While investors in Bristol-Myers Squibb ( BMY) focus on whether future drug prospects can overcome the impact of patent expirations, they also are keeping one eye on the company's troubled past. Bond rating agencies and equity analysts worry about the litany of lawsuits, patent challenges, government investigations and other legal matters that occupy six pages of the company's 2002 10-K report (the 2003 version hasn't been issued yet). Many of the legal issues played a role in the weakening of the company's stock in 2001 and 2002 and in a restatement, announced early last year, of financial results from 1999 through 2002. Last April, Moody's Investors Service declared that the company's exposure to litigation risks "is considerably higher than the industry norm," given the fact that the company is being investigated by the Securities and Exchange Commission and the Justice Department. Moody's downgraded the long-term rating on the company last by two notches to A1 from Aa2, affecting approximately $6 billion in long-term debt, and it also placed a negative outlook on the company. On Wednesday, Standard & Poor's placed Bristol-Myers Squibb's corporate credit, senior unsecured deb, short-term corporate credit and commercial paper ratings on its CreditWatch "with negative implications," meaning the rating could be cut. S&P has cut the company's corporate credit rating twice in the last two years. The bond rating firm has several concerns, including the impact of company's internal reviews of its sales, marketing and pricing practices which have been the subject of lawsuits and federal and state inquiries. Six weeks ago, when the company issued its 2003 earnings review and 2004 financial guidance, it reported that it had established $225 million in reserves for the fourth quarter for government investigations and civil lawsuits covering wholesaler, pricing and accounting issues. The company said the reserves reflected "minimum expected probable losses" for these matters. And in a statement that even the most supportive analyst would have to acknowledge, the company warned that "the aggregate impact, beyond current reserves, of these and other legal matters -- is reasonably likely to be material" to operating results and cash flow "and may be material to
our financial condition and liquidity." Analysts say the legal matters with the most potential financial damage include allegations in state and federal courts that Bristol-Myers Squibb and other companies overstated prices of certain drugs, enabling prescribers of the drugs to get inflated reimbursements from insurers; allegations that the company and other drugmakers engaged in improper pricing and marketing of drugs covered by Medicare and/or Medicaid; and allegations that the company engaged in improper accounting of inventories.
There are enough legal issues that some analysts are starting to mention the word "dividend" in connection with worst-case scenarios in the courtroom. The tone of this discussion hasn't reached the drumbeat of concern that preceded Schering-Plough's dividend cut last year, but it's still enough to attract attention. Noting that Bristol-Myers Squibb has the highest dividend yield among eight giant U.S. drug companies, Shane Higgins of Deutsche Bank Securities said in a recent research report that the company "may come under pressure" to cut its dividend if it has to make more litigation-related payments. He said management is likely to oppose any dividend cut because it has cited the dividend as "a key priority." Higgins, who has an underweight rating on the stock, doesn't own shares; his firm has an investment banking relationship with the company. Richard T. Evans, of Bernstein Research, told clients recently that Brisol-Myers Squibb should be able to settle its legal liabilities without cutting the dividend. He said the company's ability to raise money to cover adverse rulings depends heavily on the outcome of a patent challenge against Plavix, a drug that reduces the risk of stroke and heart attack by preventing blood platelets from coagulating. The drug is the company's second-best-selling product, with $2.47 billion in sales last year. Plavix was developed by the French drug giant Sanofi-Synthelabo, which has a co-marketing and co-development agreement with Bristol-Myers Squibb giving the U.S. company control of the North American, South American and Australian markets. (It also has an alliance involving the French company's Avapro/Avalide hypertension drugs, which produced $757 million in revenue for Bristol-Myers Squibb last year). Two generic drug companies are challenging two Plavix patents, and a trial is scheduled to begin in mid-2004. Bristol-Myers Squibb has said it cannot "reasonably" assess the outcome or impact of the lawsuits, but if Plavix loses patent protection, the impact "could be material."
Many analysts say a Plavix patent loss would be disastrous. Evans said a defeat would cost Bristol-Myers Squibb 11% of its sales and as much as 15% of its earnings per share. Evans, who has a market perform rating on the stock, doubts a patent ruling would come before the first quarter of 2005. (He doesn't own shares; his firm doesn't have an investment banking relationship with the company). Still, a Plavix defeat also would make it more difficult for Bristol-Myers Squibb to raise money to pay off government fines, litigation settlements or courtroom losses. If Bristol-Myers Squibb wins the Plavix case, it could comfortably raise $3 billion to $5 billion without damage to its credit rating, Evans said. If it loses the case, it could raise $1.4 billion to $3.8 billion without a risk to its credit rating. If Bristol-Myers cuts the dividend to cover legal settlements, "management loses control of the company," Evans said. Not only would a dividend reduction cause the stock price to fall but it also would turn the company into a takeover target. "It follows that cutting the dividend to settle liabilities is a last resort," he added.