Analysis of Financial Performance of Bristol-Myers Squibb - Case Study Example

Financial Performance of Bristol-Myers Squibb Executive summary Bristol-Myers Squibb (BMS) Company is a foremost pharmaceutical manufacturer with a strong record of developing innovative medicinal products for difficult medical conditions. At the beginning of the financial crisis, BMS adapted a strong risk management stance, identifying problem spots early and applying measures to prevent or mitigate the risks. At the same time, it improved its operating efficiency and entered into strategic alliances with other drug companies to share the long-term development risk of R&D and at the same time improve its chances of new discoveries and product commercialization. It is threatened by the near-term lapse of several patents pertaining to its most profitable drugs, necessitating the need to push for new formulations. An examination of the financial statements and comparison with the performance of its closest competitor reveals that BMS continues to maintain its strong profitability and efficiency, and is in an exceptionally good position to take advantage of the coming economic recovery. 2. Introduction Bristol-Myers Squibb Company (BMS) was incorporated in August 1933 in the State of Delaware, which took over operations from a predecessor-company based in New York, which itself began operations in 1887. The original company, Bristol-Myers Company, changed its name when it merged with Squibb in 1989. The declared business operations of the company, as indicated in its report to the Securities and Exchange Commission (SEC), is “the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical and nutritional products.” Today, Bristol-Myers Squibb is a $20 billion pharmaceutical giant based in New York City (BMS Website, 2010). This report is being undertaken in the nature of a company study from the point of view of a potential investor, on Bristol-Myers Squibb Company and its prospects in the industry for the coming year. The study will begin with a an examination of BMS’s company objectives and strategies. This will be supported by a review of Company events and undertakings in line with its stated mission and objectives. 3. Company’s Objective & Strategies 3.1 Objective As with all businesses, BMS strives to produce sustained strong performance and shareholder value. Other than this, however, pharmaceutical firms, by nature of their business, have a higher social calling. The BMS mission is “to discover, develop, and deliver innovative medicines that help patients prevail over serious diseases.” Its avowed commitment, which comprises the Company strategy, is to improve the quality of human life by finding solutions to cure disease and alleviate pain, and in the end allow people to lead longer, fuller lives. 3.2 Strategy -Differentiation 3.2.1 Company best practices Evidence of BMS’s differentiation strategy may be seen in the manner it addresses the currently unfolding financial crisis and economic recession. At a time of great risk, the risk management strategy of the company had helped it weather out the difficult times and come out ahead. Even prior to 2007 when the economic debacle was just beginning to snowball, the Company brought in Sandra Cartie to occupy the newly created post of current chief audit executive (CAE). The company decided to establish the CAE position after a review by external consultants revealed BMS’s management practices followed a siloed approach that was not consistent with leading practices. Among other things, Cartie created a “heat map,” which was a three-by-three grid that simply mapped all of the Company’s key risks. Each of the risks was graphically depicted according to likelihood and impact. All risk categories were evaluated – financial, operational, environmental and reputational. Then each week the Company’s management council – which has committed to “own” the risk – meet to discuss the key risks, confirm the risk tolerance for each, and determine that a plan for prevention, detection, correction and mitigation is at hand and operational to address it (Baker, 2009). Another strategy employed by BMS is the avoidance of bureaucracy. At BMS, the attention is towards keeping processes simple and personal. A source of competitive advantage is the ability to strike the right balance between impersonal rules and procedures characteristic of bureaucratic processes, and the exercise of subjective judgment and personal accountability. Bureaucracy tends to take on a life of its own, as people tend to be regimented by the limitations put around their roles, and forget the bigger picture. In order to combat bureaucracy, BMS adopts a position that their internal auditor should ensure that employees adopt value added roles in the conduct of their functions (Baker, 2009). 3.2.2 Strategic realignments Two of the Company’s businesses, the medical-imaging and wound-care groups, have had a history of pulling in thinner margins for the Company’s coffers, which is why in recent years BMS has began to shed these product lines and focus on the high-margin drug group (Peters and Conover, 2009). By concentrating its efforts on just one group, however, the Company is taking the risk of having put all its eggs in one basket, and should new drugs expected to take off suddenly tank, this could spell huge losses for the firm. Consistent with the Company’s focus on the biopharmaceutical business, BMS has, as of December 2009, announced its intention to divest its holdings in Mead Johnson Nutrition. While Mead Johnson has been a solid performer from the time it began trading in February of 2007 (largely on the back of its successful Enfamil and Enfalac infant formulas), the company’s nearly 2% yield pales in comparison to BMS’s 5% (DRIP Investor, 2009). 3.2.3 Challenges Reports in for the 2009 fourth quarter performance of the US pharmaceutical sector, and all indications are that the industry is showing strong signs of recovery (Eisberg, 2010). While this is a welcome development, it is however imminent that by 2011, many of BMS’s major patents will expire, opening the Company’s top products to legitimate reproduction by generic drugmakers. This threatens a potential loss of about half all the Company’s current sales between the period 2011 and 2013. Patents for its present cash cows, Plavix and Avapro, will be expiring by then, followed by another star, antipsychotic drug Abilify, in 2015. It is thus imperative that BMS’s next generation of drugs should come on line by that time. Another development affecting the pharmaceutical industry in general is the move by government regulators in Britain to ask, or potentially require, pharmaceuticals to share some of the costs of some of their drugs which are currently shouldered by the National Health Service (NHS). The recent move takes issue in particular with leukaemia drugs Sprycel and Tasigna, both manufactured by BMS. The drugs are said to cost $50,000 each for a year’s supply, despite the fact that there has not been sufficient evidence of the drug’s effectiveness (M.A., 2010). Committee meetings of the National Institute for Health and Clinical Excellence (NICE) are calling for the move and, if their initiative is successful, would cut into the profit margins of BMS at least for the two drugs mentioned. 3.2.4 Synergies More than half of BMS’s sales are derived from the drugs developed by partnerships with other pharmaceutical firms. Partnerships allow for the sharing of development costs and diversification of the risks of clinical and regulatory failure. Significant partnerships BMS has made so far include, among others, those with: 1. Sanofi Aventis SNY, with which they created cardiovascular drugs Plavix and Avapro, representing a third of the Company’s total sales (Peters and Conover, 2009). 2. AstraZeneca AZN, with whom they developed the diabetes drug Onglyza, the most important new drug in the Company’s arsenal of future offerings. Another drug being developed by this partnership is dapagliflozin, also a diabetes drug that promises to take off as another high-flying money earner for BMS (Peters and Conover, 2009). 3. Facet Biotech and BMS recently reported potentially promising data on elotuzumab, an investigational humanized antibody being tested for the treatment of relapsed multiple myeloma or MM (Datamonitor, 2010). 4. KineMed, a translational and personalized medicine development company based in Emeryville, California, broadened its collaboration with BMS in their research on a cure of Alzheimer’s disease and other neurodegenerative conditions. The collaboration between the two companies began in June of 2009, exploring possible therapy areas such as diseases of the nervous system, metabolic and cardiovascular disease, cancer, inflammation, and musculoskeletal diseases (Medical Device Daily, 2010). 5. Tranzyme Pharma also entered into a strategic collaboration with BMS, this time to discover and develop to commercialization certain novel macrocyclic compounds directed against identified medical conditions of interest. Tranzyme’s proprietary drug discovery technology, Macrocyclic Template Chemistry (MATCH), which identifies new drug candidates for multiple targets in various therapeutic areas, is at the center of interest in this collaborative venture. Under the agreement, Tranzyme will be principally responsible for early lead discovery, and BMS will be principally responsible for optimizing the identified lead compounds. BMS will also be solely in charge of completing preclinical and clinical development of the products that result from the collaboration, and for their commercial promotion and distribution globally (Datamonitor, 2010). 4. Analysis Porter Model and SWOT 4.1 Analyze Porter Model Based on the information in the previous section, application of Michael Porter’s Five Forces Models yields the following analysis Threat of substitutes The company moves in an industry where the patent creates competitive difference. Before the patent expires, the company has a product that could not be legally imitated. Threat of substitutes is thus low, particularly with the intense R&D process that goes into developing the drug formulation. Threat of the entry of new competitors High entry barriers protect the industry participants due to the high cost of R&D, intensive scientific discipline, and prohibitively long development horizon. On the other hand, the development of generic medicine may prove a way for new players to enter the industry. Intensity of competitive rivalry There is a race to produce novel and effective drugs to address a wider range of conditions, and jealously guarded secrets in R&D heighten this competition. However, consolidation is suggested by the growing incidents of joint projects being entered into by large firms in tandem with smaller, more dynamic firms. Bargaining power of customers While patents exist, bargaining power can of customers can be low, because most medicines have no substitutes. Medicines that are necessary, even critical, for a person’s continued health will have to be acquired even at high prices. Government, however, could step in, as earlier shown, to negotiate price adjustments with the drug companies. Bargaining power of suppliers Large companies such as BMS are capable of influencing the price of raw materials vis-à-vis their suppliers; however, specialized ingredients that require precision in their processing and development will negate to a significant extent the resistance of the Company to the power of suppliers to command prices. 4.2 Evaluate SWOT Referring to the situationer in section 2 of this paper, the following are the assessed strengths and weaknesses of the company, and the threats and opportunities its environment poses for it. They shall be mentioned here with brevity: Strengths Company strengths include best company practices of excellent risk management and reduction of bureaucracy. BMS has strong R&D capability and stable financial condition even during the economic crisis. Weaknesses BMS’s other business lines such as medical imaging, wound care, and nutritional products while profitable have remained slow earners in comparison with the biopharmaceutical products. BMS’s move to consolidate by divesting of these businesses was a wise but risky move. Opportunities BMS sees opportunities in sharing R&D risks while ensuring its greater success by striking up agreements and joint projects with other companies that have R&D capabilities complimentary to it own. The synergies created by these combined efforts ensure a steady development of new products even as the patents of old shiners lapse. Threats Government legislation, first creating laws favoring generics products and secondly in requiring large firms to subsidize socialized medicine could prove a threat to the substantial margins drug firms enjoy out of their proprietary products. 5. Ratios for the years 2004-2008 5.1 Financial ratios In the appendix of this paper are 14 financial tables showing the financial statements of Bristol Myers Squibb, closest competitor Merck & Co., and the percent of sales income statements, common size balance sheets, and financial ratios of both companies. They are presented as basis for analysis of the performance and financial condition of Bristol Myers Squibb, in comparison to its competition. 5.2 Discuss the ratio performance overall A view of Tables A-2, A-3, A-5, A-6 and C-1 yield the following observations: 5.2.1 Greater operational and cost efficiency Before 2006, the company’s performance deteriorated. Its cost of goods sold increased from 31% to 33% of sales; marketing, selling and administrative expenses from 26% to 28%, and total expenses, which jumped by ten basis points from 77% to 87%. However, from 2006 to 2008, cost of goods sold dropped as a proportion of sales, from 33% in 2006 back to 31%. So did marketing, sales and administrative, from 28% to 23%, and total expenses from 87% to a better-than-2004 ratio of 73%. While R&D rose significantly from 2004 (13%) to 2006 (18%), and hardly diminished from 2006 (18%) to 2008 (17%), this is considered ideal. R&D is the most significant productive activity of the company, and if any expenses were to rise, it should be R&D. Furthermore, even as sales rose, inventory dropped and accounts receivables fell, signs of improving efficiency. 5.2.2. Improved sales In the time series analysis, net sales from 2004 to 2006 deteriorated by some 15%, testifying to the deterioration of the market. From 2006, however, sales improved, and surpassed the 2004 level in 2008 by a 6% improvement. It is significant that cost of products sold also rose, and by a faster rate than sales, compared to 2004. This was offset, however, by a drop in marketing, selling and administrative expenses, so that total expenses were held back only to a 1% rise from 2004. 5.2.3 Rising profitability Lower costs and better sales impacted to net earnings rising by 150%, from 10% of sales in 2006 to 25% in 2008. Earnings from continuing operations before minority interest, which comprised 27% of sales, rose by 24% from 2004, but viewed from the past year is a remarkable 52 percentage points, or a 72% improvement over 2007. This brings total net earnings to 220% of 2004 figures, an increase of 140% in just the past year. The improved earnings figure is due to the conduct of the company’s continuing operations, and thus may be expected to continue into the future. 5.2.4 Stronger financial position The company has built a strong cash position, which, given the financial crisis then developing was a strong defensive ploy. The cash also allows the company maneuverability in entering into agreements joint projects with other drug companies. The firm has built a war chest of cash reserves with the intention of making new acquisitions and partnership deals as the opportunity comes along (Peters & Conover, 2009). The Company exploits financial leverage with a 60% debt capital structure, which allows equity holders to enjoy higher earnings. While it implies a higher financial risk, this is offset by the reduction in operational risk in the company’s strategy of creating R&D partnerships with other drug makers. 6. Compare with Merck’s ratios (best competitor in pharmaceutical industry) A look at the horizontal and vertical analysis of the financial statements showed that the efficiencies that were experienced by BMS also materialized for Mercks, with the slight difference that BMS’s sales grew faster and so did its earnings, indicating that proportionally BMS’s relative costs fell faster than Merck’s. As with BMS, there is likewise a horizontal build-up of cash, although not as much as BMS when viewed in proportion to total assets. Looking at the ratio analysis in Table C-1 and C-2, it is evident that BMS has a more liquid position than Merck, a faster turnover, lower inventory, and a higher payout ratio. On the other hand, Merck has higher margins in both gross and net profits, higher EPS levels, and a much improved times interest earned ratio compared to BMS. ROI and ROE are consistent between the two. 7. Overall analysis of financial information 7.1 Evaluate the objectives and Strategies BMS objectives were to produce safe and effective medicines that improve the human condition, at the most efficient cost possible; as a business, its aim is to create shareholder value by keeping the firm profitable. In this, BMS has consistently paid out an average of some 61% over the long term, and although the figure is high it does not appear to be in “immediate jeopardy” (Peters and Conover, 2009). However, the shedding of two groups in the Company’s business and consolidation of its efforts in drugs would tend to increase the risk of a failed drug, not necessarily due to R&D but probably due to bad publicity or adverse legislation, puts this dividend payout record in a precarious situation. As of the writing of this report, Bristol-Myers Squibb has not yet released its full annual report nor its SEC financial report, and thus the 2009 results could not be figured into the ratio analysis. However, in the February 22 article by Eisberg (2010) in Chemistry & Industry, the Chairman and CEO, James Cornelius, is mentioned as divulging selected financial figures for the past quarter. Fourth quarter sales were said to have increased by 11% to $5 billion, translating to a 6% increase for the full year figure to $18.8 billion compared to one year before. Fourth quarter earnings before tax was pegged at $1.3 billion, down from $1.8 billion in 2008, while the full year EBT for 2009 was $1.2 billion, 20% up from past year’s $ 1 billion. Research and development costs were down to $1.1 billion, or a drop of 7% in the fourth quarter of 2009 from the year-ago figure. 7.2 Recommend some key factors help to achieving the goal As is seen, BMS’s objectives as a business and corporate citizen are all adequately met, despite the dire economic situation. Some key factors the firm may consider is to explore new international markets and the possibility of tie-ups with firms in that jurisdiction. Abroad, however, one of the greatest threats to pharmaceuticals is that of the traffic of fake imitations that undercut their profits and likewise put the unwary customer in danger. The company should explore methods of ensuring that their products are protected against counterfeiting, maybe in the packaging or some similar aspect. Source: DRIP Investor, 2009 8. Conclusion From the preceding data, it is evident that BMS performs efficiently, manages its risks well, enjoys profitability, and is exceptionally well positioned to take advantage of the coming recovery. The foregoing price chart shows the market price of the stock being defensively strong, showing the preservation of value of stakeholders’ interest in the Company. It is thus concluded that Bristol-Myers Squibb is a good investment for both growth, income yield, and preservation of capital. REFERENCES Baker, Neil. “A New Direction.” Internal Auditor, Vol. 66 Issue 6, p32-36, Dec2009 Bristol-Myers Squibb Company Annual Reports 2004 – 2008 DRIP Investor. “Bristol-Myers Squibb To Split Off Mead Johnson Business.” DRIP Investor, Vol. 18 Issue 12, p2, Dec2009 Eisberg, Neil. “US pharma sector sees recovery in Q4 figures.” Chemistry & Industry, Issue 4, p12, 2/22/2010 “Facet Biotech and Bristol-Myers report encouraging results from myeloma study.” PharmaWatch: Biotechnology, Vol. 9 Issue 1, p9, Jan2010 “KineMed broadens Alzheimers alliance with Bristol-Myers Squibb.” Medical Device Daily, Vol. 14 Issue 26, p3, 2/9/2010 Lal, Prateek. “Engineers Outlook.” Packaging Digest, Vol. 47 Issue 2, p43, , Feb2010 M. A. “Pharma should help pay for cancer Rx”. Medical Marketing & Media, Vol. 45 Issue 3, p11, Mar2010, Merck & Co Annual Reports 2004 – 2008 “Movers & shakers.” Chemistry & Industry, Issue 1, p12, 1/11/2010 Peters, Josh; Conover, Damien. “Bristol-Myers Squibb BMY”. Morningstar Dividend Investor, Vol. 5 Issue 11, p17, Dec2009 “Tranzyme Pharma signs collaboration agreement with Bristol-Myers.” PharmaWatch: Biotechnology, Vol. 9 Issue 1, p21 Jan2010 APPENDIX A. Bristol-Myers Squibb Financial Tables A-1. BMS Comparative Income Statement A-2 BMS Income Statement as Percent of Sales A-3 BMS Income Statement Horizontal Analysis A-4 BMS Comparative Balance Sheet A-5 BMS Common Size Balance Sheet A-6 BMS Horizontal Analysis B. Merck & Company Financial Tables B-1 Merck Comparative Income Statement B-2 Merck Income Statement as Percentage of Sales B-3 Merck Income Statement Horizontal Analysis B-4 Merck Comparative Balance Sheet B-5 Merck Common Size Balance Sheet B-6 Merck Balance Sheet Horizontal Analysis C. Financial Ratio Analysis C-1 Bristol-Myers Squibb Financial Ratios (Merck on page following) C-2 Merck & Co Financial Ratios Read More