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Bristol-Myers Squibb Company 10-Q 2005
For the quarterly period ended June 30, 2005
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT

 

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

 

Commission File Number 1-1136

 


 

BRISTOL-MYERS SQUIBB COMPANY

(Exact name of registrant as specified in its charter)

 


 

Delaware   22-0790350

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

345 Park Avenue, New York, N.Y. 10154

(Address of principal executive offices)

 

Telephone: (212) 546-4000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

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

 

At June 30, 2005, there were 1,955,861,776 shares outstanding of the Registrant’s $.10 par value Common Stock.

 



Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

INDEX TO FORM 10-Q

JUNE 30, 2005

 

     Page

PART I—FINANCIAL INFORMATION

    

Item 1.

    

Financial Statements:

    

Consolidated Statement of Earnings for the three and six months ended June 30, 2005 and 2004

   3

Consolidated Statement of Comprehensive Income and Retained Earnings for the three and six months ended June 30, 2005 and 2004

   4

Consolidated Balance Sheet at June 30, 2005 and December 31, 2004

   5

Consolidated Statement of Cash Flows for the six months ended June 30, 2005 and 2004

   6

Notes to Consolidated Financial Statements

   7-32

Report of Independent Registered Public Accounting Firm

   33

Item 2.

    

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

   34-63

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

   63

Item 4.

    

Controls and Procedures

   63

PART II—OTHER INFORMATION

    

Item 1.

    

Legal Proceedings

   64

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

   64

Item 4.

    

Submission of Matters to a Vote of Security Holders

   64

Item 6.

    

Exhibits

   65

Signatures

   66

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

 

     Three Months Ended June 30,

    Six Months Ended June 30,

 
     2005

    2004

    2005

    2004

 
     (in millions, except per share data)  

EARNINGS

                                

Net Sales

   $ 4,889     $ 4,819     $ 9,421     $ 9,445  
    


 


 


 


Cost of products sold

     1,483       1,500       2,850       2,857  

Marketing, selling and administrative

     1,268       1,201       2,451       2,427  

Advertising and product promotion

     365       346       683       662  

Research and development

     649       625       1,302       1,208  

Acquired in-process research and development

     —         62       —         62  

Provision for restructuring

     2       6       5       18  

Litigation charges, net

     (26 )     379       98       379  

Gain on sale of business

     —         (18 )     —         (313 )

Equity in net income of affiliates

     (87 )     (59 )     (156 )     (134 )

Other expense, net

     105       8       130       46  
    


 


 


 


Total expenses

     3,759       4,050       7,363       7,212  
    


 


 


 


Earnings from Continuing Operations Before Minority Interest and Income Taxes

     1,130       769       2,058       2,233  

Provision for income taxes

     (21 )     118       247       514  

Minority interest, net of taxes

     160       128       282       235  
    


 


 


 


Earnings from Continuing Operations

     991       523       1,529       1,484  
    


 


 


 


Discontinued Operations

                                

Net Earnings

     —         4       (5 )     7  

Net Gain on Disposal

     13       —         13       —    
    


 


 


 


       13       4       8       7  
    


 


 


 


Net Earnings

   $ 1,004     $ 527     $ 1,537     $ 1,491  
    


 


 


 


Earnings per Common Share

                                

Basic

                                

Earnings from Continuing Operations

   $ .51     $ .27     $ .79     $ .77  

Discontinued Operations

                                

Net Earnings

     —         —         —         —    

Net Gain on Disposal

     —         —         —         —    
    


 


 


 


Net Earnings per Common Share

   $ .51     $ .27     $ .79     $ .77  
    


 


 


 


Diluted

                                

Earnings from Continuing Operations

   $ .50     $ .27     $ .78     $ .76  

Discontinued Operations

                                

Net Earnings

     —         —         —         —    

Net Gain on Disposal

     —         —         —         —    
    


 


 


 


Net Earnings per Common Share

   $ .50     $ .27     $ .78     $ .76  
    


 


 


 


Average Common Shares Outstanding

                                

Basic

     1,952       1,942       1,950       1,940  

Diluted

     1,984       1,976       1,982       1,976  

Dividends declared per common share

   $ .28     $ .28     $ .56     $ .56  

 

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

 

3


Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENT OF

COMPREHENSIVE INCOME AND RETAINED EARNINGS

(UNAUDITED)

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2005

    2004

    2005

    2004

 
     (dollars in millions)  

COMPREHENSIVE INCOME

                                

Net Earnings

   $ 1,004     $ 527     $ 1,537     $ 1,491  

Other Comprehensive Income/(Loss):

                                

Foreign currency translation, net of tax liability of zero and $2 for the three months ended June 30, 2005 and 2004, respectively; and net of tax liability of $4 and tax benefit of $20 for the six months ended June 30, 2005 and 2004, respectively

     (204 )     (115 )     (236 )     41  

Deferred (losses) gains on derivatives qualifying as hedges, net of tax liability of $67 and $12 for the three months ended June 30, 2005 and 2004, respectively; and net of tax liability of $100 and $60 for the six months ended June 30, 2005 and 2004, respectively

     150       19       271       128  

Available for sale securities, net of tax benefit of $3 for the three months ended June 30, 2005 and 2004; and net of tax benefit of $11 and $4 for the six months ended June 30, 2005 and 2004, respectively

     (5 )     (6 )     (20 )     (7 )
    


 


 


 


Total Other Comprehensive Income

     (59 )     (102 )     15       162  
    


 


 


 


Comprehensive Income

   $ 945     $ 425     $ 1,552     $ 1,653  
    


 


 


 


RETAINED EARNINGS

                                

Retained Earnings, January 1

                   $ 19,651     $ 19,439  

Net Earnings

                     1,537       1,491  

Cash dividends declared

                     (1,092 )     (1,088 )
                    


 


Retained Earnings, June 30

                   $ 20,096     $ 19,842  
                    


 


 

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

 

4


Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30,
2005


    December 31,
2004


 
     (dollars in millions)  

ASSETS

                

Current Assets:

                

Cash and cash equivalents

   $ 1,798     $ 3,680  

Marketable securities

     1,242       3,794  

Receivables, net of allowances of $222 and $221

     3,315       4,373  

Inventories, including consignment inventory

     1,993       1,830  

Deferred income taxes, net of valuation allowances

     693       805  

Prepaid expenses

     311       319  
    


 


Total Current Assets

     9,352       14,801  
    


 


Property, plant and equipment, net

     5,642       5,765  

Goodwill

     4,825       4,905  

Other intangible assets, net

     2,083       2,260  

Deferred income taxes, net of valuation allowances

     1,769       1,129  

Other assets

     1,562       1,575  
    


 


Total Assets

   $ 25,233     $ 30,435  
    


 


LIABILITIES

                

Current Liabilities:

                

Short-term borrowings

   $ 292     $ 1,883  

Accounts payable

     1,320       2,127  

Accrued expenses

     2,322       2,838  

Accrued rebates and returns

     1,063       1,209  

U.S. and foreign income taxes payable

     603       1,023  

Dividends payable

     548       545  

Accrued litigation liabilities

     479       186  

Deferred revenue on consigned inventory

     —         32  
    


 


Total Current Liabilities

     6,627       9,843  
    


 


Other liabilities

     1,797       1,927  

Long-term debt

     6,008       8,463  
    


 


Total Liabilities

     14,432       20,233  
    


 


Commitments and contingencies

                

STOCKHOLDERS’ EQUITY

                

Preferred stock, $2 convertible series: Authorized 10 million shares; issued and outstanding 7,205 in 2005 and 7,476 in 2004, liquidation value of $50 per share

     —         —    

Common stock, par value of $.10 per share: Authorized 4.5 billion shares; 2,205 million issued in 2005 and 2,202 million issued in 2004

     220       220  

Capital in excess of par value of stock

     2,525       2,491  

Restricted stock

     (70 )     (57 )

Accumulated other comprehensive loss

     (777 )     (792 )

Retained earnings

     20,096       19,651  
    


 


       21,994       21,513  

Less cost of treasury stock—249 million common shares in 2005 and 255 million in 2004

     (11,193 )     (11,311 )
    


 


Total Stockholders’ Equity

     10,801       10,202  
    


 


Total Liabilities and Stockholders’ Equity

   $ 25,233     $ 30,435  
    


 


 

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

 

5


Table of Contents

BRISTOL-MYERS SQUIBB COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

    

Six Months

Ended June 30,


 
     2005

    2004

 
     (dollars in millions)  

Cash Flows From Operating Activities:

                

Net earnings

   $ 1,537     $ 1,491  

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

                

Depreciation

     294       272  

Amortization

     179       144  

Deferred income tax benefits

     (722 )     (245 )

Litigation settlement expense

     98       379  

Provision for restructuring

     5       18  

Gain on sale of business

     (63 )     (313 )

Acquired in-process research and development

     —         62  

(Gain)/Loss on disposal of property, plant and equipment and investment in other companies

     (7 )     1  

Loss on sale of time deposits and marketable securities

     6       —    

Undistributed losses/(earnings) of affiliates, net

     7       (3 )

Unfunded pension expense

     127       84  

Changes in operating assets and liabilities:

                

Receivables

     682       133  

Inventories

     (245 )     (94 )

Prepaid expenses

     (7 )     (38 )

Other assets

     6       64  

Deferred revenue on consigned inventory

     (32 )     (28 )

Litigation settlement payments, net of insurance recoveries

     174        

Accounts payable and accrued expenses

     (690 )     (243 )

Product liability

     (41 )     51  

U.S. and foreign income taxes payable

     (447 )     33  

Other liabilities

     (101 )     144  
    


 


Net Cash Provided by Operating Activities

     760       1,912  
    


 


Cash Flows From Investing Activities:

                

Purchases, net of sales and maturities, of marketable securities

     2,545       (674 )

Additions to property, plant and equipment and capitalized software

     (352 )     (303 )

Proceeds from disposal of property, plant and equipment and investment in other companies

     69       10  

Proceeds from sale of business

     197       363  

Purchase of Acordis Speciality Fibres

     —         (150 )

ImClone milestone payment

     —         (250 )

Divestiture and acquisition costs

     —         (25 )

Investments in other companies

     (27 )     —    
    


 


Net Cash Provided by (Used in) Investing Activities

     2,432       (1,029 )
    


 


Cash Flows From Financing Activities:

                

Short-term (repayments)/borrowings

     (1,609 )     793  

Long-term debt borrowings

     6       7  

Long-term debt repayments

     (2,502 )     (1 )

Issuances of common stock under stock plans

     139       80  

Dividends paid

     (1,090 )     (1,086 )
    


 


Net Cash Used in Financing Activities

     (5,056 )     (207 )
    


 


Effect of Exchange Rates on Cash and Cash Equivalents

     (18 )     2  
    


 


(Decrease) Increase in Cash and Cash Equivalents

     (1,882 )     678  

Cash and Cash Equivalents at Beginning of Period

     3,680       2,549  
    


 


Cash and Cash Equivalents at End of Period

   $ 1,798     $ 3,227  
    


 


 

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

 

6


Table of Contents

Note 1. Basis of Presentation and New Accounting Standards

 

Bristol-Myers Squibb Company (the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q. These consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position at June 30, 2005 and December 31, 2004, the results of its operations for the three and six months ended June 30, 2005 and 2004 and cash flows for the six months ended June 30, 2005 and 2004. These consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K). PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, has performed a review of the unaudited consolidated financial statements included in this Form 10-Q, and their review report thereon accompanies this Form 10-Q.

 

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be the same as those for the full year.

 

The Company recognizes revenue when substantially all the risks and rewards of ownership have transferred to the customer, primarily at the time of shipment of products. In the case of certain sales made by the Nutritionals and Related Healthcare segments and certain non-U.S. businesses within the Pharmaceuticals segment, revenue is recognized on the date of receipt by the purchaser. Revenues are reduced at the time of sale to reflect expected returns that are estimated based on historical experience. Additionally, provisions are made at the time of sale for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue.

 

In addition, the Company includes alliance revenue in net sales. The Company has agreements to promote pharmaceuticals discovered by other companies. Alliance revenue is based upon a percentage of the Company’s copromotion partners’ net sales and is earned when the copromotion partners ship the related product and title passes to their customer.

 

The Company accounts for certain costs to obtain internal use software for significant systems projects in accordance with Statement of Position (SOP) 98-1. These costs, including external direct costs, interest costs and internal payroll and related costs for employees who are directly associated with such projects are capitalized and amortized over the estimated useful life of the software, which ranges from four to ten years. Costs to obtain software for projects that are not significant are expensed as incurred.

 

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of intangible assets, restructuring charges and accruals, sales rebate and return accruals, legal contingencies and tax assets and liabilities, as well as in estimates used in applying the revenue recognition policy and accounting for retirement and postretirement benefits (including the actuarial assumptions). Actual results could differ from the estimated results.

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. This pronouncement applies to all voluntary changes in accounting principle, and revises the requirements for accounting for and reporting a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. This pronouncement also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 retains many provisions of APB Opinion 20 without change, including those related to reporting a change in accounting estimate, a change in the reporting entity, and correction of an error. The pronouncement also carries forward the provisions of SFAS No. 3 which govern reporting accounting changes in interim financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS No. 154. The Company is evaluating any future effect of this pronouncement.

 

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by FIN 47 are those for which an entity has a legal obligation to

 

7


Table of Contents

Note 1. Basis of Presentation and New Accounting Standards (Continued)

 

perform an asset retirement activity, even if the timing and method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is evaluating the impact this statement will have on its financial position and result of operations.

 

In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-1— Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP No. 109-1). The FSP provides that the Deduction on Qualified Production Activities will be treated as a “special deduction” as described in SFAS No. 109, Accounting for Income Taxes. Accordingly, the tax effect of this deduction will be reported as a component of the Company’s tax provision and will not have an effect on deferred tax assets and liabilities. The Company anticipates that the Department of the Treasury may issue clarifying guidance with respect to the Deduction on Qualified Production Activities. The adoption of FSP No. 109-1 is not expected to have a material effect on the Company’s consolidated financial statements; however, the Company will continue to evaluate the tax effect of the special deduction as further guidance is issued by the Department of the Treasury.

 

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of this Statement should be applied prospectively, and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. The adoption of this accounting pronouncement is not expected to have a material effect on the consolidated financial statements.

 

In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an Amendment of ARB No. 43, Chapter 4. The standard requires abnormal amounts of idle facility and related expenses to be recognized as current period charges and also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the potential impact the adoption of the statement will have on its financial position and results of operations.

 

In December 2004, the FASB issued revised SFAS No. 123R (SFAS No. 123R), Share-Based Payment. This standard eliminates the ability to account for share-based compensation transactions using the intrinsic value-based method under Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and requires instead that such transactions be accounted for using a fair-value-based method. In April 2005, the SEC delayed the effective date of SFAS No. 123R to financial statements issued for the first annual period beginning after June 15, 2005. The Company plans to adopt and comply with the requirements of SFAS No. 123R when it becomes effective January 1, 2006. The implementation of SFAS No. 123R could have a material impact on the Company’s results of operations. Currently, the Company discloses the pro forma net income and related pro forma income per share information in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation Costs—Transition and Disclosure. The following table summarizes the Company’s results on a pro forma basis as if it had recorded compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, for the three and six months ended June 30, 2005 and 2004:

 

     Three Months Ended June 30,

    Six Months Ended June 30,

 
     2005

    2004

    2005

    2004

 
     (dollars in millions, except per share data)  

Net Earnings:

                                

As reported

   $ 1,004     $ 527     $ 1,537     $ 1,491  

Total stock-based employee compensation expense, included in reported net income, net of related tax effects

     7       5       13       10  

Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     (30 )     (34 )     (62 )     (70 )
    


 


 


 


Pro forma

   $ 981     $ 498     $ 1,488     $ 1,431  
    


 


 


 


Basic earnings per share:

                                

As reported

   $ .51     $ .27     $ .79     $ .77  

Pro forma

     .50       .26       .76       .74  

Diluted earnings per share:

                                

As reported

   $ .50     $ .27     $ .78     $ .76  

Pro forma

     .50       .25       .76       .73  

 

Options related to discontinued operations have no impact on basic and diluted earnings per share.

 

8


Table of Contents

Note 1. Basis of Presentation and New Accounting Standards (Continued)

 

With respect to the accounting treatment of retirement eligibility provisions of employee stock-based compensation awards, the Company has historically followed the nominal vesting period approach. Upon the adoption of SFAS No. 123R, the Company will follow the non-substantive vesting period approach and recognize compensation cost immediately for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved. The impact of applying the non-substantive vesting period approach is not material.

 

Note 2. Alliances and Investments

 

Sanofi-Aventis

 

The Company has agreements with Sanofi-Aventis (Sanofi) for the codevelopment and cocommercialization of AVAPRO*/AVALIDE* (irbesartan), an angiotensin II receptor antagonist indicated for the treatment of hypertension, and PLAVIX* (clopidogrel), a platelet aggregation inhibitor. The worldwide alliance operates under the framework of two geographic territories; one in the Americas (principally the United States, Canada, Puerto Rico and Latin American countries) and Australia and the other in Europe and Asia. Accordingly, two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished product to the individual countries. In general, at the country level, agreements either to copromote (whereby a partnership was formed between the parties to sell each brand) or to comarket (whereby the parties operate and sell their brands independently of each other) are in place. The agreements expire on the later of (i) with respect to PLAVIX*, 2013 and, with respect to AVAPRO*/AVALIDE*, 2012 in the Americas and Australia and 2013 in Europe and Asia and (ii) the expiration of all patents and other exclusivity rights in the applicable territory.

 

The Company acts as the operating partner for the territory covering the Americas and Australia and owns a 50.1% majority controlling interest in this territory. Sanofi’s ownership interest in this territory is 49.9%. As such, the Company consolidates all country partnership results for this territory and records Sanofi’s share of the results as a minority interest, net of taxes, which was $154 million and $121 million for the three months ended June 30, 2005 and 2004, respectively, and $273 million and $222 million for the six months ended June 30, 2005 and 2004, respectively. The Company recorded sales in this territory and in comarketing countries (Germany, Italy, Spain and Greece) of $1,227 million and $1,002 million for the three months ended June 30, 2005 and 2004, respectively, and $2,237 million and $1,896 million for the six months ended June 30, 2005 and 2004, respectively.

 

Sanofi acts as the operating partner of the territory covering Europe and Asia and owns a 50.1% majority financial controlling interest in this territory. The Company’s ownership interest in this territory is 49.9%. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s share of net income from these partnership entities before taxes was $87 million and $60 million for the three months ended June 30, 2005 and 2004, respectively, and was $166 million and $134 million for the six months ended June 30, 2005 and 2004, respectively.

 

In 2001, the Company and Sanofi formed an alliance for the copromotion of irbesartan, as part of which the Company contributed the irbesartan distribution rights in the United States and Sanofi paid the Company a total of $350 million in the two years ended December 31, 2002. The Company accounted for this transaction as a sale of an interest in a license and deferred and amortized the $350 million to other income over the expected useful life of the license, which is approximately eleven years. The Company recognized other income of $8 million in each of the three month periods ended June 30, 2005 and 2004 and $16 million in each of the six month periods ended June 30, 2005 and 2004. The unamortized portion of the deferred income is recorded in the liabilities section of the consolidated balance sheet and was $232 million as of June 30, 2005 and $248 million as of December 31, 2004.

 

Otsuka

 

The Company has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote ABILIFY* (aripiprazole) for the treatment of schizophrenia and related psychiatric disorders, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan, and Egypt. The Company began copromoting the product with Otsuka in the U.S. and Puerto Rico in November 2002. In June 2004, the Company received marketing approval from the European Commission. The product is currently copromoted with Otsuka in the United Kingdom, Germany and Spain, and will also be copromoted in France. ABILIFY* is currently distributed exclusively by the Company in France on a temporary basis until copromotion with Otsuka commences. Conversion to the copromotion arrangement is expected to take place before the end of 2005. The Company records alliance revenue for its 65% contractual share of Otsuka’s net sales in these copromotion countries, excluding the United Kingdom, and records all expenses related to the product. The Company recognizes this alliance revenue when

 

9


Table of Contents

Note 2. Alliances and Investments (Continued)

 

ABILIFY* is shipped and all risks and rewards of ownership have transferred to Otsuka’s customers. In the UK, and in France until copromotion with Otsuka commences, the Company records 100% of the net sales and related cost of products sold.

 

The Company also has an exclusive right to sell ABILIFY* in a number of other countries in Europe, the Americas and Asia. In these countries the Company records 100% of the net sales and related cost of products sold. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company to its customers. The agreement expires in November 2012 in the U.S. and Puerto Rico. For the countries in the European Union where the Company has an exclusive right to sell ABILIFY*, the agreement expires on the tenth anniversary of the first commercial sale. In each other country where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the later of the tenth anniversary of the first commercial sale in such country or expiration of the applicable patent in such country.

 

The Company recorded revenue for ABILIFY* of $240 million and $122 million for the three months ended June 30, 2005 and 2004, respectively, and $428 million and $237 million for the six months ended June 30, 2005 and 2004, respectively. Total milestone payments made to Otsuka under the agreement through June 2005 were $217 million, of which $157 million was expensed as acquired in-process research and development. The remaining $60 million was capitalized in other intangible assets and is amortized in cost of products sold over the remaining life of the agreement in the U.S., ranging from eight to eleven years. The Company amortized in cost of products sold $1 million in each of the three months ended June 30, 2005 and 2004, and $3 million and $2 million in the six months ended June 30, 2005 and 2004, respectively. The unamortized capitalized payment balance was $44 million as of June 30, 2005 and $47 million as of December 31, 2004.

 

ImClone

 

The Company has a commercialization agreement expiring in September 2018 with ImClone Systems, Inc (ImClone), a biopharmaceutical company focused on developing targeted cancer treatments, for the codevelopment and copromotion of ERBITUX* in the United States. In February 2004, the U.S. Food and Drug Administration (FDA) approved the Biologics License Application (BLA) for ERBITUX* for use in combination with irinotecan in the treatment of patients with Epidermal Growth Factor Receptor (EGFR)-expressing, metastatic colorectal cancer who are refractory to irinotecan-based chemotherapy and for use as a single agent in the treatment of patients with EGFR-expressing, metastatic colorectal cancer who are intolerant to irinotecan-based chemotherapy. In June 2004, the FDA approved ImClone’s Chemistry, Manufacturing and Controls supplemental BLA for licensure of its BB36 manufacturing facility. The Company paid $250 million in March 2004 as a milestone payment for the initial approval of ERBITUX*. An additional $250 million is payable upon FDA approval for use in treating an additional tumor type. Under the agreement, ImClone receives a distribution fee based on a flat rate of 39% of product revenues in North America. In addition, the Company also has codevelopment and copromotion rights with ImClone in Canada and a 50% share of the codevelopment and copromotion rights ImClone has with Merck KGaA in Japan to the extent the product is commercialized in such countries.

 

The Company accounts for the $250 million approval milestone paid in March 2004 as a license acquisition and amortizes the payment into cost of products sold over the expected useful life of the license, which is approximately fourteen years. The Company amortized into cost of products sold $5 million for each of the three months ended June 30, 2005 and 2004, and $9 million and $6 million for the six months ended June 30, 2005 and 2004, respectively. The unamortized portion of the approval payment is recorded in other intangibles, net and was $227 million as of June 30, 2005 and $236 million as of December 31, 2004.

 

The Company accounts for its investment in ImClone under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s recorded investment in ImClone common stock as of June 30, 2005 and December 31, 2004 was $65 million and $72 million, respectively, representing approximately 17% of the ImClone shares outstanding, respectively. On a per share basis, the carrying value of the ImClone investment and the closing market price of the ImClone shares as of June 30, 2005 were $4.50 and $30.97, respectively, compared to $5.03 and $46.08, respectively, as of December 31, 2004.

 

The Company determines its share in ImClone’s net income or loss by eliminating from ImClone’s results the milestone revenue ImClone recognizes for the pre-approval milestone payments that were recorded by the Company as additional equity investment. For its share of ImClone’s results of operations, the Company recorded net income of $1 million and a net loss of $2 million for the three months ended June 30, 2005 and 2004, respectively, and a net loss of $6 million and $3 million for the six months ended June 30,

 

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Table of Contents

Note 2. Alliances and Investments (Continued)

 

2005 and 2004, respectively. The Company recorded net sales for ERBITUX* of $98 million and $72 million for the three months ended June 30, 2005 and 2004, respectively and $185 million and $89 million for the six months ended June 30, 2005 and 2004, respectively.

 

Merck

 

In April 2004, the Company entered into a collaboration agreement with Merck & Co., Inc. (Merck) for worldwide codevelopment and copromotion for PARGLUVA (muraglitizar), the Company’s dual PPAR (peroxisome proliferator activated receptor) agonist, currently in Phase III clinical development for use in treating type 2 diabetes. In December 2004 the Company submitted a New Drug Application (NDA) to the FDA for regulatory approval of PARGLUVA. Under the terms of the agreement, the Company received a $100 million upfront payment in May 2004 and a $55 million milestone payment in January 2005 for submission of the NDA. The Company is entitled to receive $220 million in additional payments upon achievement of certain regulatory milestones. The Company and Merck will jointly develop the clinical and marketing strategy for PARGLUVA, share equally in future development and commercialization costs and copromote the product to physicians on a global basis, with Merck to receive payments based on net sales levels.

 

The upfront and milestone payments of $155 million were deferred and are being amortized to other income over the expected remaining useful life of the agreement which is approximately sixteen years. The Company recognized $3 million and $1 million of these payments in other income for the three months ended June 30, 2005 and June 30, 2004, respectively, and $5 million and $1 million for the six months ended June 30, 2005 and 2004, respectively. In addition, the Company records Merck’s share of codevelopment costs as a reduction to research and development expense and Merck’s share of copromotion costs as a reduction to advertising and product promotion expense.

 

Note 3. Restructuring

 

In the second quarter of 2005, the Company recorded a net pre-tax charge of $2 million related to the termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations, primarily in Africa. Of this charge, $3 million relates to employee termination benefits and related expenses for approximately 47 selling and administrative personnel, $1 million relates to retention bonuses, partially offset by a $2 million credit related to changes in estimate for restructuring actions taken in prior periods.

 

The following table presents a detail of the charges by segment and type for the three months ended June 30, 2005. The Company expects to substantially complete these activities by late 2005.

 

     Employees

   Termination
Benefits


   Other
Exit
Costs


    Relocation
and
Retention


   Total

 
     (dollars in millions)  

Pharmaceuticals

   47    $ 2    $ 1       1    $ 4  

Changes in estimate

   —        —        (2 )     —        (2 )
    
  

  


 

  


Restructuring as reflected in the statement of earnings

   47    $ 2    $ (1 )   $ 1    $ 2  
    
  

  


 

  


 

In the six months ended June 30, 2005, the Company recorded a net pre-tax charge of $5 million related to the termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations primarily in Latin America, Europe and Africa. Of this charge, $5 million related to employee termination benefits and related expenses for approximately 109 selling and administrative personnel, $1 million related to retention bonuses, partially offset by a $1 million credit related to changes in estimate for restructuring actions taken in prior periods.

 

The following table presents a detail of the charges by segment and type for the six months ended June 30, 2005. The Company expects to substantially complete these activities by late 2005.

 

     Employees

   Termination
Benefits


   Other
Exit
Costs


    Relocation
and
Retention


   Total

 
     (dollars in millions)  

Pharmaceuticals

   102    $ 3    $ 1     $ 1    $ 5  

Related Healthcare

   7      1      —         —        1  

Changes in estimate

   —        —        (1 )     —        (1 )
    
  

  


 

  


Restructuring and other as reflected in the statement of earnings

   109    $ 4    $  —       $ 1    $ 5  
    
  

  


 

  


 

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Table of Contents

Note 3. Restructuring (Continued)

 

In the second quarter of 2004, the Company recorded a net pre-tax charge of $6 million related to the termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations primarily in the United States, Canada, Europe, and Puerto Rico. Of this charge, $9 million related to employee termination benefits and related expenses for approximately 120 selling, administrative and manufacturing personnel, and $2 million related to the consolidation of certain research facilities. These charges were partially offset by an adjustment to prior period restructuring reserve of $5 million, primarily due to a reduction of estimated separation expenses.

 

The following table presents a detail of the charges by segment and type for the three months ended June 30, 2004. The Company has substantially completed these restructuring activities.

 

     Employees

   Termination
Benefits


    Other
Exit
Costs


    Asset
Write-Downs


    Relocation
and
Retention


   Total

 
     (dollars in millions)  

Pharmaceuticals

   85    $ 6       —         —       $ 2    $ 8  

Other Healthcare

   15      2       —         —         —        2  

Corporate/Other

   20      1       —         —         —        1  

Changes in estimate

   —        (3 )     (1 )     (1 )     —        (5 )
    
  


 


 


 

  


Restructuring as reflected in the statement of earnings

   120    $ 6     $ (1 )   $ (1 )   $ 2    $ 6  
    
  


 


 


 

  


 

In the six months ended June 30, 2004, the Company recorded a pre-tax charge of $18 million related to the termination benefits and other related costs for workforce reductions and downsizing and streamlining of worldwide operations primarily in Israel, the United States, Canada, Europe, and Puerto Rico. Of this charge, $17 million related to employee termination benefits and related expenses for approximately 210 selling and administrative personnel, and $1 million related to asset impairments, $4 million of expense related to the consolidation of certain research facilities and $1 million of retention bonuses. These charges were partially offset by an adjustment to prior period restructuring reserve of $5 million, primarily due to a reduction of estimated separation expenses.

 

The following table presents a detail of the charges by segment and type for the six months ended June 30, 2004. The Company has substantially completed these restructuring activities.

 

     Employees

   Termination
Benefits


    Other
Exit
Costs


    Asset
Write-Downs


    Relocation
and
Retention


   Total

 
     (dollars in millions)  

Pharmaceuticals

   152    $ 9     $ 3     $ 1     $ 5    $ 18  

Other Healthcare

   15      2       —         —         —        2  

Corporate/Other

   43      3       —         —         —        3  

Changes in estimate

   —        (3 )     (1 )     (1 )     —        (5 )
    
  


 


 


 

  


Restructuring and other as reflected in the statement of earnings

   210    $ 11     $ 2     $ —       $ 5    $ 18  
    
  


 


 


 

  


 

Restructuring charges and spending against accrued liabilities associated with prior and current actions are as follows:

 

     Employee
Termination
Liability


    Other Exit Costs
Liability


    Total

 
     (dollars in millions)        

Balance at December 31, 2003

   $ 51     $ 7     $ 58  

Charges

     102       5       107  

Spending

     (68 )     (9 )     (77 )

Changes in estimate

     (8 )     —         (8 )
    


 


 


Balance at December 31, 2004

     77       3       80  

Charges

     4       1       5  

Spending

     (31 )     (2 )     (33 )

Changes in estimate

     —         (1 )     (1 )
    


 


 


Balance at June 30, 2005

   $ 50     $ 1     $ 51  
    


 


 


 

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Table of Contents

Note 4. Acquisitions and Divestitures

 

In July 2005, the Company entered into a definitive agreement to sell its U.S. and Canadian Consumer Medicines business and related assets (Consumer Medicines) to Novartis AG. Under the terms of the agreement, Novartis will acquire the trademarks, patents and intellectual property rights of the U.S. and Canadian Consumer Medicines business and related assets for $660 million in cash. The transaction also includes the rights to the U.S. Consumer Medicines brands in Latin America, Europe, the Middle East and Africa. The transaction will be accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As such, the assets and liabilities of Consumer Medicines, classified as held for sale, were $82 million and $38 million as of June 30, 2005, respectively. The results of operations of Consumer Medicines are included in the Company’s consolidated statement of earnings. The transaction is expected to close by the end of the third quarter of 2005, subject to customary regulatory approvals. The sale will result in a pre-tax gain of approximately $560 million to $600 million, subject to certain adjustments and other post-closing matters.

 

In February 2004, the Company completed the divestiture of its Adult Nutritional business to Novartis AG (Novartis) for $386 million, including $20 million contingent on the achievement of contractual requirements, which were satisfied, and a $22 million upfront payment for a supply agreement. The Company recorded a total pre-tax gain of $320 million ($198 million net of tax), which included the $20 million contingent payment, and a $5 million reduction in Company goodwill associated with the Mead Johnson product lines.

 

In April 2004, the Company completed the acquisition of Acordis Speciality Fibres (Acordis), which is headquartered in the United Kingdom and supplied materials to ConvaTec for its Wound Therapeutics line. The acquisition is expected to strengthen the Company’s leadership position in wound therapies. The Company purchased all the stock of Acordis for $150 million, and incurred $8 million of acquisition costs in connection with the transaction. An additional $10 million payment is contingent on the achievement of future sales volumes. The purchase price for the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Of the $158 million, $63 million was allocated to in-process research and development, which represented the estimated fair value of acquired in-process projects, consisting primarily of Medicel, a wound therapeutics product, which had not yet reached technological feasibility and had no alternative future use, and was therefore expensed. The estimated fair value of these projects was determined by employment of a discounted cash flow model; and $22 million was assigned to identifiable intangible assets, predominantly patents. The excess of the purchase price over the estimated fair values of net assets acquired was approximately $73 million and was recorded as goodwill. This acquisition was accounted for by the purchase method, and, accordingly, results of operations have been included in the accompanying consolidated financial statements from the date of acquisition.

 

Note 5. Discontinued Operations

 

In May 2005, the Company completed the sale of Oncology Therapeutics Network (OTN) to One Equity Partners LLC for cash proceeds of $197 million. The Company recorded a pre-tax gain of $63 million ($13 million net of tax), presented as a gain on sale of discontinued operations in the consolidated statement of earnings.

 

The following amounts related to the OTN business have been segregated from continuing operations and reported as discontinued operations, and do not reflect the costs of certain services provided to OTN by the Company. Such costs, which are not allocated by the Company to OTN, are for services which include legal counsel, insurance, external audit fees, payroll processing, and certain human resource services and information technology systems support.

 

     Three Months Ended June 30,

   Six Months Ended June 30,

     2005

    2004

   2005

    2004

     (dollars in millions)

Net sales

   $ 319     $ 611    $ 1,015     $ 1,166

Earnings before income taxes

     (1 )     6      (8 )     11

Net (loss)/earnings from discontinued operations

     —         4      (5 )     7

 

The consolidated statement of cash flows includes the OTN business through the date of disposition. The Company uses a centralized approach to the cash management and financing of its operations and accordingly, debt is not allocated to this business. Cash flows from operating and investing activities of discontinued operations consist of outflows of $252 million and inflows of $26 million for the six months ended June 30, 2005 and 2004, respectively.

 

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Table of Contents

Note 6. Earnings Per Share

 

The numerator for basic earnings per share is net earnings available to common stockholders. The numerator for diluted earnings per share is net earnings available to common stockholders with interest expense added back for the assumed conversion of the convertible debt into common stock. The denominator for basic earnings per share is the weighted average number of common stock outstanding during the period. The denominator for diluted earnings per share is weighted average shares outstanding adjusted for the effect of dilutive stock options and assumed conversion of the convertible debt into common stock. The computations for basic and diluted earnings per common share are as follows:

 

     Three Months Ended June 30,

   Six Months Ended June 30,

     2005

   2004

   2005

    2004

     (dollars in millions, except per share amounts)

Basic:

                            

Earnings from Continuing Operations

   $ 991    $ 523    $ 1,529     $ 1,484

Discontinued Operations

                            

Net Earnings

     —        4      (5 )     7

Net Gain on Disposal

     13      —        13       —  
    

  

  


 

Net Earnings

   $ 1,004    $ 527    $ 1,537     $ 1,491
    

  

  


 

Basic Earnings Per Share:

                            

Average Common Shares Outstanding

     1,952      1,942      1,950       1,940

Earnings from Continuing Operations

   $ .51    $ .27    $ .79     $ .77

Discontinued Operations

                            

Net Earnings

     —        —        —         —  

Net Gain on Disposal

     —        —        —         —  
    

  

  


 

Net Earnings per Share - Basic

   $ .51    $ .27    $ .79     $ .77
    

  

  


 

Diluted:

                            

Earnings from Continuing Operations

   $ 991    $ 523    $ 1,529     $ 1,484

Interest expense on conversion of convertible debt bonds, net of tax

     5      1      9       2

Discontinued Operations

                            

Net Earnings

     —        4      (5 )     7

Net Gain on Disposal

     13      —        13       —  
    

  

  


 

Net Earnings

   $ 1,009    $ 528    $ 1,546     $ 1,493
    

  

  


 

Diluted Earnings Per Share:

                            

Average Common Shares Outstanding

     1,952      1,942      1,950       1,940

Conversion of convertible debt bonds

     29      29      29       29

Incremental shares outstanding assuming the exercise of dilutive stock options

     3      5      3       7
    

  

  


 

       1,984      1,976      1,982       1,976
    

  

  


 

Earnings from Continuing Operations

   $ .50    $ .27    $ .78     $ .76

Discontinued Operations

                            

Net Earnings

     —        —        —         —  

Net Gain on Disposal

     —        —        —         —  
    

  

  


 

Net Earnings per Share - Diluted

   $ .50    $ .27    $ .78     $ .76
    

  

  


 

 

Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation because they were not dilutive, were 141 million for the three and six month periods ended June 30, 2005 and 130 million for the three and six month periods ended June 30, 2004.

 

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Table of Contents

Note 7. Other (Income)/Expense, Net

 

The components of other (income)/expense, net are:

 

     Three Months
Ended June 30,


    Six Months
Ended June 30,


 
     2005

    2004

    2005

    2004

 
     (dollars in millions)  

Interest expense

   $ 73     $ 70     $ 170     $ 139  

Interest income

     (23 )     (21 )     (68 )     (38 )

Foreign exchange transaction losses

     35       38       47       55  

Other, net

     20       (79 )     (19 )     (110 )
    


 


 


 


Other expense, net

   $ 105     $ 8     $ 130     $ 46  
    


 


 


 


 

Interest expense was reduced by net interest swap gains of $15 million and $40 million for the three months ended June 30, 2005 and 2004, respectively, and $43 million and $81 million for the six months ended June 30, 2005 and 2004, respectively. Interest income relates primarily to cash, cash equivalents and investments in marketable securities. Other income includes income from third-party contract manufacturing, royalty income, gains and losses on disposal of investments and property, plant and equipment and debt retirement costs.

 

Note 8. Income Taxes

 

The effective income tax rate on earnings from continuing operations before minority interest and income taxes was (1.9)% and 12.0% for the three and six months ended June 30, 2005, respectively, compared with 15.3% and 23.0% for the three and six months ended June 30, 2004, respectively. The lower effective tax rate was due to a tax benefit associated with the release of tax contingency reserves resulting from the settlement of examinations by the Internal Revenue Service for the years 1998 through 2001, and a change in estimate related to the reduction of a deferred tax provision established in the fourth quarter of 2004 for special dividends under the American Jobs Creation Act of 2004 (AJCA), partially offset by the unfavorable impact for the treatment of certain litigation reserves. In the fourth quarter of 2004, the Company disclosed that it anticipated repatriating approximately $9 billion in special dividends in 2005 and recorded a $575 million provision for deferred taxes pursuant to the AJCA as enacted and other pending matters. In the first quarter of 2005, the Company repatriated approximately $6.2 billion in special dividends from foreign subsidiaries and anticipates repatriating the remainder of the $9 billion later this year. The Company expects that it will use the special dividends in accordance with requirements established by the AJCA and the U.S. Treasury Department. During the second quarter of 2005, the U.S. Treasury Department issued AJCA related guidance clarifying that the “gross-up” for foreign taxes associated with the special dividends also qualifies for the 5.25% tax rate established by the AJCA. As a result of this guidance, the Company reduced the $575 million provision by recording a benefit of approximately $135 million in its tax provision for the second quarter of 2005. The U.S. Treasury Department may issue further clarifying guidance with respect to the special dividends which may have a further impact on the deferred tax provision previously established. Except for earnings associated with the special dividends discussed above, U.S. income taxes have not been provided on the balance of earnings of non-U.S. subsidiaries, since the Company has invested or expects to invest such earnings permanently offshore.

 

Note 9. Inventories

 

The major categories of inventories follow:

 

     June 30,
2005


   December 31,
2004


     (dollars in millions)

Finished goods

   $ 989    $ 1,097

Work in process

     716      458

Raw and packaging materials

     288      275
    

  

     $ 1,993    $ 1,830
    

  

 

The Company has acquired raw and bulk materials in preparation for the manufacturing of abatacept, a biologic compound proposed for the treatment of rheumatoid arthritis, in anticipation of its commercialization. The Company has filed a BLA for abatacept with the FDA and is awaiting FDA’s action. If FDA approval is not granted, the abatacept inventory could be impaired. As of June 30, 2005, the carrying value of abatacept inventories were approximately $62 million. No allowance has been provided for these inventories.

 

15


Table of Contents

Note 10. Property, Plant and Equipment

 

The major categories of property, plant and equipment follow:

 

     June 30,
2005


   December 31,
2004


     (dollars in millions)

Land

   $ 286    $ 290

Buildings

     4,542      4,497

Machinery, equipment and fixtures

     4,580      4,686

Construction in progress

     494      536
    

  

       9,902      10,009

Less accumulated depreciation

     4,260      4,244
    

  

Property, plant and equipment, net

   $ 5,642    $ 5,765
    

  

 

Note 11. Goodwill

 

The changes in the carrying amount of goodwill for the year ended December 31, 2004 and the six months ended June 30, 2005 were as follows:

 

     Pharmaceuticals
Segment


   Nutritionals
Segment


   

Related

Healthcare
Segment


   Discontinued
Operations


    Total

 
     (dollars in millions)  

Balance as of December 31, 2003

   $ 4,448    $ 118     $ 190    $ 80     $ 4,836  

Purchase accounting adjustments:

                                      

Reduction due to sale of Adult Nutritional Business

     —        (5 )     —        —         (5 )

Purchase price and allocation adjustments

     —        —         74      —         74  
    

  


 

  


 


Balance as of December 31, 2004

     4,448      113       264      80       4,905  

Purchase accounting adjustments:

                                      

Reduction due to sale of OTN

     —        —         —        (80 )     (80 )
    

  


 

  


 


Balance as of June 30, 2005

   $ 4,448    $ 113     $ 264    $ —       $ 4,825  
    

  


 

  


 


 

Note 12. Other Intangible Assets

 

As of June 30, 2005 and December 31, 2004, other intangible assets consisted of the following:

 

     June 30,
2005


   December 31,
2004


     (dollars in millions)

Patents / Trademarks

   $ 275    $ 278

Less accumulated amortization

     102      90
    

  

Patents / Trademarks, net

     173      188
    

  

Licenses

     519      523

Less accumulated amortization

     135      116
    

  

Licenses, net

     384      407
    

  

Technology

     1,787      1,787

Less accumulated amortization

     598      516
    

  

Technology, net

     1,189      1,271
    

  

Capitalized Software

     698      748

Less accumulated amortization

     361      354
    

  

Capitalized Software, net

     337      394
    

  

Total other intangible assets, net

   $ 2,083    $ 2,260
    

  

 

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Note 12. Other Intangible Assets (Continued)

 

Amortization expense for other intangible assets (the majority of which is included in cost of products sold) for the three months ended June 30, 2005 and 2004 was $87 million and $75 million, respectively, and for the six months ended June 30, 2005 and 2004 was $179 million and $144 million, respectively.

 

Expected amortization expense related to the carrying amount of other intangible assets is as follows:

 

     (dollars in millions)

For the year ended December 31:

      

2005

   $ 358

2006

     355

2007

     328

2008

     265

2009

     237

Later Years

     719

 

Note 13. Short-term Borrowings and Long-term Debt

 

Short-term borrowings were $292 million at June 30, 2005, compared with $1,883 million at December 31, 2004, primarily as a result of the retirement of U.S. commercial paper. The balance of commercial paper outstanding at December 31, 2004 was $1,665 million, with an average interest rate of 2.3%.

 

Long-term debt was $6,008 million at June 30, 2005 compared to $8,463 million at December 31, 2004. During the second quarter of 2005, the Company repurchased all of its outstanding $2.5 billion aggregate principal amount 4.75% Notes due 2006, and incurred an aggregate pre-tax loss of approximately $69 million in connection with the early redemption of the Notes and termination of related interest rate swaps.

 

Note 14. Accumulated Other Comprehensive Income (Loss)

 

The accumulated balances related to each component of other comprehensive income (loss) are as follows:

 

     Foreign
Currency
Translation


    Available
for Sale
Securities


    Deferred
Loss on
Effective
Hedges


    Minimum
Pension
Liability
Adjustment


    Total
Accumulated Other
Comprehensive Loss


 
     (dollars in millions)  

Balance at December 31, 2003

   $ (491 )   $ 24     $ (258 )   $ (130 )   $ (855 )

Other comprehensive income (loss)

     41       (7 )     128       —         162  
    


 


 


 


 


Balance at June 30, 2004

   $ (450 )   $ 17     $ (130 )   $ (130 )   $ (693 )
    


 


 


 


 


Balance at December 31, 2004

   $ (283 )   $ 23     $ (309 )   $ (223 )   $ (792 )

Other comprehensive income (loss)

     (236 )     (20 )     271       —         15  
    


 


 


 


 


Balance at June 30, 2005

   $ (519 )   $ 3     $ (38 )   $ (223 )   $ (777 )
    


 


 


 


 


 

Note 15. Business Segments

 

The Company has three reportable segments—Pharmaceuticals, Nutritionals, and Related Healthcare. The Pharmaceuticals segment is comprised of the global pharmaceutical and international consumer medicines businesses. The Nutritionals segment consists of Mead Johnson, primarily an infant formula business. The Related Healthcare segment consists of the ConvaTec, Medical Imaging and Consumer Medicines (United States and Canada) businesses.

 

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Note 15. Business Segments (Continued)

 

     Three Months Ended June 30,

    Six Months Ended June 30,

 
     Net Sales

   Earnings Before
Minority Interest
and Income Taxes


    Net Sales

   Earnings Before
Minority Interest
and Income Taxes


 
     (dollars in millions)     (dollars in millions)  
     2005

   2004

   2005

    2004

    2005

   2004

   2005

    2004

 

Pharmaceuticals

   $ 3,886    $ 3,856    $ 1,058     $ 1,139     $ 7,464    $ 7,566    $ 1,969     $ 2,182  

Nutritionals

     548      510      172       162       1,074      1,012      344       340  

Related Healthcare

     455      453      130       155       883      867      240       265  
    

  

  


 


 

  

  


 


Total Segments

     4,889      4,819      1,360       1,456       9,421      9,445      2,553       2,787  

Corporate/Other

     —        —        (230 )     (687 )     —        —        (495 )     (554 )
    

  

  


 


 

  

  


 


Total

   $ 4,889    $ 4,819    $ 1,130     $ 769     $ 9,421    $ 9,445    $ 2,058     $ 2,233  
    

  

  


 


 

  

  


 


 

Note 16. Pension and Other Postretirement Benefit Plans

 

The Company and certain of its subsidiaries have defined benefit pension plans and defined contribution plans for regular full-time employees. The principal pension plan is the Bristol-Myers Squibb Retirement Income Plan. The funding policy is to contribute amounts to provide for current service and to fund past service liability. Plan benefits are based primarily on years of credited service and on the participant’s compensation. Plan assets consist principally of equity and fixed-income securities.

 

The Company also provides comprehensive medical and group life benefits for substantially all U.S. retirees who elect to participate in its comprehensive medical and group life plans. The medical plan is contributory. Contributions are adjusted periodically and vary by date of retirement and the original retiring Company. The life insurance plan is noncontributory. Plan assets consist principally of equity and fixed-income securities. Similar plans exist for employees in certain countries outside of the United States.

 

Cost of the Company’s deferred benefits and postretirement benefit plans included the following components for the three and six months ended June 30, 2005 and 2004:

 

     Three Months Ended June 30,

    Six Months Ended June 30,

 
     Pension Benefits

    Other Benefits

   

Pension Benefits


    Other Benefits

 
     2005

    2004

    2005

    2004

    2005

    2004

    2005

    2004

 
     (dollars in millions)     (dollars in millions)  

Service cost — benefits earned during the period

   $ 53     $ 44     $ 2     $ 2     $ 103     $ 85     $ 5     $ 5  

Interest cost on projected benefit obligation

     84       78       11       13       162       150       21       26  

Expected return on plan assets

     (101 )     (96 )     (6 )     (4 )     (196 )     (185 )     (12 )     (9 )

Net amortization and deferral

     54       41       —         5       104       79       —         10  
    


 


 


 


 


 


 


 


Net periodic benefit cost

     90       67       7       16       173       129       14       32  

Curtailments and settlements

     —         —         —         —         —         —         —         —    
    


 


 


 


 


 


 


 


Total net periodic benefit cost

   $ 90     $ 67     $ 7     $ 16     $ 173     $ 129     $ 14     $ 32  
    


 


 


 


 


 


 


 


 

Contributions

 

For the three and six months ended June 30, 2005, there were no cash contributions to the U.S. pension plans, and $22 million and $38 million, respectively, were contributed to the international pension plans. There was no cash funding for other benefits.

 

Those cash benefit payments from the Company, which are classified as contributions in the FAS 132 disclosure, for the three and six months ended June 30, 2005, totaled $5 million and $9 million, respectively, for pension benefits, and $16 million and $33 million, respectively, for other benefits.

 

Note 17. Legal Proceedings and Contingencies

 

Various lawsuits, claims, proceedings and investigations are pending against the Company and certain of its subsidiaries. In accordance with SFAS No. 5, Accounting for Contingencies, the Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. These matters involve antitrust, securities, patent infringement, the Employee Retirement Income Security Act of 1974, as amended (ERISA), pricing, sales and marketing practices, environmental, health and safety matters, product liability and insurance coverage. The most significant of these matters are described below. There can be no assurance that there will not be an increase in the scope of these matters or that any future lawsuits, claims, proceedings or investigations will not be material.

 

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Note 17. Legal Proceedings and Contingencies (Continued)

 

The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. As a result of external factors, the availability of insurance has become more restrictive while the cost has increased significantly. The Company has evaluated its risks and has determined that the cost of obtaining insurance outweighs the benefits of coverage protection against losses and as such, is self-insured for product liabilities effective July 1, 2004. The Company will continue to evaluate these risks and benefits to determine its insurance needs in the future.

 

PLAVIX* Litigation

 

United States

 

The Company’s U.S. territory partnership under its alliance with Sanofi is a plaintiff in three pending patent infringement lawsuits instituted in the U.S. District Court for the Southern District of New York entitled Sanofi-Synthelabo, Sanofi-Synthelabo Inc., and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership v. Apotex Inc. and Apotex Corp. (Apotex), 02-CV-2255 (SHS); Sanofi-Synthelabo, Sanofi-Synthelabo Inc. and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership v. Dr. Reddy’s Laboratories, LTD, and Dr. Reddy’s Laboratories, Inc., 02-CV-3672 (SHS); and Sanofi-Synthelabo, Sanofi-Synthelabo Inc., and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership vs. Teva Pharmaceuticals USA, Inc. and Teva Pharmaceuticals Industries, Ltd., 04-CV-7458. Teva Pharmaceuticals Industries, Ltd. has since been dismissed from the case. Proceedings involving PLAVIX* also have been instituted outside the United States.

 

The U.S. suits were filed on March 21, 2002, May 14, 2002, and September 23, 2004 respectively, and were based on U.S. Patent No. 4,847,265, a composition of matter patent, which discloses and claims, among other things, the hydrogen sulfate salt of clopidogrel, which is marketed as PLAVIX*. The first two suits were also based on U.S. Patent No. 5,576,328, which discloses and claims, among other things, the use of clopidogrel to prevent a secondary ischemic event. The plaintiffs later withdrew Patent No. 5,576,328 from the two lawsuits. Plaintiffs’ infringement position is based on defendants’ filing of their Abbreviated New Drug Applications (ANDA) with the FDA, seeking approval to sell generic clopidogrel bisulfate prior to the expiration of the composition of matter patent in 2011. The defendants responded by alleging that the patent is invalid and/or unenforceable. Apotex has added antitrust counterclaims. The first two cases were consolidated for discovery. Fact discovery closed on October 15, 2003 and expert discovery was completed in November 2004. The joint pretrial order was submitted May 27, 2005, and the court approved it. The trial may occur in the second half of 2005 or early 2006. In a stipulation approved by the U.S. District Court for the Southern District of New York on April 15, 2005, all parties to the patent infringement litigation against Teva have agreed that the Teva litigation will be stayed, pending resolution of the Apotex and Dr. Reddy’s litigation, and that the parties to the Teva litigation will be bound by the outcome of the litigation in the District Court against Apotex or Dr. Reddy. On April 18, 2005, the Court denied as moot the pending motion to consolidate the Teva litigation with the litigation against Apotex and Dr. Reddy’s, as a result of the Court’s approval of the Stipulation.

 

On April 20, 2005, Apotex filed a complaint for declatory judgment against Sanofi-Aventis, Sanofi-Aventis, Inc., and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership. The complaint seeks a declatory judgment that the ‘265 patent is unenforceable due to alleged inequitable conduct committed during the prosecution of the patent. No response has been submitted at this point.

 

The Company’s U.S. territory partnership under its alliance with Sanofi is a plaintiff in another pending patent infringement lawsuit instituted in the U.S. District Court for the District of New Jersey entitled Sanofi-Synthelabo, Sanofi-Synthelabo Inc. and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership v. Watson Pharmaceuticals, Inc. and Watson Laboratories, Inc. 2:04-CV-4926. The suit was filed October 7, 2004 and was based on U.S. patent 6,429,210, which discloses and claims a particular crystalline or polymorph form of the hydrogen sulfate salt of clopidogrel, which is marketed as PLAVIX*. The case is in its early stages.

 

PLAVIX* is currently the Company’s largest product ranked by net sales. Net sales of PLAVIX* were approximately $3.3 billion for the year ended December 31, 2004.

 

Currently, the Company expects PLAVIX* to have market exclusivity in the United States until 2011. If the composition of matter patent for PLAVIX* is found not infringed, invalid and/or unenforceable at the district court level, the FDA could then approve the defendants’ ANDAs to sell generic clopidogrel, and generic competition for PLAVIX* could begin before the Company has exhausted its appeals. Such generic competition would likely result in substantial decreases in the sales of PLAVIX* in the United States. The statutory stay imposed on the approval of the first-filed ANDA by the filing of the lawsuit on the ‘265 patent under the Hatch-Waxman Act expired May 17, 2005. Accordingly, the Company that filed the first ANDA could obtain final approval at any time and decide to launch a generic product at risk assuming the ANDA application meets the regulatory requirements for approval. Thus there is no legal impediment to final approval of an ANDA and a corresponding generic launch at any time assuming the ANDA application meets the regulatory requirements for approval.

 

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Note 17. Legal Proceedings and Contingencies (Continued)

 

Although the plaintiffs intend to vigorously pursue enforcement of their patent rights in PLAVIX*, it is not possible at this time reasonably to assess the outcome of these lawsuits, or, if the Company were not to prevail in these lawsuits, the timing of potential generic competition for PLAVIX*. It also is not possible reasonably to estimate the impact of these lawsuits on the Company.

 

However, loss of market exclusivity of PLAVIX* and the subsequent development of generic competition would be material to the Company’s sales of PLAVIX* and results of operations and cash flows and could be material to its financial condition and liquidity.

 

Canada

 

Sanofi-Synthelabo and Sanofi-Synthelabo Canada Inc. instituted a prohibition action in the Federal Court of Canada against Apotex Inc. (Apotex) and the Minister of Health in response to a Notice of Allegation from Apotex directed against Canadian Patent 1,336,777 covering clopidogrel bisulfate. Apotex’s Notice of Allegation (NOA) indicated that it had filed an Abbreviated New Drug Submission (ANDS) for clopidogrel bisulfate tablets and that it sought approval (a Notice of Compliance) of that ANDS before the expiration of Canadian Patent 1,336,777, which expires August 12, 2012. Apotex’s NOA further alleged that the ‘777 patent was invalid or not infringed. A hearing was held from February 21 to February 25, 2005. On March 21, 2005, the Canadian Federal Court of Ottawa rejected Apotex’s challenge to the Canadian PLAVIX* patent and held that the asserted claims are novel, not obvious and infringed and granted Sanofi’s application for an order of prohibition against the Minister of Health and Apotex Inc. That order of prohibition will preclude approval of Apotex’s ANDS until the patent expires in 2012, unless the Federal Court’s decision is reversed on appeal. Apotex has filed an appeal.

 

Sanofi-Synthelabo and Sanofi-Synthelabo Canada Inc. also instituted a prohibition action in the Federal Court of Canada against Apotex Inc. (Apotex) and the Minister of Health in response to a Notice of Allegation (NOA) directed against Canadian Patent 2,334,870 covering the form 2 polymorph of clopidogrel bisulfate. Apotex seeks approval of its ANDS before expiration of the ‘870 patent in 2019. Apotex alleges in its NOA that it does not infringe the ‘870 patent and that it is invalid. The action is in its early stages.

 

Sanofi-Aventis and Sanofi-Synthelabo Canada Inc. have also instituted a prohibition action in the Federal Court of Canada against Novopharm Limited (Novopharm) and the Minister of Health in response to a Notice of Allegation from Novopharm directed against Canadian Patent 1,336,777 covering clopidogrel bisulfate. Novopharm’s Notice of Allegation (NOA) indicated that it had filed an Abbreviated New Drug Submission (ANDS) for clopidogrel bisulfate tablets and that it sought approval (a Notice of Compliance) of that ANDS before the expiration of Canadian Patent 1,336,777, which expires August 12, 2012. Novopharm’s NOA further alleged that the ‘777 patent was invalid. Novopharm has since withdrawn its NOA and agreed to be bound by the result in the Apotex proceeding. The prohibition action has therefore been discontinued.

 

United Kingdom

 

In December 2004, Aircoat Limited (Aircoat) filed a nullity petition in the Court of Session in Glasgow, Scotland. By its nullity petition, Aircoat seeks revocation of European Patent 0 281 459, which has been registered in the United Kingdom. European Patent 0 281 459 covers, inter alia, clopidogrel bisulfate, the active ingredient in PLAVIX*. Aircoat specifically alleges that the claims of European Patent 0 281 459 are invalid and the UK patent should be revoked on the grounds of lack of novelty and/or lack of inventive step. The action is in its early stages and no hearing date has been set.

 

OTHER PATENT LITIGATION

 

TEQUIN. The Company and Kyorin Pharmaceuticals Co., Ltd. (Kyorin) commenced a patent infringement action on March 23, 2004, against Teva USA and Teva Industries in the United States District Court for the Southern District of New York, relating to the antibiotic gatifloxacin, for which Kyorin holds the composition of matter patent and which the Company sells as TEQUIN. Teva Industries has since been dismissed from the case. This action relates to Teva’s filing of an ANDA for a generic version of gatifloxacin tablets with a certification that the composition of matter patent, which expires in December 2007 but which has been granted a patent term extension until December 2009, is invalid or not infringed. The filing of the suit places a stay on the approval of Teva’s generic product until June 2007, unless there is a court decision adverse to the Company and Kyorin before that date.

 

TEQUIN (injectable form). The Company and Kyorin Pharmaceuticals Co., Ltd. (Kyorin) commenced patent infringement actions on March 8, 2005, against Apotex Inc. and Apotex Corp., and against Sicor Pharmaceuticals, Inc., Sicor Inc., Sicor Pharmaceuticals Sales Inc., Teva Pharmaceuticals USA, Inc., and Teva Pharmaceutical Industries Ltd. in the United States District Court for the Southern District of New York, relating to injectable forms of the antibiotic gatifloxacin, for which Kyorin holds the composition of matter patent and which the Company sells as TEQUIN. The action related to Apotex’s and Sicor’s filing of ANDAs for generic versions of injectable gatifloxacin with p(IV) certifications that the composition of the matter patent, which expires December 2007

 

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Table of Contents

Note 17. Legal Proceedings and Contingencies (Continued)

 

but which was granted a patent term extension until December 2009, is invalid. The filing of the lawsuits places stays on the approvals of both Apotex’s and Sicor’s generic products until July/August 2007, unless there is a court decision adverse to the Company and Kyorin before that date. The parties have jointly moved to consolidate these two cases with the proceeding above.

 

ERBITUX*. On October 28, 2003, a complaint was filed by Yeda Research and Development Company Ltd. (Yeda) against ImClone and Aventis Pharmaceuticals, Inc. in the U.S. District Court for the Southern District of New York. This action alleges and seeks that three individuals associated with Yeda should also be named as co-inventors on U.S. Patent No. 6,217,866, which covers the therapeutic combination of any EGFR-specific monoclonal antibody and anti-neoplastic agents, such as chemotherapeutic agents, for use in the treatment of cancer. If Yeda’s action were successful, Yeda could be in a position to practice, or to license others to practice, the invention. This could result in product competition for ERBITUX* that might not otherwise occur. The Company, which is not a party to this action, is unable to predict the outcome at this stage in the proceedings.

 

On May 5, 2004, RepliGen Corporation (Repligen) and Massachusetts Institute of Technology (MIT) filed a lawsuit in the United States District Court for the District of Massachusetts against ImClone claiming that ImClone’s manufacture and sale of ERBITUX* infringes a patent which generally covers a process for protein production in mammalian cells. Repligen and MIT seek damages based on sales of ERBITUX* which commenced in February 2004. The patent expired on May 5, 2004, although Repligen and MIT are seeking extension of the patent. The Company, which is not a party to this action, is unable to predict the outcome at this stage in the proceedings.

 

ABILIFY*. On August 11, 2004, Otsuka filed with the United States Patent and Trademark Office (USPTO) a Request for Reexamination of U.S. composition of matter patent covering ABILIFY*, an antipsychotic agent used for the treatment of schizophrenia and related psychiatric disorders (U.S. Patent Number No. 5,006,528, the “528 Patent”) that expires in 2009, and may be extended until 2014 if pending supplemental protection extensions are granted. Otsuka has determined that the original ‘528 Patent application contained an error in that the description of a prior art reference was identified by the wrong patent number. In addition, Otsuka has taken the opportunity to bring other information to the attention of the USPTO. The USPTO has granted the Request for Reexamination and the reexamination proceeding is ongoing. The reexamination proceeding will allow the USPTO to consider the patentability of the patent claims in light of the corrected patent number and newly cited information. The USPTO is expected to make a final decision on the reexamination before the end of 2006.

 

The Company and Otsuka believe that the invention claimed in the ‘528 Patent is patentable over the prior art and expect that the USPTO will reconfirm that in the reexamination. However, there can be no guarantee as to the outcome. If the patentability of the ‘528 Patent were not reconfirmed following a reexamination, there may be sooner than expected loss of market exclusivity of ABILIFY* and the subsequent development of generic competition which would be material to the Company.

 

Paragraph IV Certifications Received

 

PLAVIX*. Mylan Pharmaceuticals, Inc. and Sandoz Inc. have served notices that they filed ANDAs with p(IV) certifications directed against U.S. Patents 6,429,210 and 6,504,030, which cover the form 2 polymorph of clopidogrel bisulfate and expire in 2019. Both assert that their proposed generic formulations do not infringe the patents. Neither company challenged the patent covering PLAVIX* that expires in 2011.

 

VANLEV Litigation

 

In April, May and June 2000, the Company, its former chairman of the board and chief executive officer, Charles A. Heimbold, Jr., and its former chief scientific officer, Peter S. Ringrose, Ph.D., were named as defendants in a number of class action lawsuits alleging violations of federal securities laws and regulations. These actions have been consolidated into one action in the U.S. District Court for the District of New Jersey. The plaintiff claims that the defendants disseminated materially false and misleading statements and/or failed to disclose material information concerning the safety, efficacy and commercial viability of, VANLEV, a drug in development, during the period November 8, 1999 through April 19, 2000.

 

In May 2002, the plaintiff submitted an amended complaint adding allegations that the Company, its former chairman of the board and current chief executive officer, Peter R. Dolan, its former chairman of the board and chief executive officer, Charles A. Heimbold, Jr., and its former chief scientific officer, Peter S. Ringrose, Ph.D., disseminated materially false and misleading statements and/or failed to disclose material information concerning the safety, efficacy, and commercial viability of VANLEV during the period April 19, 2000 through March 20, 2002. A number of related class actions, making essentially the same allegations, were also filed in the U.S. District Court for the Southern District of New York. These actions have been transferred to the U.S. District Court for the District of New Jersey.

 

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Note 17. Legal Proceedings and Contingencies (Continued)

 

The Company filed a motion for partial judgment in its favor based upon the pleadings. The plaintiff opposed the motion, in part by seeking again to amend its complaint. The court granted in part and denied in part the Company’s motion and ruled that the plaintiff may amend its complaint to challenge certain alleged misstatements.

 

The court has certified two separate classes: a class relating to the period from November 8, 1999 to April 19, 2000 and a class relating to the period from March 22, 2001 to March 20, 2002. The class certifications are without prejudice to defendants’ rights to fully contest the merits of plaintiff’s claims. The plaintiff seeks compensatory damages, costs and expenses on behalf of shareholders with respect to the two class periods.

 

On December 17, 2004, the Company and the other defendants made a motion for summary judgment as to all of plaintiff’s claims. The final pre-trial conferences in this matter were held on December 15, 2004 and June 15, 2005. On June 20, 2005, oral argument was heard on the Company’s motion for summary judgment and a decision is pending. No trial date has been set.

 

In January 2005, the plaintiff moved for leave to file a third amended complaint, seeking to combine the two class periods into one expanded class period from October 19, 1999 through March 19, 2002 and to add further allegations that the Company, Peter R. Dolan, Charles A. Heimbold, Jr., and Peter S. Ringrose, Ph.D. disseminated materially false and misleading statements and or failed to disclose material information concerning the safety, efficacy and commercial viability of VANLEV. The Magistrate Judge denied the plaintiff’s motion. Plaintiffs have appealed to the District Court.

 

It is not possible at this time reasonably to assess the final outcome of this litigation or reasonably to estimate the possible loss or range of loss with respect to this litigation. If the Company were not to prevail in final, non-appealable determinations of this litigation, the impact could be material.

 

Other Securities Matters

 

During the period March through May 2002, the Company and a number of its current and former officers were named as defendants in a number of securities class action suits. The suits variously alleged violations of federal securities laws and regulations in connection with three different matters: (1) VANLEV (as discussed above), (2) sales incentives and wholesaler inventory levels, and (3) ImClone, and ImClone’s product, ERBITUX*. As discussed above, the allegations concerning VANLEV have been transferred to the U.S. District Court for the District of New Jersey and consolidated with the action pending there. The remaining actions were consolidated in the U.S. District Court for the Southern District of New York. Plaintiffs filed a consolidated class action complaint on April 11, 2003 against the Company and certain current and former officers alleging a class period of October 19, 1999 through March 10, 2003. The consolidated class action complaint alleged violations of federal securities laws in connection with, among other things, the Company’s investment in and relationship with ImClone and ImClone’s product, ERBITUX*, and certain accounting issues, including issues related to wholesaler inventory and sales incentives, the establishment of reserves, and accounting for certain asset and other sales. The parties reached an agreement in principle to settle the action and on July 30, 2004, the District Court entered an order preliminarily approving the settlement and certifying a class for settlement purposes only. Pursuant to the terms of the proposed settlement, all claims in the action would be dismissed, the litigation would be terminated, the defendants would receive releases, and the Company would pay $300 million to a fund for class members. On November 9, 2004, after a fairness hearing, the District Court certified the action as a class action, approved a settlement of the action, and signed a judgment dismissing the case with prejudice. In the second quarter of 2005, the Company entered into agreements with its various insurers and received $230 million in insurance proceeds which was reflected in its financial statements in the second quarter of 2005.

 

Approximately 58 million shares were excluded from the class action settlement discussed above pursuant to requests for exclusion. Of those, plaintiffs purporting to hold approximately 44.5 million shares brought four actions in New York State Supreme Court. On June 1, 2005, the parties settled these four actions for a total payment of $89 million and the cases were dismissed with prejudice.

 

The Company and a number of the Company’s current and former officers were named as defendants in a purported class action filed on October 6, 2004 in the State Court in Cook County, Illinois. The complaint made factual allegations similar to those made in the settled federal class action in the Southern District of New York and asserted common law fraud and breach of fiduciary duty claims. The complaint purported to assert those claims on behalf of stockholders who purchased the Company’s stock before October 19, 1999 and held onto their stock through March 10, 2003. The Company removed the action to the U.S. District Court for Northern District of Illinois on February 10, 2005. Plaintiffs filed a motion to remand. On July 1, 2005, the District Curt denied the motion to remand and dismissed the case with prejudice.

 

On November 18, 2004, a class action complaint was filed in United States District Court for the Eastern District of Missouri against the Company, D & K Healthcare Resources, Inc. (D & K) and several current and former D & K directors and officers on behalf of

 

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purchasers of D & K stock between August 10, 2000 and September 16, 2002. The class action complaint alleges that the Company participated in fraudulently inflating the value of D & K stock by allegedly engaging in improper “channel-stuffing” agreements with D & K. BMS filed a motion to dismiss this case on January 28, 2005. That motion has been fully briefed and argued, and is under consideration by the court. Under the Private Securities Litigation Reform Act, discovery is automatically stayed pending the outcome of the motion to dismiss. The plaintiff filed a motion to partially lift the automatic discovery stay on February 22, 2005. The Company filed an opposition to the motion on March 4, 2005 and plaintiff filed a reply on March 16, 2005. The court is considering the motion.

 

Beginning in October 2002, a number of the Company’s current and former officers and directors were named as defendants in three shareholder derivative suits pending in the U.S. District Court for the Southern District of New York. A number of the Company’s current and former officers and directors were named as defendants in three shareholder derivative suits filed during the period March 2003 through May 2003 in the U.S. District Court for the District of New Jersey. In July 2003, the U.S. District Court for the District of New Jersey ordered the three shareholder derivative lawsuits that were filed in that court transferred to the U.S. District Court for the Southern District of New York. Subsequently, the U.S. District Court for the Southern District of New York ordered all six federal shareholder derivative suits consolidated. Plaintiffs filed a consolidated, amended, verified shareholder complaint against certain members of the board of directors, current and former officers and PricewaterhouseCoopers (PwC), an independent registered public accounting firm. As is customary in derivative suits, the Company was named as a defendant in this action. The consolidated amended complaint alleged, among other things, violations of federal securities laws and breaches of fiduciary duty by certain individual defendants in connection with the Company’s conduct concerning, among other things: safety, efficacy and commercial viability of VANLEV (as discussed above); the Company’s sales incentives to certain wholesalers and the inventory levels of those wholesalers; the Company’s investment in and relations with ImClone and ImClone’s product ERBITUX*; and alleged anticompetitive behavior in connection with BUSPAR and TAXOL®. The lawsuit also alleged malpractice (negligent misrepresentation and negligence) by PwC. The plaintiffs sought restitution and rescission of certain officers’ and directors’ compensation and alleged improper insider trading proceeds; injunctive relief; fees, costs and expenses; contribution from certain officers for alleged liability in the consolidated securities class action pending in the U.S. District Court for the Southern District of New York (as discussed above); and contribution and indemnification from PwC. The parties reached a settlement of the federal derivative matter which was preliminarily approved by the U.S. District Court for the Southern District of New York on April 26, 2005. Under the proposed settlement, the Company agreed to adopt certain corporate governance enhancements. Also, under the proposed settlement, the plaintiffs’ attorneys requested up to $4.75 million in fees and the Company agreed not to oppose the request. Such fees will be paid from directors’ and officers’ liability insurance proceeds. On May 13, 2005 after a fairness hearing, the District Court approved the settlement and dismissed the action with prejudice. On June 8, 2005, a shareholder who had filed an objection to the settlement, filed a notice of appeal with the Second Circuit. That appeal is pending. Two similar actions are pending in New York State court in which plaintiffs seek equitable relief, damages, costs and attorneys’ fees. Stipulations dismissing those two actions as to the Company and its officers and directors have been filed with the court.

 

As previously disclosed, on August 4, 2004, the Company 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 10s to the Company’s quarterly report on Form 10-Q for the period ended September 30, 2004. In the Consent, the Company agreed, without admitting or denying any liability, not to violate certain provisions of the securities laws. The Company also agreed to establish a $150 million fund for a class of shareholders to be distributed under the court’s supervision. The $150 million fund, which included a $100 million civil penalty, will be distributed to certain Company shareholders under a plan of distribution established by the SEC.

 

The settlement does not resolve the ongoing investigation by the SEC of the activities of certain current and former members of the Company’s management in connection with the wholesaler inventory issues and other accounting matters. The company is continuing to cooperate with this investigation.

 

On June 15, 2005, the United States Attorney’s Office for the District of New Jersey (the “Office”) filed a criminal complaint charging the Company with conspiracy to commit securities fraud in connection with a previously disclosed investigation by that office, concerning the inventory and various accounting matters covered by the Company’s settlement with the SEC. In connection with the filing of that complaint, the Company and the Office entered into a Deferred Prosecution Agreement. Pursuant to that Agreement, the Company agreed to maintain and continue to implement remedial measures pursuant to the settlement with the SEC, take certain additional remedial action and continue to cooperate with the U.S. Attorney’s Office, including with respect to the ongoing investigation regarding individual current and former employees of the Company, as well as to make an additional payment of $300 million into the fund for shareholders established pursuant to the Company’s settlement with the SEC. If the Company fulfills its obligations under the Deferred Prosecution Agreement, the Office will dismiss the criminal complaint two years from the date of its filing.

 

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In the second quarter of 2005, the Company established a charge of $249 million in relation to wholesaler inventory issues and certain other accounting matters as discussed above. These amounts were incremental to the $124 million charge recorded in the first quarter of 2005 and the $16 million charge recorded in the fourth quarter of 2004, bringing total charges to $389 million.

 

ERISA Litigation

 

In December 2002 and the first quarter of 2003, the Company and others were named as defendants in five class actions brought under the Employee Retirement Income Security Act (ERISA) in the U.S. District Courts for the Southern District of New York and the District of New Jersey. These actions have been consolidated in the Southern District of New York under the caption In re Bristol-Myers Squibb Co. ERISA Litigation, 02 CV 10129 (LAP). An Amended Consolidated Complaint was served on August 18, 2003. A Second Amended Consolidated Complaint was brought on behalf of four named plaintiffs and a putative class consisting of all participants in, or beneficiaries of, the Bristol-Myers Squibb Company Savings and Investment Program (Savings Plan) at any time between January 1, 1999 and March 10, 2003 whose accounts included investment in Company stock. The named defendants are the Company, the Bristol-Myers Squibb Company Savings Plan Committee (Committee), thirteen individuals who presently serve on the Committee or who served on the Committee in the recent past, Charles A. Heimbold, Jr. and Peter R. Dolan (the past and present Chief Executive Officers, respectively, and the Company). The Second Amended Consolidated Complaint generally alleges that the defendants breached their fiduciary duties under ERISA during the class period by, among other things, imprudently investing assets of the Savings Plan in Company stock; misrepresenting and failing to disclose truthful and adequate information about Company stock as a Savings Plan investment; and operating under conflicts of interest. In addition, all defendants except Heimbold and Dolan were alleged to have failed to monitor the other Savings Plan fiduciaries. These ERISA claims are predicated upon factual allegations similar to those raised in “Other Securities Matters” above, concerning, among other things: the safety, efficacy and commercial viability of VANLEV; the Company’s sales incentives to certain wholesalers and the inventory levels of those wholesalers; and alleged anticompetitive behavior in connection with BUSPAR and TAXOL®.

 

On June 6, 2005, counsel for plaintiffs and the Company entered into a Stipulation and Agreement of Settlement (Settlement). The Settlement provides, among other things, that the Company pay to the BMS Savings Plan Master Trust approximately $41 million less plaintiffs’ attorneys’ fees, costs and certain expenses (including notice costs). Additionally, the Company agreed to certain structural changes relating to plan administration and participant education. The Settlement provides for certification, for Settlement purposes only, of a class consisting of all persons who were participants in, or beneficiaries of, (i) the Bristol-Myers Squibb Company Savings and Investment Program; (ii) the Bristol-Myers Squibb Puerto Rico, Inc. Savings and Investment Program; and (iii) the Bristol-Myers Squibb Company Employee Incentive Thrift Plan, at any time between January 1, 1999 and March 10, 2003 and whose accounts in such plans included investments in the Bristol-Myers Squibb Company Stock Fund (excluding the individual defendants). The U.S. District Court for the Southern District of New York preliminarily approved the Settlement on June 22, 2005. Notice of the Settlement is to be completed by August 22, 2005, and the fairness hearing has been scheduled for October 12, 2005. If the Company were not to prevail in final, non-appealable determination of this matter, the impact could be material to its results of operations.

 

Pricing, Sales and Promotional Practices Litigation and Investigations

 

The Company, together with a number of other pharmaceutical manufacturers, is a defendant in several private class actions and in actions brought by the Nevada, Montana, Pennsylvania, Wisconsin, Kentucky, Illinois and Alabama Attorneys General, the City of New York and several New York counties that are pending in federal and state courts relating to the pricing of certain Company products. The federal cases, and some related state court cases that were removed to federal courts, have been consolidated for pre-trial purposes under the caption In re Pharmaceutical Industry Average Wholesale Price Litigation, MDL No. 1456, Civ. Action No. 01-CV-12257-PBS, before United States District Court Judge Patti B. Saris in the United States District Court for the District of Massachusetts (AWP Multidistrict Litigation). On June 18, 2003, the private plaintiffs in the AWP Multidistrict Litigation filed an Amended Master Consolidated Complaint (Amended Master Complaint). The Amended Master Complaint contains two sets of allegations against the Company. First, it alleges that the Company’s and many other pharmaceutical manufacturers’ reporting of prices for certain drug products (20 listed drugs in the Company’s case) had the effect of falsely overstating the Average Wholesale Price (AWP) published in industry compendia, which in turn improperly inflated the reimbursement paid to medical providers, pharmacists, and others who prescribed, administered or sold those products to consumers. Second, it alleges that the Company and certain other defendant pharmaceutical manufacturers conspired with one another in a program called the “Together Rx Card Program” to fix AWPs for certain drugs made available to consumers through the Program. The Amended Master Complaint asserts claims under the federal RICO and antitrust statutes and state consumer protection and fair trade statutes.

 

The Amended Master Complaint is brought on behalf of two main proposed classes, whose definitions have been subject to further amendment as the case has progressed. As of December 17, 2004, those proposed classes may be summarized as: (1) all persons or entities who, from 1991 forward, paid or reimbursed all or part of a listed drug under Medicare Part B or under a private contract that expressly used AWP as a pricing standard and (2) all persons or entities who, from 2002 forward, paid or reimbursed any portion of

 

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the purchase price of a drug covered by the Together Rx Card Program based in whole or in part on AWP. The first class is further divided into several proposed subclasses depending on whether the listed drug in question is physician-administered, self-administered, sold through a pharmacy benefits manager or specialty pharmacy, or is a brand-name or generic drug. On September 3, 2004, plaintiffs in the AWP Multidistrict Litigation moved for certification of a proposed plaintiff class. The parties briefed that motion, as it related to the amended proposed definition of the first main class and sub-classes discussed above, and motion was heard by the Court on February 10, 2005.

 

The Company and other defendants moved to dismiss the Amended Master Complaint on the grounds that it fails to state claims under the applicable statutes. On February 24, 2004, the Court denied this motion in large part, although the Court dismissed one of the plaintiffs’ claims for failure to plead a cognizable RICO “enterprise”. Accordingly, the Court required that the Company and the other defendants answer the Amended Master Complaint. The Court subsequently ordered that five defendants, including the Company engage in accelerated discovery with respect to the remaining allegations of the Amended Master Complaint, other than the allegations related to Together Rx, which are on a more extended discovery schedule. This accelerated discovery continues for these five defendants until August, 2005. In addition, the Company and the other defendants have obtained discovery of the named plaintiffs and of several non-parties, such as benefits consultants, the federal government, and health insurers. The current schedule calls for expert reports, expert depositions and summary judgment briefing on liability issues during the second half of 2005 into early 2006.

 

The cases commenced by the Nevada, Montana, Pennsylvania, Wisconsin, Illinois, Alabama and Kentucky Attorneys General (the Attorneys General AWP Cases) and the cases commenced by New York City and several New York counties (the New York City & County AWP Cases) include fraud and consumer protection claims similar to those in the Amended Master Complaint. Certain of the states, city and counties also have made additional allegations that defendants, including the Company, have violated state Medicaid statutes by, among other things, failing to provide the states with adequate rebates required under federal law.

 

In a series of decisions in June, September, and October 2004, affecting the Montana Attorney General’s case and the New York City & County AWP Cases which are proceeding in the AWP Multidistrict Litigation in coordination with the private class actions, the Court declined to find that the Medicaid rebate claims were preempted by federal law, but nevertheless dismissed many of the claims relating to “rebate” payments made by several drug manufacturers, including those claims relating to the Company as insufficiently pled. The Court allowed to proceed the state law claims that allege that the Company misreported AWPs. The Company has filed its answer to the claims remaining in the Montana Attorney General’s complaint. On June 15, 2005, New York City and all of the Counties that have sued thus far (except Suffolk, Nassau and Erie Counties, which continue to proceed separately) served the Company and other manufacturers with a Consolidated Complaint. The Consolidated Complaint contains claims similar to those in the prior, individual complaints of the City and Counties.

 

The Company also joined with other defendants in a motion to dismiss the Pennsylvania Attorney General’s action. In a decision filed February 1, 2005, the Pennsylvania Commonwealth Court granted the motion to dismiss on the ground that the plaintiff had failed to plead the complaint with the requisite particularity. The Attorney General has since served an Amended Complaint to which defendants have objected. Defendants’ objections to the Pennsylvania Complaint have been fully briefed and were heard by the Commonwealth Court on June 8, 2005. On July 16, 2004, the Nevada court denied the Company’s and other defendants’ motions to dismiss the complaint except as to the state RICO claim and granted the Attorney General leave to replead, in an opinion that was based on the prior rulings of the AWP Multidistrict Litigation Court. The Nevada court subsequently entered an order coordinating all discovery in that case with that in the AWP Multidistrict Litigation.

 

The Company and other defendants also have made motions to dismiss in the other Attorneys General AWP Cases. On July 13, 2005, the Company and the other defendants removed all of the Attorneys General AWP Cases (other than the Nevada case) to the federal district courts in their respective states based on a recent U.S. Supreme Court ruling that established federal jurisdiction over the claims made therein. The Company anticipates that it and the other defendants will seek to have the Attorneys General AWP Cases transferred to the AWP Multidistrict litigation, but that the Attorneys’ General will seek to have the Cases remanded to their respective state courts.

 

The Company is also one of a number of defendants in a private class action making AWP-based claims that was remanded from the AWP Multidistrict Litigation to Arizona state court. An individual, Robert J. Swanston, asserts claims under Arizona state law on behalf of himself and an alleged class of persons and entities in Arizona who paid for prescription drugs based on AWP (the Swanston Action), which claims generally allege that the defendant drug manufacturers have conspired to inflate AWPs. By order dated August 5, 2004, the Arizona Court denied defendants’ motions to dismiss or stay the proceedings. However, at the later request of counsel for the plaintiff, the Arizona Court on March 10, 2005, issued a stay of the proceedings pending the class determination in the AWP Multidistrict Litigation.

 

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On or about October 8, 2004, the Company was added as a defendant in a putative class action previously commenced against other drug manufacturers in federal court in Alabama. The case was brought by two health care providers that are allegedly entitled under a federal statute, Section 340B of the Public Health Service Act, to discounted prices on prescription drugs dispensed to the poor in the providers’ local areas. The plaintiff health care providers contend that they and an alleged class of other providers authorized to obtain discounted prices under the statute may in fact not have received the level of discounts to which they are entitled. The Amended Complaint against the Company and the other manufacturers asserts claims directly under the federal statute, as well as under state law for unjust enrichment and for an accounting. The Company has joined in a motion to dismiss the Complaint that was filed by the original manufacturer defendants and that has, with the court’s approval been made applicable to the Amended Complaint.

 

Finally, the Company is a defendant in related state court proceedings commenced in New York, New Jersey, California, and Tennessee. Those proceedings were transferred to the AWP Multidistrict Litigation for pre-trial purposes. The plaintiffs in the California and New Jersey actions sought to remand their cases to the state courts. The California remand motions were denied, and the New Jersey remand motion remains pending.

 

These cases are at a very preliminary stage, and the Company is unable to assess the outcome and any possible effects on its business and profitability, or reasonably estimate possible loss or range of loss with respect to these cases. If the Company were not to prevail in final, non-appealable determinations of these litigations and investigations, the impact could be material.

 

The Company, together with a number of other pharmaceutical manufacturers, also has received subpoenas and other document requests from various government agencies seeking records relating to its pricing, sales and marketing practices, and “Best Price” reporting for drugs covered by Medicare and/or Medicaid. The requests for records have come from the U.S. Attorneys’ Offices for the District of Massachusetts, the Eastern District of Pennsylvania, and the Northern District of Texas, the Civil Division of the Department of Justice, the Offices of the Inspector General of the Department of Health and Human Services and the Office of Personnel Management (each in conjunction with the Civil Division of the Department of Justice), and several states. In addition, requests for information have come from the House Committee on Energy & Commerce and the Senate Finance Committee in connection with investigations that the committees are currently conducting into Medicaid Best Price issues and the use of educational grants by pharmaceutical companies.

 

As previously disclosed, in mid-2003, the Company initiated an internal review of certain of its sales and marketing practices, focusing on whether these practices comply with applicable anti-kickback laws and analyzing these practices with respect to compliance with (1) Best Price reporting and rebate requirements under the Medicaid program and certain other U.S. governmental programs, which reference the Medicaid rebate program and (2) applicable FDA requirements. The Company has met with representatives of the U.S. Attorney’s Office for the District of Massachusetts to discuss the review and has received related subpoenas from that U.S. Attorney’s Office, including a subpoena received on May 5, 2005 for documents relating to possible off label promotion of ABILIFY*. The Company’s internal review is expected to continue until resolution of pending governmental investigations of related matters.

 

The Company is producing documents and actively cooperating in the investigations, which could result in the assertion of civil and/or criminal claims. The Company has reserves for liabilities in relation to pharmaceutical pricing and sales and marketing practices of $134 million. It is not possible at this time to reasonably assess the final outcome of these matters. In accordance with GAAP, the Company has determined that the above amount represents minimum expected probable losses with respect to these matters, which losses could include the imposition of fines, penalties, administrative remedies and/or liability for additional rebate amounts. Eventual losses related to these matters may exceed these reserves, and the further impact could be material. The Company does not believe that the top–end of the range for these losses can be estimated. If the Company were not to prevail in final, non–appealable determinations of these litigations and investigations, the impact could be material.

 

As previously disclosed, in 2004 the Company undertook an analysis of its methods and processes for calculating prices for reporting under governmental rebate and pricing programs related to its U.S. Pharmaceuticals business. The analysis was completed in early 2005. Based on the analysis, the Company identified the need for revisions to the methodology and processes used for calculating reported pricing and related rebate amounts and implemented these revised methodologies and processes beginning with its reporting to the Federal government agency with primary responsibility for these rebate and price reporting obligations, the Centers for Medicare and Medicaid Services (CMS) in the first quarter of 2005. In addition, using the revised methodologies and processes, the Company also has recalculated the “Best Price and “Average Manufacturer’s Price” required to be reported under the Company’s federal Medicaid rebate agreement and certain state agreements, and the corresponding revised rebate liability amounts under those programs for the three-year period 2002 to 2004. Upon completion of the analysis in early 2005, the Company determined that the estimated rebate liability for those programs for the three-year period 2002 to 2004 was actually less than the rebates that had been paid by the Company for such period. Accordingly, in the fourth quarter of 2004, the Company recorded a reduction to the rebate liability in the amount of the estimated overpayment. The Company’s proposed revisions and its updated estimate have been

 

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submitted for review to CMS. The Department of Justice (DOJ) has informed the Company that it also is reviewing the submission in conjunction with the previously disclosed subpoena received by the Company from the DOJ relating to, among other things, “Best Price” reporting for drugs covered by Medicaid as discussed in more detail above. These agencies may take the position that further revisions to the company’s methodologies and calculations are required. Upon completion of governmental review, the Company will determine whether any further recalculation of the liability from the Company under the identified programs for any period or under any other similar programs is necessary or appropriate. The Company believes, based on current information, that any such recalculation is not likely to result in material rebate liability. However, due to the uncertainty surrounding the recoverability of the Company’s estimated overpayment arising from the review process described above, the Company recorded a reserve in an amount equal to the estimated overpayment.

 

General Commercial Litigation

 

The Company, together with a number of other pharmaceutical manufacturers, has been named as a defendant in an action filed in California State Superior Court in Oakland, James Clayworth et al. v. Bristol-Myers Squibb Company, et al., alleging that the defendants have conspired to fix the prices of pharmaceuticals by agreeing to charge more for their drugs in the United States than they charge in Canada, and asserting claims under California’s Cartwright Act and unfair competition law. The plaintiffs seek treble damages for any damages they have sustained; restitution of any profit obtained by defendants through charging artificially higher prices to plaintiffs; an injunction barring the defendants from charging the plaintiffs higher prices offered to other customers; an award of reasonable attorneys’ fees and costs; and any other relief the Court deems proper.

 

This case is at a very preliminary stage, and the Company is unable to assess the outcome and any possible effect on its business and profitability, or reasonably estimate possible loss or range of loss with respect to this case. If the Company were not to prevail in a final, non-appealable determination of this litigation, the impact could be material.

 

The Company also has been named as a defendant, along with many other pharmaceutical companies, in an action brought by the Utility Consumers Action Network, a consumer advocacy organization which focuses on privacy issues. The lawsuit, filed in California State Superior Court, San Diego County, and entitled Utility Consumers Action Network on behalf of the Privacy Rights Clearinghouse, et al. v. Bristol-Myers Squibb Co., et al, was originally directed only at retail drug stores but was amended in July, 2004 to add the Company and the other pharmaceutical companies as defendants. Another lawsuit, Rowan Klein, a Representative Action on Behalf of Similarly Situated Persons and the Consuming Public, v. Walgreen’s, et al., was filed in February 2005, also in California State Superior Court, San Diego County, against retail pharmacies, the Company and other pharmaceutical companies, and is substantially the same as the Utility Consumers Action Network lawsuit (jointly referred to as “the Complaints”). The Complaints seek equitable relief, monetary damages and attorneys’ fees based upon allegedly unfair business practices and untrue and misleading advertising under various California statutes, including the California Confidentiality of Medical Information Act. Specifically, the Complaints allege that through the “Drug Marketing Program”, retail stores are selling consumers’ confidential medical information to companies. The Complaints further allege that the companies are using consumers’ medical information for direct marketing that increase the sale of targeted drugs.

 

Both cases are at a very preliminary stage, and the Company is unable to assess the outcome and any possible effect on its business and profitability, or reasonably estimate possible loss or range of loss with respect to this case. If the Company were not to prevail in a final, non-appealable determination of these two lawsuits, the impact could be material.

 

Product Liability Litigation

 

The Company is a party to product liability lawsuits involving allegations of injury caused by the Company’s pharmaceutical and over-the-counter medications. The majority of these lawsuits involve certain over-the-counter medications containing phenylpropanolamine (PPA), hormone therapy products, and the Company’s SERZONE and STADOL NS prescription drugs. In addition to lawsuits, the Company also faces unfiled claims involving the same products.

 

PPA. In May 2000, Yale University published the results of its Hemorrhagic Stroke Project, which concluded that there was evidence of a suggestion that PPA may increase the risk of hemorrhagic stroke in a limited population. In November 2000, the FDA issued a Public Health Advisory and requested that manufacturers of PPA-containing products voluntarily cease manufacturing and marketing them. At that time, the only PPA-containing products manufactured or sold by the Company were COMTREX (liqui-gel formulations only) and NALDECON. On or about November 6, 2000, the Company, as well as other manufacturers of PPA- containing products, discontinued the manufacture and marketing of PPA-containing products and allowed customers to return any unused product that they had in their possession.

 

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In January 2001, the Company was served with its first PPA lawsuit. The Company currently is a defendant in approximately 20 personal injury lawsuits, filed on behalf of approximately 20 plaintiffs, in federal and state courts throughout the United States. Many of these lawsuits involve multiple defendants. Among other claims, plaintiffs allege that PPA causes hemorrhagic and ischemic strokes, that the defendants were aware of the risk, failed to warn consumers and failed to remove PPA from their products. Plaintiffs seek compensatory and punitive damages. All of the federal cases have been transferred to the U.S. District Court for the Western District of Washington, In re Phenylpropanolamine (PPA) Products Liability Litigation, MDL No. 1407. The District Court has denied all motions for class certification and there are no class action lawsuits pending against the Company in this litigation.

 

On June 18, 2003, the District Court issued a ruling effectively limiting the plaintiffs’ claims to hemorrhagic and ischemic strokes. Rulings favorable for the defendants included the inadmissibility of expert testimony in cases alleging injuries occurring more than three days after ingestion of a PPA-containing product and cases involving psychoses, seizures and cardiac injuries. The Company expects to be dismissed from additional cases in which its products were never used by the plaintiffs and where plaintiffs’ alleged injury occurred more than three days after ingestion of a PPA-containing product or where a plaintiff suffered from cardiac injuries or psychoses.

 

SERZONE. SERZONE (nefazodone hydrochloride) is an antidepressant that was launched by the Company in May 1994 in Canada and in March 1995 in the United States. In December 2001, the Company added a black box warning to its SERZONE label warning of the potential risk of severe hepatic events including possible liver failure and the need for transplantation and risk of death. Within several months of the black box warning being added to the package insert for SERZONE, a number of lawsuits, including several class actions, were filed against the Company. Plaintiffs allege that the Company knew or should have known about the hepatic risks posed by SERZONE and failed to adequately warn physicians and users of the risks. They seek compensatory and punitive damages, medical monitoring, and refunds for the costs of purchasing SERZONE. In May 2004, the Company announced that, following an evaluation of the commercial potential of the product after generic entry into the marketplace and rapidly declining brand sales, it had decided to discontinue the manufacture and sale of the product in the U.S. effective June 14, 2004.

 

At present, the Company has approximately 216 lawsuits, on behalf of approximately 2,625 plaintiffs, pending against it in federal and state courts throughout the United States. Twenty-seven of these cases are pending in New York State Court and have been consolidated for pretrial discovery. In addition, there are approximately 763 alleged, but unfiled, claims of injury associated with SERZONE. In August 2002, the federal cases were transferred to the U.S. District Court for the Southern District of West Virginia, In re Serzone Products Liability Litigation, MDL 1477. In June 2003, the District Court dismissed the class claims in all but two of the class action complaints. A purported class action has also been filed in Illinois. Although a number of the class action complaints filed against the Company had sought the certification of one or more personal injury classes, the remaining class action complaints do not seek the certification of personal injury classes. In addition to the cases filed in the United States, there are four national class actions filed in Canada.

 

Without admitting any wrongdoing or liability, on or around October 15, 2004, the Company entered into a settlement agreement with respect to all claims in the United States and its territories regarding SERZONE. The settlement agreement embodies a schedule of payments dependent upon whether the class member has developed a qualifying medical condition, whether he or she can demonstrate that they purchased or took SERZONE, and whether certain other criteria apply. The settlement is subject to final approval by the District Court and any appeals therefrom. Pursuant to the settlement agreement, plaintiffs’ class counsel filed a class action complaint seeking relief for the settlement class. On November 18, 2004, the District Court conditionally certified the temporary settlement class and preliminarily approved the settlement. The opt-out period ended on April 8, 2005. Potential class members could have entered the settlement up to and including May 13, 2005. The fairness hearing occurred on June 29, 2005. The Court requested additional submissions from the parties before ruling on the settlement’s fairness. Pursuant to the terms of the proposed settlement, all claims will be dismissed, the litigation will be terminated, the defendants will receive releases, and the Company commits to paying at least $70 million to funds for class members. Class Counsel will have the right to petition the court for an award of reasonable attorneys’ fees and expenses; the fees will be paid by the Company and will not reduce the amount of money paid to class members as part of the settlement. The Company may terminate the settlement based upon the number of claims submitted or the number of purported class members who opt not to participate in the settlement and instead pursue individual claims.

 

In the second quarter of 2004, the Company established reserves for liabilities for these lawsuits of $75 million. It is not possible at this time to reasonably assess the final outcome of these lawsuits. In accordance with GAAP, the Company has determined that the above amounts represent minimum expected probable losses with respect to these lawsuits. Eventual losses related to these lawsuits may exceed these reserves, and the further impact could be material. The Company does not believe that the top-end of the range for these losses can be estimated.

 

STADOL NS. STADOL NS was approved in 1992 by the FDA as an unscheduled opioid analgesic nasal spray. In February 1995, the Company asked the FDA to schedule STADOL NS as a Schedule IV, low potential for abuse, drug due to post-marketing reports

 

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suggestive of inappropriate use of the product. On October 31, 1997, it became a Schedule IV drug. Since 1997, the Company has received a number of lawsuits involving STADOL. In late 2002, the number of filed suits increased due to newly passed tort reform legislation, which became effective on January 1, 2003. Most, if not all, of the plaintiffs in these new suits had previously asserted claims against the Company for their alleged injuries. In May 2004, the Company announced that, following an evaluation of the commercial potential of the product after generic entry in the marketplace and rapidly declining brand sales, it had decided to discontinue the manufacture and sale of the product effective June 14, 2004.

 

The Company is a party in approximately 8 cases pending, on behalf of a total of approximately 39 plaintiffs, in federal and state courts throughout the United States. The Company is finalizing the settlement of 7 of those lawsuits, involving 38 plaintiffs.

 

In the second quarter of 2004, the Company recovered insurance proceeds of $25 million with respect to the STADOL NS case.

 

In the second quarter of 2005, the Company entered into agreements to settle coverage disputes with its various insurers and expects to recover insurance proceeds of $65 million with respect to the STADOL NS and SERZONE cases as discussed above, which were recorded in the second quarter of 2005.

 

BREAST IMPLANT LITIGATION. The Company, together with its subsidiary Medical Engineering Corporation (MEC) and certain other companies, remains a defendant in a few lawsuits alleging damages for personal injuries of various types resulting from polyurethane-covered breast implants and smooth-walled breast implants formerly manufactured by MEC or a related company. The vast majority of similar lawsuits were resolved through settlements or trial.

 

The Company remains subject to the terms of a nationwide class action settlement approved by the Federal District Court in Birmingham, Alabama (Revised Settlement) that will run through 2010. The Company has established accruals in respect of breast implant product liability litigation. The Company believes that any possible loss in addition to the amounts accrued will not be material.

 

HORMONE REPLACEMENT THERAPY (HRT) LITIGATION. In 1991, The National Institute of Health began some clinical trials involving Prempro (estrogen and progestin) and Premarin (estrogen), both of which are manufactured by Wyeth. A July 2002, article in the Journal of the American Medical Association reported that among the Prempro subjects, there were increased risks of breast cancer, heart attacks, blood clots and strokes. The Prempro phase of the study was stopped on July 9, 2002. In July 2003, the Company was served with its first HRT lawsuit. The Company products involved in this litigation are: ESTRACE® (an estrogen-only tablet); ESTRADIOL (generic estrogen-only tablet); DELESTROGEN® (an injectable estrogen); and OVCON® (an oral contraceptive containing both estrogen and progestin). All of these products were sold to other companies between January 2000 and August 2001, but the Company maintains the ESTRACE® ANDA, and continues to manufacture some of the products under a supply agreement.

 

The Company currently is a defendant in approximately 676 lawsuits involving the above-mentioned products, filed on behalf of approximately 1,154 plaintiffs, in federal and state courts throughout the United States. A majority of these lawsuits involve multiple defendants. The Company expects to be dismissed from many cases in which its products were never used. Plaintiffs allege, among other things, that these products cause breast cancer, stroke, blood clots, cardiac and other injuries in women, that the defendants were aware of these risks and failed to warn consumers. The federal cases are being transferred to the U.S. District Court for the Eastern District of Arkansas, In re Prempro (Wyeth) Products Liability Litigation, MDL No., 1507.

 

Environmental Proceedings

 

The following discussion describes (1) environmental proceedings with a governmental authority which may involve potential monetary sanctions of $100,000 or more (the threshold prescribed by specific SEC rule), (2) a civil action or an environmental claim that could result in significant liabilities, (3) updates of ongoing matters, or the resolution of other matters, disclosed in recent public filings and (4) a summary of environmental remediation costs.

 

The U.S. Environmental Protection Agency (EPA) is investigating industrial and commercial facilities throughout the U.S. that use refrigeration equipment containing ozone-depleting substances (ODS) and enforcing compliance with regulations governing the prevention, service and repair of leaks (ODS requirements). In 2004, the Company performed a voluntary corporate-wide audit at its facilities in the U.S. and Puerto Rico that use ODS-containing refrigeration equipment. The Company submitted an audit report to the EPA in November, 2004, identifying potential violations of the ODS requirements at several of its facilities. In addition to the matters covered in the Company’s audit report letter to the EPA, the EPA previously sent the Company’s wholly owned subsidiary, Mead Johnson, a request for information regarding compliance with ODS requirements at its facility in Evansville, Indiana. The Company responded to the request in June 2004, and, as a result, identified potential violations at the Evansville facility. The company currently is in discussions with EPA to resolve both the potential violations discovered during the audit and those identified as a result of the

 

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Note 17. Legal Proceedings and Contingencies (Continued)

 

EPA request for information to the Evansville facility. If the EPA determines that the Evansville facility, or any other facilities, was, or is, in violation of applicable ODS requirements, the Company could be subject to penalties and/or be required to convert or replace refrigeration equipment to use non-ODS approved substitutes.

 

In March 2005, the Company commenced a voluntary environmental audit of the Barceloneta and Humacao facilities to determine their compliance with EPA’s regulations regarding the maximum achievable control technology requirements for emissions of hazardous air pollutants from pharmaceuticals production (Pharmaceutical MACT). In May 2005, the Company disclosed potential violations of the Pharmaceutical MACT requirements at both facilities and is currently in the process of analyzing the potential violations to provide more details to EPA. To date, the Company has not been contacted by EPA with respect to these potential violations; however, if EPA determines that the Barceloneta and Humacao facilities violated the Pharmaceutical MACT requirements, the Company could be subject to civil penalties and/or be required to make investments in the facilities to ensure their compliance with the Pharmaceutical MACT.

 

In October 2003, the Company was contacted by counsel representing the North Brunswick, NJ Board of Education regarding a site where waste materials from E.R. Squibb and Sons, a wholly owned subsidiary of the Company, may have been disposed from the 1940’s through the 1960’s. Fill material containing industrial waste and heavy metals in excess of residential standards was discovered in Fall 2003 during an expansion project at the North Brunswick Township High School, as well as at a number of neighboring residential properties and adjacent public park areas. In January 2004, the NJDEP sent the Company and approximately five other companies an information request letter about possible waste disposal at the site, to which the Company responded in March 2004. The school board and the Township, who are the current owners of school property and the park, are conducting and jointly financing soil remediation work under a work plan approved by the NJDEP, and are evaluating the need to conduct response actions to remediate or contain potentially impacted ground water. In addition, the school board reportedly is facing unexpected project cost increases due to contractor claims that discovery of the waste material has delayed and complicated performance of site work. The site owner entities have asked the Company to contribute to the cost of remediation, and to contribute funds on an interim basis to assure uninterrupted performance of necessary site work in the face of unbudgeted cost increases. The Company is in discussions with the site owners and other potentially responsible parties regarding the scope and costs of work required to address the known conditions of concern, and recently has offered to negotiate with the school board and Township on the terms of a cooperative funding agreement and allocation process. Municipal records indicate the Township operated a municipal landfill at the site in the 1940’s through the 1960’s, and the Company is actively investigating the historic use of the site, including the Company’s possible connection. To date, no claims have been asserted against the Company.

 

In September 2003, the NJDEP issued an administrative enforcement Directive and Notice under the New Jersey Spill Compensation and Control Act requiring the Company and approximately 65 other companies to perform an assessment of natural resource damages and to implement unspecified interim remedial measures to restore conditions in the Lower Passaic River. The Directive alleges that the Company is liable because it historically sent bulk waste to the former Inland Chemical Company facility in Newark, N.J. (now owned by McKesson Corp.) for reprocessing, and that releases of hazardous substances from this facility have migrated into Newark Bay and continue to have an adverse impact on the Lower Passaic River watershed. Subsequently, the EPA also issued a notice letter under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) to numerous parties—but not including the Company—seeking their cooperation in a study of conditions in substantially the same stretch of the Passaic River that is the subject of the NJDEP’s Directive. A group of these other parties entered into a consent agreement with EPA in 2004 to finance a portion of that study. The EPA estimates this study will cost $20 million, of which roughly half will be financed by this private party group. This study may also lead to clean-up actions, directed by the EPA and the Army Corps of Engineers. The Company is working cooperatively with a group of the parties that received the NJDEP Directive and/or the EPA notice to explore potential resolutions of the Directive and to address the risk of collateral claims. Although the Company does not believe it has caused or contributed to any contamination in the Lower Passaic River watershed, the Company has informed the NJDEP that it is willing to discuss NJDEP’s allegations against the Company. In the Directive and in more recent communications to the cooperating group, NJDEP has stated that if the responsible parties do not cooperate, the NJDEP may perform the damage assessment and restoration and take civil action to recover its remedial costs, and treble damages for administrative costs and penalties. Also, in late 2004, a group of federal agencies designated as trustees of natural resources affected by contamination in the Passaic River watershed approached the cooperating group about funding a cooperative study of possible natural resources damages (NRD) in the area. This study presumably would dovetail with the ongoing EPA study, and ideally would be joined by the NJDEP, to coordinate actions NJDEP may seek under the Directive. Discussions with the federal trustees are ongoing. Recently, McKesson had asserted that the Company is obligated to reimburse a fixed percentage of costs that McKesson ultimately may face in this matter by operation of a 1993 cost-sharing agreement governing performance of an on-site remedy at the former Inland facility. The Company has denied the obligation but has proposed to enter an agreement to toll the running of any limitations bars on any claims McKesson may have to allow consideration of such claims in the larger context of facts and claims that may develop with respect to the NJDEP Directive and/or the EPA remedial process. The extent of any liability the Company may face, under either the Directive, the EPA’s notice letter, or with respect to future NRD actions or claims by the federal trustees, or in contribution to McKesson or other responsible parties, cannot yet be determined.

 

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Note 17. Legal Proceedings and Contingencies (Continued)

 

On October 16, 2003, the Michigan Department of Environmental Quality (MDEQ) sent the Company a Letter of Violation (LOV) alleging that, over an unspecified period of time, emissions from certain digestion tanks at Mead Johnson’s Zeeland, Michigan facility exceeded an applicable limit in the facility’s renewable operating air permit. The LOV requires the Company to take corrective action and to submit a compliance program report. The MDEQ has not demanded fines or penalties, and has not taken further enforcement action. The Company and the MDEQ completed revisions to the Company’s air use permit which appear to have resolved the matter although the Company cannot predict the ultimate outcome with certainty.

 

On December 1, 2003, the Company and the NJDEP entered an Administrative Consent Order (ACO) concerning alleged violations of the New Jersey Air Pollution Control Act and its implementing regulations at the Company’s New Brunswick facility. Pursuant to the ACO, the Company agreed to submit a permit application creating a facility-wide emissions cap and to pay an administrative fine of approximately $28,000. Both of these obligations were satisfied in early 2004. Subsequently, on February 15, 2005, the ACO was amended to provide that the Company would install a new cogeneration turbine at its New Brunswick facility by December 31, 2006, and would obtain air permits, including those required for the cogeneration turbine, by December 31, 2005. The estimated cost of the new cogeneration turbine is approximately $3.5 million.

 

The Company is one of several defendants, including most of the major U.S. pharmaceutical companies, in a purported class action suit filed in superior court in Puerto Rico in February 2000 by residents of three wards from the Municipality of Barceloneta, alleging that air emissions from a government owned and operated wastewater treatment facility in the Municipality have caused respiratory and other ailments, violated local air rules and adversely impacted property values. The Company believes its wastewater discharges to the treatment facility are in material compliance with the terms of the Company’s permit. Discovery in the case is ongoing, and the plaintiffs’ motion to certify the class is pending at this time. The court has scheduled a hearing on the class certification motion for September 30, 2005. The Company believes that this litigation will be resolved for an immaterial amount and is engaged in settlement discussions, which may bring the matter to resolution. However, in the event of an adverse judgment, the Company’s ultimate financial liability could be greater than anticipated.

 

The Company is also responsible under various state, federal and foreign laws, including CERCLA, for certain costs of investigating and/or remediating contamination resulting from past industrial activity at the Company’s current or former sites or at waste disposal or reprocessing facilities operated by third parties. The Company typically estimates these costs based on information obtained from the EPA, or counterpart state agency, and/or studies prepared by independent consultants, including the total estimated costs for the site and the expected cost-sharing, if any, with other potentially responsible parties (PRP). The Company accrues liabilities when they are probable and reasonably estimable. As of June 30, 2005, the Company estimated its share of the total future costs for these sites to be approximately $58 million, recorded as other liabilities, which represents the sum of best estimates or, where no simple estimate can reasonably be made, estimates of the minimal probable amount among a range of such costs (without taking into account any potential recoveries from other parties, which are not currently expected). The Company has paid less than $4 million (excluding legal fees) in each of the last five years for investigation and remediation of such matters, including liabilities under CERCLA and for other on-site remedial obligations. Although it is not possible to predict with certainty the outcome of these environmental proceedings or the ultimate costs of remediation, the Company does not believe that any reasonably possible expenditures that the Company may incur in excess of existing reserves will have a material adverse effect on its business, financial position, or results of operations.

 

Other Matters

 

On October 25, 2004, the SEC notified the Company that it is conducting an informal inquiry into the activities of certain of the Company’s German pharmaceutical subsidiaries and its employees and/or agents. The Company believes the SEC’s informal inquiry may encompass matters currently under investigation by the Staatsanwaltin prosecutor in Munich, Germany. Although, uncertain at this time, the Company believes the inquiry and investigation may concern potential violations of the Foreign Corrupt Practices Act and/or German law. The Company is cooperating with both the SEC and the German authorities. It is not possible at this time reasonably to assess the final outcome of these matters or to reasonably estimate the possible loss or range of loss.

 

Indemnification of Officers and Directors

 

The Company’s corporate by-laws require that, to the extent permitted by law, the Company shall indemnify its officers and directors against judgments, fines, penalties and amounts paid in settlement, including legal fees and all appeals, incurred in connection with civil or criminal actions or proceedings, as it relates to their services to the Company and its subsidiaries. The by-laws provide no limit on the amount of indemnification. Indemnification is not permitted in the case of willful misconduct, knowing violation of criminal law, or improper personal benefit. As permitted under the laws of the state of Delaware, the Company has for many years purchased directors and officers insurance coverage to cover claims made against the directors and officers. The amounts and types of coverage have varied from period to period as dictated by market conditions.

 

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Note 17. Legal Proceedings and Contingencies (Continued)

 

The litigation matters and regulatory actions described above involve certain of the Company’s current and former directors and officers, all of whom are covered by the aforementioned indemnity and if applicable, certain prior period insurance policies. However, certain indemnification payments may not be covered under the Company’s directors and officers’ insurance coverage. The Company cannot predict with certainty the extent to which the Company will recover from its insurers the indemnification payments made in connection with the litigation matters and regulatory actions described above.

 

On July 31, 2003, one of the Company’s insurers, Federal Insurance Company (Federal), filed a lawsuit in New York Supreme Court against the Company and several current and former officers and members of the board of directors, seeking rescission, or in the alternative, declarations allowing Federal to avoid payment under certain Directors and Officers insurance policies and certain Fiduciary Liability insurance policies with respect to potential liability arising in connection with the matters described under the “—VANLEV Litigation,” “—Other Securities Matters” and “—ERISA Litigation” sections above. The parties negotiated a settlement of these disputes. Pursuant to the settlement, the Company received $200 million in insurance proceeds which were reflected in its financial statements in the second quarter of 2005.

 

On October 3, 2003, another of the Company’s insurers, SR International Business Insurance Co. Ltd. (SRI), informed the Company that it intended to try to avoid certain insurance policies issued to the Company on grounds of alleged material misrepresentation or non-disclosure, and that it had initiated arbitration proceedings in London, England. SRI has indicated that it intends to rely upon allegations similar to those described in the “—Other Securities Matters” section above in support of its avoidance action. The parties negotiated a settlement of this dispute and other insurance coverage issues. Pursuant to the settlement, the Company received insurance proceeds which were reflected in its financial statements in the second quarter of 2005.

 

Note 18. Subsequent Events

 

In July 2005, the Company entered into a definitive agreement to sell its U.S. and Canadian Consumer Medicines business and related assets to Novartis AG. Under the terms of the agreement, Novartis will acquire the trademarks, patents and intellectual property rights of the U.S. and Canadian Consumer Medicines business and related assets for $660 million in cash. The transaction also includes the rights to the U.S. Consumer Medicines brands in Latin America, Europe, the Middle East and Africa. The sale will result in a pre-tax gain of approximately $560 million to $600 million, subject to certain adjustments and other post-closing matters. The gain from the sale will be recognized on the closing date. The transaction is expected to close by the end of the third quarter of 2005, subject to customary regulatory approvals.

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors

and Stockholders of

Bristol-Myers Squibb Company:

 

We have reviewed the accompanying consolidated balance sheet of Bristol-Myers Squibb Company and its subsidiaries as of June 30, 2005, and the related consolidated statements of earnings and comprehensive income and retained earnings for each of the three-month and six-month periods ended June 30, 2005 and 2004 and the consolidated statement of cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of earnings, comprehensive income and retained earnings and of cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004; and in our report dated March 3, 2005, we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP


PricewaterhouseCoopers LLP

 

Philadelphia, Pennsylvania

August 3, 2005

 

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

 

Summary

 

Bristol-Myers Squibb Company (BMS, the Company or Bristol-Myers Squibb) is a worldwide pharmaceutical and related healthcare products company whose mission is to extend and enhance human life. The Company is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceuticals and other healthcare related products.

 

For the second quarter of 2005, the Company reported global sales from continuing operations of $4.9 billion. Sales increased 1% from the prior year level due to the favorable impact from foreign exchange rate fluctuations and an increase in volume, partially offset by a decrease in average selling prices. U.S. sales remained constant at $2.7 billion in both 2005 and 2004, while international sales increased 3% to $2.2 billion, including a 4% favorable foreign exchange impact.

 

The Company invested $649 million in research and development in the second quarter of 2005, a 4% growth over 2004. For the quarter, research and development dedicated to pharmaceutical products, including milestone payments for in-licensing and development programs, was $606 million and as a percentage of Pharmaceutical sales was 15.6% compared to $564 million and 14.6% in 2004.

 

The Company continues to execute its strategy of serving specialists and high-value primary care physicians by transitioning its product portfolio to focus on disease areas of significant unmet need, where innovative medicines can help patients with serious illnesses.

 

The Company and its subsidiaries are the subject of a number of significant pending lawsuits, claims, proceedings and investigations. It is not possible at this time reasonably to assess the final outcome of these investigations or litigations. Management continues to believe, as previously disclosed, that during the next few years, the aggregate impact, beyond current reserves, of these and other legal matters affecting the Company is reasonably likely to be material to the Company’s results of operations and cash flows, and may be material to its financial condition and liquidity. For additional discussion of this matter, see “Item 1. Financial Statements—Note 17. Legal Proceedings and Contingencies.”

 

The following discussion of the Company’s three and six-month results of continuing operations excludes the results related to the Oncology Therapeutics Network (OTN) business, which were previously presented as a separate segment, and has been segregated from continuing operations and reflected as discontinued operations for all periods presented. See “—Discontinued Operations” below.

 

Three Months Results of Operations

 

     Three Months Ended
June 30,


       
     2005

    2004

    % Change

 
     (dollars in millions)        

Net Sales

   $ 4,889     $ 4,819     1 %

Earnings from continuing operations before minority interest and income tax

   $ 1,130     $ 769     47 %

% of net sales

     23.1 %     16.0 %      

Provision on income taxes

   $ (21 )   $ 118     (118 )%

Effective tax rate

     (1.9 )%     15.3 %      

Earnings from continuing operations

   $ 991     $ 523     89 %

% of net sales

     20.3 %     10.9 %      

 

Net sales from continuing operations for the second quarter of 2005 increased 1% to $4,889 million from $4,819 million in 2004. U.S. sales remained constant at $2,668 million in 2005 and $2,662 million in 2004, while international sales increased 3%, including a 4% favorable foreign exchange impact, to $2,221 million in 2005 from $2,157 million in 2004.

 

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The composition of the net increase/(decrease) in sales is as follows:

 

         Analysis of % Change

 

Three Months Ended June 30,


   Total Change

  Volume

  Price

  Foreign
Exchange


 

2005 vs. 2004

   1%   1%   (2)%   2 %

 

In general, the Company’s business is not seasonal. For information on U.S. pharmaceuticals prescriber demand, reference is made to the table within Business Segments under the Pharmaceuticals section below, which sets forth a comparison of changes in net sales to the estimated total prescription growth (for both retail and mail order customers) for certain of the Company’s pharmaceutical products.

 

The Company operates in three reportable segments—Pharmaceuticals, Nutritionals and Related Healthcare. In 2004, the Company signed a definitive agreement to sell OTN, which was previously presented as a separate segment. As such, the results of operations for OTN are presented as part of the Company’s results from discontinued operations in accordance with Statement of Financial Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, OTN results of operations in prior periods have been reclassified to discontinued operations to conform with current year presentations. The percent of the Company’s sales by segment were as follows:

 

     Net Sales

       
     Three Months Ended June 30,

       
     2005

    2004

    % Change

 
     (dollars in millions)        

Pharmaceuticals

   $ 3,886     $ 3,856     1 %

% of net sales

     79.5 %     80.0 %      

Nutritionals

     548       510     7 %

% of net sales

     11.2 %     10.6 %      

Related Healthcare

     455       453      

% of net sales

     9.3 %     9.4 %      

Total

   $ 4,889     $ 4,819     1 %

 

The Company recognizes revenue net of various sales adjustments to arrive at net sales as reported on the Consolidated Statement of Earnings. These adjustments are referred to as gross-to-net sales adjustments. The following table sets forth the reconciliation of the Company’s gross sales to net sales by each significant category of gross-to-net sales adjustments:

 

     Three Months Ended June 30,

 
     2005

    2004

 
     (dollars in millions)  

Gross Sales

   $ 5,873     $ 5,861  
    


 


Gross-to-Net Sales Adjustments

                

Prime Vendor Charge-Backs

     (328 )     (312 )

Women, Infants and Children (WIC) Rebates

     (210 )     (206 )

Managed Health Care Rebates and Other Contract Discounts

     (127 )     (142 )

Medicaid Rebates

     (149 )     (157 )

Cash Discounts

     (69 )     (76 )

Sales Returns

     (41 )     (77 )

Other Adjustments

     (60 )     (72 )
    


 


Total Gross-to-Net Sales Adjustments

     (984 )     (1,042 )
    


 


Net Sales

   $ 4,889     $ 4,819  
    


 


 

The decrease in sales returns in 2005 was primarily attributable to lower returns for certain products including TEQUIN, PRAVACHOL and PARAPLATIN.

 

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Pharmaceuticals

 

The composition of the net increase/(decrease) in pharmaceutical sales is as follows:

 

         Analysis of % Change

 

Three Months Ended June 30,


   Total Change

  Volume

  Price

  Foreign
Exchange


 

2005 vs. 2004

   1%   1%   (2)%   2 %

 

For the three months ended June 30, 2005, worldwide Pharmaceuticals sales increased 1% to $3,886 million, due to a 1% increase in domestic sales to $2,097 million from $2,071 million in 2004, primarily due to the continued growth of PLAVIX* and newer products including ABILIFY*, REYATAZ and ERBITUX*, partially offset by lost exclusivity for PARAPLATIN, the GLUCOPHAGE* franchise and VIDEX EC. In aggregate, estimated wholesaler inventory levels of the Company’s key pharmaceutical products sold by the U.S. Pharmaceutical business at the end of the second quarter were down slightly from the end of the first quarter of 2005, but held at approximately three weeks. International pharmaceutical sales remained unchanged, including a 4% favorable foreign exchange impact, at $1,789 million in the second quarter of 2005 compared to 2004. The sales decrease excluding the favorable impact of foreign exchange was primarily due to a decline in TAXOL® and PRAVACHOL sales resulting from increased generic competition, partially offset by increased sales of newer products including REYATAZ and ABILIFY*, as well as growth of PLAVIX*.

 

Key pharmaceutical products and their sales, representing 80% and 79% of total pharmaceutical sales in the second quarter of 2005 and 2004, respectively, are as follows:

 

     Three Months Ended
June 30,


      
     2005

   2004

   % Change

 
     (dollars in millions)       

Cardiovascular

                    

PLAVIX*

   $ 968    $ 769    26 %

PRAVACHOL

     625      656    (5 )%

AVAPRO*/AVALIDE*

     258      233    11 %

MONOPRIL

     54      72    (25 )%

COUMADIN

     50      77    (35 )%

Virology

                    

SUSTIVA

     167      153    9 %

REYATAZ

     183      85    115 %

ZERIT

     59      78    (24 )%

VIDEX/VIDEX EC

     43      69    (38 )%

Infectious Diseases

                    

CEFZIL

     54      55    (2 )%

TEQUIN

     35      39    (10 )%

BARACLUDE

     5          

Oncology

                    

TAXOL®

     186      249    (25 )%

ERBITUX*

     98      72    36 %

PARAPLATIN

     33      241    (86 )%

Affective (Psychiatric) Disorders

                    

ABILIFY* (total revenue)

     240      122    97 %

Metabolics

                    

GLUCOPHAGE* IR

     20      12    67 %

GLUCOPHAGE* XR

     14      10    40 %

GLUCOVANCE*

     12      47    (74 )%

 

    Sales of PLAVIX*, a platelet aggregation inhibitor, increased 26%, including a 1% favorable foreign exchange impact, to $968 million from $769 million in 2004, primarily due to increased demand in mail order prescriptions and a smaller reduction in U.S. wholesaler inventory levels, compared to the prior year. Total U.S. prescription demand grew approximately 15% compared to 2004. PLAVIX* is a cardiovascular product that was launched from the alliance between the Company and Sanofi-Aventis (Sanofi). Market exclusivity for PLAVIX* is expected to expire in 2011 in the U.S. and 2013 in the EU. Statements on exclusivity are subject to any adverse determination that may occur with respect to the PLAVIX* patent litigation. For additional information on the PLAVIX* patent litigation, see “Item 1. Financial Statements—Note 17. Legal Proceedings and Contingencies.”

 

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    Sales of PRAVACHOL, an HMG Co-A reductase inhibitor, decreased 5%, including a 2% favorable foreign exchange impact, to $625 million from $656 million in 2004. Domestic sales increased 8% to $353 million in 2005, primarily due to lower Medicaid and managed health-care rebate rates in the second quarter of 2005, a smaller reduction in U.S. wholesaler inventory levels, compared to the prior year, partially offset by lower demand. Total U.S. prescriptions declined by 14% compared to 2004. International sales decreased 18%, including a 3% favorable foreign exchange impact, to $272 million, reflecting generic competition in key European markets. Market exclusivity protection for PRAVACHOL is expected to expire in April 2006 in the U.S. Market exclusivity in the EU expired in 2004, with the exception of France and Sweden, for which expiration will occur in August and March 2006, respectively, and in Italy, for which expiration will occur in January 2008.

 

    Sales of AVAPRO*/AVALIDE*, an angiotensin II receptor blocker for the treatment of hypertension, increased 11%, including a 2% favorable foreign exchange impact, to $258 million from $233 million in 2004, primarily due to increased demand. Total U.S. prescription growth increased approximately 15% compared to 2004. AVAPRO*/AVALIDE* are cardiovascular products launched from the alliance between the Company and Sanofi. Market exclusivity for AVAPRO*/AVALIDE* (known in the EU as APROVEL*/KARVEA*) is expected to expire in 2011 in the U.S. and 2012 in countries in the EU; AVAPRO*/AVALIDE* is not currently marketed in Japan.

 

    Sales of MONOPRIL, a second generation angiotesin converting enzyme (ACE) inhibitor for the treatment of hypertension, decreased 25%, including a 2% favorable foreign exchange impact, to $54 million due to increased generic competition. Market exclusivity protection for MONOPRIL expired in 2003 in the U.S. and has expired or is expected to expire between 2001 and 2008 in countries in the EU. MONOPRIL is not currently marketed in Japan.

 

    Sales of COUMADIN, an oral anti-coagulant used predominately in patients with atrial fibrillation or deep venous thrombosis/pulmonary embolism, decreased 35% to $50 million in 2005 compared to $77 million in 2004 due to decreased demand, a greater reduction in U.S. wholesaler inventory levels compared to the prior year and increased returns and rebates. Total U.S. prescriptions declined by approximately 18% compared to 2004. Market exclusivity for COUMADIN expired in the U.S. in 1997.

 

    Sales of SUSTIVA, a non-nucleoside reverse transcriptase inhibitor for the treatment of HIV, increased 9%, including a 2% favorable foreign exchange impact, to $167 million in 2005 from $153 million in 2004, primarily due to U.S. prescription growth of approximately 5% for the second quarter of 2005. Market exclusivity protection for SUSTIVA is expected to expire in 2013 in the U.S. and in countries in the EU; the Company does not (but others do) market SUSTIVA in Japan.

 

    Sales of REYATAZ, a protease inhibitor for the treatment of HIV, increased 115%, including a 3% favorable foreign exchange impact, to $183 million in 2005 compared to $85 million in 2004. REYATAZ has achieved a monthly new prescription share of the U.S. protease inhibitors market of approximately 30%. Sales in Europe continued to grow since its introduction in the second quarter of 2004, achieving sales of $52 million in the second quarter of 2005. Market exclusivity for REYATAZ is expected to expire in 2017 in the U.S., in countries in the EU and Japan.

 

    Sales of ZERIT, an antiretroviral agent used in the treatment of HIV, decreased 24% to $59 million in 2005 from $78 million in 2004, as a result of decreased demand. Total U.S. prescriptions declined by approximately 31% compared to 2004. Market exclusivity protection for ZERIT is expected to expire in 2008 in the U.S., between 2007 and 2011 in countries in the EU and 2008 in Japan.

 

    Sales of VIDEX/VIDEX EC, an antiretroviral agent used in the treatment of HIV, decreased 38%, including a 2% favorable foreign exchange impact, to $43 million in 2005 from $69 million in 2004, primarily as a result of increased generic competition in the U.S. which began in the fourth quarter of 2004. The Company has a licensing agreement with the U.S Government for VIDEX/VIDEX EC, which by its terms became non-exclusive in 2001. The U.S. Government’s method of use patent expires in 2007 in the U.S. (which includes an earned pediatric extension) and in Japan, and between 2006 and 2009 in countries in the EU. The license to the Company is non-exclusive, which has allowed another company to obtain a license from the U.S. Government and receive approval for marketing. With respect to VIDEX/VIDEX EC, the Company has patents covering the reduced mass formulation of VIDEX/VIDEX EC that expire in 2012 in the U.S., the EU and Japan. However, these patents apply only to the type of reduced mass formulation specified in the patent. Other reduced mass formulations may exist. There is currently no issued patent covering the VIDEX EC formulation.

 

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    Sales of CEFZIL, an antibiotic for the treatment of mild to moderately severe bacterial infections, decreased 2%, including a 2% favorable foreign exchange impact, to $54 million in 2005 from $55 million in 2004 due to lower demand partially offset by a smaller reduction in U.S. wholesaler inventory levels, compared to the prior year. Market exclusivity is expected to expire in December 2005 in the U.S. and between 2007 and 2009 in the EU.

 

    Sales of TEQUIN, an antibiotic used for the treatment of respiratory tract infections, were $35 million in 2005, a decrease of 10% compared to 2004 sales of $39 million. TEQUIN is a seasonal product with sales increasing during the flu season. The basic U.S. patent expires in 2007, but was granted a statutory patent term extension until December 2009.

 

    BARACLUDE, the Company’s internally developed oral antiviral agent for the treatment of chronic hepatitis B, was approved by the U.S. Food and Drug Administration (FDA) in March 2005. Sales were $5 million since its launch in the U.S. in April 2005. BARACLUDE also received its first international approval from regulatory authorities in Brazil in July 2005.

 

    Sales of TAXOL®, the Company’s leading anti-cancer agent, were $186 million in 2005 compared to $249 million in 2004. Sales of TAXOL®, which are almost exclusively international, decreased 25%, including a 3% favorable foreign exchange impact, primarily as a result of increased generic competition in Europe. Market exclusivity protection for TAXOL® expired in 2002 in the U.S., in 2003 in the EU and is expected to expire between 2005 and 2013 in Japan.

 

    Sales of ERBITUX*, used to treat refractory metastatic colorectal cancer, which is sold almost exclusively in the U.S., increased 36% to $98 million in 2005 compared to $72 million in 2004. ERBITUX* was approved by the FDA in February 2004, and is marketed by the Company under a distribution and copromotion agreement with ImClone Systems Incorporated. A patent relating to combination therapy with ERBITUX* expires in 2017. The Company’s right to market ERBITUX* in North America and Japan expires in September 2018. The Company does not, but others do, market ERBITUX* in countries in the EU.

 

    Sales of PARAPLATIN, an anticancer agent, decreased 86% to $33 million in 2005 from $241 million in 2004 due to generic competition. Market exclusivity protection for PARAPLATIN expired in October 2004 in the U.S., in 2000 in the EU and in 1998 in Japan.

 

    Total revenue for ABILIFY*, increased 97%, including a 1% favorable foreign exchange impact to $240 million in 2005 from $122 million in 2004, primarily due to strong growth in domestic demand and continued growth in Europe. ABILIFY* has achieved a monthly new prescription share of the U.S. antipsychotic market of approximately 12% in June 2005. Total revenue for ABILIFY* in Europe has continued to grow since its launch to $36 million in the second quarter of 2005. ABILIFY* is an antipsychotic agent for the treatment of schizophrenia, acute bipolar mania and Bipolar I Disorder. Total revenue for ABILIFY* primarily consists of alliance revenue for the Company’s 65% share of net sales in copromotion countries with Otsuka Pharmaceutical Co., Ltd. (Otsuka). Market exclusivity protection for ABILIFY* is expected to expire in 2009 in the U.S. (and may be extended until 2014 if a pending patent term extension is granted). The Company also has the right to copromote ABILIFY* in several European countries (the United Kingdom, France, Germany and Spain) and to act as exclusive distributor for the product in the rest of the European Union (EU). Market exclusivity protection for ABILIFY* is expected to expire in 2009 for the EU (and may be extended until 2014 if pending supplemental protection certificates are granted). The Company’s right to market ABILIFY* expires in November 2012 in the U.S. and Puerto Rico and, for the countries in the EU where the Company has the exclusive right to market ABILIFY* until June 2014. Statements on exclusivity are subject to any adverse determination that may occur with respect to the ABILIFY* patent reexamination. For additional information on this matter, see “Item 1. Financial Statements – Note 17. Legal Proceedings and Contingencies.” For additional information on revenue recognition of ABILIFY*, see “Item 1. Financial Statements – Note 2. Alliances and Investments.”

 

    GLUCOPHAGE* franchise sales decreased 35% to $51 million in 2005 compared to $79 million in 2004 due to generic competition. Market exclusivity protection expired in March 2000 for GLUCOPHAGE* IR, in October 2003 for GLUCOPHAGE* XR (Extended Release), and in January 2004 for GLUCOVANCE*. The Company does not (but others do) market these products in the EU and Japan.

 

In most instances, the basic exclusivity loss date indicated above is the expiration date of the patent that claims the active ingredient of the drug or the method of using the drug for the approved indication. In some instances, the basic exclusivity loss date indicated is the expiration date of the data exclusivity period. In situations where there is only data exclusivity without patent protection, a competitor could seek regulatory approval by submitting its own clinical trial data to obtain marketing approval. The Company assesses the market exclusivity period for each of its products on a case-by-case basis. The length of market exclusivity for any of the Company’s products is difficult to predict with certainty because of the complex interaction between patent and regulatory forms of exclusivity and other factors. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that the Company currently anticipates. The estimates of market exclusivities reported above are for business planning purposes only and are not intended to reflect the Company’s legal opinion regarding the strength or weakness of any particular patent or other legal position.

 

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The following table sets forth for each of the Company’s top 15 pharmaceutical products sold by the Company’s U.S. Pharmaceuticals business (based on 2004 net sales), the reported net sales changes for the three months ended June 30, 2005 and 2004 compared to the same periods in the prior year, the estimated change in total U.S. prescription (for both retail and mail order customers) for the three months ended June 30, 2005 and 2004 compared to the same period in the prior year and the estimated U.S. therapeutic category share of the applicable product for the months of June 2005 and 2004.

 

    

Three Months Ended

June 30, 2005


   

Month Ended

June 30, 2005


  

Three Months Ended

June 30, 2004


   

Month Ended

June 30, 2004


     % Change
in U.S.
Net Sales(a)


    % Change in
U.S. Total
Prescriptions(b)


    Estimated TRx
Therapeutic
Category Share %


   % Change
in U.S.
Net Sales(a)


   

% Change

in U.S. Total
Prescriptions(b)


    Estimated TRx
Therapeutic
Category Share %


ABILIFY* (total revenue)

   68     49     10    86     117     7

AVAPRO*/AVALIDE*

   9     15     15    48     15     15

CEFZIL

   3     (8 )   7    (24 )   (29 )   8

COUMADIN

   (40 )   (18 )   23    (20 )   (19 )   30

DOVONEX

   3     (5 )   2    17     (9 )   3

ERBITUX* (c)

   35     N/A     N/A    —       N/A     N/A

GLUCOPHAGE* Franchise

   (40 )   (66 )   2    (69 )   (56 )   5

PARAPLATIN (c)

   (100 )   N/A     N/A    (3 )   N/A     N/A

PLAVIX*

   26     15     85    38     25     84

PRAVACHOL

   8     (14 )   8    (18 )   (9 )   10

REYATAZ

   51     44     13    —       —       10

SUSTIVA

   8     5     23    (14 )   5     23

TEQUIN

   (15 )   (37 )   1    (16 )   (19 )   2

VIDEX/VIDEX EC

   (80 )   (66 )   3    (17 )   (1 )   10

ZERIT

   (32 )   (31 )   8    (24 )   (28 )   10

(a) Reflects percentage change in net sales in dollar terms, including change in average selling prices and wholesaler buying patterns.
(b) Reflects percentage change in total prescriptions in unit terms, based on third-party data.
(c) ERBITUX* and PARAPLATIN specifically, and oncology products in general, do not have prescription-level data.

 

The estimated prescription growth amounts are based on third-party data provided by IMS Health, a supplier of market research to the pharmaceutical industry. A significant portion of the Company’s domestic pharmaceutical sales is made to wholesalers. Where changes in reported net sales differ from prescription growth, this change in net sales may not reflect underlying prescriber demand.

 

For all products other than ERBITUX* and PARAPLATIN, the estimated U.S. therapeutic category share information above is determined based on third-party data provided by IMS Health, for total retail and mail order prescriptions. The estimated U.S. therapeutic category share is determined by dividing the Company’s total prescriptions of the applicable product by the total prescriptions, as provided by IMS Health, within the therapeutic category in which the product competes. The products listed above compete in the following therapeutic categories: ABILIFY* (antipsychotics), AVAPRO*/AVALIDE* (angiotensin receptor blockers), CEFZIL (branded oral liquid antibiotics), COUMADIN (warfarin), DOVONEX (anti-inflamatory-antipsoriasis), GLUCOPHAGE* Franchise (oral antidiabetics), PLAVIX* (antiplatelets), PRAVACHOL (HMG CoA reductase inhibitors), REYATAZ (antiretrovirals - third agents), SUSTIVA (antiretrovirals - third agents), TEQUIN (branded oral solid antibiotics), VIDEX/VIDEX EC (nucleoside reverse transcriptase inhibitors) and ZERIT (nucleoside reverse transcriptase inhibitors). The therapeutic categories are determined by the Company as those products considered to be in direct competition with the Company’s own products.

 

ERBITUX* and PARAPLATIN specifically, and oncology products in general, do not have prescription-level data because physicians do not write prescriptions for these products. The Company believes therapeutic category share information provided by third parties for these products may not be reliable and accordingly, none is presented here.

 

The following table sets forth for each of the Company’s top 15 pharmaceutical products sold by the Company’s U.S. Pharmaceuticals business (based on 2004 net sales), the U.S. Pharmaceuticals net sales of the applicable product for the three months ended June 30, 2005 and March 31, 2005, and the estimated number of months on hand of the applicable product in the U.S. wholesaler distribution channel as of June 30, 2005 and March 31, 2005.

 

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     June 30, 2005

   March 31, 2005

    

Net Sales

(dollars in millions)


    Months on Hand

  

Net Sales

(dollars in millions)


   Months on Hand

ABILIFY* (total revenue)

   $ 200     0.7    $ 161    0.7

AVAPRO*/AVALIDE*

     157     0.6      102    0.8

CEFZIL

     30     0.8      50    0.7

COUMADIN

     42     0.7      42    1.0

DOVONEX

     36     0.7      30    0.6

ERBITUX*

     97          87    **

GLUCOPHAGE* Franchise

     44     0.8      39    1.0

PARAPLATIN

     (1 )   0.8      15    0.9

PLAVIX*

     823     0.6      673    0.8

PRAVACHOL

     353     0.7      258    0.8

REYATAZ

     98     0.8      92    0.8

SUSTIVA

     97     0.8      103    0.8

TEQUIN

     22     0.8      38    0.7

VIDEX/VIDEX EC

     5     1.0      10    1.2

ZERIT

     26     0.8      26    0.8

** Less than 0.1 months on hand.

 

For all products other than ERBITUX*, the Company determines the above months on hand estimates by dividing the estimated amount of the product in the U.S. wholesaler distribution channel by the estimated amount of out-movement of the product from the U.S. wholesaler distribution channel over a period of thirty-one days, all calculated as described below. Factors that may influence the Company’s 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, such estimates are calculated using data from third parties which data are a product of the third parties’ own record-keeping processes and such third-party data also may reflect estimates.

 

The Company maintains inventory management agreements (IMAs) with most of its U.S. pharmaceutical wholesalers which account for nearly 100% of total gross sales of U.S. pharmaceutical products. Under the current terms of the IMAs, the Company’s three largest wholesaler customers provide the Company with weekly information with respect to inventory levels of product on hand and the amount of out-movement of products. These three wholesalers account for approximately 90% of total gross sales of U.S. pharmaceutical products. The inventory information received from these wholesalers excludes inventory held by intermediaries to whom they sell, such as retailers and hospitals, and excludes goods in transit to such wholesalers. The Company uses the information provided by these three wholesalers as of the Friday closest to quarter end to calculate the amount of inventory on hand for these wholesalers at the applicable quarter end. This amount is then increased by the Company’s estimate of goods in transit to these wholesalers as of the applicable Friday which have not been reflected in the weekly data provided by the wholesalers. Under the Company’s revenue recognition policy, sales are recorded when substantially all the risks and rewards of ownership are transferred, which in the U.S. Pharmaceutical business is generally when product is shipped. In such cases, goods in transit to a wholesaler are owned by the applicable wholesaler and, accordingly, are reflected in the calculation of inventories in the wholesaler distribution channel. The Company estimates the amount of goods in transit by using information provided by these wholesalers with respect to their open orders as of the applicable Friday and the Company’s records of sales to these wholesalers with respect to such open orders. The Company determines the out-movement of a product from these wholesalers over a period of thirty-one days by using the most recent four weeks of out-movement of a product as provided by these wholesalers and extrapolating such amount to a thirty-one day basis. The Company estimates inventory levels on hand and out-movements for its U.S. Pharmaceutical business’s wholesaler customers other than the three largest wholesalers for each product based on the assumption that such amounts bear the same relationship to the three largest wholesalers’ inventory levels and out-movements for such product as the percentage of aggregate sales for all