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 US$1 billion through sales incentives to wholesalers, a company official said Thursday.
Bristol-Myers spokesman Bonnie Jacobs said the company is cooperating with the investigation first reported in the Financial Times.
The probe has been going on since April, when Bristol-Myers announced the inventory glut caused by incentives would slash this years earning's up to 50 percent. Bristol-Myers said the SEC hasn't told it that it acted improperly in addressing the inventory situation. The SEC didn't return calls for comment.
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. Earlier this week, Merck & Co had to pull an initial public offering to spin off one of its units because of concerns over its accounting. Bristol-Myers shares fell US$1.04 to close at US$22.11.
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.
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 was 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 US$1.3 million bonus was dependent on the company's performance. He also earned a salary of US$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 US$7.8 billion, with analysts saying it overpaid by up to US$2 billion. Then the company agreed to pay up to US$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 US$875 million of that investment because ImClone stock tanked after the Food and Drug Administration rejected the Erbitux application.
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