Bristol-Myers Squibb PATENTS, PROFITS, AND PUBLIC SCRUTINY

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Bristol-Myers SquibbPATENTS, PROFITS, AND
PUBLIC SCRUTINY

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Agenda

• Overview of case issues
• Bristol-Myers brief history and general
  information
• Financials
• Forecast
• Peter Dolan bio
• Plavix information
• Apotex
• Pharmaceutical industry
• Generic competition

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Agenda

• Bristol-Myers accounting scandal
• Failed patent protection agreement
• Patent protection court battle
• Challenges facing the board
• Discussion questions

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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 companys 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

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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 worlds 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).

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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)
• RD 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
  RD, 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).

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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 BMSs core
  territories. (Merck, Norvartis, and Pfizer are
  core competition)

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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/200
  6/07/bristol-myers-squibb.php

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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

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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.

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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 RD 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 Dolans 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.

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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

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Sanofi Aventis

• Headquartered in Paris
• Worlds third largest Pharmaceutical (1 in
  Europe)
• 35,000 member sales force
• Sales 27 billion euros
• RD 4 billion euros
• Has operations in more than 100 countries

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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

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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

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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

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Patent expiration

• The following blockbuster drugs will go generic
  in the near future

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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

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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

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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 Dolans New York office

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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

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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

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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

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BMS Financial Impact

• Earnings forecast lowered by 25
• EPS lt dividend
• Moodys Investor Services downgraded
  Bristol-Myers debt to A2 from A1
• Analysts expect dividend cut
• Stock loses 60 of value during Dolans five year
  tenure

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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

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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 Dolans firing or the patent
  dispute?

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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?