BRISTOL MYERS SQUIBB CO, 10-Q filed on 7/23/2009
Quarterly Report
Statement Of Income Alternative (USD $)
In Millions, except Per Share data
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
EARNINGS
 
 
 
 
Net Sales
$ 5,384 
$ 10,399 
$ 5,203 
$ 10,094 
Cost of products sold
1,461 
2,874 
1,670 
3,240 
Marketing, selling and administrative
1,077 
2,141 
1,165 
2,299 
Advertising and product promotion
400 
724 
420 
739 
Research and development
829 
1,752 
826 
1,608 
Acquired in-process research and development
32 
32 
Provision for restructuring, net
20 
47 
30 
41 
Litigation expense, net
28 
132 
Equity in net income of affiliates
(150)
(296)
(150)
(314)
Other (income)/expense, net
(22)
(100)
(13)
19 
Total Expenses, net
3,643 
7,274 
3,982 
7,666 
Earnings from Continuing Operations Before Income Taxes
1,741 
3,125 
1,221 
2,428 
Provision for income taxes
443 
906 
258 
588 
Net Earnings from Continuing Operations
1,298 
2,219 
963 
1,840 
Discontinued Operations:
 
 
 
 
Earnings, net of taxes
42 
99 
Loss on Disposal, net of taxes
(43)
Net Earnings from Discontinued Operations
42 
56 
Net Earnings
1,298 
2,219 
1,005 
1,896 
Net Earnings Attributable to Noncontrolling Interest
315 
598 
241 
471 
Net Earnings Attributable to Bristol-Myers Squibb Company
983 
1,621 
764 
1,425 
Earnings per Common Share from Continuing Operations Attributable to Bristol-Myers Squibb Company:
 
 
 
 
Basic
0.49 
0.81 
0.36 
0.69 
Diluted
0.49 
0.81 
0.36 
0.68 
Earnings per Common Share Attributable to Bristol-Myers Squibb Company:
 
 
 
 
Basic
0.49 
0.81 
0.38 
0.72 
Diluted
0.49 
0.81 
0.38 
0.71 
Dividends declared per common share
$ 0.31 
$ 0.62 
$ 0.31 
$ 0.62 
Statement Of Other Comprehensive Income (USD $)
In Millions
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
COMPREHENSIVE INCOME
 
 
 
 
Net earnings
$ 1,298 
$ 2,219 
$ 1,005 
$ 1,896 
Other Comprehensive Income/(Loss):
 
 
 
 
Foreign currency translation
95 
20 
(13)
141 
Foreign currency translation on hedge of a net investment
(35)
(2)
(115)
Derivatives qualifying as cash flow hedges, net of taxes of $15 and $16 for the three months ended June 30, 2009 and 2008, respectively; and $2 and $19 for the six months ended June 30, 2009 and 2008, respectively
(31)
(66)
Derivatives qualifying as cash flow hedges reclassified to net earnings, net of taxes of $7 and $11 for the three months ended June 30, 2009 and 2008, respectively; and $14 and $16 for the six months ended June 30, 2009 and 2008, respectively
(21)
(41)
24 
35 
Pension and postretirement benefits, net of taxes of $160 and $9 for the three months ended June 30, 2009 and 2008, respectively; and $220 and $9 for the six months ended June 30, 2009 and 2008, respectively
295 
405 
17 
17 
Pension and postretirement benefits reclassified to net earnings, net of taxes of $20 and $11 for the three months ended June 30, 2009 and 2008, respectively; and $37 and $17 for the six months ended June 30, 2009 and 2008, respectively
35 
65 
23 
46 
Available for sale securities, net of taxes of $4 and $3 for the three months ended June 30, 2009 and 2008, respectively; and $5 and $1 for the six months ended June 30, 2009 and 2008, respectively
12 
14 
(32)
(109)
Total Other Comprehensive Income/(Loss)
350 
464 
29 
(51)
Comprehensive Income
1,648 
2,683 
1,034 
1,845 
Comprehensive Income Attributable to Noncontrolling Interest
317 
603 
241 
471 
Comprehensive Income Attributable to Bristol-Myers Squibb Company
1,331 
2,080 
793 
1,374 
RETAINED EARNINGS
 
 
 
 
Retained Earnings at January 1
 
22,549 
 
19,762 
Net Earnings Attributable to Bristol-Myers Squibb Company
983 
1,621 
764 
1,425 
Cash dividends declared
 
(1,234)
 
(1,230)
Retained Earnings at June 30
$ 22,936 
$ 22,936 
$ 19,957 
$ 19,957 
Statement Of Other Comprehensive Income (Parenthetical) (USD $)
In Millions
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
Derivatives qualifying as cash flow hedges, taxes
$ 15 
$ 2 
$ 16 
$ 19 
Derivatives qualifying as cash flow hedges reclassified to net earnings, taxes
14 
11 
16 
Pension and postretirement benefits, taxes
160 
220 
Pension and postretirement benefits reclassified to net earnings, taxes
20 
37 
11 
17 
Available for sale securities, taxes
$ 4 
$ 5 
$ 3 
$ 1 
Statement Of Financial Position Classified (USD $)
In Millions
Jun. 30, 2009
Dec. 31, 2008
ASSETS
 
 
Current Assets:
 
 
Cash and cash equivalents
$ 7,507 
$ 7,976 
Marketable securities
613 
289 
Receivables, net of allowances of $130 in 2009 and $128 in 2008
3,619 
3,644 
Inventories, net
1,780 
1,765 
Deferred income taxes, net of valuation allowances
666 
703 
Prepaid expenses
385 
320 
Total Current Assets
14,570 
14,697 
Property, plant and equipment, net
5,468 
5,405 
Goodwill
4,827 
4,827 
Other intangible assets, net of accumulated amortization of $1,912 in 2009 and $1,802 in 2008
1,070 
1,151 
Deferred income taxes, net of valuation allowances
1,802 
2,137 
Marketable securities
983 
188 
Other assets
1,089 
1,081 
Total Assets
29,809 
29,486 
LIABILITIES
 
 
Current Liabilities:
 
 
Short-term borrowings
124 
154 
Accounts payable
1,802 
1,535 
Accrued expenses
2,548 
2,936 
Deferred income
267 
277 
Accrued rebates and returns
815 
806 
U.S. and foreign income taxes payable
394 
347 
Dividends payable
630 
617 
Accrued litigation liabilities
164 
38 
Total Current Liabilities
6,744 
6,710 
Pension, postretirement and postemployment liabilities
1,061 
2,285 
Deferred income
872 
791 
U.S. and foreign income taxes payable
531 
466 
Other liabilities
430 
441 
Long-term debt
6,235 
6,585 
Total Liabilities
15,873 
17,278 
Commitments and contingencies (Note 21)
EQUITY
 
 
Bristol-Myers Squibb Company Shareholders' Equity:
 
 
Preferred stock, $2 convertible series, par value $1 per share: Authorized 10 million shares; issued and outstanding 5,664 in 2009 and 5,668 in 2008, liquidation value of $50 per share
Common stock, par value of $0.10 per share: Authorized 4.5 billion shares; 2.2 billion issued in both 2009 and 2008
220 
220 
Capital in excess of par value of stock
3,790 
2,828 
Restricted stock
(87)
(71)
Accumulated other comprehensive loss
(2,255)
(2,719)
Retained earnings
22,936 
22,549 
Less cost of treasury stock -224 million common shares in 2009 and 226 million in 2008
(10,508)
(10,566)
Total Bristol-Myers Squibb Company Shareholders' Equity
14,096 
12,241 
Noncontrolling interest
(160)
(33)
Total Equity
13,936 
12,208 
Total Liabilities and Equity
$ 29,809 
$ 29,486 
Statement Of Financial Position Classified (Parenthetical) (USD $)
In Millions, except Share and Per Share data
Jun. 30, 2009
Dec. 31, 2008
Receivables, allowances
$ 130 
$ 128 
Other intangible assets, accumulated amortization
1,912 
1,802 
Preferred stock, $2 convertible series, par value
Preferred stock, $2 convertible series, Authorized
10,000,000 
10,000,000 
Preferred stock, $2 convertible series, issued
5,664 
5,668 
Preferred stock, $2 convertible series, outstanding
5,664 
5,668 
Preferred stock, $2 convertible series, liquidation value
50 
50 
Common stock, par value
0.10 
0.10 
Common stock, Authorized
4,500,000,000 
4,500,000,000 
Common stock, issued
2,200,000,000 
2,200,000,000 
Treasury stock, common shares
224,000,000 
226,000,000 
Statement Of Cash Flows Indirect (USD $)
In Millions
6 Months Ended
Jun. 30,
2009
2008
Cash Flows From Operating Activities:
 
 
Net earnings
$ 2,219 
$ 1,896 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
Net earnings attributable to noncontrolling interest
(598)
(471)
Depreciation
231 
328 
Amortization
101 
126 
Deferred income tax expense
112 
276 
Stock-based compensation expense
88 
88 
Impairment charges
23 
Gain on sale of product lines and businesses
(59)
(25)
Gain on debt buyback and interest swap terminations
(11)
Gain on sale of property, plant and equipment and investment in other companies
(8)
(12)
Acquired in-process research and development
32 
Changes in operating assets and liabilities:
 
 
Receivables
64 
59 
Inventories
(10)
(78)
Deferred income
75 
(53)
Accounts payable
266 
305 
U.S. and foreign income taxes payable
61 
(118)
Changes in other operating assets and liabilities
(1,283)
(487)
Net Cash Provided by Operating Activities
1,248 
1,889 
Cash Flows From Investing Activities:
 
 
Proceeds from sale of marketable securities
810 
306 
Purchases of marketable securities
(1,913)
(323)
Additions to property, plant and equipment and capitalized software
(365)
(460)
Proceeds from sale of property, plant and equipment and investment in other companies
36 
53 
Proceeds from sale of product lines and businesses
68 
483 
Purchase of Kosan Biosciences, Inc., net
(191)
Proceeds from sale and leaseback of properties
227 
Net Cash (Used in)/Provided by Investing Activities
(1,364)
95 
Cash Flows From Financing Activities:
 
 
Short-term debt repayments
(30)
(99)
Long-term debt borrowings
1,579 
Long-term debt repayments
(67)
Interest rate swap termination
191 
(19)
Issuances of common stock under stock plans and excess tax benefits from share-based payment arrangements
Dividends paid
(1,231)
(1,230)
Proceeds from Mead Johnson initial public offering
782 
Net Cash (Used in)/Provided by Financing Activities
(355)
235 
Effect of Exchange Rates on Cash and Cash Equivalents
27 
(Decrease)/Increase in Cash and Cash Equivalents
(469)
2,246 
Cash and Cash Equivalents at Beginning of Period
7,976 
1,801 
Cash and Cash Equivalents at End of Period
$ 7,507 
$ 4,047 
Notes to Financial Statements
6 Months Ended
Jun. 30, 2009
Note 1. Basis of Presentation and New Accounting Standards
Note 2. Alliances and Collaborations
Note 3. Business Segments
Note 4. Restructuring
Note 5. Mead Johnson Nutrition Company Initial Public Offering
Note 6. Discontinued Operations
Note 7. Earnings Per Share
Note 8. Other (Income)/Expense, Net
Note 9. Income Taxes
Note 10. Fair Value Measurement
Note 11. Cash, Cash Equivalents and Marketable Securities
Note 12. Receivables, Net
Note 13. Inventories, Net
Note 14. Property, Plant and Equipment, Net
Note 15. Accrued Expenses
Note 16. Equity
Note 17. Pension, Postretirement and Postemployment Liabilities
Note 18. Employee Stock Benefit Plans
Note 19. Short-Term Borrowings and Long-Term Debt
Note 20. Financial Instruments
Note 21. Legal Proceedings and Contingencies
Note 22. Subsequent Event

Note 1. Basis of Presentation and New Accounting Standards

Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS or the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission and United States (U.S.) generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required 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, 2009 and December 31, 2008, the results of its operations for the three and six months ended June 30, 2009 and 2008 and its cash flows for the six months ended June 30, 2009. All material intercompany balances and transactions have been eliminated. Material subsequent events are evaluated and disclosed through the report issuance date, July 23, 2009. These unaudited consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 included in our Current Report on Form 8-K filed on April 28, 2009. See “—Note 3. Business Segments” for discussion of the change in business segments, due to the Mead Johnson Nutrition Company (Mead Johnson) initial public offering. Certain reclassifications were made to conform to the current period presentation.

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

The Company recognizes revenue when title and substantially all the risks and rewards of ownership have transferred to the customer. Generally, revenue is recognized at the time of shipment; however, for certain sales made by Mead Johnson and certain non-U.S. businesses within the BioPharmaceuticals segment, revenue is recognized on the date of receipt by the purchaser. Revenues are reduced at the time of recognition to reflect expected returns that are estimated based on historical experience and business trends. Additionally, provisions are made at the time of revenue recognition 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 related product is shipped by the copromotion partners and title passes to the customer.

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; inventory obsolescence; legal contingencies; tax assets and tax liabilities; stock-based compensation; retirement and postretirement benefits (including the actuarial assumptions); financial instruments, including marketable securities with no observable market quotes; as well as in estimates used in applying the revenue recognition policy. Actual results may differ from the estimated results.

Effective July 1, 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 168, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. The adoption of this pronouncement is not expected to have a material effect on the consolidated financial statements.

The Company adopted the provisions of SFAS No. 157, Fair Value Measurements, with respect to non-financial assets and liabilities effective January 1, 2009. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of SFAS No. 157 did not have an impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. Among other items, SFAS No. 166 removes the concept of a qualifying special-purpose entity and clarifies that the objective of paragraph 9 of SFAS No. 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. SFAS No. 166 is effective January 1, 2010. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amending FASB Interpretation No. 46(R). SFAS No. 167 amends FIN 46(R) in determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. SFAS No. 167 is effective January 1, 2010. The Company is currently evaluating the impact of adopting this pronouncement.

The Company adopted SFAS No.160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51, on January 1, 2009. As a result of adoption the following retroactive adjustment was made: the December 31, 2008 noncontrolling interest balance of $33 million, previously presented as $66 million of receivables and $33 million of non-current other liabilities, has been presented as part of equity. Also, noncontrolling interest has been presented as a reconciling item in the consolidated statements of earnings, the consolidated statements of comprehensive income and retained earnings and the consolidated statements of cash flows.

The Company adopted SFAS No. 141(R), Business Combinations, for business combinations on or after January 1, 2009. This pronouncement replaced SFAS No. 141, Business Combinations, and requires recognition of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, this pronouncement requires recognition of identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. This pronouncement also requires the fair value of acquired in-process research and development to be recorded as indefinite lived intangibles, contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as incurred. In addition, any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. The adoption of SFAS No. 141(R) did not have an impact on the Company’s consolidated financial statements as there were no business combinations.

The Company adopted the provisions of Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property, effective January 1, 2009 and the provisions have been applied retroactively. According to this pronouncement a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third-parties in connection with collaborative arrangements are presented gross or net based on the criteria in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and other accounting literature. Payments to or from collaborators are evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are disclosed along with the accounting policies and the classification and amounts of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity are accounted for under other accounting literature; however, required disclosure under EITF Issue No. 07-1 applies to the entire collaborative agreement. This pronouncement did not have a material impact on the Company’s consolidated financial statements.

Note 2. Alliances and Collaborations

sanofi

The Company has agreements with sanofi-aventis (sanofi) for the codevelopment and cocommercialization of AVAPRO*/AVALIDE* (irbesartan/irbesartan-hydrochlorothiazide), an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy, and PLAVIX* (clopidogrel bisulfate), a platelet aggregation inhibitor. The worldwide alliance operates under the framework of two geographic territories; one in the Americas (principally the U.S., Canada, Puerto Rico and Latin American countries) and Australia and the other in Europe and Asia. Accordingly, two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished product to the individual countries. In general, at the country level, agreements either to copromote (whereby a partnership was formed between the parties to sell each brand) or to comarket (whereby the parties operate and sell their brands independently of each other) are in place. The agreements 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 noncontrolling interest which was $424 million ($283 million after-tax) and $354 million ($238 million after-tax) for the three months ended June 30, 2009 and 2008, respectively, and $815 million ($549 million after-tax) and $688 million ($464 million after-tax) for the six months ended June 30, 2009 and 2008, respectively. The Company recorded net sales in this territory and in comarketing countries outside this territory (Germany, Italy, Spain and Greece) of $1,851 million and $1,722 million for the three months ended June 30, 2009 and 2008, respectively, and $3,588 million and $3,335 million for the six months ended June 30, 2009 and 2008, respectively.

Cash flows from operating activities of the partnerships in the territory covering the Americas and Australia are recorded as operating activities within the Company’s consolidated statements of cash flows. Distributions of partnership profits to sanofi and sanofi’s funding of ongoing partnership operations occur on a routine basis and are also recorded within operating activities on the Company’s consolidated statements of cash flows.

Sanofi acts as the operating partner for the territory covering Europe and Asia and owns a 50.1% majority financial controlling interest within this territory. The Company’s ownership interest in the partnership within 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 statements of earnings. The Company’s share of income from these partnership entities before taxes was $154 million and $162 million for the three months ended June 30, 2009 and 2008, respectively, and $301 million and $324 million for the six months ended June 30, 2009 and 2008, respectively.

The Company routinely receives distributions of profits and provides funding for the ongoing operations of the partnerships in the territory covering Europe and Asia. These transactions are recorded as operating activities within the Company’s consolidated statements of cash flows.

The Company and sanofi have a separate partnership governing the copromotion of irbesartan in the U.S. Under this alliance, the Company recognized other income of $8 million in each of the three month periods ended June 30, 2009 and 2008, and $16 million in each of the six month periods ended June 30, 2009 and 2008, related to the amortization of deferred income associated with sanofi’s $350 million payment to the Company for their acquisition of an interest in the irbesartan license for the U.S. upon formation of the alliance. The unrecognized portion of the deferred income amounted to $107 million and $123 million at June 30, 2009 and December 31, 2008, respectively, and will continue to amortize through 2012, the expected expiration of the license.

The following is the summarized financial information for the Company’s equity interests in the partnerships with sanofi for the territory covering Europe and Asia:

     Three Months Ended June 30,    Six Months Ended June 30,
Dollars in Millions    2009    2008    2009    2008

Net sales

   $ 772    $ 926    $ 1,527    $ 1,823

Gross profit

     577      708      1,144      1,391

Net income

     295      328      584      660

Otsuka

The Company has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote with Otsuka, ABILIFY* (aripiprazole), for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan and Egypt. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company or Otsuka to third-party customers. The product is currently copromoted with Otsuka in the U.S., United Kingdom (UK), Germany, France and Spain. Currently in the U.S., Germany, France and Spain, where the product is invoiced to third-party customers by the Company on behalf of Otsuka, the Company records alliance revenue for its 65% contractual share of third-party net sales and records all expenses related to the product. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to third-party customers. In the UK and Italy, where the Company is presently the exclusive distributor for the product, the Company records 100% of the net sales and related cost of products sold and expenses. The Company also has an exclusive right to sell ABILIFY* in other countries in Europe, the Americas and a number of countries in Asia. In these countries, the Company records 100% of the net sales and related cost of products sold.

In April 2009, the Company and Otsuka announced an agreement to extend the U.S. portion of the commercialization and manufacturing agreement until the expected loss of product exclusivity in April 2015. Under the terms of the agreement, the Company paid Otsuka $400 million, which will be amortized as a reduction of net sales through the extension period. Beginning on January 1, 2010, the share of ABILIFY* U.S. net sales that the Company records will change from 65% to the following:

     Share as a % of U.S. Net
Sales

2010

   58.0%

2011

   53.5%

2012

   51.5%

During this period, Otsuka will be responsible for 30% of the expenses related to the commercialization of ABILIFY*.

Beginning January 1, 2013, and through the expected loss of U.S. exclusivity in 2015, the Company will receive the following percentages of U.S. annual net sales:

     Share as a % of U.S. Net
Sales

$0 to $2.7 billion

   50%

$2.7 billion to $3.2 billion

   20%

$3.2 billion to $3.7 billion

   7%

$3.7 billion to $4.0 billion

   2%

$4.0 billion to $4.2 billion

   1%

In excess of $4.2 billion

   20%

During this period, Otsuka will be responsible for 50% of all expenses related to the commercialization of ABILIFY*.

In addition, the Company and Otsuka announced that they have entered into an oncology collaboration for SPRYCEL and IXEMPRA, which includes the U.S., Japan and European Union (EU) markets (the Oncology Territory). Beginning in 2010 through 2020, the collaboration fees the Company will pay to Otsuka annually are the following percentages of net sales of SPRYCEL and IXEMPRA in the Oncology Territory:

     % of Net Sales
     2010 - 2012   2013 - 2020

$0 to $400 million

   30%   65%

$400 million to $600 million

   5%   12%

$600 billion to $800 billion

   3%   3%

$800 million to $1.0 billion

   2%   2%

In excess of $1.0 billion

   1%   1%

During these periods, Otsuka will contribute (i) 20% of the first $175 million of certain commercial operational expenses relating to the oncology products, and (ii) 1% of such commercial operational expenses relating to the products in the territory in excess of $175 million. Starting in 2011, Otsuka will have the right to co-promote SPRYCEL with the Company in the U.S. and Japan and in 2012, in the top five EU markets.

The U.S. extension and the oncology collaboration include a change-of-control provision in the case of an acquisition of the Company. If the acquiring company does not have a competing product to ABILIFY*, then the new company will assume the ABILIFY* agreement (as amended) and the oncology collaboration as it exists today. If the acquiring company has a product that competes with ABILIFY*, Otsuka can elect to request the acquiring company to choose whether to divest ABILIFY* or the competing product. In the scenario where ABILIFY* is divested, Otsuka would be obligated to acquire the Company’s rights under the ABILIFY* agreement (as amended). The agreements also provide that in the event of a generic competitor to ABILIFY* after January 1, 2010, the Company has the option of terminating the ABILIFY* April 2009 amendment (with the agreement as previously amended remaining in force). If the Company were to exercise such option then either (i) the Company would receive a payment from Otsuka according to a pre-determined schedule and the oncology collaboration would terminate at the same time or (ii) the oncology collaboration would continue for a truncated period according to a pre-determined schedule.

For the entire EU, the agreement remained unchanged and will expire in June 2014. In other countries where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the later of the 10th anniversary of the first commercial sale in such country or expiration of the applicable patent in such country.

The Company recorded total revenue for ABILIFY* of $643 million and $529 million for the three months ended June 30, 2009 and 2008, respectively, and $1,232 million and $983 million for the six months ended June 30, 2009 and 2008, respectively. The Company amortized into cost of products sold $2 million in each of the three month periods ended June 30, 2009 and 2008, and $4 million in each of the six month periods ended June 30, 2009 and 2008, for previously capitalized milestone payments. The unamortized capitalized payment balance is recorded in other intangible assets, net and was $19 million at June 30, 2009 and $23 million at December 31, 2008, and will continue to amortize through 2012. The Company amortized as a reduction of net sales $16 million for both the three and six month periods ended June 30, 2009, related to the $400 million extension payment. The unamortized portion of this payment amounted to $384 million at June 30, 2009, and is included in other assets, net.

Lilly

The Company has a commercialization agreement with Eli Lilly and Company (Lilly) through Lilly’s November 2008 acquisition of ImClone Systems Incorporated (ImClone) for the codevelopment and copromotion of ERBITUX* (cetuximab) in the U.S., which expires as to ERBITUX* in September of 2018. The Company also has codevelopment and copromotion rights in Canada and Japan. ERBITUX* is indicated for use in the treatment of patients with metastatic colorectal cancer and for use in the treatment of squamous cell carcinoma of the head and neck. Under the agreement covering North America, Lilly receives a distribution fee based on a flat rate of 39% of net sales in North America.

In October 2007, the Company and ImClone amended their codevelopment agreement with Merck KGaA to provide for cocommercialization of ERBITUX* in Japan, which expires in 2032. Lilly has the ability to terminate the agreement after 2018 if it determines that it is commercially unreasonable for Lilly to continue. ERBITUX* received marketing approval in Japan in July 2008 for the use of ERBITUX* in treating patients with advanced or recurrent colorectal cancer.

The Company recorded net sales for ERBITUX* of $173 million and $196 million for the three months ended June 30, 2009 and 2008, respectively, and $337 million and $383 million for the six months ended June 30, 2009 and 2008, respectively. The Company amortized into cost of products sold $10 million and $9 million for the three months ended June 30, 2009 and 2008, respectively, and $19 million in each of the six month periods ended June 30, 2009 and 2008, for previously capitalized milestone payments, which were accounted for as a license acquisition. The unamortized portion of the approval payments is recorded in other intangible assets, net and was $341 million at June 30, 2009 and $360 million at December 31, 2008, and will continue to amortize through 2018, the remaining term of the agreement.

Upon initial execution of the commercialization agreement, the Company acquired an ownership interest in ImClone which approximated 17% at the time of the transaction noted below, and had been accounting for its investment under the equity method. The Company recorded an equity loss in net income of affiliates, which was adjusted for revenue recognized by ImClone for pre-approved milestone payments made by the Company prior to 2004, of $9 million and $5 million for the three and six months ended June 30, 2008, respectively. The Company sold its shares of ImClone for $1.0 billion and recognized a pre-tax gain of $895 million in November 2008.

Gilead

The Company and Gilead Sciences, Inc. (Gilead) have a joint venture to develop and commercialize ATRIPLA* (efavirenz 600 mg/ emtricitabine 200 mg/ tenofovir disoproxil fumarate 300 mg), a once-daily single tablet three-drug regimen combining the Company’s SUSTIVA (efavirenz) and Gilead’s TRUVADA* (emtricitabine and tenofovir disoproxil fumarate), in the U.S., Canada and Europe.

Gilead records all ATRIPLA* revenues in the U.S., Canada and most countries in Europe and consolidates the results of the joint venture in its operating results. The Company records revenue for the bulk efavirenz component of ATRIPLA* upon sales of that product to third-party customers. In a limited number of EU countries, the Company records revenue for ATRIPLA* where the Company agreed to purchase the product from Gilead and distribute it to third-party customers. The Company recorded revenues of $206 million and $131 million for the three months ended June 30, 2009 and 2008, respectively, and $388 million and $250 million for the six months ended June 30, 2009 and 2008, respectively, related to ATRIPLA* sales. The Company accounts for its participation in the U.S. joint venture under the equity method of accounting and records its share of the joint venture results in equity in net income of affiliates in the consolidated statements of earnings. The Company recorded an equity loss on the U.S. joint venture with Gilead of $3 million and $2 million for the three months ended June 30, 2009 and 2008, respectively, and $5 million and $4 million for the six months ended June 30, 2009 and 2008, respectively.

AstraZeneca

The Company maintains two worldwide codevelopment and cocommercialization agreements with AstraZeneca PLC (AstraZeneca), one for the worldwide (except for Japan) codevelopment and cocommercialization of saxagliptin, a DPP-IV inhibitor (Saxagliptin Agreement), and one for the worldwide (including Japan) codevelopment and cocommercialization of dapagliflozin, a sodium-glucose cotransporter-2 (SGLT2) inhibitor (SGLT2 Agreement). Both compounds are being studied for the treatment of diabetes and were discovered by the Company.

The $150 million in upfront and milestone payments received by the Company in the two year period ended December 31, 2008 were deferred and are being recognized over the useful life of the products into other income. The Company amortized into other income $3 million and $2 million of these payments in the three months ended June 30, 2009 and 2008, respectively, and $6 million and $4 million in the six months ended June 30, 2009 and 2008, respectively. The unamortized portion of the upfront and milestone payments was $128 million at June 30, 2009 and $134 million at December 31, 2008. Additional milestone payments are expected to be received by the Company upon the successful achievement of various development and regulatory events as well as sales-related milestones. Under the Saxagliptin Agreement, the Company could receive up to an additional $250 million if all development and regulatory milestones for saxagliptin are met and up to an additional $300 million if all sales-based milestones for saxagliptin are met. Under the SGLT2 Agreement, the Company could receive up to an additional $350 million if all development and regulatory milestones for dapagliflozin are met and up to an additional $390 million if all sales-based milestones for dapagliflozin are met. Under each agreement, the Company and AstraZeneca also share in development and commercialization costs. The majority of development costs under the initial development plans through 2009 will be paid by AstraZeneca (with AstraZeneca bearing all the costs of the initial agreed upon development plan for dapagliflozin in Japan) and any additional development costs will generally be shared equally. The Company records development costs related to saxagliptin and dapagliflozin net of AstraZeneca’s share in research and development expenses. The Company incurred reimbursable research and development expenses of $5 million and $43 million for the three months ended June 30, 2009 and 2008, respectively, and $29 million and $81 million for the six months ended June 30, 2009 and 2008, respectively. Under each agreement, the two companies will jointly develop the clinical and marketing strategy and share commercialization expenses and profits/losses equally on a global basis (excluding, in the case of saxagliptin, Japan), and the Company will manufacture both products. The companies will cocommercialize dapagliflozin in Japan and share profits/losses equally. Under each agreement, the Company has the option to decline involvement in cocommercialization in a given country and instead receive a royalty.

Pfizer

The Company and Pfizer Inc. (Pfizer) maintain a worldwide codevelopment and cocommercialization agreement for apixaban, an anticoagulant discovered by the Company being studied for the prevention and treatment of a broad range of venous and arterial thrombotic conditions.

The Company received $290 million in upfront payments in the two year period ended December 31, 2008. In addition, the Company received a $150 million milestone payment in April 2009 for the commencement of Phase III clinical trials for prevention of major adverse cardiovascular events in acute coronary syndrome. The Company amortized into other income $7 million and $4 million of the upfront and milestone payments in the three months ended June 30, 2009 and 2008, respectively, and $12 million and $9 million for the six months ended June 30, 2009 and 2008, respectively. The unamortized portion of the upfront and milestone payments was $399 million at June 30, 2009 and $261 million at December 31, 2008. Pfizer will fund 60% of all development costs effective January 1, 2007 going forward, and the Company will fund 40%. The Company records apixaban development costs net of Pfizer’s share in research and development expenses. The Company incurred reimbursable research and development expenses of $45 million and $40 million for the three months ended June 30, 2009 and 2008, respectively, and $87 million and $83 million for the six months ended June 30, 2009 and 2008, respectively. The Company may also receive additional payments from Pfizer of up to an additional $630 million based on development and regulatory milestones. The companies will jointly develop the clinical and marketing strategy, will share commercialization expenses and profits/losses equally on a global basis, and will manufacture product under this arrangement.

 

 

Medarex

The Company maintains a worldwide collaboration with Medarex, Inc. (Medarex) to codevelop and copromote ipilimumab, a fully human antibody currently in Phase III development for the treatment of metastatic melanoma.

Future milestone payments would be required to be made by the Company to Medarex based upon the successful achievement of various regulatory and sales-related stages. The Company and Medarex will also share in future development costs. Medarex could receive up to $220 million if all regulatory milestones for ipilimumab are met and up to $275 million if sales-related milestones for ipilimumab are met. In the U.S., Medarex will receive royalties unless it exercises an option to copromote in the U.S., in which event it will share in commercialization costs and receive/bear up to 45% of the profits/losses with the Company in the U.S. The Company has an exclusive license outside of the U.S. and will pay royalties to Medarex.

The Company previously invested $25 million in Medarex which represents 2.4% of their outstanding shares. See “—Note 22. Subsequent Event.”

Exelixis

In December 2008, the Company and Exelixis, Inc. (Exelixis) entered into a global codevelopment and cocommercialization arrangement for XL184 (a MET/VEG/RET inhibitor), an oral anti-cancer compound, and a license for XL281 with utility in RAS and RAF mutant tumors under development by Exelixis. Under the terms of the arrangement, the Company paid Exelixis $195 million in 2008 upon execution of the agreement, and paid an additional $20 million in the first six months of 2009 and $25 million in July 2009, all of which was expensed as research and development in 2008. Exelixis will fund the first $100 million of development for XL184. If Exelixis elects to continue sharing development, Exelixis will fund 35% of future global development costs (excluding Japan) and share U.S. profits/losses equally and has an option to copromote in the U.S.; failing such elections, Exelixis receives milestones and royalties on U.S. sales. The Company will fund 100% of development costs in Japan. In addition to royalties on non-U.S. sales, the Company could pay up to $610 million if all development and regulatory milestones are met on both compounds and up to an additional $300 million if all sales-based milestones are met on both compounds.

In addition, the Company and Exelixis have a history of collaborations to identify, develop and promote oncology targets. During December 2006, the Company and Exelixis entered into an oncology collaboration and license agreement under which Exelixis will pursue the development of three small molecule INDs for codevelopment and copromotion. Under the terms of this agreement, the Company paid Exelixis $60 million of upfront fees in 2007. During 2008, the Company paid Exelixis $40 million in IND acceptance milestones. If Exelixis elects to fund development costs and copromote in the U.S., both parties will equally share development costs and profits. If Exelixis opts out of the codevelopment and copromotion agreement, the Company will take over full development and U.S. commercial rights, and, if successful, will pay Exelixis development and regulatory milestones up to $190 million and up to an additional $90 million of sales-based milestones, as well as royalties.

Since July 2001, the Company has held an equity investment in Exelixis, which at June 30, 2009 represented less than 1% of their outstanding shares.

ZymoGenetics

In January 2009, the Company and ZymoGenetics, Inc. (ZymoGenetics) entered into a global codevelopment arrangement in the U.S. for PEG-Interferon lambda, a novel type 3 interferon for the treatment of hepatitis C. Under the terms of the arrangement, the Company paid ZymoGenetics $105 million in the first six months of 2009 and an additional $25 million in July 2009, all of which was expensed as research and development. ZymoGenetics will fund the first $100 million of global development for PEG-Interferon lambda after which, ZymoGenetics will fund 20% of development costs in the U.S. and Europe and the Company will fund 100% of the development costs in the rest of the world. If ZymoGenetics elects to continue sharing development and commercialization costs in the U.S., ZymoGenetics will share 40% of U.S. profits/losses and has an option to copromote in the U.S. Failing such election to fund development costs in the U.S., ZymoGenetics will receive royalties on U.S. sales. The Company will pay ZymoGenetics royalties on all non-U.S. sales. In addition, the Company could pay up to $405 million if all hepatitis C development and regulatory milestones are met; up to $287 million if development and regulatory milestones for other potential indications are met; and up to an additional $285 million if all sales-based milestones are met.

Note 3. Business Segments

Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Company reports financial and operating information in two segments —BioPharmaceuticals and Mead Johnson. The BioPharmaceuticals segment is comprised of the global biopharmaceutical and international consumer medicines businesses. The Mead Johnson segment consists of the Company’s 83.1% interest in Mead Johnson Nutrition Company, which is primarily an infant formula and children’s nutrition business.

Effective January 1, 2009, the Company changed its measurement of segment income for all the periods presented. The following summarizes the most significant changes from the previously reported amounts:

 

   

Certain items that were previously excluded from segment results are now included, including, but not limited to, costs attributed to certain corporate administrative functions and programs, stock-based compensation expense and net interest expense;

   

Certain items that were previously included in segment results are now excluded, including but not limited to, costs attributed to productivity transformation initiative (PTI), upfront milestone payments and acquired in-process research and development; and

   

The pre-tax income attributable to noncontrolling interest is excluded from the segment results.

The following table reconciles the Company’s segment results to earnings from continuing operations before income taxes:

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2009     2008     2009     2008  

Segment results:

        

BioPharmaceuticals

   $ 1,242      $ 848      $ 2,340      $ 1,680   

Mead Johnson

     151        188        310        396   
                                

Total segment results

     1,393        1,036        2,650        2,076   

Reconciliation of segment results to earnings from continuing operations before income taxes:

        

Productivity transformation initiative

     (82     (109     (111     (222

Auction rate securities (ARS) impairment charge and gain on sale

            2               (23

Upfront and milestone payments and acquired in-process research and development

     (29     (63     (174     (83

Litigation and product liability charges

     (28     (2     (125     (18

Mead Johnson separation costs

     (8     (1     (25     (1

Mead Johnson gain on sale of trademark

     12               12          

Debt buyback and swap terminations

     11               11          

Noncontrolling interest

     472        358        887        699   
                                

Earnings from continuing operations before income taxes

   $ 1,741      $ 1,221      $ 3,125      $ 2,428   
                                

Net sales of the Company’s key products and product categories within business segments were as follows: 

     Three Months Ended June 30,    Six Months Ended June 30,
Dollars in Millions    2009    2008    2009    2008

BioPharmaceuticals

           

PLAVIX*

   $ 1,539    $ 1,387    $ 2,974    $ 2,695

AVAPRO*/AVALIDE*

     313      335      615      640

REYATAZ

     331      324      653      621

SUSTIVA Franchise (total revenue)

     312      282      604      555

BARACLUDE

     179      136      331      244

ERBITUX*

     173      196      337      383

SPRYCEL

     107      76      195      142

IXEMPRA

     29      26      53      51

ABILIFY*

     643      529      1,232      983

ORENCIA

     148      106      272      193

Other

     891      1,078      1,721      2,156
                           

Total BioPharmaceuticals

     4,665      4,475      8,987      8,663
                           

Mead Johnson Nutrition Company products

     719      728      1,412      1,431
                           

Total

   $ 5,384    $ 5,203    $ 10,399    $ 10,094
                           

Note 4. Restructuring

The Company’s productivity transformation initiative is designed to fundamentally change the way it runs its business to meet the challenges of a changing business environment, to take advantage of the diverse opportunities in the marketplace as the Company is transforming into a next-generation biopharmaceutical company, and to create a total of $2.5 billion in annual productivity cost savings and cost avoidance by 2012. In connection with the PTI, the Company aims to achieve a culture of continuous improvement to enhance its efficiency, effectiveness and competitiveness and to substantially improve its cost base.

The charges associated with the PTI are estimated to be in the range of $1.3 billion to $1.6 billion, which includes $806 million of costs already incurred. The incurred costs are net of $214 million of gains related to the sale of mature product lines and businesses. The exact timing of the recognition of PTI charges cannot be predicted with certainty and will be affected by the existence of triggering events for expense recognition, among other factors.

The Company recorded the following PTI charges:

     Three Months Ended June 30,    Six Months Ended June 30,  
Dollars in Millions    2009     2008    2009     2008  

Provision for restructuring, net

   $ 20      $ 30    $ 47      $ 41   

Accelerated depreciation, asset impairment and other shutdown costs

     24        58      50        154   

Retirement plan curtailment charge (Note 17)

     25             25          

Process standardization implementation costs

     24        21      44        36   

Gain on sale of product lines, businesses and assets

     (11          (55     (9
                               

Total

   $ 82      $ 109    $ 111      $ 222   
                               

Most of the accelerated depreciation, asset impairment charges and other shutdown costs were included in cost of products sold and primarily relate to the rationalization of the Company’s manufacturing network in the BioPharmaceuticals segment. These assets continue to be depreciated until the facility closures are complete. The remaining costs of PTI were primarily attributed to process standardization activities across the Company and are recognized as incurred.

Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 140 and 170 for the three months ended June 30, 2009 and 2008, respectively, and 355 and 370 for the six months ended June 30, 2009 and 2008, respectively. The following tables present the detail of expenses incurred in connection with the restructuring activities:

     Three Months Ended June 30, 2009    Three Months Ended June 30, 2008
Dollars in Millions    Termination
Benefits
   Other Exit
Costs
   Total    Termination
Benefits
    Other Exit
Costs
   Total

Charges

   $ 18    $    $ 18    $ 27      $  —    $ 27

Changes in estimates

     2           2      3             3
                                          

Provision for restructuring, net

   $ 20    $    $ 20    $ 30      $    $ 30
                                          
     Six Months Ended June 30, 2009    Six Months Ended June 30, 2008
Dollars in Millions    Termination
Benefits
   Other Exit
Costs
   Total    Termination
Benefits
    Other Exit
Costs
   Total

Charges

   $ 41    $ 6    $ 47    $ 40      $ 1    $ 41

Changes in estimates

                    (1     1     
                                          

Provision for restructuring, net

   $ 41    $ 6    $ 47    $ 39      $ 2    $ 41
                                          

The Company excludes the impact of restructuring charges and other related PTI costs from segment income. See “—Note 3. Business Segments” for a reconciliation of segment results to earnings from continuing operations before income taxes. Restructuring charges originating from the BioPharmaceuticals segment were $19 million and $29 million for the three months ended June 30, 2009 and 2008, respectively, and $38 million and $39 million for the six months ended June 30, 2009 and 2008, respectively, with the remaining charges relating to the Mead Johnson segment.

The following table represents the reconciliation of restructuring liabilities and spending against those liabilities:

Dollars in Millions    Termination
Liability
    Other Exit Costs
Liability
    Total  

Liability at January 1, 2009

   $ 188      $ 21      $ 209   

Charges

     41        6        47   

Spending

     (75     (4     (79
                        

Liability at June 30, 2009

   $ 154      $ 23      $     177   
                        

Note 5. Mead Johnson Nutrition Company Initial Public Offering

In February 2009, Mead Johnson Nutrition Company completed an initial public offering (IPO), in which it sold 34.5 million shares of its Class A common stock at $24 per share. The net proceeds, after deducting $46 million of underwriting discounts, commissions and offering expenses, were $782 million, which were allocated to noncontrolling interest and capital in excess of par value of stock within the Company’s equity.

Upon completion of the IPO, the Company held 42.3 million shares of Mead Johnson Class A common stock and 127.7 million shares of Mead Johnson Class B common stock, representing an 83.1% interest in Mead Johnson and 97.5% of the combined voting power of the outstanding common stock. The rights of the holders of the shares of Class A common stock and Class B common stock are identical, except with regard to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time at the election of the holder into one share of Class A common stock. The Class B common stock will automatically convert into shares of Class A common stock in certain circumstances.

Mead Johnson continues to be consolidated for financial reporting purposes. The Company has entered into various agreements related to the separation of Mead Johnson, including a separation agreement, a transitional services agreement, a tax matters agreement, a registration rights agreement and an employee matters agreement.

Note 6. Discontinued Operations

As discussed in our 2008 Annual Report on Form 10-K, the Company completed the divestiture of ConvaTec and Medical Imaging. The results of the ConvaTec and Medical Imaging businesses are included in net earnings from discontinued operations for the three months and six months ended June 30, 2008. The Medical Imaging business divestiture was completed in the first quarter of 2008, resulting in a pre-tax gain of $25 million (after-tax loss of $43 million).

The following summarized financial information related to the ConvaTec and Medical Imaging businesses has been segregated from continuing operations in 2008 and reported as discontinued operations through the date of disposition and does not reflect the costs of certain services provided to ConvaTec and Medical Imaging by the Company. These costs were not allocated by the Company to ConvaTec and Medical Imaging and were for services that included legal counsel, insurance, external audit fees, payroll processing, certain human resource services and information technology systems support.

 

     Three Months Ended June 30, 2008    Six Months Ended June 30, 2008
Dollars in Millions    ConvaTec    Medical
Imaging
   Total    ConvaTec    Medical
Imaging
   Total

Net sales

   $ 322    $ 8    $ 330    $ 612    $ 26    $ 638

Earnings before income taxes

   $ 83    $ 1    $ 84    $ 166    $ 5    $ 171

Curtailment losses and special termination benefits

     16           16      16           16

Provision for income taxes

     26           26      55      1      56
                                         

Earnings, net of taxes

   $ 41    $ 1    $ 42    $ 95    $ 4    $ 99
                                         

The consolidated statements of cash flows include the ConvaTec and Medical Imaging businesses through the date of disposition. The Company uses a centralized approach for cash management and financing of its operations; as such, debt was not allocated to these businesses.

Note 7. Earnings Per Share

The numerator for basic earnings per share is net earnings attributable to shareholders reduced by dividends and undistributed earnings attributable to unvested shares. The numerator for diluted earnings per share is net earnings attributable to shareholders with interest expense added back for the assumed conversion of the convertible debt into common stock and reduced by dividends and undistributed earnings attributable to unvested shares. 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 the weighted-average shares outstanding adjusted for the effect of dilutive stock options, restricted shares and contingently convertible debt into common stock. The computations for basic and diluted earnings per common share were as follows:

     Three Months Ended June 30,     Six Months Ended June 30,  
Amounts in Millions, Except Per Share Data    2009     2008     2009     2008  

Basic:

        

Net Earnings from Continuing Operations

   $ 1,298      $ 963      $ 2,219      $ 1,840   

Less Net Earnings Attributable to Noncontrolling Interest

     (315     (241     (598     (471
                                

Net Earnings from Continuing Operations Attributable to Bristol-Myers Squibb Company

     983        722        1,621        1,369   

Dividends and undistributed earnings attributable to unvested shares

     (6     (4     (9     (7
                                

Net Earnings from Continuing Operations Attributable to Bristol-Myers Squibb Company used for Basic Earnings per Common Share Calculation

     977        718        1,612        1,362   

Discontinued Operations:

        

Earnings, net of taxes

            42               99   

Loss on Disposal, net of taxes

                          (43
                                

Net Earnings Attributable to Bristol-Myers Squibb Company

   $ 977      $ 760      $ 1,612      $ 1,418   
                                

Basic Earnings Per Share:

        

Average Common Shares Outstanding – Basic

     1,980        1,977        1,979        1,976   
                                

Net Earnings from Continuing Operations Attributable to Bristol-Myers Squibb Company per Common Share

   $ 0.49      $ 0.36      $ 0.81      $ 0.69   

Discontinued Operations:

        

Earnings, net of taxes

            0.02               0.05   

Loss on Disposal, net of taxes

                          (0.02
                                

Net Earnings Attributable to Bristol-Myers Squibb Company per Common Share

   $ 0.49      $ 0.38      $ 0.81      $ 0.72   
                                

Diluted:

        

Net Earnings from Continuing Operations

   $ 1,298      $ 963      $ 2,219      $ 1,840   

Less Net Earnings Attributable to Noncontrolling Interest

     (315     (241     (598     (471
                                

Net Earnings from Continuing Operations Attributable to Bristol-Myers Squibb Company

     983        722        1,621        1,369   

Contingently convertible debt interest expense and dividends and undistributed earnings attributable to unvested shares

     (6            (9     5   
                                

Net Earnings from Continuing Operations Attributable to Bristol-Myers Squibb Company used for Diluted Earnings per Common Share Calculation

     977        722        1,612        1,374   

Discontinued Operations:

        

Earnings, net of taxes

            42               99   

Loss on Disposal, net of taxes

                          (43
                                

Net Earnings Attributable to Bristol-Myers Squibb Company

   $ 977      $ 764      $ 1,612      $ 1,430   
                                

Diluted Earnings Per Share:

        

Average Common Shares Outstanding – Basic

     1,980        1,977        1,979        1,976   

Contingently convertible debt common stock equivalents

     1        29        1        29   

Incremental shares outstanding assuming the exercise/vesting of share-based compensation awards

     2               2          
                                

Average Common Shares Outstanding – Diluted

     1,983        2,006        1,982        2,005   
                                

Net Earnings from Continuing Operations Attributable to Bristol-Myers Squibb Company per Common Share

   $ 0.49      $ 0.36      $ 0.81      $ 0.68   

Discontinued Operations:

        

Earnings, net of taxes

            0.02               0.05   

Loss on Disposal, net of taxes

                          (0.02
                                

Net Earnings Attributable to Bristol-Myers Squibb Company per Common Share

   $ 0.49      $ 0.38      $ 0.81      $ 0.71   
                                

Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation because they were anti-dilutive, were 138 million and 143 million for the three months ended June 30, 2009 and 2008, respectively, and 132 million and 142 million for the six months ended June 30, 2009 and 2008, respectively.

Note 8. Other (Income)/Expense, Net

The components of other (income)/expense, net were as follows:

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2009     2008     2009     2008  

Interest expense

   $ 42      $ 80      $ 94      $ 153   

Interest income

     (14     (31     (27     (74

Gain on debt buyback and termination of interest rate swap agreements

     (11            (11       

ARS impairment charge

                          25   

Foreign exchange transaction losses/(gains)

     17        (2     4        17   

Gain on sale of product lines, businesses and assets

     (23            (67     (9

Net royalty income and amortization of upfront and milestone payments received from alliance partners (Note 2)

     (34     (41     (69     (82

Pension curtailment charge (Note 17)

     25               25          

Other, net

     (24     (19     (49     (11
                                

Other (income)/expense, net

   $ (22   $ (13   $ (100   $ 19   
                                

Interest expense was reduced by $29 million and $15 million for the three months ended June 30, 2009 and 2008, respectively, and $53 million and $22 million for the six months ended June 30, 2009 and 2008, respectively, from the effects of interest rate swaps. In addition, interest expense was further reduced by $7 million and less than $1 million for the three months ended June 30, 2009 and 2008, respectively, and $12 million and less than $1 million for the six months ended June 30, 2009 and 2008, respectively, from the termination of interest rate swaps during 2009 and 2008. See “—Note 20. Financial Instruments” for additional discussion on terminated swap contracts.

Interest income relates primarily to interest earned on cash, cash equivalents and investments in marketable securities. For further detail on ARS impairment charge, see “—Note 11. Cash, Cash Equivalents and Marketable Securities.”

Foreign exchange transaction losses were primarily due to a weakening U.S. dollar impact on non-qualifying foreign exchange hedges and the re-measurement of non-functional currency denominated transactions.

Gain on sale of product lines, businesses and assets were primarily related to the sale of mature brands, including the Pakistan business in 2009.

Other, net includes income from third-party contract manufacturing, gains and losses on the sale of property, plant and equipment, deferred income recognized, certain litigation charges/recoveries, and ConvaTec and Medical Imaging net transitional service fees.

Note 9. Income Taxes

The effective income tax rate on earnings from continuing operations before income taxes was 25.4% and 29.0% for the three and six months ended June 30, 2009, respectively, compared to 21.1% and 24.2% for the three and six months ended June 30, 2008, respectively. The higher tax rate in the three months ended June 30, 2009 compared to the same period in 2008 was due primarily to a tax benefit of $91 million recorded in the three months ended June 30, 2008 related to the effective settlement of the 2002—2003 audit with the Internal Revenue Service. In addition, the three months ended June 30, 2009 included offsetting effects related to the Mead Johnson separation activities discussed below and a $40 million tax benefit related to the final settlement of certain state audits. The higher tax rate in the six months ended June 30, 2009 compared to the same period in 2008 was primarily related to the transfer of various international units of the Company to Mead Johnson prior to its initial public offering in addition to the items discussed above.

U.S. income taxes have not been provided on the earnings of certain low tax non-U.S. subsidiaries that are not projected to be distributed this year since the Company has invested or expects to invest such earnings permanently offshore. If, in the future, these earnings are repatriated to the U.S., or if the Company determines such earnings will be remitted in the foreseeable future, additional tax provisions would be required.

President Obama’s Administration has proposed reforms to the international tax laws that if adopted may increase taxes and reduce the Company’s results of operations and cash flows.

The Company has recorded significant deferred tax assets related to U.S. foreign tax credit and research and development tax credit carryforwards. The foreign tax credit and research and development tax credit carryforwards expire in varying amounts beginning in 2014. Realization of foreign tax credit and research tax credit carryforwards is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. Although realization is not assured, management believes it is more likely than not that these deferred tax assets will be realized.

The Company will continue to file a U.S. federal consolidated federal tax return and various state combined tax returns with Mead Johnson. As part of the initial public offering of Mead Johnson, a tax sharing agreement was put in place between the Company and Mead Johnson. Mead Johnson will make payments to the Company on a quarterly basis for its tax liability for U.S. federal purposes and various state purposes computed as a stand alone entity. These payments represent either Mead Johnson’s share of the tax liability or reimbursement to the Company for utilization of certain tax attributes. The Company has agreed to indemnify Mead Johnson for any outstanding tax liabilities or audit exposures (such as, income, sales and use, or property taxes) that existed for periods prior to the initial public offering.

The Company classifies interest expense and penalties related to unrecognized tax benefits as income tax expense. The Company is currently under examination by a number of tax authorities, which have potential adjustments to tax for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. The Company anticipates that it is reasonably possible that the total amount of unrecognized tax benefits at June 30, 2009 will decrease in the range of approximately $55 million to $85 million in the next 12 months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits, primarily settlement related, will involve the payment of additional taxes, the adjustment of certain deferred taxes, and/or the recognition of tax benefits. The Company also anticipates that it is reasonably possible that new issues will be raised by tax authorities, which may require increases to the balance of unrecognized tax benefits. However, an estimate of such increases cannot reasonably be made at this time.

Note 10. Fair Value Measurement

Financial assets and liabilities carried at fair value at June 30, 2009 are classified in one of the three categories, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

Dollars in Millions    Level 1    Level 2    Level 3    Total

Available for Sale:

           

U.S. Government Agency Securities

   $ 550    $    $    $ 550

U.S. Treasury Bills

     160                160

Equity Securities

     28                28

Prime Money Market Funds

          3,275           3,275

U.S. Treasury Money Market Funds

          1,454           1,454

U.S. Government Agency Money Market Funds

          918           918

Corporate Debt Securities

          393           393

FDIC Insured Debt Securities

          301           301

Floating Rate Securities

               96      96

Auction Rate Securities

               94      94
                           

Total available for sale assets

     738      6,341      190      7,269

Derivatives:

           

Interest Rate Swap Derivatives

          210           210

Foreign Exchange Derivatives

          27           27
                           

Total derivative assets

          237           237
                           

Total assets at fair value

   $     738    $     6,578    $     190    $     7,506
                           
Dollars in Millions    Level 1    Level 2    Level 3    Total

Derivatives:

           

Foreign Exchange Derivatives

   $    $ 39    $    $ 39

Interest Rate Swap Derivatives

          13           13

Natural Gas Contracts

          5           5
                           

Total derivative liabilities

          57           57
                           

Total liabilities at fair value

   $    $ 57    $    $ 57
                           

At June 30, 2009, the majority of the Company’s ARS are primarily rated ‘BBB/Baa1’ or better; however, several of the ARS are rated below investment grade at ‘BBB/Caa2’. ARS primarily represent interests in insurance securitizations and, to a lesser extent, structured credits. Due to the lack of observable market quotes on the Company’s ARS portfolio, the Company utilizes valuation models that rely exclusively on Level 3 inputs, including those that are based on expected cash flow streams and collateral values including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The Company’s determination of fair value on its ARS investment portfolio at June 30, 2009 included internally developed valuations that were based in part on indicative bids received on the underlying assets of the securities and other non-observable evidence of fair value. Because the Company intends to sell these investments before recovery of their amortized cost basis, the Company will consider any further decline in fair value to be an other-than-temporary impairment.

 

 

The Company’s floating rate securities (FRS) are primarily rated ‘BBB/B3’ or better at June 30, 2009. FRS are long-term debt securities with coupons that are reset periodically against a benchmark interest rate. The underlying assets of the FRS primarily consist of consumer loans, auto loans, collateralized loan obligations, monoline securities, asset-backed securities and corporate bonds and loans. Since the latter part of 2007, the general FRS market became less liquid or active due to continuing credit and liquidity concerns; as a result, there is no availability of observable market quotes in the active market (Level 1 inputs) or market quotes on similar or identical assets or liabilities, or inputs that are derived principally from or corroborated by observable market data by correlation or other means (Level 2 inputs). Due to the current lack of an active market for the Company’s FRS and the general lack of transparency into their underlying assets, the Company relies on other qualitative analysis including discussion with brokers and fund managers, default risk underlying the security and overall capital market liquidity (Level 3 inputs) to value its FRS portfolio. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider any decline in fair value to be an other-than-temporary impairment. Therefore, any declines in fair value are reported as a temporary loss in other comprehensive income. During the six months ended June 30, 2009 the Company received $120 million of principal at par for FRS.

In the second quarter of 2009, the Company invested $394 million in corporate debt securities. Corporate debt securities are rated ‘A/A2’ or better.

For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including LIBOR and EURIBOR yield curves, foreign exchange forward prices, NYMEX futures pricing and common stock price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities:

 

   

U.S. Government Agency Securities and U.S. Government Agency Money Market Funds – valued at the quoted market price from observable pricing sources at the reporting date.

 

   

U.S. Treasury Bills and U.S. Treasury Money Market Funds – valued at the quoted market price from observable pricing sources at the reporting date.

 

   

Equity Securities – valued using quoted stock prices from New York Stock Exchange or National Association of Securities Dealers Automated Quotation System at the reporting date.

 

   

Prime Money Market Funds – net asset value of $1 per share.

 

   

Corporate Debt Securities – valued at the quoted market price from observable pricing sources at the reporting date.

 

   

FDIC Insured Debt Securities – valued at the quoted market price from observable pricing sources at the reporting date.

 

   

Foreign exchange derivative assets and liabilities – valued using quoted forward foreign exchange prices at the reporting date. Counterparties to these contracts are highly-rated financial institutions, none of which experienced any significant downgrades during the six months ended June 30, 2009. Valuations may fluctuate considerably from period-to-period due to volatility in the underlying foreign currencies. Due to the short-term maturities of the Company’s foreign exchange derivatives, which are 17 months or less, counterparty credit risk is not significant.

 

   

Interest rate swap derivative assets and liabilities – valued using LIBOR and EURIBOR yield curves, less credit valuation adjustments, at the reporting date. Counterparties to these contracts are highly-rated financial institutions, none of which experienced any significant downgrades during the six months ended June 30, 2009. Valuations may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which is driven by market conditions and the duration of the swap. In addition, credit valuation adjustment volatility may have a significant impact on the valuation of the Company’s interest rate swaps due to changes in counterparty credit ratings and credit default swap spreads.

 

   

Natural gas forward contracts – valued using NYMEX futures prices for natural gas at the reporting date. Counterparties to these contracts are highly-rated financial institutions, none of which experienced any significant downgrades during the six months ended June 30, 2009. Valuations may fluctuate considerably from period-to-period due to volatility in the underlying natural gas prices. Due to the short-term maturities of the Company’s natural gas derivatives, which are six months or less, counterparty credit risk is not significant.

For further discussion on the Company’s June 30, 2009 fair value, carrying value and rollforward of activity that occurred during 2009, see “—Note 11. Cash, Cash Equivalents and Marketable Securities.”

Note 11. Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents at June 30, 2009 and December 31, 2008 of $7,507 million and $7,976 million, respectively, primarily consisted of U.S. government agency securities. Cash equivalents primarily consist of highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value. The Company maintains cash and cash equivalent balances in U.S. dollars and foreign currencies, which are subject to currency rate risk.

The following tables summarize the Company’s current and non-current marketable securities, which include U.S. dollar-denominated FRS and ARS, and are accounted for as “available for sale” debt securities:

     June 30, 2009     December 31, 2008  
Dollars in Millions    Cost     Fair Value     Carrying
Value
   Unrealized
(Loss)/Gain in
Accumulated
OCI
    Cost     Fair Value     Carrying
Value
    Unrealized
(Loss)/Gain in
Accumulated
OCI
 

Current:

                 

U.S. government agency securities

   $ 350      $ 350      $ 350    $      $      $      $      $   

U.S. Treasury Bills

     160        160        160             179        180        180        1   

FDIC insured debt securities

     100        100        100                                    

Floating rate securities

     3        3        3             115        109        109        (6
                                                               

Total current

   $ 613      $ 613      $ 613    $      $ 294      $ 289      $ 289      $ (5
                                                               

Non-current:

                 

Corporate debt securities

   $ 394      $ 393      $ 393    $ (1   $      $      $      $   

FDIC insured debt securities

     200        201        201      1                               

U.S. government agency securities

     200        200        200                                    

Auction rate securities

     169        94        94             169        94        94          

Floating rate securities

     131        93        93      (38     139        94        94        (45

Other

     2        2        2                                    
                                                               

Total non-current

   $     1,096      $ 983      $ 983    $ (38   $ 308      $ 188      $ 188      $ (45
                                                               
The following table summarizes the activity for those financial assets where fair value measurements are estimated utilizing Level 3 inputs (ARS and FRS):    
     2009     2008  
     Current     Non-current          Current     Non-current        
Dollars in Millions    FRS     FRS     ARS    Total     FRS     FRS     ARS     Total  

Carrying value at January 1

   $ 109      $ 94      $ 94    $ 297      $ 337      $      $ 419      $ 756   

Settlements

     (112     (8          (120     (103            (49     (152

Transfers between current and non-current

                               (104     104                 

Losses included in earnings

                                             (23     (23

Gains/(losses) included in OCI

     6        7             13        (35     (12     (53     (100
                                                               

Carrying value at June 30

   $ 3      $ 93      $ 94    $ 190      $ 95      $ 92      $ 294      $ 481   
                                                               

Note 12. Receivables, Net

 

The major categories of receivables were as follows:

Dollars in Millions    June 30,
2009
   December 31,
2008

Trade receivables

   $ 2,487    $ 2,545

Alliance partners receivables

     857      804

Income tax refund claims

     102      64

Miscellaneous receivables

     303      359
             
     3,749      3,772

Less allowances

     130      128
             

Receivables, net

   $     3,619    $     3,644
             

Receivables are netted with deferred income related to alliance partners until recognition of income. As a result, a corresponding reclassification was made which reduced alliance partner receivables and deferred income by $499 million and $566 million at June 30, 2009 and December 31, 2008, respectively. For additional information on the Company’s alliance partners, see “—Note 2. Alliances and Collaborations.”

In the aggregate, receivables due from three pharmaceutical wholesalers in the U.S. represented 38% and 35% of total trade receivables at June 30, 2009 and December 31, 2008, respectively.

Note 13. Inventories, Net

The major categories of inventories were as follows:

Dollars in Millions    June 30,
2009
   December 31,
2008

Finished goods

   $ 721    $ 707

Work in process

     669      738

Raw and packaging materials

     390      320
             

Inventories, net

   $     1,780    $     1,765
             

Inventories expected to remain on-hand beyond one year were $288 million at June 30, 2009 and $185 million at December 31, 2008 and were included in non-current other assets.

Inventories include capitalized costs related to production of products for programs in Phase III development subject to final U.S. Food and Drug Administration approval. The probability of future sales, as well as the status of the regulatory approval process were considered in assessing the recoverability of these costs. These capitalized costs were $52 million and $47 million at June 30, 2009 and December 31, 2008, respectively.

Note 14. Property, Plant and Equipment, Net

The major categories of property, plant and equipment were as follows:

Dollars in Millions    June 30,
2009
   December 31,
2008

Land

   $ 150    $ 149

Buildings

     4,619      4,506

Machinery, equipment and fixtures

     4,077      4,007

Construction in progress

     828      787
             

Total property, plant and equipment

     9,674      9,449

Less accumulated depreciation

     4,206      4,044
             

Property, plant and equipment, net

   $     5,468    $     5,405
             

Capitalized interest was $8 million and $12 million for the six months ended June 30, 2009 and 2008, respectively.

Note 15. Accrued Expenses

 

The major categories of accrued expenses were as follows:

Dollars in Millions    June 30,
2009
   December 31,
2008

Employee compensation and benefits

   $ 467    $ 784

Royalties

     563      515

Accrued research and development

     451      466

Restructuring—current

     129      158

Pension and postretirement benefits

     84      90

Other

     854      923
             

Total accrued expenses

   $     2,548    $     2,936
             

Note 16. Equity

Changes in common shares, treasury stock, capital in excess of par value of stock and restricted stock were as follows:

Dollars and Shares in Millions    Common Shares
Issued
   Treasury
Stock
    Cost
    of Treasury    
Stock
    Capital in Excess
of Par Value

of Stock
   Restricted
Stock
 

Balance at January 1, 2008

   2,205    226      $ (10,584   $ 2,722    $ (97

Employee stock compensation plans

             14        53      5   
                                  

Balance at June 30, 2008

   2,205    226      $ (10,570   $ 2,775    $ (92
                                  

Balance at January 1, 2009

   2,205    226      $ (10,566   $ 2,828    $ (71

Mead Johnson initial public offering

                    942        

Employee stock compensation plans

      (2     58        20      (16
                                  

Balance at June 30, 2009

   2,205    224      $ (10,508   $ 3,790    $ (87
                                  

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

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

Balance at January 1, 2008

   $ (325   $ (37   $ (973   $ (126   $ (1,461

Other comprehensive income/(loss)

     26        (31     63        (109     (51
                                        

Balance at June 30, 2008

   $ (299   $ (68   $ (910   $ (235   $ (1,512
                                        

Balance at January 1, 2009

   $ (424   $ 14      $ (2,258   $ (51   $ (2,719

Other comprehensive income/(loss)

     18        (38     470        14        464   
                                        

Balance at June 30, 2009

   $ (406   $ (24   $ (1,788   $ (37   $ (2,255
                                        

The reconciliation of noncontrolling interest was as follows:

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2009     2008     2009     2008  

Balance at beginning of period

   $ (208   $ 6      $ (33   $ (27

Mead Johnson initial public offering

                   (160       

Net earnings attributable to noncontrolling interest

     456        358        864        699   

Other comprehensive income attributable to noncontrolling interest

     2               5          

Distributions

     (410     (376     (836     (684
                                

Balance at June 30

   $ (160   $ (12   $ (160   $ (12
                                

Noncontrolling interest is primarily related to the Company’s partnerships with sanofi for the territory covering the Americas for sales of PLAVIX* and the 16.9% of Mead Johnson owned by the public. Net earnings attributable to noncontrolling interest is presented net of taxes of $157 million and $117 million for the three months ended June 30, 2009 and 2008, respectively, and $289 million and $228 million for the six months ended June 30, 2009 and 2008, respectively, in the consolidated statements of earnings with a corresponding increase to the provision for income taxes. Distribution of the partnership profits to sanofi and sanofi’s funding of ongoing partnership operations occur on a routine basis and are included within operating activities in the consolidated statements of cash flows. The above activity includes the pre-tax income and distributions related to these partnerships.

Note 17. Pension, Postretirement and Postemployment Liabilities

 

The net periodic benefit cost of the Company’s defined benefit pension and postretirement benefit plans included the following components:

     Three Months Ended June 30,     Six Months Ended June 30,  
     Pension Benefits     Other Benefits     Pension Benefits     Other Benefits  
Dollars in Millions    2009     2008     2009     2008     2009     2008     2009     2008  

Service cost — benefits earned during the period

   $ 48      $ 54      $ 2      $ 2      $ 107      $ 119      $ 3      $ 4   

Interest cost on projected benefit obligation

     89        99        10        10        193        196        19        20   

Expected return on plan assets

     (107     (117     (5     (7     (233     (236     (10     (14

Amortization of prior service cost/(credit)

     1        2        (1     (1     4        5        (2     (2

Amortization of net actuarial loss

     28        24        2        1        70        49        5        3   
                                                                

Net periodic benefit cost

     59        62        8        5        141        133        15        11   

Curtailments and special termination benefits

     25        16                      25        16                 
                                                                

Total net periodic benefit cost

   $   84      $   78      $   8      $   5      $   166      $   149      $   15      $   11   
                                                                

During June 2009, the Company amended its U.S. Retirement Income Plan (and several other plans) whereby, effective December 31, 2009, the Company will eliminate crediting future benefits relating to service. The Company will continue to consider salary increases for an additional five-year period in determining the benefit obligation related to prior service. The Company has accounted for the amendment as a curtailment.

As a result, the Company re-measured the applicable plan assets and obligations. The re-measurement resulted in a $455 million reduction to accumulated OCI ($295 million net of taxes) and a corresponding decrease to the unfunded status of the plan due to the curtailment, updated plan asset valuations and a change in the discount rate from 7.0% to 7.5%. A curtailment charge of $25 million was also recognized in other (income)/expense, net during the second quarter of 2009 for the remaining amount of unrecognized prior service cost. In addition, the Company has reclassified all participants as inactive for benefit plan purposes and will amortize actuarial gains and losses over the expected weighted-average remaining lives of plan participants (31 years).

In connection with the plan amendment, the Company will also increase its expected contributions to its principal defined contribution plans in the U.S. and Puerto Rico effective January 1, 2010. The net impact of the above actions is expected to reduce the future retiree benefit costs, although future costs will continue to be subject to market conditions and other factors including actual and expected plan asset performance and interest rates.

In February 2009, the Company re-measured the U.S. Retirement Income Plan and several other retirement and benefit plans upon the transfer of certain plan assets and related obligations to new Mead Johnson plans for active Mead Johnson participants. The re-measurement resulted in a $170 million reduction to accumulated OCI ($110 million net of taxes) in the first quarter of 2009 and a corresponding decrease to the unfunded status of the plan due to updated plan asset valuations and a change in the discount rate from 6.5% to 7.0%.

Contributions to the U.S. pension plans are expected to be approximately $650 million during 2009, of which $615 million was contributed in the six months ended June 30, 2009. Contributions to the international plans are expected to be in the range of $120 million to $140 million in 2009, of which $55 million was contributed in the six months ended June 30, 2009.

In 2008, concurrent with the agreement to sell ConvaTec, a revaluation of various pension plans’ assets and obligations was performed. The revaluation resulted in a curtailment charge of $3 million and special termination benefit charge of $13 million, which are included in discontinued operations.

Note 18. Employee Stock Benefit Plans

 

The following table summarizes stock-based compensation expense, net of taxes:

     Three Months Ended June 30,     Six Months Ended June 30,  
Dollars in Millions    2009     2008     2009     2008  

Stock options

   $ 18      $ 18      $ 36      $ 39   

Restricted stock

     19        17        35        40   

Long-term performance awards

     8        5        17        9   
                                

Total stock-based compensation expense

     45        40        88        88   

Less tax benefit

     (15     (13     (29     (29
                                

Stock-based compensation expense, net of taxes

   $ 30      $ 27      $ 59      $ 59   
                                

In the six months ended June 30, 2009, the Company granted 23.8 million stock options, 6.2 million restricted stock units and 1.6 million long-term performance awards. The weighted-average grant date fair value of stock options granted was $3.70 per share. The weighted-average stock price for restricted stock and long-term performance awards granted during the six months ended June 30, 2009 was $17.94 and $18.28, respectively.

Total compensation costs, related to nonvested awards not yet recognized and the weighted-average period over which such awards are expected to be recognized at June 30, 2009 were as follows:

Dollars in Millions    Stock Options    Restricted Stock    Long-Term
Performance
Awards

Unrecognized compensation cost

   $ 141    $ 212    $ 40

Expected weighted-average period of compensation cost to be recognized

     2.5 years      2.9 years      1.6 years

Note 19. Short-Term Borrowings and Long-Term Debt

Short-term borrowings were $124 million and $154 million at June 30, 2009 and December 31, 2008, respectively.

The components of long-term debt were as follows:

Dollars in Millions    June 30,
2009
    December 31,
2008
 

Principal Value

    

6.125% Notes due 2038

   $ 1,000      $ 1,000   

5.875% Notes due 2036

     960        1,023   

4.375% Euro Notes due 2016

     699        698   

4.625% Euro Notes due 2021

     699        698   

5.45% Notes due 2018

     600        600   

5.25% Notes due 2013

     597        597   

6.80% Debentures due 2026

     350        350   

7.15% Debentures due 2023

     339        339   

6.88% Debentures due 2097

     287        287   

Floating Rate Convertible Senior Debentures due 2023

     50        50   

5.75% Industrial Revenue Bonds due 2024

     35        35   

1.81% Yen Notes due 2010

     37        39   

Variable Rate Industrial Revenue Bonds due 2030

     15        15   

Other

     3        6   
                

Subtotal

   $ 5,671      $ 5,737   
                

Adjustments to Principal Value

    

Fair value of interest rate swaps

   $ 197      $ 647   

Unamortized basis adjustment from swap terminations

     397        233   

Unamortized bond discounts

     (30     (32
                

Total

   $     6,235      $     6,585   
                

  

In June 2009, the Company repurchased approximately $63 million principal amount of its 5.875% Notes due 2036 for a premium of $4 million. The total gain attributed to this transaction amounted to $11 million, which also included the termination of approximately $35 million notional amount of fixed-to-floating interest rate swaps for proceeds of $5 million.

In June 2009, the Company executed several fixed-to-floating interest rate swaps to convert $200 million of its 5.45% Notes due 2018 from fixed rate debt to variable rate debt. In April 2009, the Company executed several fixed-to-floating interest rate swaps to convert $597 million of its 5.25% Notes due 2013 from fixed rate debt to variable rate debt. In January 2009, the Company terminated $1,061 million notional amount of fixed-to-floating interest rate swap agreements for proceeds of $187 million. The basis adjustment on the debt, which was equal to the proceeds from this swap termination, is being recognized as a reduction to interest expense over the remaining life of the underlying debt. For further discussion of the Company’s interest rate swaps, refer to “—Note 20. Financial Instruments.”

In February 2009, Mead Johnson & Company as borrower and Mead Johnson as guarantor, both of which are indirect, majority-owned subsidiaries of the Company, entered into a three year syndicated revolving credit facility agreement. The facility is unsecured and repayable on maturity in February 2012, subject to annual extensions if sufficient lenders agree. The maximum amount of outstanding borrowings and letters of credit permitted at any one time is $410 million, which may be increased up to $500 million, at the option of Mead Johnson and with the consent of the lenders, subject to customary conditions contained in the facility. There were no borrowings outstanding under this revolving credit facility at June 30, 2009.

The Company obtained a $2.0 billion, revolving credit facility from a syndicate of lenders maturing in December 2011, which is extendable with the consent of the lenders. This facility contains customary terms and conditions, including a financial covenant whereby the ratio of consolidated debt to consolidated capital cannot exceed 50% at the end of each quarter. The Company has been in compliance with this covenant since the inception of this new facility. There were no borrowings outstanding under this revolving credit facility at June 30, 2009.

Note 20. Financial Instruments

The Company is exposed to market risk due to changes in currency exchange rates, interest rates and to a lesser extent natural gas pricing. To reduce that risk, the Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. Derivative financial instruments are not used for speculative purposes.

Cash Flow Hedges

Foreign Exchange contracts — The Company utilizes foreign currency contracts to hedge forecasted transactions, primarily intercompany transactions, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. The notional and fair value amounts of the Company’s foreign exchange derivative contracts at June 30, 2009 and December 31, 2008 were $1,194 million and $10 million net liabilities and $1,151 million and $49 million net assets, respectively. For these derivatives, the majority of which qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in accumulated OCI and recognized in earnings when the hedged item affects earnings.

At June 30, 2009, the balance of deferred losses on foreign exchange forward contracts that qualified for cash flow hedge accounting included in accumulated OCI on a pre-tax basis was $7 million ($4 million net of taxes), all of which is expected to be reclassified into earnings within the next 17 months.

The Company assesses effectiveness at the inception of the hedge and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of change in fair value is not deferred in accumulated OCI and is included in current period earnings. For the three and six months ended June 30, 2009, the impact of hedge ineffectiveness on earnings was not significant. The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. For the three and six months ended June 30, 2009, the impact of discontinued foreign exchange hedges was a pre-tax loss of $4 million and $1 million, respectively, and was reported in other (income)/expense, net.

 

 

Natural Gas contracts — The Company utilizes forward contracts to hedge forecasted purchases of natural gas and designates these derivative instruments as cash flow hedges when appropriate. For these derivatives the effective portion of changes in fair value is temporarily reported in accumulated OCI and recognized in earnings when the hedged item affects earnings. The notional and fair value amounts of the Company’s natural gas derivative contracts at June 30, 2009 and December 31, 2008 were 1 million decatherms and $5 million liability and 3 million decatherms and $7 million liability, respectively.

At June 30, 2009, the balance of deferred losses on natural gas forward contracts that qualified for cash flow hedge accounting included in accumulated OCI on a pre-tax basis was $2 million ($1 million net of taxes), all of which is expected to be reclassified into earnings within the next six months.

Non-Qualifying Foreign Exchange Contracts

In addition to the foreign exchange contracts noted above, the Company utilizes forward contracts to hedge foreign currency-denominated monetary assets and liabilities. The primary objective of these forward contracts is to protect the U.S. dollar value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement in U.S. dollars. These forward contracts are not designated as hedges and are marked to fair value through other (income)/expense, net, as they occur, and substantially offset the change in spot value of the underlying foreign currency denominated monetary asset or liability. The notional and fair value amounts of purchased and sold foreign exchange forward contracts at June 30, 2009 were not material.

Furthermore, the Company uses foreign exchange forward contracts to offset its exposure to certain assets and liabilities and earnings denominated in certain foreign currencies. These foreign exchange forward contracts are not designated as hedges; therefore, changes in the fair value of these derivatives are recognized in earnings in other (income)/expense, net, as they occur. The notional and fair value amounts of purchased and sold foreign exchange forward contracts at June 30, 2009 were a $15 million and a $2 million net liability, respectively.

Hedge of Net Investment

The Company uses non-U.S. dollar borrowings, primarily the €500 Million Notes due 2016 and the €500 Million Notes due 2021, to hedge the foreign currency exposures of the Company’s net investment in certain foreign affiliates. These non-U.S. dollar borrowings are designated as a hedge of net investment. The effective portion of foreign exchange gains or losses on these hedges is recorded as part of the foreign currency translation (CTA) component of accumulated OCI. At June 30, 2009, $133 million was recorded in the CTA component of accumulated OCI.

Fair Value Hedges

Interest Rate contracts — The Company uses derivative instruments as part of its interest rate risk management strategy. The derivative instruments used are comprised principally of fixed-to-floating interest rate swaps, which are designated in fair-value hedge relationships. The total notional amounts of outstanding interest rate swaps were $2.3 billion and €1 billion ($1.4 billion) at June 30, 2009. For the three and six months ended June 30, 2009, the effect of the interest rate swaps was to decrease interest expense by $29 million and $53 million, respectively.

The swaps, as well as the underlying debt for the benchmark risk being hedged, are recorded at fair value. Swaps are generally held to maturity and are intended to create an appropriate balance of fixed and floating rate debt for the Company. The basis adjustment to the debt hedged in qualifying fair value hedging relationships where the underlying swap is terminated prior to maturity is amortized to earnings as an adjustment to interest expense over the remaining life of the debt.

In June 2009, the Company executed several fixed-to-floating interest rate swaps to convert $200 million of its 5.45% Notes due 2018 from fixed rate debt to variable rate debt.

In April 2009, the Company executed several fixed-to-floating interest rate swaps to convert $597 million of its 5.25% Notes due 2013 from fixed rate debt to variable rate debt.

 

In January 2009, the Company terminated $1,061 million notional amount of fixed-to-floating interest rate swap agreements for proceeds of $187 million.

The effective portion of the fair value of swaps that qualify as cash flow hedges that are terminated, but for which the hedged debt remains outstanding, are reported in accumulated OCI and amortized to earnings as an adjustment to interest expense over the remaining life of the debt. At June 30, 2009, the balance of deferred losses on forward starting swaps included in accumulated OCI was $19 million, which will be reclassified into earnings over the remaining life of the debt.

For further discussion on the Company’s debt refer to “—Note 19. Short-Term Borrowings and Long-Term Debt.”

The following table summarizes the interest rate swaps outstanding at June 30, 2009:

Dollars in Millions    Notional Amount of
Underlying Debt
   Variable Rate
Received
  Year of
Transaction
   Maturity    Fair
Value
 

Swaps associated with:

             

5.25% Note due 2013

   $ 597    1 month U.S. $ LIBOR +3.084%   2009    2013    $ (13

5.45% Notes due 2018

     400    1 month U.S. $ LIBOR +1.065%   2008    2018      22   

5.45% Notes due 2018

     200    1 month U.S. $ LIBOR +1.541%   2009    2018      3   

4.375 €500 Million Notes due 2016

     699    3 month EUR € EURIBOR +0.40%   2006    2016      26   

4.625% €500 Million Notes due 2021

     699    3 month EUR € EURIBOR +0.56%   2006    2021      13   

7.15% Notes due 2023

     175    1 month U.S. $ LIBOR +1.66%   2004    2023      26   

5.875% Notes due 2036

     537    1 month U.S. $ LIBOR +0.62%   2006    2036      83   

6.125% Notes due 2038

     200    1 month U.S. $ LIBOR +1.3255%   2008    2038      18   

6.125% Notes due 2038

     200    1 month U.S. $ LIBOR +1.292%   2008    2038      19   
                       

Total interest rate swaps

   $ 3,707            $     197   
                       

The following table summarizes the Company’s fair value of outstanding derivatives at June 30, 2009 and December 31, 2008 on the consolidated balance sheets:

Dollars in Millions    Balance Sheet Location    2009    2008    Balance Sheet Location    2009     2008  

Derivatives designated as hedging instruments:

       

Interest rate contracts

   Other assets    $     210    $ 647    Accrued expenses    $ (13   $   

Foreign exchange contracts

   Other assets      27      89    Accrued expenses      (37     (40

Hedge of net investments

                Long-term debt      (1,220     (1,319

Natural gas contracts

                Accrued expenses      (5     (7
                                    

Subtotal

        237      736         (1,275     (1,366
                                    

Derivatives not designated as hedging instruments:

                

Foreign exchange contracts

   Other assets           1    Accrued expenses      (2     (5
                                    

Total Derivatives

      $ 237    $     737       $     (1,277   $     (1,371
                                    

The impact on earnings from interest rate swaps that qualified as fair value hedges for the three and six months ended June 30, 2009 and 2008 was as follows:

     Three Months Ended June 30,    Six Months Ended June 30,
Dollars in Millions    2009    2008    2009    2008

Interest expense

   $ 29    $ 15    $ 53    $ 22

Amortized basis adjustment from swap terminations recognized in interest expense

     7           12     
                           

Total

   $ 36    $ 15    $ 65    $ 22
                           

 

The impact on OCI and earnings from foreign exchange contracts, natural gas contracts, and forward starting swaps that qualified as cash flow hedges for the six months ended June 30, 2009 and 2008 was as follows:

     Foreign Exchange
Contracts
    Natural Gas
Contracts
   Forward Starting
Swaps
    Total Impact  
Dollars in Millions    2009     2008     2009     2008    2009     2008     2009     2008  

Net carrying amount at January 1

   $ 35      $ (38   $ (2   $    $ (19   $      $ 14      $ (38

Cash flow hedges deferred in OCI

     3        (66     2                    (19     5        (85

Cash flow hedges reclassified to cost of products sold (effective portion)

     (55     51                                  (55     51   

Change in deferred taxes

     13        3        (1                        12        3   
                                                               

Net carrying amount at June 30

   $ (4   $ (50   $     (1   $     —    $     (19   $     (19   $     (24   $     (69
                                                               

The impact on OCI and earnings from non-derivative debt designated as a hedge of net investment for the six months ended June 30, 2009 and 2008 was as follows:

     Net Investment Hedges  
Dollars in Millions    2009     2008  

Net carrying amount at January 1

   $ (131   $ (168

Change in spot value of non-derivative debt designated as a hedge deferred in CTA/OCI

     (2     (115
                

Net carrying amount at June 30

   $ (133   $ (283
                

The impact on earnings from non-qualifying derivatives recorded in other (income)/expense, net for the three and six months ended June 30, 2009 and 2008 was as follows:

     Three Months Ended June 30,    Six Months Ended June 30,
Dollars in Millions    2009    2008    2009    2008

Loss recognized in other (income)/expense, net

   $ 2    $ 6    $    $ 14

For a discussion on the fair value of financial instruments, see “—Note 10. Fair Value Measurement.” For a discussion on cash, cash equivalents and marketable securities, see “—Note 11. Cash, Cash Equivalents and Marketable Securities.”

The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide with Standard & Poor’s and Moody’s long-term debt ratings of A or higher. In addition, only conventional derivative financial instruments are utilized. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at June 30, 2009 failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments.

Note 21. Legal Proceedings and Contingencies

 

Various lawsuits, claims, proceedings and investigations are pending involving 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, pricing, sales and marketing practices, environmental, health and safety matters, consumer fraud, employment matters, product liability and insurance coverage.

The most significant of these matters are described in “Item 8. Financial Statements—Note 25. Legal Proceedings and Contingencies” in the Company’s 2008 Annual Report on Form 10-K. The following discussion is limited to certain recent developments related to these previously described matters, and certain new matters that have not previously been described in a prior report. Accordingly, the disclosure below should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. Unless noted to the contrary, all matters described in those earlier reports remain outstanding and the status is consistent with what has previously been reported.

There can be no assurance that there will not be an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material.

INTELLECTUAL PROPERTY

PLAVIX* Litigation

PLAVIX* is currently the Company’s largest product ranked by net sales. The PLAVIX* patents are subject to a number of challenges in the U.S., including the litigation with Apotex Inc. and Apotex Corp. (Apotex) described below, and in other less significant markets for the product. It is not possible reasonably to estimate the impact of these lawsuits on the Company. However, loss of market exclusivity of PLAVIX* and sustained generic competition in the U.S. would be material to the Company’s sales of PLAVIX*, results of operations and cash flows, and could be material to the Company’s financial condition and liquidity. The Company and its product partner, sanofi, (the Companies) intend to vigorously pursue enforcement of their patent rights in PLAVIX*.

PLAVIX* Litigation – U.S.

Patent Infringement Litigation against Apotex and Related Matters

As previously disclosed, the Company’s U.S. territory partnership under its alliance with sanofi is a plaintiff in a pending patent infringement lawsuit instituted in the United States District Court for the Southern District of New York (District Court) entitled Sanofi-Synthelabo, Sanofi-Synthelabo, Inc. and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership v. Apotex. The suit is based on U.S. Patent No. 4,847,265 (the ‘265 Patent), a composition of matter patent, which discloses and claims, among other things, the hydrogen sulfate salt of clopidogrel, a medicine made available in the U.S. by the Companies as PLAVIX*. Also, as previously reported, the District Court upheld the validity and enforceability of the ‘265 Patent, maintaining the main patent protection for PLAVIX* in the U.S. until November 2011. The District Court also ruled that Apotex’s generic clopidogrel bisulfate product infringed the ‘265 Patent and permanently enjoined Apotex from engaging in any activity that infringes the ‘265 Patent, including marketing its generic product in the U.S. until after the patent expires.

Apotex appealed the District Court’s decision and on December 12, 2008, the United States Court of Appeals for the Federal Circuit (Circuit Court) affirmed the District Court’s ruling sustaining the validity of the ‘265 Patent. Apotex filed a petition with the Circuit Court for a rehearing en banc, and in March 2009, the Circuit Court denied Apotex’s petition. The case has been remanded to the District Court for further proceedings. Apotex could file a petition for writ of certiorari with the U.S. Supreme Court requesting the Supreme Court to review the Circuit Court’s decision.

As previously disclosed, the Company’s U.S. territory partnership under its alliance with sanofi is also a plaintiff in five additional pending patent infringement lawsuits against Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, LTD (Dr. Reddy’s), Teva Pharmaceuticals USA, Inc. (Teva), Cobalt Pharmaceuticals Inc. (Cobalt), Watson Pharmaceuticals, Inc. and Watson Laboratories, Inc. (Watson) and Sun Pharmaceuticals (Sun). The lawsuits against Dr. Reddy’s, Teva and Cobalt relate to the ‘265 Patent. In May 2009, Dr Reddy’s signed a consent judgment in favor of sanofi and BMS conceding the validity and infringement of the ‘265 Patent. As previously reported, the patent infringement actions against Teva and Cobalt were stayed pending resolution of the Apotex litigation, and the parties to those actions agreed to be bound by the outcome of the litigation against Apotex, although Teva and Cobalt can appeal the outcome of the litigation. Consequently, on July 12, 2007, the District Court entered judgments against Cobalt and Teva and permanently enjoined Cobalt and Teva from engaging in any activity that infringes the ‘265 Patent until after the Patent expires. Cobalt and Teva have each filed an appeal and these appeals are still pending. The lawsuit against Watson, filed in October 2004, is based on U.S. Patent No. 6,429,210 (the ‘210 Patent), which discloses and claims a particular crystalline or polymorph form of the hydrogen sulfate salt of clopidogrel, which is marketed as PLAVIX*. In December 2005, the court permitted Watson to pursue its declaratory judgment counterclaim with respect to U.S. Patent No. 6,504,030. In January 2006, the Court approved the parties’ stipulation to stay this case pending the outcome of the trial in the Apotex matter. On May 1, 2009, BMS and Watson entered into a stipulation to dismiss the case. In April 2007, Pharmastar filed a request for inter partes reexamination of the ‘210 Patent. The U.S. Patent and Trademark Office granted this request in July of 2007. Thus, the ‘210 Patent is currently under reexamination. The lawsuit against Sun, filed on July 11, 2008, is based on infringement of the ‘265 Patent and the ‘210 Patent. With respect to the ‘265 Patent, Sun has agreed to be bound by the outcome of the Apotex litigation. Each of Dr. Reddy’s, Teva, Cobalt, Watson and Sun have filed an aNDA with the FDA, and, with respect to Dr. Reddy’s, Teva, Cobalt and Watson all exclusivity periods and statutory stay periods under the Hatch-Waxman Act have expired. Accordingly, final approval by the FDA would provide each company authorization to distribute a generic clopidogrel bisulfate product in the U.S., subject to various legal remedies for which the Companies may apply including injunctive relief and damages.

It is not possible at this time reasonably to assess the outcome of any petition for writ of certiorari by Apotex requesting an appeal of the Circuit Court’s decision, or the other PLAVIX* patent litigations or the timing of any renewed generic competition for PLAVIX* from Apotex or additional generic competition for PLAVIX* from other third-party generic pharmaceutical companies. However, if Apotex were to prevail in an appeal of the patent litigation, the Company would expect to face renewed generic competition for PLAVIX* promptly thereafter. Loss of market exclusivity for PLAVIX* and/or sustained generic competition would be material to the Company’s sales of PLAVIX*, results of operations and cash flows, and could be material to the Company’s financial condition and liquidity. Additionally, it is not possible at this time reasonably to assess the amount of damages that could be recovered by the Company and Apotex’s ability to pay such damages in the event the Company prevails in the patent litigation.

Additionally, on November 13, 2008, Apotex filed the lawsuit in New Jersey Superior Court entitled, Apotex Inc., et al. v. sanofi-aventis, et al., seeking payment of $60 million, plus interest, related to the break-up of the proposed settlement agreement. On December 31, 2008, the defendants removed the case to the Federal District Court for New Jersey. Apotex moved to remand the case back to state court and, in June 2009, the Federal District Court of New Jersey remanded the case back to the New Jersey Superior Court.

PLAVIX* Litigation – International

PLAVIX* – Canada (Apotex, Inc.)

On April 22, 2009, Apotex filed an impeachment action against sanofi in the Federal Court of Canada alleging that sanofi’s Canadian Patent No. 1,336,777 (the ‘777 Patent) is invalid. The ‘777 Patent covers clopidogrel bisulfate and was the patent at issue in the prohibition action in Canada previously disclosed in which the Canadian Federal Court of Ottawa rejected Apotex’s challenge to the ‘777 Patent, held that the asserted claims are novel, not obvious and infringed, and granted sanofi’s application for an order of prohibition against the Minster of Health and Apotex, precluding approval of Apotex’s Abbreviated New Drug Submission until the patent expires in 2012, which decision was affirmed on appeal by both the Federal Court of Appeal and the Supreme Court of Canada. On June 8, 2009, sanofi filed its defense to the impeachment action and filed a suit against Apotex for infringement of the ‘777 Patent.

OTHER INTELLECTUAL PROPERTY LITIGATION

ATRIPLA*

In April 2009, Teva filed an aNDA to manufacture and market a generic version of ATRIPLA*. Teva sent Gilead Sciences Inc. (Gilead) a Paragraph IV certification letter challenging two of the fifteen Orange-Book listed patents for ATRIPLA*. ATRIPLA* is the product of a joint venture between the Company and Gilead. In May 2009, Gilead filed a patent infringement action against Teva in the United States District Court for the Southern District of New York.

SHAREHOLDER DERIVATIVE ACTIONS

As previously disclosed, on July 31, 2007, certain members of the Board of Directors, current and former officers and the Company were named in two derivative actions filed in the New York State Supreme Court, John Frank v. Peter Dolan, et al. (07-602580) and Donald Beebout v. Peter Dolan, et al. (07-602579), and one derivative action filed in the federal district court, Steven W. Sampson v. James D. Robinson, III, et al. (07-CV-6890). The complaints allege breaches of fiduciary duties for allegedly failing to disclose material information relating to efforts to settle the PLAVIX* patent infringement litigation with Apotex. Plaintiffs seek monetary damages on behalf of the Company, contribution and indemnification. By decision filed on December 13, 2007, the state court granted motions to dismiss the complaints, Frank and Beebout, relating to certain members of the Board of Directors, but did not dismiss the complaints as to the former officers. By decision dated August 20, 2008, the federal district court granted the Company’s motion to dismiss the Sampson action. Plaintiffs appealed the district court’s decision to the U.S. Circuit Court of Appeals for the Second Circuit. In June 2009, the parties reached a settlement in principle to resolve this matter, for an amount that is not material to the Company, pending final approval by the court.

SECURITIES LITIGATION

In Re Bristol-Myers Squibb Co. Securities Litigation

As previously disclosed, in June and July 2007, two putative class action complaints, Minneapolis Firefighters’ Relief Assoc. v. Bristol-Myers Squibb Co., et al. (07 CV 5867) and Jean Lai v. Bristol-Myers Squibb Company, et al., were filed in the U.S. District for the Southern District of New York against the Company, the Company’s former Chief Executive Officer, Peter Dolan and former Chief Financial Officer, Andrew Bonfield. The complaints allege violations of securities laws for allegedly failing to disclose material information relating to efforts to settle the PLAVIX* patent infringement litigation with Apotex. On September 20, 2007, the Court dismissed the Lai case without prejudice, changed the caption of the case to In re Bristol-Myers Squibb, Co. Securities Litigation, and appointed Ontario Teachers’ Pension Plan Board as lead plaintiff. On October 15, 2007, Ontario Teachers’ Pension Plan Board filed an amended complaint making similar allegations as the earlier filed complaints, naming an additional former officer but no longer naming Andrew Bonfield as a defendant. By decision dated August 20, 2008, the federal district court denied defendants’ motions to dismiss. In May 2009, the parties reached a settlement in principle to resolve this litigation for payment of $125 million, pending final approval by the court.

PRICING, SALES AND PROMOTIONAL PRACTICES LITIGATION AND INVESTIGATIONS

AWP Litigation

As previously disclosed, the Company, together with a number of other pharmaceutical manufacturers, is a defendant in a number of private class actions as well as suits brought by the attorneys general of various states. In these actions, plaintiffs allege that defendants caused the Average Wholesale Prices (AWPs) of their products to be inflated, thereby injuring government programs, entities and persons who reimbursed prescription drugs based on AWPs. The Company remains a defendant in four state attorneys’ general suits pending in federal and state courts around the country.

As previously reported, one set of class actions, together with a suit by the Arizona attorney general, have been consolidated in the U.S. District Court for the District of Massachusetts (AWP MDL). The Court in the AWP MDL has certified three classes of persons and entities who paid for or reimbursed for seven of the Company’s physician-administered drugs. In June 2007, the Company settled in principle the claims of Class 1 (Medicare Part B beneficiaries nationwide) for $13 million, plus half the costs of class notice up to a maximum payment of $1 million and the parties are finalizing the terms of the settlement. A hearing is scheduled for preliminary approval of the Class 1 settlement. In June 2007, in a non-jury trial in the AWP MDL, the Court found the Company liable for violations of Massachusetts’ consumer protection laws with respect to certain oncology drugs for certain years and awarded damages in the amount of $183 thousand plus interest for Class 3 (private third-party payors) and instructed the parties to apply the Court’s opinion to determine damages for Class 2 (Medigap insurers). In August, 2007, the Court found damages of $187 thousand plus interest for Class 2. The Company appealed the June 2007 decision to the U.S. Court of Appeals for the First Circuit and oral arguments were heard on November 4, 2008. In September 2008, the Court in the AWP MDL issued an order certifying multi-state classes for Class 2 and Class 3.

In May 2009, the Company reached an agreement in principle to settle the claims of Classes 2 and 3 for $6 million. A preliminary approval hearing is scheduled. The Company’s appeal to the First Circuit has been stayed. Additionally, in May 2009, the Company reached an agreement in principle to settle the AWP lawsuit filed by the state of Arizona, for an amount that is not material to the Company.

 

ENVIRONMENTAL PROCEEDINGS

As previously reported, the Company is a party to several environmental proceedings and other matters, and is responsible under various state, Federal and foreign laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), for certain costs of investigating and/or remediating contamination resulting from past industrial activity at the Company’s current or former sites or at waste disposal or reprocessing facilities operated by third-parties.

CERCLA Matters

With respect to CERCLA matters for which the Company is responsible under various state, Federal and foreign laws, the Company typically estimates potential costs based on information obtained from the U.S. Environmental Protection Agency (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”, and the Company accrues liabilities when they are probable and reasonably estimable. As of June 30, 2009, the Company estimated its share of the total future costs for these sites to be approximately $60 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). These estimated future costs include a site in Brazil where the Company is working with the Brazilian environmental authorities to determine what remediation steps must be undertaken.

North Brunswick Township Board of Education

As previously disclosed, in October 2003, the Company was contacted by counsel representing the North Brunswick, NJ Board of Education (BOE) regarding a site where waste materials from E.R. Squibb and Sons may have been disposed from the 1940’s through the 1960’s. Fill material containing industrial waste and heavy metals in excess of residential standards was discovered during an expansion project at the North Brunswick Township High School, as well as at a number of neighboring residential properties and adjacent public park areas. In January 2004, the NJDEP sent the Company and others an information request letter about possible waste disposal at the site, to which the Company responded in March 2004. The BOE and the Township, as the current owners of the school property and the park, are conducting and jointly financing soil remediation work and ground water investigation work under a work plan approved by NJDEP, and has asked the Company to contribute to the cost. The Company is actively monitoring the clean-up project, including its costs. To date, neither the school board nor the Township has asserted any claim against the Company. Instead, the Company and the local entities have negotiated an agreement to attempt to resolve the matter by informal means, including mediation and binding allocation as necessary. A central component of the agreement is provision by the Company of interim funding to help defray cleanup costs and assure the work is not interrupted; the Company transmitted an initial interim funding payment in December 2007. The parties commenced mediation in late 2008, and it is uncertain whether further sessions will be productive. If not, the parties will move to a binding allocation process.

ODS Regulatory Compliance

As previously disclosed, the U.S. EPA was 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 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 signed a Consent Decree with the EPA to resolve both the potential violations discovered during the audit and those identified as a result of the EPA request for information to the Evansville facility, which was filed in the Evansville Division of the U.S. District Court for the Southern District of Indiana on July 8, 2008. The Consent Decree required the Company to pay a civil penalty of $127 thousand and to retire, retrofit or replace 17 ODS-containing refrigeration units by June 2009 located at facilities in New Jersey, Indiana, and Puerto Rico. The Consent Decree also required the Company to spend at least $2,225 thousand on a Supplemental Environmental Project, which consists of the removal of two ODS-containing comfort cooling devices at the New Brunswick, NJ facility and the tie in of their functions to a new centralized chiller system that does not use ODS as a refrigerant. The Court entered the Consent Decree on May 6, 2009, the $127 thousand civil penalty was paid on June 4, 2009, and the Company will complete all of its obligations under the Consent Decree by July 31, 2009, as required.

Note 22. Subsequent Event

On July 22, 2009, Bristol-Myers Squibb and Medarex announced that the companies signed a definitive merger agreement that provides for the acquisition of Medarex by Bristol-Myers Squibb for an aggregate purchase price of approximately $2.4 billion. Under the terms of the definitive merger agreement, Bristol-Myers Squibb will commence a cash tender offer on or about July 27, 2009 to purchase all of the outstanding shares of Medarex common stock for $16.00 per share in cash.

The closing of the transaction is expected to occur during the third quarter of 2009 subject to, among other items, at least a majority of the outstanding shares of Medarex being tendered (including the shares already owned by Bristol-Myers Squibb) and customary regulatory approvals.

The companies have collaborated on the development of ipilimumab, a novel immunotherapy currently in Phase III development for the treatment of metastatic melanoma.

Document Information
6 Months Ended
Jun. 30, 2009
Document Information [Text Block]
 
Document Type
10-Q 
Amendment Flag
FALSE 
Amendment Description
N.A. 
Document Period End Date
06/30/2009 
Entity Information (USD $)
6 Months Ended
Jun. 30, 2009
Jun. 30, 2008
Entity [Text Block]
 
 
Trading Symbol
BMY 
 
Entity Registrant Name
BRISTOL MYERS SQUIBB CO 
 
Entity Central Index Key
0000014272 
 
Current Fiscal Year End Date
12/31 
 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Current Reporting Status
Yes 
 
Entity Voluntary Filers
No 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
1,980,924,717 
 
Entity Public Float
 
$ 40,628,202,837