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SEC Probes Sales at Bristol-Myers

Drugs: Inquiry centers on whether the firm made timely disclosure about revenue tactics.


Drug giant Bristol-Myers Squibb Co., already in hot water with investors for a series of missteps, is facing regulatory scrutiny over its aggressive sales incentives that bolstered revenue by $1 billion last year.

The probe by the Securities and Exchange Commission, disclosed Thursday, appears to center on whether Bristol-Myers made appropriate and timely disclosure to investors about the sales tactics that led to excess wholesaler inventories. Those tactics enabled the company to largely meet analysts' expectations last year but are now hurting the company's sales as wholesalers work off the inventories.

Bristol-Myers said Thursday that it has been in discussions with the SEC since April, when the company disclosed the effect of the inventory glut. In a short statement, the company said it believed its accounting treatment of excess inventory was completely appropriate.

The SEC declined to comment.

But the fact that another corporation--and a big pharmaceutical company at that--was being targeted by regulators set off another frantic day on Wall Street. This week, Merck & Co. said it had recorded more than $12 billion in sales from drug co-payments that it did not collect, further dimming investors' confidence in the pharmaceutical industry.

For Bristol-Myers, news of the SEC probe was the latest setback and cast darker shadows over the company and its chief executive, Peter Dolan, who has struggled amid missteps that have included an ill-advised investment in ImClone Systems Inc., which itself is under regulatory scrutiny.

"I don't know why [Dolan] has survived as long as he has," said Barbara Ryan, an analyst at Deutsche Bank Securities in New York. Ryan said that under Dolan, Bristol-Myers has shown a pattern of not being forthcoming about material information involving the company. Citing one example, she said it took the company several months before it disclosed in March negative test results on a hypertension drug that it is trying to get through government approval.

Analysts, however, were not surprised by the news of the SEC investigation, saying it was expected given the current regulatory pressures and the way Bristol-Myers jolted investors in April when it disclosed the extent of a risky practice that's known in the drug industry as "channel-stuffing."

It is not uncommon for drug makers to drive sales with wholesalers by giving discounts upfront or providing favorable payment terms, although the amount of the channeling is much smaller than the billion dollars worth that Bristol-Myers did last year. For the industry as a whole, these incentives account for 5% to 15% of sales to wholesalers, said Andrew Speller, an analyst at A.G. Edwards & Sons in St. Louis. The sales are booked as revenue to the drug makers, and wholesalers cannot return the products, he said, except in the rare case that they sit in warehouses long enough to expire.

Analysts said Bristol-Myers put through aggressive incentives last year because sales of other products were slower than expected. But in booking an additional $1 billion in revenue this way, some analysts said, the company did not warn investors until April about the potential effect the excess inventories would have on sales this year. In April, Bristol-Myers substantially lowered its revenue and earnings estimates for this year.

"These are real sales ....The problem comes in that as they were doing this, did they make disclosures to the investors?" said Richard Lawrence, an analyst at Parker/Hunter Inc., a brokerage in Pittsburgh.

Lawrence said the SEC investigation was not changing his outlook for the company, which as with most analysts has been significantly lowered this year.

Shares of New York-based Bristol-Myers declined $1.04, or 4%, to $22.11 on the New York Stock Exchange, although they had fallen earlier in the day by as much as 16% to a five-year low. The stock is down 54% since the start of the year. The company reported revenue of $4.1 billion for its first quarter, down 13% from a year earlier.

Lynn Stout, professor of law specializing in securities regulation at UCLA, said that public companies are not required to disclose right away as much information as many people think, although many firms do so. But when they make required quarterly and annual filings, they are obligated to disclose material information.

With Bristol-Myers, she said, the central question for the SEC appears to be: "Were there filings that left out the information at a time when the company knew it was material ... or alternatively, did the company make any voluntary disclosures, speeches or meetings that were misleading?"

Although Bristol-Myers refused to comment beyond its statement Thursday, analysts said a good chunk of the $1 billion in extra revenue garnered last year came from the diabetes treatment Glucophage. Bristol-Myers had strong reason to encourage wholesalers to load up on the drug because it was set to come off patent in February of this year.

It's unclear when Bristol-Myers knew about the full effect of the generic competition, which led to a buildup of Glucophage on wholesaler shelves.

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