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Bristol-Myers Squibb PATENTS, PROFITS, AND PUBLIC SCRUTINY Agenda Overview of case issues Bristol-Myers brief history and general information Financials Forecast Peter Dolan bio Plavix information Apotex Pharmaceutical industry Generic competition Agenda Bristol-Myers accounting scandal Failed patent protection agreement Patent protection court battle Challenges facing the board Discussion questions Overview of Issues In the Bristol-Myers Squibb corporate Pledge, the company declares: We pledge Bristol-Myers Squibb to the highest standard of moral and ethical behavior and to policies and practices that fully embody the responsibility, integrity and decency required of free enterprise if it is to merit and maintain the confidence of our society. 1999-2001 accounting scandal at Bristol-Myers Squibb Patent protection of Plavix Plavix is the company’s top-grossing drug: responsible for approximately 30% of BMS revenues. (Second is Pravachol, a widely-applicable anti-cholesterol medication, responsible for 12% of BMS revenues.) Nascent patent protection agreement with Apotex Failure of negotiations in August 2006 Department of Justice investigation History of Bristol-Myers Squibb ―Starting with a dream, a handful of people and a few thousand dollars in capital,‖ William McLaren Bristol and John Ripley Myers founded the Bristol, Myers company in 1887. The original mission of Bristol-Myers was ―to sell quality medicines directly to doctors.‖ In the latter half of the 19th century, Dr. Edward Robinson Squibb also launched a pharmaceutical business that carried his name. Bristol-Myers and Squibb merged in 1989, one of the largest mergers in corporate history. At the time, they formed the world’s second-largest pharmaceutical company. Core products include: Videx (1991), Monopril (1991) and Pravachol (1991, expanded usage granted in 1995 by the FDA), TAXOL Injection (1991), Glucophage (1993), Avapro (1997), Plavix (1997), Excedrin (1998), Sustiva capsules (2001), Coumadin Crystalline (2001), Abilify (2002), Reyataz (2004), Orencia (2005), EMSAM transdermal (2006), SPRYCEL (2006), and ATRIPLA (2006). Financial situation 2005 revenues were approximately $19 billion with profits of $3 billion, a -7.6% decrease and 25.6% increase, respectively. (Source: CNN Money.com, Fortune 500 2006 rankings) R&D expenditures in 2005 were $2.7 billion, up 10% from 2004; this included $2.5 billion in payments for in-licensing and development programs. For 1Q2006, $750 million was spent on R&D, up 22% from the previous year. Bristol-Myers Squibb is determined to be a leader in drug development. Strategies include: in-house development and collaboration acquisition of smaller dynamic pharmaceutical companies divestiture of non-core assets (May 2005 sale of Oncology Therapeutics Network distribution business, and US and Canadian Consumer Medicines business to Novartis). Forecast I Forecast for the future is cautiously optimistic: New BMS blockbuster drugs may spearhead a turnaround. In the first half of 2003 two major drugs were approved: Abilify, an antipsychotic, and Reyataz, the first once-daily protease inhibitor for the treatment of HIV/AIDS. In addition limited clearance was given to Erbitux, the sidelined cancer drug licensed from Imclone. Analysts at SunTrust Robinson Humphrey estimated that Erbitux sales could peak at more than $700 million. The promising drugs signaled a potential new beginning for the company. Morningstar projects an average revenue growth rate of 3 percent through 2007. However, more generic challengers are entering the market There is the threat of increased competition from the large drug developers in BMS’s core territories. (Merck, Norvartis, and Pfizer are core competition) Forecast II If 1Q 2006 is an indication of a trend, 2006 will be more profitable for BMS: the company reported a 34% increase in first-quarter profit to $714 million, helped by higher sales of heart and blood-pressure drugs and, a $200 million gain from selling off assets. Revenues were up only 3% to $4.7 billion, (U.S. pharma revenues rose 17% to $2.1 billion). However, Erbitux sales were $413 million for the year up 58%. Plavix, Abilify, and Reyataz sales were up 15%, 54% and 68% respectively – definitely a bright spot for the company. Source: http://www.contractpharma.com/articles/2006/07/bristol-myers-squibb.php Corporate Communications at BMS Robert T. Zito, SVP Corporate and Business Communications and Chief Communications Officer Former EVP of Communications for the NYSE Functions under Zito include brand management, advertising, media, employee communications, policy communications, executive communications, creative services and community affairs A Brief History of Peter Dolan Born: January 6, 1956, in Salem, Massachusetts. Education: BA from Tufts University (1978), and MBA from Dartmouth College (1980). Worked at General Foods from 1983-1987. In 1988, began working at Bristol-Myers as Vice-President of Marketing. 1995-1996: As president of the Mead Johnson Nutritional Group, the company opened manufacturing facilities in four countries and international sales climbed to 40 percent of the corporation's revenue by 1996. Was famous for setting ―Big Hairy Audacious Goals‖ – like his 2001 promise to double BMS revenues within five years. He would come to regret that statement, as 2002 sales totalled $18.1 billion, down 1% from 2000. Named CEO in February 2001 and chairman in 2002. A Brief History of Peter Dolan (cont.) 2001: Heeding calls from Wall Street, quickly jettisons auxiliary businesses —selling Clairol, the number-one hair-color brand and a longtime anchor product, for example — and re-focuses on pharmaceuticals. Negotiates and invests heavily in a $2- billion R&D and marketing deal with ImClone Systems regarding the cancer drug Erbitux, which was subsequently issued a ―refusal to file‖ letter from the FDA . Investor outrage over the fact that Dolan had invested in the partnership without solid reassurance resulted in a write-down of $367 million — most of Bristol's investment in ImClone. Concern over BMS flagging analyst ratings and crumbling stock price Board of Directors and analysts express concern as to whether Dolan’s meteoric rise up the corporate ladder had exposed him to enough of the ―character-building‖ experiences that season a CEO and teach him to deal with adversity. What is Plavix? Anti-platelet medication approved by the U.S. Food and Drug Administration to reduce the risk: Heart attack Stroke Vascular death in patients with established peripheral arterial disease When taken daily can help reduce risk of having a future heart attack or stroke Used by 48 million Americans Marketed through a partnership with Bristol-Myers and Sanofi- Aventis Sanofi Aventis Headquartered in Paris World’s third largest Pharmaceutical (#1 in Europe) 35,000 member sales force Sales = 27 billion euros R&D = 4 billion euros Has operations in more than 100 countries Plavix and BMS Revenues Bristol-Myers Squibb 2005 revenue was $19.2b. Plavix sales represent about 30% of total revenues U.S. sales of $3.8b in 2005, up 15% from 2004 Global sales of $5.9 billion Second best selling drug in the world Revenue $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Apotex Founded in 1974 Largest Canadian-owned pharmaceutical company Main business is making and selling generic pharmaceuticals 2005 sales of $740 million (Canadian) Over 500 products Wants to sell generic Plavix Received FDA approval for generic Plavix in early 2006 Pharmaceutical Industry Market Size Global pharmaceutical market in 2005 was $565 billion and is growing at an estimated 7% per year Competition Generic competition is the biggest threat to branded drug makers Between 2006 and 2010, at least 70 innovative brand-name drugs are expected to go off patent in the United States 19 of those are blockbusters (defined as a drug with annual sales of more than $1 billion) Accounts for $45 billion (or roughly 8%) of the global market Patent expiration The following blockbuster drugs will go generic in the near future Major Potential Patent Expirations for Selected Brand Name Pharmaceuticals Brand Name Company Indication Sales Expiration Date Zocor Merck Hyperlipidemia 4.4 Jun-06 Prevacid TAP Duodenal ulcers 3.8 Nov-09 Zoloft Pfizer Depression 3.1 Jun-06 Effexor XR Wyeth Depression 2.6 Jun-08 Norvasc Pfizer Hypertension 2.6 Sep-07 Risperdal Janssen Schizophrenia 2.3 Dec-07 Fosamax Merck Osteroporosis 2 Feb-08 Pravachol Bristol-Myers Squibb Hyperlipidemia 1.7 Apr-06 Ambien Sanofi-Aventis Insomnia 1.6 Apr-07 Zyrtec Pfizer Allergies 1.4 Dec-07 BMS Accounting scandal 3/10/2003 – company announces earning overstated by $2.5 billion Bristol-Myers admitted using ―channel surfing‖ to inflate sales Wholesales acquired almost $2 billion in excess inventories Former CFO Frederick S. Schiff and former executive vice president Richard J. Lane were indicted Accounting Scandal Net sales reduced by $1.4 billion for 2001, $678 million for 2000, and $376 million for 1999 A total of $839 million was paid to shareholders harmed by Bristol-Myers fraudulent conduct Charges against the company are dropped pending two year probationary period Patent Protection Agreement BMS negotiates with Apotex to keep generic Plavix out of the market until June 1, 2011 Regulators (FTC and state attorneys general) refuse to sign-off on agreement July 2006 – investigation into the failed agreement FBI searches Dolan’s New York office Patent Protection Agreement Investigation BMS allegedly agrees to pay (i.e. bribe) Apotex $40 million to keep generic Plavix out of the market until 2011 Investigation also alleges BMS made unusual and anti- competitive concessions to Apotex and concealed the concessions from federal regulators Anti-competitive concession in agreement – Bristol-Myers agrees not to sell its own generic version of Plavix for 6 months after Apotex releases their generic Generic Plavix Because the agreement failed, Apotex introduces generic Plavix in August 2006 and quickly gains 75% share of new prescriptions Generic priced 10 – 20% lower than brand-name Plavix Court orders injunction to halt sales of generic Plavix until patent protection case is heard in court Court does not order a recall – supply of generic Plavix will stretch well into 2007 Plavix Patent Trial Trial to start January 2007 $400 million bond provided by BMS and Plavix partner Sanofi- Aventis as security to Apotex if court rules against BMS BMS Financial Impact Earnings forecast lowered by 25% EPS < dividend Moody’s Investor Services downgraded Bristol-Myers debt to ―A2‖ from ―A1‖ Analysts expect dividend cut Stock loses 60% of value during Dolan’s five year tenure BMS Board Reacts Dolan and BMS General Counsel Richard K. Willard fired on 9/12/2006 James M. Cornelius, a Bristol-Myers director and former executive at Guidant Corp., named interim CEO Internal and external search for permanent CEO Wall Street speculates that BMS may be acquired or taken over Questions for discussion What are the critical issues facing Bristol-Myers Squibb in this case? Who are the key stakeholders in this case? How would a patent case verdict for or against Bristol-Myers Squibb affect the stakeholders? What messages does Zito need to communicate to the stakeholder groups? How should he deliver his message to them? Does Bristol-Myers Squibb need to retain an external firm to help it craft an effective public response to Dolan’s firing or the patent dispute? Questions for discussion What other actions (if any) should the board take in response to the accounting and patent protection scandals? What mistakes did Dolan make while negotiating with Apotex? What else could he have done to protect the Plavix patent? Can corporate communication play a role in helping Bristol- Myers Squibb win the upcoming patent protection trial? What can Zito and his team do?
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