either concurrently or sequentially with Yervoy in
patients with advanced melanoma. In patients who received the dose used in
the Phase III trial (1 mg/kg nivolumab + 3 mg/kg Yervoy) in the concurrent
regimen, 53% had confirmed objective responses by modified
Organization criteria. In all nine of the responders, tumors shrank by at
least 80% by the time of the first scheduled clinical treatment assessment
(12 weeks), including three complete responses.
Sprycel (dasatanib) - an oral inhibitor of multiple tyrosine kinases indicated for the first-line treatment of adults with
Philadelphiachromosome-positive chronic myeloid leukemia in chronic phase and the treatment of adults with chronic, accelerated, or myeloid or lymphoid blast phase chronic myeloid leukemia with resistance or intolerance to prior therapy, including Gleevec* (imatinib meslylate). Sprycel is part of our strategic alliance with Otsuka.
Otsuka announced four-year follow-up data from the Phase III DASISION study
of Sprycel 100 mg once daily vs. Gleevec* (400 mg daily) in the first-line
treatment of adults with
chronic myeloid leukemia. At four years, 76% of Sprycel patients vs. 63% of
Gleevec* patients achieved a major molecular response Additionally, 84% of
Sprycel patients vs. 64% of Gleevec* patients achieved BCR-ABL ?10% at three
months, which is considered an optimal molecular response as defined by
treatment guidelines (2013 European LeukemiaNet guidelines). Patients in both
arms who achieved this response at three months had improved overall survival
and progression-free survival at four years versus those who did not. At four
years, 67% of Sprycel patients (n=172) and 65% of Gleevec* patients (n=168)
remained on treatment.
Yervoy (ipilimumab) - a monoclonal antibody for the treatment of patients with unresectable (inoperable) or metastatic melanoma
(chemotherapy naÏve) advanced melanoma patients.
from a pooled analysis of survival data for 12 studies in patients with
metastatic or locally advanced or unresectable melanoma who were treated with
Yervoy at different doses and regimens, including the investigational dose of
10 mg/kg and some patients who were followed for up to 10 years. The analysis
found that a plateau in the survival curve begins at three years, with some
patients followed for up to ten years. At three years, 22% of patients were
randomized, double-blind clinical trial (Study 043) comparing Yervoy to
placebo following radiation in patients with advanced metastatic
castration-resistant prostate cancer who have received prior treatment with
docetaxel. The study's primary endpoint of overall survival did not reach
statistical significance. However, antitumor activity was observed across
some efficacy endpoints, including progression free-survival.
Elotuzumab - a humanized monoclonal antibody being investigated as an anticancer treatment. Elotuzumab is part of our strategic alliance with AbbVie Inc. (AbbVie).
data from a small, randomized Phase II, open-label study in patients with
previously-treated multiple myeloma that evaluated two doses of elotuzumab in
combination with lenalidomide and low-dose dexamethasone. In the 10 mg/kg
arm, which is the dose used in the ongoing Phase III trials, median
progression-free survival (PFS), or the time without disease progression, was
33 months after a median follow-up of 20.8 months 38
-------------------------------------------------------------------------------- and the objective response rate (ORR) was 92%. As previously reported, median PFS was 18 months in the 20 mg/kg arm after a median follow-up of 17.1 months and ORR was 76%.
Abilify* (aripiprazole) - an antipsychotic agent for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder and is part of our strategic alliance with Otsuka
treatment of pediatric bipolar mania.
Metreleptin - a protein in development for the treatment of lipodystrophy that was part of our strategic alliance with AstraZeneca and included in our sale of the diabetes business to them
filing and granted a Priority Review designation for the BLA. In
require a three-month extension to complete its review of the data supporting
the BLA. In
metreleptin for the treatment of pediatric and adult patients with
generalized lipodystrophy (LD). EMDAC did not recommend metreleptin in
patients with partial LD for the indication currently proposed. The Company
and AstraZeneca remain committed to pursuing metreleptin for treatment in
patients with metabolic disorders associated with partial LD. The Companies
acknowledged the EMDAC's feedback and will continue to work with the
identify the appropriate patients with partial LD who may benefit from
metreleptin. The Prescription Drug User Free Act (PDUFA) date, the date by
which a decision by the
Farxiga/Xigduo (dapagliflozin and metformin hydrochloride) - an oral sodium-glucose cotransporter (SGLT2) inhibitor for the treatment of diabetes that was part of our strategic alliance with AstraZeneca and included in our sale of the diabetes business to them
granted marketing authorization by the
of type 2 diabetes in the EU.
Farxiga to improve glycemic control, along with diet and exercise, in adults
with type 2 diabetes.
Study of Diabetes (EASD), the Company and AstraZeneca announced results from
a Phase III study evaluating dapagliflozin in adult patients with type 2
diabetes who were inadequately controlled on combination treatment with
metformin plus sulfonylurea. Patients treated with dapagliflozin as an add on
therapy to metformin plus sulfonylurea demonstrated significant improvements
in glycosylated hemoglobin levels (HbA1c) and, among key secondary endpoints,
significant reductions in fasting plasma glucose and body weight compared to
placebo at 24 weeks. Significant improvements were also observed in seated
systolic blood pressure at eight weeks in patients treated with dapagliflozin
compared to placebo.
Phase IIa pilot study evaluating Farxiga added to insulin in 70 adult
patients with sub-optimally controlled type 1 diabetes, which showed that the
mean of daily blood glucose derived from 7-point glucose measurements trended
downward in all treatment groups through day seven and reductions in total
daily insulin dosing at day seven were observed with Farxiga.
accepted for review the regulatory submission for Farxiga for the treatment
of type 2 diabetes.
review the regulatory submission for Farxiga for the treatment of type 2 diabetes. Onglyza (saxagliptin) - a once-daily oral tablet for the treatment of type 2 diabetes that is part of our strategic alliance with AstraZeneca and included in our sale of the diabetes business to them
to investigate a possible association between use of Onglyza/Kombiglyze and
heart failure. The
evaluation that the
FDAis conducting of all type 2 diabetes drug therapies and cardiovascular risk. 39
AstraZeneca announced the full results of the SAVOR clinical trial in adult
patients with type 2 diabetes. In this study, Onglyza met the primary safety
objective, demonstrating no increased risk for the primary composite endpoint
of cardiovascular death, non-fatal myocardial infarction or non-fatal
ischemic stroke, when added to a patient's current standard of care (with or
without other anti-diabetic therapies), as compared to placebo. Onglyza did
not meet the primary efficacy endpoint of superiority to placebo for the same
composite endpoint. Patients treated with Onglyza experienced improved
glycemic control and reduced development and progression of microalbuminuria
over two years as assessed in exploratory analyses. At a subsequent meeting
(the Annual Meeting of the EASD) additional subanalyses from SAVOR were
presented. These subanalyses found no increased rate of hypoglycemia among
patients treated with Onglyza compared to placebo when added to metformin
monotherapy, at baseline. These subanalyses also found higher rates of
hypoglycemia only in the Onglyza group compared to the placebo group among
patients taking sulfonylureas, agents known to cause hypoglycemia, at
baseline. In addition, the subanalyses found that rates of
adjudication-confirmed pancreatitis were balanced between the Onglyza and
placebo treatment groups. Observed rates of pancreatic cancer were also low
(5 patients in the Onglyza arm versus 12 patients in the placebo arm).
Orencia (abatacept) - 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.
formulation of Orencia for the treatment of rheumatoid arthritis in cases
where existing treatments are inadequate.
which compared the subcutaneous formulation of Orencia versus Humira*
(adalimumab), each on a background of methotrexate in biologic naÏve patients
with moderate to severe rheumatoid arthritis. AMPLE met its primary endpoint
as measured by non-inferiority of
American College of Rheumatology20% improvement at year one. The Orencia regimen achieved comparable rates of efficacy versus the Humira* regimen (64.8% vs 63.4%, respectively).
Eliquis - an oral Factor Xa inhibitor, targeted at stroke prevention in nonvalvular atrial fibrillation (NVAF) and the prevention and treatment of venous thromboembolic (VTE) disorders. Eliquis is part of our strategic alliance with Pfizer.
for review a Supplemental New Drug Application for Eliquis for treatment of
deep vein thrombosis (DVT) and pulmonary embolism (PE), and for the reduction
in the risk of recurrent DVT and PE. The PDUFA date is
application for Eliquis for the treatment of DVT and PE, and prevention of
recurrent DVT and PE.
Company and Pfizer announced the results of a posthoc subanalysis from the
Phase III ARISTOTLE trial, which evaluated Eliquis compared to warfarin in
patients with or without other types of valvular heart disease (VHD) who were
eligible for enrollment in the ARISTOTLE trial, including mitral
regurgitation, mitral stenosis, aortic regurgitation, aortic stenosis,
tricuspid regurgitation, or valve surgery. The results of this subanalysis
were consistent with the results of the overall ARISTOTLE trial and
demonstrated that Eliquis compared with warfarin reduced stroke or systemic
embolism, caused fewer major bleeding events, and reduced all-cause mortality
in NVAF patients with or without VHD.
post-hoc subanalysis from the Phase III ARISTOTLE trial which showed
comparable rates of clinical events versus the warfarin treatment arm in a
30-day period following a procedure which required the temporary
discontinuation of an anticoagulant prior to and following the procedure.
review a Supplemental New Drug Application for Eliquis, for the prophylaxis
of deep vein thrombosis, which may lead to pulmonary embolism, in adult
patients who have undergone hip or knee replacement surgery. The PDUFA date
III AMPLIFY trial, which evaluated Eliquis versus the current standard of
care for the treatment of acute venous thromboembolism, were published online
showed that Eliquis demonstrated comparable efficacy and significantly lower
rates of major bleeding in patients compared to the current standard of care.
subanalysis of the ARISTOTLE trial were published in Circulation, the
peer-reviewed journal of the
the subgroup analysis were consistent with the overall study results that had
demonstrated Eliquis' superiority versus warfarin in the reduction of stroke
or systemic embolism and the number of major bleeding events and mortality in
patients with NVAF.
• Eliquis received regulatory approval for the reduction of the risk of stroke
and systemic embolism in patients with NVAF in
• Eliquis received regulatory approval for the prevention of venous
thromboembolic events in adult patients who have undergone elective hip or
knee replacement surgery in
RESULTS OF OPERATIONS Total Revenues The composition of the changes in revenues was as follows: Year Ended December 31, 2013 vs. 2012 2012 vs. 2011 Total Revenues Analysis of % Change Analysis of % Change Total Foreign Total Foreign Dollars in Millions 2013 2012 2011 Change Volume Price Exchange Change Volume Price Exchange United States
$ 8,318 $ 10,384 $ 14,039(20 )% (19 )% (1 )% - (26 )% (30 )% 4 % - Europe 3,930 3,706 3,879 6 % 7 % (3 )% 2 % (4 )% 6 % (3 )% (7 )% Rest of the World 3,295 3,204 3,237 3 % 11 % (2 )% (6 )% (1 )% 2 % (1 )% (2 )% Other(a) 842 327 89 ** N/A N/A - ** N/A N/A - Total $ 16,385 $ 17,621 $ 21,244(7 )% (5 )% (1 )% (1 )% (17 )% (17 )% 2 % (2 )%
(a) Other total revenues include royalties and other alliance-related revenues
for products not sold by our regional commercial organizations.
** Change in excess of 100%.
No single country outside the U.S. contributed more than 10% of total revenues in any period presented. In general, our business is not seasonal.
The change in U.S. revenues in both periods attributed to volume reflects the exclusivity loss of Plavix* in
May 2012and Avapro*/Avalide* in March 2012, partially offset by increased demand for most key products and Amylin-related product revenues following the completion of our acquisition in August 2012. The change in U.S. revenues in 2013 attributed to price was a result of the reduction in our share of Abilify* (aripiprazole) revenues from 51.5% in 2012 to 34.0% in 2013 (8% impact) partially offset by higher average net selling prices of Abilify* and other key products. The change in U.S. revenues in 2012 attributed to price was a result of higher average net selling prices of Abilify* and other key products partially offset by the reduction in our share of Abilify* revenues from 53.5% to 51.5% in 2012. See "-Key Products" for further discussion of total revenues by key product. Revenues in Europeincreased in 2013 due to volume growth for most key products, Amylin-related product revenues following the transition of non-U.S. operations in the the second quarter of 2013 and favorable foreign exchange partially offset by the restructured Sanofi agreement. See "Item 8. Financial Statements-Note 3. Alliances" for further discussion. Revenues decreased in 2012 primarily due to unfavorable foreign exchange and lower revenues of certain mature brands from divestitures and generic competition as well as generic competition for Plavix* and Avapro*/Avalide* partially offset by volume growth for most key products. Revenues in both periods continued to be negatively impacted by 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, and other restrictive measures. Revenues in the Rest of the World increased in 2013 due to volume growth for most key products partially offset by the restructured Sanofi agreement, unfavorable foreign exchange (particularly in Japan), and generic competition for mature brands. Revenues in the Rest of the World decreased in 2012 due to generic competition for Plavix* and Avapro*/Avalide* and lower revenues of mature brands from generic competition and divestitures partially offset by volume growth for most key products.
Other revenues increased in 2013 due to higher royalties resulting from the restructured Sanofi agreement and alliance and other revenue attributed to mature brands and over-the-counter products alliances. Other revenues increased in 2012 due to enhanced royalty-related
41 -------------------------------------------------------------------------------- revenues and higher revenues attributed to active pharmaceutical ingredient supply agreements resulting from divestitures of manufacturing facilities and restructured alliance agreements. These revenues are expected to decline in 2015 and 2016 upon the expiration of certain royalty and alliance agreements. See "Item 8. Financial Statements-Note 3. Alliances" for further discussion of the alliances. In
February 2014, BMS sold to AstraZeneca the diabetes business of BMS which comprised our global alliance with them, including all rights and ownership to Onglyza, Forxiga, Bydureon*, Byetta*, Symlin* and metreleptin. Total revenues of these products were $1.7 billionin 2013. See "Item 8. Financial Statements-Note 5. Assets Held-For-Sale" for further discussion. We recognize revenue net of gross-to-net adjustments that are further described in "-Critical Accounting Policies". Our share of certain Abilify* and Atripla* revenues is reflected net of all gross-to-net adjustments in alliance and other revenues. Although not presented as a gross-to-net adjustment in the below tables, our share of Abilify* and Atripla* gross-to-net adjustments were approximately $1.1 billionin 2013, $1.5 billionin 2012 and $1.3 billionin 2011. Changes in these gross-to-net adjustments were impacted by additional rebates and discounts required under U.S. healthcare reform and a reduction in our share of Abilify* revenues.
The activities and ending reserve balances for each significant category of gross-to-net adjustments were as follows:
Healthcare Charge-Backs Rebates and Related to Other Government Cash Contract Medicaid Sales Other Dollars in Millions Programs Discounts Discounts Rebates Returns Adjustments Total Balance at January 1, 2012
$ 51 $ 28 $ 417 $ 411 $ 161 $ 181 $ 1,249Provision related to sale made in: Current period 651 191 351 423 256 451 2,323 Prior period - 1 (67 ) (37 ) (8 ) (17 ) (128 ) Returns and payments (663 ) (208 ) (561 ) (459 ) (88 ) (435 ) (2,414 ) Amylin acquisition 2 1 34 13 23 3 76 Impact of foreign currency translation - - 1 - 1 - 2 Balance at December 31, 2012 $ 41 $ 13 $ 175 $ 351 $ 345 $ 183 $ 1,108Provision related to sale made in: Current period 563 154 504 360 114 540 2,235 Prior period - - (5 ) (85 ) (52 ) (6 ) (148 ) Returns and payments (565 ) (153 )
(477 ) (388 ) (107 ) (479 ) (2,169 ) Assets/related liabilities held-for-sale
(2 ) (2 ) (48 ) (11 ) (20 ) (1 ) (84 ) Impact of foreign currency translation - - (2 ) - (1 ) (1 ) (4 )
The reconciliation of gross product sales to net product sales by each significant category of gross-to-net adjustments was as follows:
Year Ended December 31, % Change Dollars in Millions 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Gross product sales
$ 14,391 $ 15,849 $ 20,385(9 )% (22 )% Gross-to-Net Adjustments Charge-Backs Related to Government Programs (563 ) (651 ) (767 ) (14 )% (15 )% Cash Discounts (154 ) (192 ) (282 ) (20 )% (32 )% Managed Healthcare Rebates and Other Contract Discounts (499 ) (284 ) (752 ) 76 % (62 )% Medicaid Rebates (275 ) (386 ) (536 ) (29 )% (28 )% Sales Returns (62 ) (248 ) (76 ) (75 )% ** Other Adjustments (534 ) (434 ) (350 ) 23 % 24 % Total Gross-to-Net Adjustments (2,087 ) (2,195 ) (2,763 ) (5 )% (21 )% Net product sales $ 12,304 $ 13,654 $ 17,622(10 )% (23 )% ** Change in excess of 100% 42 -------------------------------------------------------------------------------- Gross-to-net adjustment rates are primarily a function of changes in revenues mix and contractual and legislative discounts and rebates. Gross-to-net adjustments decreased in 2013 and 2012 due to: • Chargebacks related to government programs, cash discounts and Medicaid
rebates decreased in both periods as a result of lower Plavix* revenues
following its loss of exclusivity.
• Managed healthcare rebates and other contract discounts in 2013 increased
primarily due to Amylin-related net product sales. Managed healthcare
rebates and other contract discounts in 2012 decreased primarily as a
result of lower Plavix* revenues following its loss of exclusivity. Managed
healthcare rebates and other contract discounts in 2012 also decreased due
coverage gap discounts attributable to prior period rebates after receiving
actual invoices and the nonrenewal of Plavix* contract discounts in the
Medicare Part Dprogram as of January 1, 2012. • The estimated Medicaidrebates attributable to prior period sales were
actual invoices and other information from certain state
• The provision for sales returns was higher in 2012 as a result of the loss
of exclusivity of Plavix* and Avapro*/Avalide*. The U.S. sales return
reserves for these products were
31, 2013 and 2012, respectively, and were determined after considering
several factors including estimated inventory levels in the distribution
channels. In accordance with Company policy, these products are eligible to
be returned between six months prior and twelve months after product
expiration. Adjustments to these reserves might be required in the future
for revised estimates to various assumptions including actual returns,
which are mostly expected to occur in 2014.
• Other adjustments increased in 2013 primarily due to higher government
rebates in non-U.S. markets. Other adjustments increased in 2012 due to U.S. co-pay and coupon programs. 43
-------------------------------------------------------------------------------- Key Products Revenues of key products represented 83% of total revenue in 2013, 84% in 2012 and 86% in 2011. The following table presents U.S. and international revenues by key product, 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: % Change Attributable to Year Ended December 31, % Change Foreign Exchange Dollars in Millions 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 2013 vs. 2012 2012 vs. 2011 Key Products Virology Baraclude (entecavir)
$ 1,527 $ 1,388 $ 1,19610 % 16 % (3 )% (2 )% U.S. 289 241 208 20 % 16 % - - Non-U.S. 1,238 1,147 988 8 % 16 % (3 )% (2 )% Reyataz (atazanavir sulfate) 1,551 1,521 1,569 2 % (3 )% (1 )% (3 )% U.S. 769 783 771 (2 )% 2 % - - Non-U.S. 782 738 798 6 % (8 )% (2 )% (6 )% Sustiva (efavirenz) Franchise 1,614 1,527 1,485 6 % 3 % - (2 )% U.S. 1,092 1,016 950 7 % 7 % - - Non-U.S. 522 511 535 2 % (4 )% 1 % (5 )% Oncology Erbitux* (cetuximab) 696 702 691 (1 )% 2 % - - U.S. 682 688 681 (1 )% 1 % - - Non-U.S. 14 14 10 - 40 % - (2 )% Sprycel (dasatinib) 1,280 1,019 803 26 % 27 % (4 )% (4 )% U.S. 541 404 299 34 % 35 % - - Non-U.S. 739 615 504 20 % 22 % (7 )% (6 )% Yervoy (ipilimumab) 960 706 360 36 % 96 % - N/A U.S. 577 503 323 15 % 56 % - - Non-U.S. 383 203 37 89 % ** - N/A Neuroscience Abilify* (aripiprazole) 2,289 2,827 2,758 (19 )% 3 % - (1 )% U.S. 1,519 2,102 2,052 (28 )% 2 % - - Non-U.S. 770 725 706 6 % 3 % 1 % (7 )% Metabolics Bydureon* (exenatide extended-release for injectable suspension) 298 78 N/A ** N/A N/A N/A U.S. 263 75 N/A ** N/A - N/A Non-U.S. 35 3 N/A ** N/A N/A N/A Byetta* (exenatide) 400 149 N/A ** N/A N/A N/A U.S. 304 147 N/A ** N/A - N/A Non-U.S. 96 2 N/A ** N/A N/A N/A Forxiga (dapagliflozin) 23 - N/A N/A N/A N/A N/A U.S. N/A N/A N/A N/A N/A - N/A Non-U.S. 23 - N/A N/A N/A N/A N/A Onglyza/Kombiglyze (saxagliptin/saxagliptin and metformin) 877 709 473 24 % 50 % - (2 )% U.S. 591 516 346 15 % 49 % - - Non-U.S. 286 193 127 48 % 52 % (2 )% (9 )% 44
% Change Attributable to Year Ended December 31, % Change Foreign Exchange Dollars in Millions 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 2013 vs. 2012
2012 vs. 2011 Key Products (continued) Immunoscience Nulojix (belatacept)
$ 26 $ 11 $ 3** ** - N/A U.S. 20 9 3 ** ** - - Non-U.S. 6 2 - ** N/A - N/A Orencia (abatacept) 1,444 1,176 917 23 % 28 % (2 )% (2 )% U.S. 954 797 621 20 % 28 % - - Non-U.S. 490 379 296 29 % 28 % (8 )% (6 )% Cardiovascular Avapro*/Avalide* (irbesartan/irbesartan-hydrochlorothiazide) 231 503 952 (54 )% (47 )% - (1 )% U.S. (7 ) 155 549 ** (72 )% - - Non-U.S. 238 348 403 (32 )% (14 )% - (3 )% Eliquis (apixaban) 146 2 - ** N/A - N/A U.S. 97 - N/A N/A N/A - - Non-U.S. 49 2 - ** N/A - N/A Plavix* (clopidogrel bisulfate) 258 2,547 7,087 (90 )% (64 )% - - U.S. 153 2,424 6,709 (94 )% (64 )% - - Non-U.S. 105 123 378 (15 )% (67 )% 3 % (1 )% Mature Products and All Other 2,765 2,756 2,950 - (7 )% (1 )% (3 )% U.S. 474 524 527 (10 )% (1 )% - - Non-U.S. 2,291 2,232 2,423 3 % (8 )% (1 )% (3 )% ** Change in excess of 100%
Baraclude - an oral antiviral agent for the treatment of chronic hepatitis B • U.S. revenues in both periods increased due to higher average net selling
prices and higher demand. We may experience a rapid and significant decline
in U.S. revenues beginning in 2014 due to possible generic competition following a Federal court's decision in
February 2013invalidating the composition of matter patent.
• International revenues increased in both periods due to higher demand
partially offset by unfavorable foreign exchange.
Reyataz - a protease inhibitor for the treatment of the HIV • U.S. revenues in 2013 decreased due to lower demand partially offset by
higher average net selling prices. U.S. revenues in 2012 increased due to
higher average net selling prices.
• International revenues in 2013 increased due to higher demand and the timing
of government purchases in certain countries. International revenues in 2012
decreased due to unfavorable foreign exchange, the timing of government
purchases in certain countries and lower demand resulting from competing
products. 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 600 mg/emtricitabine 200 mg/tenofovir disoproxil fumarate 300 mg), a product sold through our alliance with Gilead • U.S. revenues in 2013 increased due to higher average net selling prices
partially offset by lower demand. U.S. revenues in 2012 increased primarily
due to higher demand and higher average net selling prices.
• International revenues in 2013 increased due to favorable foreign exchange.
International revenues in 2012 decreased due to unfavorable foreign exchange. 45
-------------------------------------------------------------------------------- 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. • U.S. revenues in both periods remained relatively flat. Sprycel - an oral inhibitor of multiple tyrosine kinases indicated for the first-line treatment of adults with Philadelphiachromosome-positive chronic myeloid leukemia in chronic phase and the treatment of adults with chronic, accelerated, or myeloid or lymphoid blast phase chronic myeloid leukemia with resistance or intolerance to prior therapy, including Gleevec* (imatinib meslylate). Sprycel is part of our strategic alliance with Otsuka. • U.S. revenues in both periods increased primarily due to higher demand and
higher average net selling prices.
• International revenues in both periods increased primarily 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 • U.S. revenues in both periods increased due to higher demand. U.S. revenues
in 2013 were also favorably impacted by the recognition of
revenues that were previously deferred until sufficient historical
experience to estimate sales returns was developed.
• International revenues in both periods increased due to higher demand.
Abilify* - an antipsychotic agent for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder and is part of our strategic alliance with Otsuka • U.S. revenues decreased due to a reduction in our contractual share of
revenues from 51.5% in 2012 to a 34.0% in 2013, which was partially offset
by higher average net selling prices. U.S. revenues in 2012 increased due to
higher average net selling prices and a
in the estimated amount of customer rebates and discounts attributable to 2011 based on actual invoices received.
• International revenues in both periods increased primarily due to higher
demand. International revenues were impacted by unfavorable foreign exchange
Bydureon* - a once-weekly GLP-1 receptor agonist for the treatment of type 2 diabetes and was part of our strategic alliance with AstraZeneca • U.S. revenues are included in our results since the completion of our Amylin
• The transition of international operations of Bydureon* in a majority of
Financial Statements-Note 3. Alliances" for further discussion.
Byetta* - a twice daily glucagon-like peptide-1 (GLP-1) receptor agonist for the treatment of type 2 diabetes and was part of our strategic alliance with AstraZeneca • U.S. revenues are included in our results since the completion of our Amylin
• The transition of international operations of Byetta* in a majority of
Financial Statements-Note 3. Alliances" for further discussion.
Forxiga - an oral sodium-glucose cotransporter (SGLT2) inhibitor for the treatment of type 2 diabetes and was part of our strategic alliance with AstraZeneca • Forxiga was launched for the treatment of type 2 diabetes in a limited
number of EU markets during the fourth quarter of 2012 and continues to be
launched in various EU markets.
Onglyza/Kombiglyze (known in the EU as Onglyza/Komboglyze) - a once-daily oral tablet for the treatment of type 2 diabetes and was part of our strategic alliance with AstraZeneca • U.S. revenues in 2013 increased primarily due to higher average net selling
prices. U.S. revenues in 2012 increased primarily due to higher overall
demand and higher average net selling prices.
• International revenues increased in both periods primarily due to higher
demand, which was partially offset by unfavorable foreign exchange in 2012.
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 EU during 2011. 46 -------------------------------------------------------------------------------- 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. revenues in both periods increased primarily due to higher demand and
higher average net selling prices.
• International revenues in both periods increased primarily due to higher
demand, partially driven by the launch of the subcutaneous formulation of Orencia in certain EU markets beginning in the second quarter of 2012, partially offset by unfavorable foreign exchange. 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. revenues are no longer recognized following the restructured Sanofi
increase in the sales return reserve for Avalide*. U.S. revenues decreased
in 2012 due to the loss of exclusivity in
March 2012. • International revenues were impacted by changes attributed to the restructured Sanofi agreement. See "Item 8. Financial Statements-Note 3.
Alliances" for further discussion. International revenues in 2012 decreased
due to lower demand including from generic competition in certain EU markets
Canada. Eliquis - an oral Factor Xa inhibitor, targeted at stroke prevention in atrial fibrillation and the prevention and treatment of VTE disorders. Eliquis is part of our strategic alliance with Pfizer. • Eliquis was launched in the U.S., Europe, Japanand Canadain the first
quarter of 2013 and continues to be launched in various markets for the
reduction of the risk of stroke and systemic embolism in patients with NVAF. • Eliquis was approved in the EU for VTE prevention in
May 2011and was launched in a limited number of EU countries beginning in May 2011. Plavix* - a platelet aggregation inhibitor that is part of our alliance with Sanofi • U.S. revenues in both periods decreased due to the loss of exclusivity in
• International revenues in 2013 were impacted by changes attributed to the
restructured Sanofi agreement. See "Item 8. Financial Statements-Note 3. Alliances" for further discussion. International revenues in 2012 were negatively impacted by generic clopidogrel products in the EU,
Canada, and Australia. 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. revenues decreased in both periods from generic erosion of certain products which was partially offset by sales of Symlin* following the completion of our Amylin acquisition in August 2012.
• International revenues increased in 2013 due to certain alliances which were
partially offset by the continued generic erosion of other products. International revenues in 2012 decreased due to the continued generic erosion of certain brands and unfavorable foreign exchange. • International revenues are expected to decline in 2015 and 2016 upon the expiration of certain royalty and alliance agreements.
Estimated End-User Demand
Pursuant to the
U.S. Securities and Exchange Commission(SEC) Consent Order described below under "-SEC Consent Order", we monitor the level of inventory on hand in the U.S. wholesaler distribution channel and outside of the U.S. in the direct customer distribution channel. We are obligated to disclose products with levels of inventory in excess of one month on hand or expected demand, subject to a de minimis exception. Estimated levels of inventory in the distribution channel in excess of one month on hand for these products were not material as of the dates indicated above. No U.S. products had estimated levels of inventory in the distribution channel in excess of one month on hand at December 31, 2013. Below are international products that had estimated levels of inventory in the distribution channel in excess of one month on hand at September 30, 2013. Dafalgan, an analgesic product sold principally in Europe, had 1.1 months of inventory on hand at direct customers at September 30, 2013and December 31, 2012. The level of inventory on hand was primarily due to ordering patterns of pharmacists in France. Reyataz had 1.1 months of inventory on hand internationally at September 30, 2013compared to 0.7 month of inventory on hand at December 31, 2012. The level of inventory on hand was due to government purchasing patterns in Brazil. 47 -------------------------------------------------------------------------------- In the U.S., we generally determine our months on hand estimates using inventory levels of product on hand and the amount of out-movement provided by our three largest wholesalers, which account for approximately 90% of total gross sales of U.S. products. Factors that may influence our estimates include generic competition, seasonality of products, wholesaler purchases in light of increases in wholesaler list prices, new product launches, new warehouse openings by wholesalers and new customer stockings by wholesalers. In addition, these estimates are calculated using third-party data, which may be impacted by their recordkeeping processes. For our businesses outside of the U.S., we have significantly more direct customers. Limited information on direct customer product level inventory and corresponding out-movement information and the reliability of third-party demand information, where available, varies widely. When direct customer product level inventory, ultimate patient/consumer demand or out-movement data does not exist or is otherwise not available, we have developed a variety of other methodologies to estimate such data, including using such factors as historical sales made to direct customers and third-party market research data related to prescription trends and end-user demand. Accordingly, we rely on a variety of methods to estimate direct customer product level inventory and to calculate months on hand. Factors that may affect our estimates include generic competition, seasonality of products, direct customer purchases in light of price increases, new product launches, new warehouse openings by direct customers, new customer stockings by direct customers and expected direct customer purchases for governmental bidding situations. As such, all of the information required to estimate months on hand in the direct customer distribution channel for non-U.S. business for the year ended December 31, 2013is not available prior to the filing of this annual report on Form 10-K. We will disclose any product with levels of inventory in excess of one month on hand or expected demand, subject to a de minimis exception, in the next quarterly report on Form 10-Q. Expenses % Change Dollar in Millions 2013 2012 2011 2013 vs. 2012 2012 vs. 2011 Cost of products sold $ 4,619 $ 4,610 $ 5,598- (18 )% Marketing, selling and administrative 4,084 4,220 4,203 (3 )% - Advertising and product promotion 855 797 957 7 % (17 )% Research and development 3,731 3,904 3,839 (4 )% 2 %
Impairment charge for BMS-986094 intangible asset - 1,830
- (100 )% N/A Other (income)/expense 205 (80 ) (334 ) ** (76 )% Total Expenses
$ 13,494 $ 15,281 $ 14,263(12 )% 7 %
** Change in excess of 100%
Cost of products sold
Cost of products sold include material costs, internal labor and overhead from our owned manufacturing sites, third-party processing costs, other supply chain costs and the settlement of foreign currency forward contracts that are used to hedge forecasted intercompany inventory purchase transactions. Essentially all of these costs are managed by our global manufacturing and supply organization. Cost of products also includes royalties and profit sharing attributed to licensed products and alliances, amortization of acquired developed technology costs from business combinations and milestone payments that occur on or after regulatory approval. Cost of products sold can vary between periods as a result of product mix (particularly resulting from royalties and profit sharing expenses in connection with our alliances), price, inflation and costs attributed to the rationalization of manufacturing sites resulting in accelerated depreciation, impairment charges and other stranded costs. In addition, changes in foreign currency may also provide volatility as certain costs are denominated in foreign currencies. Cost of products sold as a percentage of total revenues were 28.2% in 2013, 26.2% in 2012, and 26.4% in 2011. These changes were primarily attributed to a less favorable product mix as a result of royalties and profit sharing expenses in connection with our alliances.
• Cost of products sold in 2013 was relatively flat as higher profit sharing
expenses in connection with our alliances (including those resulting from
the Amylin acquisition in
attributable to the Amylin acquisition were partially offset by lower
royalties following the loss of exclusivity of Plavix* and Avapro*/Avalide*
and higher impairment charges during 2012.
• The decrease in cost of products sold in 2012 was primarily attributed to
lower sales volume following the loss of exclusivity of Plavix* and Avapro*/Avalide* which resulted in lower royalties in connection with our Sanofi alliance and favorable foreign exchange partially offset by
impairment charges discussed below and higher amortization costs resulting
from the Amylin acquisition (net of the amortization of the Amylin alliance
• Impairment charges of
million related to continued competitive pricing pressures and a reduction
in the undiscounted projected cash flows to an amount less than the carrying
value of a developed technology intangible asset. The remaining
impairment charge related to the abandonment of a manufacturing facility
resulting from the outsourcing of a manufacturing process. 48
Marketing, selling and administrative
Marketing, selling and administrative expenses include salary and benefit costs, third-party professional and marketing fees, outsourcing fees, shipping and handling costs and other expenses that are not attributed to product manufacturing costs or research and development expenses. These expenses are managed through regional commercialization organizations or global corporate organizations such as finance, law, information technology and human resources. • Marketing, selling and administrative expenses in 2013 decreased due to the
accelerated vesting of stock options and restricted stock units related to
the Amylin acquisition (
fee assessed by the Federal government, and, a reduction in sales related
activities for certain products to coincide with their respective lifecycles
partially offset by higher spending to support the launch of new key products and additional spending following the Amylin acquisition.
• Marketing, selling and administrative expenses in 2012 increased primarily
as a result of the Amylin acquisition (
accelerated vesting of stock options and restricted stock units), partially
offset by a reduction in sales-related activities for Plavix* and
Avapro*/Avalide*. Marketing, selling and administrative expenses were also
impacted by favorable foreign exchange.
Advertising and product promotion
Advertising and product promotion expenses include media, sample and direct to consumer programs. • Advertising and product promotion expenses in 2013 increased primarily due
to higher spending for recently launched key products.
• Advertising and product promotion expenses in 2012 decreased primarily due
to lower spending on the promotion of Plavix*, Avapro*/Avalide*, Abilify*,
and certain mature brands in the U.S. to coincide with their product life
cycle. Research and development Research and development expenses include salary and benefit costs, third-party grants and fees paid to clinical research organizations, supplies and facility costs. Total research and development expenses include the costs of discovery research, preclinical development, early- and late-clinical development and drug formulation, as well as clinical trials and medical support of marketed products, proportionate allocations of enterprise-wide costs, facilities, information technology, and employee stock compensation costs, and other appropriate costs. Upfront licensing fees and other related payments upon the achievement of regulatory or other contractual milestones are also included. Certain expenses are shared with alliance partners based upon contractual agreements. Most expenses are managed by our global research and development organization of which, approximately
$2.2 billion, $1.9 billionand $2.0 billionof the total spend in 2013, 2012 and 2011, respectively, was attributed to development activities with the remainder attributed to preclinical and research activities. These expenses can vary between periods for a number of reasons, including the timing of upfront, milestone and other licensing payments. • Research and development expenses in 2013 decreased primarily due to prior
year impairment charges, accelerated vesting of stock options and restricted
stock units related to the Amylin acquisition and upfront, milestone and
other licensing payments partially offset by additional costs following the
Amylin acquisition and higher clinical grant spending. • Research and development expenses in 2012 increased primarily from
million of expenses related to the Amylin acquisition (including accelerated
vesting of Amylin stock options and restricted stock units of
partially offset by favorable foreign exchange and the net impact of
upfront, milestone, and other licensing payments and IPRD impairment
charges. Refer to "Specified Items" included in "-Non-GAAP Financial
Measures" for amounts attributed to each period. IPRD impairment charges
relate to projects previously acquired in the
million in 2012 related to FV-100, a nucleoside inhibitor for the reduction
of shingles-associated pain) resulting from unfavorable clinical trial results and decisions to cease further development.
Impairment charge for BMS-986094 intangible asset
$1.8 billionimpairment charge was recognized in 2012 when the development of BMS-986094 (formerly INX-189), a compound which we acquired as part of our acquisition of Inhibitexto treat hepatitis C virus infection, was discontinued in the interest of patient safety. See "Item 8. Financial Statements -Note 14. Goodwill and Other Intangible Assets" for further information. Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products or IPRD. These assets are initially measured at fair value and therefore a reduction in expectations used in the valuations could potentially lead to an impairment. See "-Critical Accounting Policies" for further discussion. 49 -------------------------------------------------------------------------------- Other (income)/expense Other (income)/expense include: Year Ended December 31, Dollars in Millions 2013 2012 2011 Interest expense $ 199 $ 182 $ 145Investment income (104 ) (106 ) (91 ) Provision for restructuring 226 174 116 Litigation charges/(recoveries) 20 (45 ) 6 Equity in net income of affiliates (166 ) (183 ) (281 ) Out-licensed intangible asset impairment - 38
Gain on sale of product lines, businesses and assets (2 ) (53 ) (37 ) Other income received from alliance partners, net (148 ) (312 ) (140 ) Pension curtailments and settlements 165 158 10 Other 15 67 (62 ) Other (income)/expense
$ 205 $ (80 ) $ (334 )
• Interest expense increased in both periods due to higher average borrowings.
• Provision for restructuring was primarily attributable to employee
termination benefits. Employee termination costs of
incurred in 2013 as a result of workforce reductions in several European
countries. The employee reductions are primarily attributed to sales force
reductions resulting from the restructuring of the Sanofi and Otsuka
agreements and streamlining operations due to challenging market conditions
• Litigation charges/(recoveries) in 2012 included
of the Apotex damages award concerning Plavix*.
• Equity in net income of affiliates is primarily related to our international
partnership with Sanofi in
as a result of our restructuring of the Sanofi agreement and continues to be
negatively impacted by generic competition for Plavix* in
Equity in net income of affiliates in 2012 decreased due to the continued
impact of generic competition on international Plavix* net sales, the conversion of certain territories to opt-out markets and the impact of unfavorable foreign exchange. • Out-licensed intangible asset impairment charges in 2012 are related to assets acquired in the
Medarexand ZymoGenetics, Inc.( ZymoGenetics)
acquisitions and resulted from unfavorable clinical trial results and/or
abandonment of the programs.
• Gain on sale of product lines, businesses and assets was primarily related
to the sale of a building in
• Other income from alliance partners includes royalties and amortization of
upfront, milestone and other licensing payments related to certain
alliances. The decrease in U.S. Plavix* net product sales resulted in lower
development royalties owed to Sanofi in 2013. Royalties received from Sanofi
result of the restructured Sanofi agreement. See "Item 8. Financial
Statements-Note 3. Alliances" for further discussion.
• Pension settlement charges were recognized after determining the annual lump
sum payments would exceed the annual interest and service costs for certain
pension plans, including the primary U.S. pension plan in 2013 and 2012. The
charges included the acceleration of a portion of unrecognized actuarial
losses. Similar charges may occur in the future. See "Item 8. Financial
Statements-Note 19. Pension, Postretirement and Postemployment Liabilities"
for further detail. • The change in Other is primarily related to higher acquisition costs and losses on debt repurchases in 2012 and sales tax reimbursements, gains on debt repurchases, and higher upfront, milestone and licensing receipts in 2011. Income Taxes Dollars in Millions 2013 2012 2011 Earnings Before Income Taxes
$ 2,891 $ 2,340 $ 6,981
Provision for/(benefit from) income taxes 311 (161 ) 1,721 Effective tax/(benefit) rate
10.8 % (6.9 )% 24.7 % The change in the effective tax rates was primarily due to a
$392 milliontax benefit in 2012 attributed to a capital loss deduction resulting from the tax insolvency of Inhibitex. The impact of this deduction reduced the effective tax rate by 16.7 percentage points in 2012. Other changes resulted from tax benefits attributable to higher impairment charges in 2012 (including an $1,830 millionimpairment charge for the BMS-986094 intangible asset in the U.S.); favorable earnings mix between high and low tax jurisdictions attributable to lower Plavix* revenues and to a lesser extent, an internal transfer of intellectual property in the fourth quarter of 2012; the legal enactment of the 2012 and 2013 research and development tax credit during 2013, and higher charges from contingent tax matters. 50 -------------------------------------------------------------------------------- Historically, the effective income tax rate is lower than the U.S. statutory rate of 35% due to our decision to indefinitely reinvest the earnings for certain of our manufacturing operations in Irelandand Puerto Rico. We have favorable tax rates in Irelandand Puerto Ricounder grants not scheduled to expire prior to 2023. Noncontrolling Interest See "Item 8. Financial Statements-Note 3. Alliances" for a discussion of our Plavix* and Avapro*/Avalide* partnerships with Sanofi for the territory covering the Americas. The decrease in noncontrolling interest in both periods resulted from the exclusivity loss in the U.S. of Plavix* in May 2012and Avapro*/Avalide* in March 2012. A summary of noncontrolling interest is as follows: Year Ended December 31, Dollars in Millions 2013 2012 2011 Sanofi partnerships $ 36 $ 844 $ 2,323Other 1 14 20 Noncontrolling interest-pre-tax 37 858 2,343 Income taxes (20 ) (317 ) (792 ) Net earnings attributable to noncontrolling interest-net of taxes $ 17 $ 541 $ 1,551Non-GAAP Financial Measures Our non-GAAP financial measures, including non-GAAP earnings and related EPS information, are adjusted to exclude certain costs, expenses, gains and losses and other specified items that due to their significant and/or unusual nature are evaluated on an individual basis. Similar charges or gains for some of these items have been recognized in prior periods and it is reasonably possible that they could reoccur in future periods. Non-GAAP information is intended to portray the results of our baseline performance which include the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical products on a global basis and to enhance an investor's overall understanding of our past financial performance and prospects for the future. For example, non-GAAP earnings and EPS information is an indication of our baseline performance before items that are considered by us to not be reflective of our ongoing results. In addition, this information is among the primary indicators we use as a basis for evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods. This information is not intended to be considered in isolation or as a substitute for net earnings or diluted EPS prepared in accordance with GAAP. 51 --------------------------------------------------------------------------------
Specified items were as follows:
Year Ended December 31, Dollars in Millions 2013 2012
Accelerated depreciation, asset impairment and other shutdown costs
$ 36 $ 147 $ 75Amortization of acquired Amylin intangible assets 549 229 - Amortization of Amylin alliance proceeds (273 ) (114 ) - Amortization of Amylin inventory adjustment 14 23 - Cost of products sold 326 285 75 Stock compensation from accelerated vesting of Amylin awards - 67 - Process standardization implementation costs 16 18 29 Marketing, selling and administrative 16 85 29 Stock compensation from accelerated vesting of Amylin awards - 27 - Upfront, milestone and other licensing payments 16 47 207 IPRD impairment - 142 28 Research and development 16 216 235 Impairment charge for BMS-986094 intangible asset - 1,830 - Provision for restructuring 226 174 116 Gain on sale of product lines, businesses and assets - (51 ) (12 ) Pension settlements 161 151 13 Acquisition and alliance related items (10 ) 43 - Litigation charges/(recoveries) (23 ) (45 ) 9 Upfront, milestone and other licensing receipts (14 ) (10 ) (20 ) Out-licensed intangible asset impairment - 38 - Loss on debt repurchases - 27 - Other (income)/expense 340 327 106 Increase to pretax income 698 2,743 445 Income tax on items above (242 ) (947 ) (136 ) Specified tax benefit(a) - (392 ) (97 ) Income taxes (242 ) (1,339 ) (233 ) Increase to net earnings $ 456 $ 1,404 $ 212(a) The 2012 specified tax benefit relates to a capital loss deduction. The 2011 specified tax benefit relates to releases of tax reserves that were specified in prior periods. The reconciliations from GAAP to Non-GAAP were as follows: Year Ended December 31, Dollars in Millions, except per share data 2013 2012
Net Earnings Attributable to BMS - GAAP
$ 2,563 $ 1,960 $ 3,709Earnings attributable to unvested restricted shares - (1 ) (8 ) Net Earnings Attributable to BMS used for Diluted EPS Calculation - GAAP $ 2,563$
Net Earnings Attributable to BMS - GAAP
$ 2,563 $ 1,960 $ 3,709Less Specified Items 456 1,404 212 Net Earnings Attributable to BMS - Non-GAAP 3,019 3,364 3,921 Earnings attributable to unvested restricted shares - (1 ) (8 ) Net Earnings Attributable to BMS used for Diluted EPS Calculation - Non-GAAP $ 3,019$
Average Common Shares Outstanding - Diluted 1,662
Diluted EPS Attributable to BMS - GAAP
$ 1.54 $ 1.16 $ 2.16Diluted EPS Attributable to Specified Items 0.28 0.83 0.12 Diluted EPS Attributable to BMS - Non-GAAP $ 1.82 $ 1.99 $ 2.2852
Financial Position, Liquidity and Capital Resources
Our net debt position was as follows: Dollars in Millions 2013
Cash and cash equivalents
Marketable securities - current 939
Marketable securities - non-current 3,747
Total cash, cash equivalents and marketable securities 8,272
Short-term borrowings and current portion of long-term debt (359 )
(826 ) Long-term debt (7,981 ) (6,568 ) Net debt position
$ (68 ) $ (1,042 )
Cash, cash equivalents and marketable securities held in the U.S. were approximately
We started issuing commercial paper to meet near-term domestic liquidity requirements during 2012. The average amount of commercial paper outstanding was
$259 millionat a weighted-average interest rate of 0.12% during 2013. The maximum month-end amount of commercial paper outstanding was $820 millionwith no outstanding borrowings at December 31, 2013. We will continue to issue commercial paper on an as-needed basis. In February 2014, BMS sold to AstraZeneca the diabetes business of BMS which comprised our global alliance with them. Under the terms of the agreement, AstraZeneca made an upfront payment of $2.7 billionto the Company. BMS also received a $600 millionmilestone payment in February 2014for the approval of Farxiga in the U.S. See"Item 8. Financial Statements-Note 5. Assets Held-For-Sale" for further discussion. In January 2014, notices were provided to the holders of the 5.45% Notes due 2018 that BMS will exercise its call option to redeem the notes in their entirety in February 2014. The outstanding principal amount of the notes is $582 million. Our investment portfolio includes non-current marketable securities which are subject to changes in fair value as a result of interest rate fluctuations and other market factors, which may impact our results of operations. Our investment policy places limits on these investments and the amount and time to maturity of investments with any institution. The policy also requires that investments are only entered into with corporate and financial institutions that meet high credit quality standards. See "Item 8. Financial Statements-Note 10. Financial Instruments and Fair Value Measurements." We have two separate $1.5 billionfive-year revolving credit facilities from a syndicate of lenders. The facilities provide for customary terms and conditions with no financial covenants and are extendable on any anniversary date with the consent of the lenders. No borrowings were outstanding under either revolving credit facility at December 31, 2013or 2012. In October 2013, BMS issued $1.5 billionof senior unsecured notes in a registered public offering consisting of $500 millionin aggregate principal amount of 1.750% Notes due 2019, $500 millionin aggregate principal amount of 3.250% Notes due 2023 and $500 millionin aggregate principal amount of 4.500% Notes due 2044. The proceeds were used for general corporate purposes, including the repayment of our commercial paper borrowings. Additional regulations in the U.S. could be passed in the future which could further reduce our results of operations, operating cash flow, liquidity and financial flexibility. We also continue to monitor the potential impact of the economic conditions in certain European countries and the related impact on prescription trends, pricing discounts, creditworthiness of our customers, and our ability to collect outstanding receivables from our direct customers. Currently, we believe these economic conditions in the EU will not have a material impact on our liquidity, cash flow or financial flexibility. As a mechanism to limit our overall credit exposures, and an additional source of liquidity, we sell trade receivables to third parties, principally from wholesalers in Japanand certain government-backed entities in Italy, Portugal, and Spain. Sales of trade receivables in Italy, Portugaland Spain were $509 millionin 2013, $322 millionin 2012 and $484 millionin 2011. Sales of receivables in Japanwere $522 millionin 2013, $634 millionin 2012 and $593 millionin 2011. Our sales agreements do not allow for recourse in the event of uncollectibility and we do not retain interest to the underlying assets once sold. 53 -------------------------------------------------------------------------------- We continue to manage our operating cash flows by focusing on working capital items that are most directly affected by changes in sales volume, such as receivables, inventories, and accounts payable. Dollars in Millions December 31, 2013 December 31, 2012 Net trade receivables $ 1,690 $ 1,708 Inventories 1,498 1,657 Accounts payable (2,559 ) (2,202 ) Total $ 629 $ 1,163 Credit Ratings Moody's Investors Service long-term and short-term credit ratings are currently A2 and Prime-1, respectively, and their long-term credit outlook was revised from stable to negative in September 2013. Standard & Poor's long-term and short-term credit ratings are currently A+ and A-1+, respectively, and their long-term credit outlook remains stable. Fitch lowered our long-term credit rating from A to A-, lowered our short-term credit rating from F1 to F2, and revised our long-term credit outlook from negative to stable in July 2013and from stable to negative in December 2013. Our credit ratings are considered investment grade. Our long-term ratings reflect the agencies' opinion that we have a low default risk but are somewhat susceptible to adverse effects of changes in circumstances and economic conditions. Our short-term ratings reflect the agencies' opinion that we have good to extremely strong capacity for timely repayment.
Cash Flows The following is a discussion of cash flow activities: Dollars in Millions
2013 2012 2011 Cash flow provided by/(used in): Operating activities
$ 3,545 $ 6,941 $ 4,840Investing activities (572 ) (6,727 ) (1,437 ) Financing activities (1,068 ) (4,333 ) (2,657 ) Operating Activities Cash flow from operating activities represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Operating cash flow is derived by adjusting net earnings for noncontrolling interest, non-cash operating items, gains and losses attributed to investing and financing activities and changes in operating assets and liabilities resulting from timing differences between the receipts and payments of cash and when the transactions are recognized in our results of operations. As a result, changes in cash from operating activities reflect the timing of cash collections from customers and alliance partners; payments to suppliers, alliance partners and employees; pension contributions; and tax payments in the ordinary course of business.
The changes in cash provided by operating activities in both periods were primarily attributable to:
• Upfront, milestone and contingent alliance proceeds of
for entering into the Amylin alliance) and
• Lower operating cash flows of
attributed to Plavix* and Avapro*/Avalide* revenue reductions following the
loss of exclusivity of these products in 2012; and
• Other changes including working capital requirements in each period.
The changes in cash used in investing activities were primarily attributable to:
• Cash was used to fund the acquisitions of Amylin (
$5.0 billion) and Inhibitex( $2.5 billion) in 2012 and Amira ( $360 million) in 2011.
• Cash used in the sales, purchases and maturities of marketable securities
attributed to the timing of investments in time deposits and corporate debt
securities with maturities greater than 90 days. Cash generated from the
sales, purchases, and maturities of marketable securities was
in 2012. The cash was used to partially fund acquisitions in 2012.
• Other investing activities included litigation recoveries of
in 2011. 54
The changes in cash used in financing activities were primarily attributable to:
• Cash used to repurchase common stock was
in 2012 and
authorized the repurchase of up to
Directors increased its authorization for the repurchase of stock by an
date and we may consider future repurchases.
• Dividend payments were
declared per common share were
$1.41in 2013, $1.37in 2012 and $1.33in 2011. In December 2013, we declared a quarterly dividend of $0.36per common share and expect to pay a dividend for the full year of 2014 of $1.44per share. Dividend decisions are made on a quarterly basis by our Board of Directors.
• Proceeds from the issuance of senior unsecured notes were
in 2013. Repayments of debt assumed in the Amylin acquisition were
$2.0 billionin 2012.
• Management periodically evaluates potential opportunities to repurchase
certain debt securities and terminate certain interest rate swap contracts
prior to their maturity. Cash outflows related to the repurchase of debt
termination of interest rate swap contracts were
$296 millionin 2011. • Proceeds from stock option exercises were $435 million(excluding $129
million of cash retained from excess tax benefits) in 2013,
$71 millionof cash retained from excess tax benefits) in 2012 and $554 million(excluding $47 millionof cash retained from excess tax benefits) in 2011. The amount of proceeds vary each period based upon
fluctuations in the market value of our stock relative to the exercise
price of the stock options and other factors.
Contractual Obligations Payments due by period for our contractual obligations at
December 31, 2013were as follows: Obligations Expiring by Period Dollars in Millions Total 2014 2015 2016 2017 2018 Later Years Short-term borrowings $ 359 $ 359$ - $ - $ - $ - $ - Long-term debt 7,566 - - 684 750 631 5,501 Interest on long-term debt(a) 5,567 257 269 294 287 219 4,241 Operating leases 614 145 137 117 77 65 73 Purchase obligations 1,476 703 379 200 133 61 - Uncertain tax positions(b) 114 114 - - - - - Other long-term liabilities 627 - 101 164 47 39 276 Total(c) $ 16,323 $ 1,578 $ 886 $ 1,459 $ 1,294 $ 1,015 $ 10,091
(a) Includes estimated future interest payments on our short-term and long-term
debt securities. Also includes accrued interest payable recognized on our
consolidated balance sheets, which consists primarily of accrued interest on
short-term and long-term debt as well as accrued periodic cash settlements
(b) Due to the uncertainty related to the timing of the reversal of uncertain
tax positions, only the short-term uncertain tax benefits have been provided
in the table above. See "Item 8. Financial Statements-Note 8. Income Taxes"
for further detail. (c) The table above excludes future contributions by us to our pensions,
postretirement and postemployment benefit plans. Required contributions are
contingent upon numerous factors including minimum regulatory funding
requirements and the funded status of each plan. Due to the uncertainty of
such future obligations, they are excluded from the table. Contributions for
both U.S. and international plans are expected to be
See "Item 8. Financial Statements-Note 19. Pension, Postretirement and
Postemployment Liabilities" for further detail.
In addition to the above, we are committed to
$3.6 billion(in the aggregate) of potential future research and development milestone payments to third parties as part of in-licensing and development programs. Early-stage milestones, defined as milestones achieved through Phase III clinical trials, comprised $700 millionof the total committed amount. Late-stage milestones, defined as milestones achieved post Phase III clinical trials, comprised $2.9 billionof the total committed amount. Payments under these agreements generally are due and payable only upon achievement of certain developmental and regulatory milestones, for which the specific timing cannot be predicted. In addition to certain royalty obligations that are calculated as a percentage of net product sales, some of these agreements also provide for sales-based milestones aggregating $1.6 billionthat we would be obligated to pay to alliance partners upon achievement of certain sales levels. We also have certain manufacturing, development, and commercialization obligations in connection with alliance arrangements. It is not practicable to estimate the amount of these obligations. See "Item 8. Financial Statements-Note 3. Alliances" for further information regarding our alliances. For a discussion of contractual obligations, see "Item 8. Financial Statements-Note 19. Pension, Postretirement and Postemployment Liabilities," "-Note 10. Financial Instruments and Fair Value Measurements" and "-Note 21. Leases." 55 --------------------------------------------------------------------------------
SEC Consent Order
As previously disclosed, on
August 4, 2004, we entered into a final settlement with the SEC, concluding an investigation concerning certain wholesaler inventory and accounting matters. The settlement was reached through a Consent, a copy of which was attached as Exhibit 10 to our quarterly report on Form 10-Q for the period ended September 30, 2004. Under the terms of the Consent, we agreed, subject to certain defined exceptions, to limit sales of all products sold to our direct customers (including wholesalers, distributors, hospitals, retail outlets, pharmacies and government purchasers) based on expected demand or on amounts that do not exceed approximately one month of inventory on hand, without making a timely public disclosure of any change in practice. We also agreed in the Consent to certain measures that we have implemented including: (a) establishing a formal review and certification process of our annual and quarterly reports filed with the SEC; (b) establishing a business risk and disclosure group; (c) retaining an outside consultant to comprehensively study and help re-engineer our accounting and financial reporting processes; (d) publicly disclosing any sales incentives offered to direct customers for the purpose of inducing them to purchase products in excess of expected demand; and (e) ensuring that our budget process gives appropriate weight to inputs that come from the bottom to the top, and not just from the top to the bottom, and adequately documenting that process. We have established a company-wide policy to limit our sales to direct customers for the purpose of complying with the Consent. This policy includes the adoption of various procedures to monitor and limit sales to direct customers in accordance with the terms of the Consent. These procedures include a governance process to escalate to appropriate management levels potential questions or concerns regarding compliance with the policy and timely resolution of such questions or concerns. In addition, compliance with the policy is monitored on a regular basis. We maintain inventory management agreements (IMAs) with our U.S. pharmaceutical wholesalers, which account for nearly 100% of our gross U.S. revenues. Under the current terms of the IMAs, our wholesaler customers provide us with weekly information with respect to months on hand product-level inventories and the amount of out-movement of products. The three largest wholesalers currently account for approximately 90% of our gross U.S. revenues. The inventory information received from our wholesalers, together with our internal information, is used to estimate months on hand product level inventories at these wholesalers. We estimate months on hand product inventory levels for our U.S. business's wholesaler customers other than the three largest wholesalers by extrapolating from the months on hand calculated for the three largest wholesalers. In contrast, our non-U.S. business has significantly more direct customers, limited information on direct customer product level inventory and corresponding out-movement information and the reliability of third-party demand information, where available, varies widely. Accordingly, we rely on a variety of methods to estimate months on hand product level inventories for these business units.
We believe the above-described procedures provide a reasonable basis to ensure compliance with the Consent.
Recently Issued Accounting Standards
July 2013, the Financial Accounting Standards Boardissued an update that clarified existing guidance on the presentation of unrecognized tax benefits when various qualifying tax benefit carryforwards exist, including when the unrecognized tax benefit should be presented as a reduction to deferred tax assets or as a liability. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The reduction to deferred tax assets is expected to be approximately $250 million.
Critical Accounting Policies
The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Our critical accounting policies are those that significantly impact our financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of this uncertainty, actual results may vary from these estimates. These accounting policies were discussed with the Audit Committee of the Board of Directors.
Our accounting policy for revenue recognition has a substantial impact on reported results and relies on certain estimates. We recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed and determinable, collectability is reasonably assured and title and substantially all of the risks and rewards of ownership have transferred, which is generally at time of shipment. Revenue is also reduced for gross-to-net sales adjustments discussed below, all of which involve significant estimates and judgment after considering legal interpretations of applicable laws and regulations, historical experience, payer channel mix (e.g.
Medicareor Medicaid), current contract prices under applicable programs, unbilled claims and processing time lags and inventory levels in the distribution channel. 56 -------------------------------------------------------------------------------- Estimates are assessed each period and adjusted as required to revised information or actual experience. In addition, See "-Total Revenues" above for further discussion and analysis of each significant category of gross-to-net sales adjustments. Gross-to-Net Adjustments
The following categories of gross-to-net adjustments involve significant estimates, judgments and information obtained from external sources.
Charge-backs related to government programs
Our U.S. business participates in programs with government entities, the most significant of which are the
U.S. Department of Defenseand the U.S. Department of Veterans Affairs, and other parties, including covered entities under the 340B Drug Pricing Program, whereby pricing on products is extended below wholesaler list price to participating entities. These entities purchase products through wholesalers at the lower program price and the wholesalers then charge us the difference between their acquisition cost and the lower program price. Accounts receivable is reduced for the estimated amount of unprocessed charge-back claims attributable to a sale (typically within a two to four week time lag). Cash discounts
In the U.S. and certain other countries, cash discounts are offered as an incentive for prompt payment, generally approximating 2% of the sales price. Accounts receivable is reduced for the estimated amount of unprocessed cash discounts (typically within a one month time lag).
Managed healthcare rebates and other contract discounts
Rebates and discounts are offered to managed healthcare organizations in the U.S. managing prescription drug programs and
Medicare Advantageprescription drug plans covering the Medicare Part Ddrug benefit in addition to their commercial plans, as well as other contract counterparties such as hospitals and group purchasing organizations globally. Beginning in 2011, the rebates for the Medicare Part Dprogram included a 50% discount on the Company's brand-name drugs to patients who fall within the Medicare Part Dcoverage gap. Rebates are also required under the U.S. Department of Defense TRICARE Retail Pharmacy Refund Program. The estimated amount for these unpaid or unbilled rebates and discounts are presented as a liability. A $67 millionreversal for the estimated amount of 2011 Medicare Part Dcoverage gap discounts occurred in 2012 after receipt of the actual invoices.
Our U.S. businesses participates in state government
Medicaidprograms and other qualifying Federal and state government programs requiring discounts and rebates to participating state and local government entities. All discounts and rebates provided through these programs are included in our Medicaidrebate accrual. Retroactive to January 1, 2010, minimum rebates on Medicaiddrug sales increased from 15.1% to 23.1%. Medicaidrebates have also been extended to drugs used in managed Medicaidplans beginning in March 2010. The estimated amount for these unpaid or unbilled rebates is presented as a liability. The estimated Medicaidrebates attributable to prior period revenues were reduced by $85 millionin 2013 and $37 millionin 2012.
Products are typically eligible to be returned between six months prior to and twelve months after product expiration, in accordance with our policy. Estimated returns for established products are determined after considering historical experience and other factors including levels of inventory in the distribution channel, estimated shelf life, product recalls, product discontinuances, price changes of competitive products, introductions of generic products, introductions of competitive new products and instances of expected precipitous declines in demand following the loss of exclusivity. The estimated amount for product returns is presented as a liability. Reserves were established for Plavix* and Avapro*/Avalide* (
$147 millionand $173 millionat December 31, 2013and 2012, respectively) after considering the relevant factors as well as estimated future retail and wholesale inventory work down that would occur after the loss of exclusivity. Estimated returns for new products are determined after considering historical sales return experience of similar products, such as those within the same product line or similar therapeutic category. We defer recognition of revenue until the right of return expires or until sufficient historical experience to estimate sales returns is developed in limited circumstances. This typically occurs when the new product is not an extension of an existing line of product or when historical experience with products in a similar therapeutic category is lacking. Estimated levels of inventory in the distribution channel and projected demand are also considered in estimating sales returns for new products. 57 --------------------------------------------------------------------------------
Use of information from external sources
Information from external sources is used to estimate gross-to-net adjustments. Our estimate of inventory at the wholesalers are based on the projected prescription demand-based sales for our products and historical inventory experience, as well as our analysis of third-party information, including written and oral information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers and third-party market research data, and our internal information. The inventory information received from wholesalers is a product of their recordkeeping process and excludes inventory held by intermediaries to whom they sell, such as retailers and hospitals. We have also continued the practice of combining retail and mail prescription volume on a retail-equivalent basis. We use this methodology for internal demand forecasts. We also use information from external sources to identify prescription trends, patient demand and average selling prices. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information was itself in the form of estimates, and reflect other limitations including lags between the date as of which third-party information is generated and the date on which we receive third-party information.
Accounting for pension and postretirement benefit plans requires actuarial valuations based on significant assumptions for discount rates and expected long-term rates of return on plan assets. In consultation with our actuaries, these significant assumptions and others such as salary growth, retirement, turnover, healthcare trends and mortality rates are evaluated and selected based on expectations or actual experience during each remeasurement date. Pension expense could vary within a range of outcomes and have a material effect on reported earnings, projected benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors. The yield on high quality corporate bonds that coincides with the cash flows of the plans' estimated payouts is used in determining the discount rate. The Citigroup Pension Discount curve is used for the U.S. plans. The U.S. plans' pension expense for 2013 was determined using a 4.15% weighted-average discount rate. The present value of benefit obligations at
December 31, 2013for the U.S. pension plans was determined using a 4.62% discount rate. If the discount rate used in determining the U.S. plans' pension expense for 2013 was reduced by an additional 1%, such expense would increase by approximately $10 million. If the assumed discount rate used in determining the U.S. pension plans' projected benefit obligation at December 31, 2013was reduced by an additional 1%, the projected benefit obligation would increase by approximately $950 million. The expected long-term rate of return on plan assets is estimated considering expected returns for individual asset classes with input from external advisors. We also consider long-term historical returns including actual performance compared to benchmarks for similar investments. The U.S. plans' pension expense for 2013 was determined using an 8.63% expected long-term rate of return on plan assets. If the expected long-term rate of return on plan assets used in determining the U.S. plans' pension expense for 2013 was reduced by 1%, such expense would increase by $53 million.
For a more detailed discussion on retirement benefits, see "Item 8. Financial Statements-Note 19. Pension, Postretirement and Postemployment Liabilities."
Goodwill and other intangible assets acquired in business combinations, licensing and other transactions were
$15.6 billion(representing 41% of total assets), including $6.2 billionincluded in assets held-for-sale at December 31, 2013. Assets acquired and liabilities assumed are recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. The fair value of intangible assets, including IPRD, is typically determined using the "income method." This method starts with a forecast of net cash flows, risk adjusted for estimated probabilities of technical and regulatory success (for IPRD) and adjusted to present value using an appropriate discount rate that reflects the risk associated with the cash flow streams. All assets are valued from a market participant view which might be different than specific BMS views. The valuation process is very complex and requires significant input and judgment using internal and external sources. Although the valuations are required to be finalized within a one-year period, it must consider all and only those facts and evidence available at the acquisition date. The most complex and judgmental matters applicable to the valuation process are summarized below:
• Unit of accounting - Most intangible assets are valued as single global
assets rather than multiple assets for each jurisdiction or indication
after considering the development stage, expected levels of incremental
costs to obtain additional approvals, risks associated with further
development, amount and timing of benefits expected to be derived in the
future, expected patent lives in various jurisdictions and the intention to
promote the asset as a global brand. 58
• Estimated useful life - The asset life expected to contribute meaningful
cash flows is determined after considering all pertinent matters associated
with the asset, including expected regulatory approval dates (if
unapproved), exclusivity periods and other legal, regulatory or contractual
provisions as well as the effects of any obsolescence, demand, competition,
and other economic factors, including barriers to entry.
• Probability of Technical and Regulatory Success (PTRS) Rate - PTRS rates
are determined based upon industry averages considering the respective
programs development stage and disease indication and adjusted for specific
information or data known at the acquisition date. Subsequent clinical
results or other internal or external data obtained could alter the PTRS
rate and materially impact the estimated fair value of the intangible asset
in subsequent periods leading to impairment charges.
• Projections - Future revenues are estimated after considering many factors
such as initial market opportunity, pricing, sales trajectories to peak
sales levels, competitive environment and product evolution. Future costs
and expenses are estimated after considering historical market trends,
market participant synergies and the timing and level of additional
development costs to obtain the initial or additional regulatory approvals,
maintain or further enhance the product. We generally assume initial
positive cash flows to commence shortly after the receipt of expected
regulatory approvals which typically may not occur for a number of years.
Actual cash flows attributed to the project are likely to be different than
those assumed since projections are subjected to multiple factors including
trial results and regulatory matters which could materially change the
ultimate commercial success of the asset as well as significantly alter the
costs to develop the respective asset into commercially viable products.
• Tax rates - The expected future income is tax effected using a market
participant tax rate. Our recent valuations typically use a U.S. tax rate
(and applicable state taxes) after considering the jurisdiction in which
the intellectual property is held and location of research and manufacturing infrastructure. We also considered that any earnings repatriation would likely have U.S. tax consequences.
• Discount rate - Discount rates are selected after considering the risks
inherent in the future cash flows; the assessment of the asset's life cycle
and the competitive trends impacting the asset, including consideration of
any technical, legal, regulatory, or economic barriers to entry, as well as
expected changes in standards of practice for indications addressed by the
asset. See "Item 8. Financial Statements-Note 4. Acquisitions" for specific details and values assigned to assets acquired and liabilities assumed in our acquisitions of Amylin and
Inhibitexin 2012 and Amira in 2011. Significant estimates utilized at the time of the valuations to support the fair values of the lead compounds within the acquisitions include: Estimated Phase of Year of first Discount
useful life Development as PTRS Rate projected positive Dollars in Millions
Fair value rate utilized (in years) of acquisition date utilized cash flow Commercialized products: Bydureon*
$ 5,26011.1 % 13 N/A N/A N/A Byetta* 770 10.0 % 7 N/A N/A N/A Symlin* 310 10.0 % 9 N/A N/A N/A Recothrom 230 11.0 % 10 N/A N/A N/A IPRD: BMS-986094 (formerly INX-189) 1,830 12.0 % N/A Phase II 38.0 % 2017 Metreleptin 120 12.0 % N/A Phase III 75.0 % 2017 AM152 160 12.5 % N/A Phase I 12.5 % 2021 Impairment Goodwill Goodwill was $7.1 billionat December 31, 2013. Goodwill is tested at least annually for impairment on an enterprise level by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. Examples of qualitative factors assessed in the current year 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. For discussion on goodwill, acquired in-process research and development and other intangible assets, see "Item 8. Financial Statements-Note 1. Accounting Policies-Goodwill, Acquired In-Process Researchand Development and Other Intangible Assets." 59
Other Intangible Assets, including IPRD
Other intangible assets were
$2.3 billionat December 31, 2013, including licenses ( $525 million), developed technology rights ( $1.0 billion), capitalized software ( $241 million) and IPRD ( $548 million). Intangible assets are tested for impairment whenever current facts or circumstances warrant a review, although IPRD is required to be tested at least annually. Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products or IPRD. These assets are initially measured at fair value and therefore any reduction in expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval and additional development costs, inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. The complexity in estimating the fair value of intangible assets in connection with an impairment test is similar to the initial valuation. Considering the high risk nature of research and development and the industry's success rate of bringing developmental compounds to market, IPRD impairment charges are likely to occur in future periods. We recognized charges of $2.1 billionin 2012 including a $1.8 billioncharge resulting from the discontinued development of BMS-986094 and for other projects previously acquired in the Medarex, Inc.and Inhibitexacquisitions resulting from unfavorable clinical trial results, additional development costs, extended development periods and decisions to cease further development. We also recognized charges of $30 millionin 2011 related to three Medarexprojects for which development has ceased. IPRD is closely monitored and assessed each period for impairment. In addition to IPRD, commercial assets are also subject to impairment. For example, an impairment charge of $120 millionwas recognized in 2012 related to a non-key product from a prior acquisition after continuing competitive pricing pressures. We operate in a very dynamic market and regulatory environment in which events can occur causing our expectations to change quickly and thus leading to potential impairment charges. Specific intangible assets with material carrying values at December 31, 2013, that are exposed to potential impairment include IPRD assets peginterferon lambda ( $310 million) in Phase III development for the treatment of hepatitis C virus and AM152 ( $160million)in Phase II development for the treatment of fibrosis. These assets are monitored for changes in expectations from those used in the initial valuation.
Property, Plant and Equipment
Property, plant and equipment is tested for impairment whenever current facts or circumstances warrant a review. Additionally, these long-lived assets are periodically reviewed to determine if any change in facts or circumstances would result in a change to the estimated useful life of the asset, possibly resulting in the acceleration of depreciation. If such circumstances exist, an estimate of undiscounted future cash flows generated by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists at its lowest level of identifiable cash flows. If an asset is determined to be impaired, the loss is measured based on the difference between the asset's fair value and its carrying value. Expectations of future cash flows are subject to change based upon the near and long-term production volumes and margins generated by the asset as well as any potential alternative future use.
In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, contractual claims and tax matters. We recognize accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. These estimates are subject to uncertainties that are difficult to predict and, as such, actual results could vary from these estimates.
For discussions on contingencies, see "Item 8. Financial Statements-Note 1. Accounting Policies-Contingencies," "-Note 8. Income Taxes" and "-Note 22. Legal Proceedings and Contingencies."
Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including long-range forecasts of future taxable income and evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made. Our deferred tax assets were
$4.8 billionnet of valuation allowances of $4.6 billionat December 31, 2013and $5.1 billion, net of valuation allowances of $4.4 billionat December 31, 2012. Deferred tax assets related to a U.S. Federal net operating loss carryforward of $138 millionand a U.S. Federal tax credit carryforward of $23 millionwere recognized at December 31, 2013. The net operating loss carryforward expires in varying amounts beginning in 2022. The U.S. Federal tax credit carryforward expires in varying amounts beginning in 2017. The realization of these carryforwards is 60 --------------------------------------------------------------------------------
dependent on generating sufficient domestic-sourced taxable income prior to their expiration. Although realization is not assured, we believe it is more likely than not that these deferred tax assets will be realized.
In addition, a deferred tax asset related to a U.S. Federal and state capital loss of
$784 millionwas recognized at December 31, 2013that can be carried back three years and carried forward five years. The realization of this carryforward is dependent upon generating sufficient capital gains prior to its expiration. A $383 millionvaluation allowance was established for this item at December 31, 2013.
Taxes are not provided on undistributed earnings of foreign subsidiaries expected to be reinvested indefinitely offshore.
Prior to the Mead Johnson Nutrition Company (Mead Johnson) split-off in 2009, the following transactions occurred: (i) an internal spin-off of Mead Johnson shares while still owned by us; (ii) conversion of
Mead Johnson Class Bshares to Class A shares; and; (iii) conversion of Mead Johnson & Companyto a limited liability company. These transactions as well as the split-off of Mead Johnson through the exchange offer should qualify as tax-exempt transactions under the Internal Revenue Code based upon a private letter ruling received from the Internal Revenue Service related to the conversion of Mead Johnson Class Bshares to Class A shares, and outside legal opinions. Certain assumptions, representations and covenants by Mead Johnson were relied upon regarding the future conduct of its business and other matters which could affect the tax treatment of the exchange. For example, the current tax law generally creates a presumption that the exchange would be taxable to us, if Mead Johnson or its shareholders were to engage in transactions that result in a 50% or greater change in its stock ownership during a four year period beginning two years before the exchange offer, unless it is established that the exchange offer were not part of a plan or series of related transactions to effect such a change in ownership. If the internal spin-off or exchange offer were determined not to qualify as a tax exempt transaction, the transaction could be subject to tax as if the exchange was a taxable sale by us at market value. In addition, a negative basis or excess loss account (ELA) existed in our investment in stock of Mead Johnson prior to these transactions. We received an opinion from outside legal counsel to the effect that it is more likely than not that we eliminated the ELA as part of these transactions and do not have taxable income with respect to the ELA. The tax law in this area is complex and it is possible that even if the internal spin-off and the exchange offer is tax exempt under the Internal Revenue Code, the IRScould assert that we have additional taxable income for the period with respect to the ELA. We could be exposed to additional taxes if this were to occur. Based upon our understanding of the Internal Revenue Code and opinion from outside legal counsel, a tax reserve of $244 millionwas established reducing the gain on disposal of Mead Johnson included in discontinued operations in 2009. We agreed to certain tax related indemnities with Mead Johnson as set forth in the tax sharing agreement. For example, Mead Johnson has agreed to indemnify us for potential tax effects resulting from the breach of certain representations discussed above as well as certain transactions related to the acquisition of Mead Johnson's stock or assets. We have agreed to indemnify Mead Johnson for certain taxes related to its business prior to the completion of the IPO and created as part of the restructuring to facilitate the IPO. We established liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, transfer pricing matters, tax credits and deductibility of certain expenses. Such liabilities represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes known.
For discussions on income taxes, see "Item 8. Financial Statements-Note 1. Accounting Policies-Income Taxes" and "-Note 8. Income Taxes."
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K (including documents incorporated by reference) and other written and oral statements we make from time to time contain certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as "should", "expect", "anticipate", "estimate", "target", "may", "project", "guidance", "intend", "plan", "believe" and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, our goals, plans and projections regarding our financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly under "Item 1A. Risk Factors," that we believe could cause actual results to differ materially from any forward-looking statement. Although we believe we have been prudent in our plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise. 61