Jul 12, 2002 4 min read

By Theresa Agovino AP Business Writer

NEW YORK (AP) – The Securities and Exchange Commission is investigating Bristol-Myers Squibb Co. to see whether the drug giant improperly inflated its revenues last year by up to $1 billion through sales incentives to wholesalers, a company official said Thursday. Its shares sank more than 8 percent.

Bristol-Myers spokesman Bonnie Jacobs said the company is cooperating with the investigation first reported in the Financial Times.

The investigation comes at a time when the government is probing the accounting practices at a wide range of companies including Enron and WorldCom, and investors have grown increasingly suspect of corporate financial reports.

In afternoon trading on the New York Stock Exchange, Bristol-Myers shares were down $1.90 at $21.25.

The probe centers around whether it was appropriate for Bristol-Myers to offer wholesalers generous incentives to buy drugs last year to help the company meet 2001 earnings projections. Those incentives created an inventory glut that will slash this year’s earnings by up to 50 percent below last year’s levels depending on how long it takes for the excess to be depleted.

Offering incentives to wholesalers is common practice in the industry but Bristol-Myers’ program was considered aggressive. Pharmaceutical companies often hint at price increases allowing wholesalers time to stock up on products. This way, drug companies’ sales increase and so do wholesalers’ margins.

“Programs of this magnitude are simply not usual,” Barbara Ryan, a managing director at Deutsche Bank, said of Bristol-Myers actions.

Ryan is outraged that Bristol-Myers didn’t disclose the inventory glut until April when analysts had suspected it last year. But she said the problem is not on a par with allegations about Enron or WorldCom.

“There were not off-balance sheet financing going on here. This is something that, when the inventory is written down, the problem will be over,” said Ryan. “The investigation is not a good thing. In this environment I guess the SEC felt they need to look into it. “

Ryan said Bristol-Myers’ failure to disclose the inventory problem earlier continues to linger because it just one of various missteps by management. Bristol-Myers’ former president of the drug division Richard Lane and former chief financial officer Fred Schiff left because of the glut.

The SEC investigation puts more pressure on Bristol-Myers chief executive Peter Dolan, who is already under a microscope because of a series of disappointing risky moves to help bolster sales that have been hurt by generic competition.

“I don’t understand why Dolan still has a job,” said Ryan.

She believes Bristol-Myers will resist restating last year’s earnings because Dolan’s $1.3 million bonus was dependent on the company’s performance. He also earned a salary of $1.03 million.

“Investors are voting on Dolan’s performance with their feet,” said Ryan.

Last year, Bristol-Myers purchased DuPont’s drug business for $7.8 billion, with analysts saying it overpaid by up to $2 billion. Then the company agreed to pay up to $2 billion for a 19.9 percent stake in ImClone Systems Inc. and share of the profits of its promising cancer drug Erbitux. It has already written off $875 million of that investment because ImClone stock tanked after the Food and Drug Administration rejected the Erbitux application. It had been expected the drug would be approved this year, but now it is likely it won’t be approved for years.

Ryan is angry that Bristol-Myers failed to disclose until earlier this year that Vanlev, a hypertension drug that was supposed to help spur revenue growth, proved no more effective than existing treatments. She insists the company knew the results of the study last year.

Furthermore, Bristol-Myers refuses to tell analysts how it is compensating wholesalers for the inventory glut. Some of the products wholesalers purchased now have generic equivalents that would cost less than Bristol-Myers discounted price. Ryan wants to know whether Bristol-Myers is offering wholesalers the difference in cash or offering discounts on other drugs.

“Nobody feels they know what is going on with this company,” Ryan said.

Indeed analysts were confused by Bristol-Myers statements about the inventory problems when they were raised in April.

In early April, the company had said full year earnings would be up to 30 percent below last year’s levels and added excess inventory would cost the company between 35 cents a share and 40 cents a share, or $800 million to $1 billion.

But during a conference call later that month, the company said the reduction would be closer to 40 cents a share and would begin during the second quarter while adding the inventory glut sliced 6 cent to 7 cents off first quarter earnings. That left analysts wondering if the real number should have been 47 cents and if Bristol-Myers really had a handle on the problem.