BRISTOL MYERS SQUIBB CO – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

EXECUTIVE SUMMARY

Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS, the Company, we, our or us) is a global biopharmaceutical company whose mission is to discover, develop and deliver innovative medicines that help patients prevail over serious diseases. We license, manufacture, market, distribute and sell pharmaceutical products on a global basis.  

We continued to execute our string-of-pearls strategy with the acquisition of Amira Pharmaceuticals, Inc. (Amira) in September 2011, and Inhibitex, Inc. (Inhibitex) in February 2012, and through various collaboration agreements entered into during the year.

  YERVOY (ipilimumab) was launched in the United States (U.S.) and the European Union (EU) for the treatment of adult patients with unresectable (inoperable) or metastatic melanoma. We also launched a subcutaneous formulation of ORENCIA (abatacept) in the U.S., NULOJIX (belatacept) in the U.S. and the EU for the prevention of organ rejection in adult patients receiving a kidney transplant and ELIQUIS (apixaban) in the EU for the prevention of venous thromboembolic events (VTE) in adult patients who have undergone hip or knee replacement surgery.  We announced the main results of the ARISTOTLE trial of ELIQUIS which compared with warfarin significantly reduced the risk for stroke or systemic embolism and had both our New Drug Application (NDA) in the U.S. and our Marketing Authorization Application (MAA) in the EU for ELIQUIS accepted for review.  In January 2012, we received a complete response letter from the U.S. Food and Drug Administration (FDA) regarding our NDA for dapagliflozin. The complete response letter requests additional clinical data from ongoing studies and may require information from new clinical trials.  

Highlights

The following table is a summary of our financial highlights:

                                                                 Year Ended December 31, Dollars in Millions, except per share data            2011            2010            2009 Net Sales                                           $  21,244       $  19,484       $  18,808 Total Expenses                                         14,263          13,413          13,206 Earnings from Continuing Operations before Income Taxes                                            6,981           6,071           5,602 Provision for Income Taxes                              1,721           1,558           1,182 Effective tax rate                                      24.7  %         25.7  %         21.1  %  Net Earnings from Continuing Operations Attributable to BMS GAAP                                                    3,709           3,102           3,239 Non-GAAP                                                3,921           3,735           3,667  Diluted Earnings Per Share from Continuing Operations Attributable to BMS GAAP                                                     2.16            1.79            1.63 Non-GAAP                                                 2.28            2.16            1.85 

Cash, Cash Equivalents and Marketable Securities 11,642 9,982

           9,883   Our non-GAAP financial measures, including non-GAAP earnings and related EPS information, are adjusted to exclude specified items which represent certain costs, expenses, gains and losses and other items impacting the comparability of financial results. For a detailed listing of all specified items and further information and reconciliations of non-GAAP financial measures see "-Non-GAAP Financial Measures" below.  Business Environment  Our business is primarily conducted within the pharmaceutical/biotechnology industry, which is highly competitive and subject to numerous government regulations. Many competitive factors may significantly affect sales of our products, including product efficacy, safety, price, demand, competition and cost-effectiveness; marketing effectiveness; market access; product labeling; quality control and quality assurance of our manufacturing operations; and research and development of new products. To successfully compete for business in the healthcare industry, we must demonstrate that our products offer medical benefits as well as cost advantages. Sometimes, our new product introductions compete with other products already on the market in the same therapeutic category, in addition to potential competition of new products that competitors may introduce in the future. We manufacture branded products, which are priced higher than generic products. Generic competition is one of our leading challenges globally.                                           35 

-------------------------------------------------------------------------------- In the pharmaceutical/biotechnology industry, the majority of an innovative product's commercial value is usually realized during its market exclusivity period. Afterwards, it is no longer protected by a patent and is subject to new competing products in the form of generic brands. Upon exclusivity loss, we can lose a major portion of that product's sales in a short period of time. Competitors seeking approval of biological products under a full Biologics License Application (BLA) must file their own safety and efficacy data and address the challenges of biologics manufacturing, which involve more complex processes and are more costly than those of other pharmaceutical operations. Under the U.S. healthcare legislation enacted in 2010, which is described more fully below, there is now an abbreviated path for regulatory approval of generic versions of biological products. This path for approval of biosimilar products under the U.S. healthcare legislation significantly affects the regulatory data exclusivity for biological products. The legislation provides a regulatory mechanism that allows for regulatory approval of biologic drugs that are similar to (but not generic copies of) innovative drugs on the basis of less extensive data than is required by a full BLA. It is not possible at this time to reasonably assess the impact of the U.S. biosimilar legislation on the Company.  Globally, the healthcare industry is subject to various government-imposed regulations authorizing prices or price controls that will continue to have an impact on our net sales. In March 2010, the U.S. government enacted healthcare reform legislation, signing into law the Patient Protection and Affordable Care Act (HR 3590) and a reconciliation bill containing a package of changes to the healthcare bill. The legislation made extensive changes to the healthcare insurance and benefits system with the intention of broadening coverage and reducing costs. These bills significantly changed how Americans receive healthcare coverage and how they pay for it. They also have a significant impact on companies, in particular those companies in the pharmaceutical industry and other healthcare related industries, including BMS. We have experienced and will continue to experience additional financial costs and certain other changes to our business as the healthcare law provisions become effective. For example, in 2010, minimum rebates on our Medicaid drug sales have increased from 15.1 percent to 23.1 percent and Medicaid rebates have also been extended to drugs used in risk-based Medicaid managed care plans.  Two additional provisions that impact our financial results went into effect on January 1, 2011. The first is a 50 percent discount on our brand-name drugs to patients within the Medicare Part D coverage gap, also referred to as the "donut hole." The second is an annual non-tax-deductible pharmaceutical company fee payable to the Federal government based on an allocation of our market share of branded prior year sales to certain U.S. government programs including Medicare, Medicaid, Department of Veterans Affairs, Department of Defense and TRICARE.  The annual EPS impact of U.S. healthcare reform increased from $0.10 in 2010 to $0.24 in 2011. In 2011, net sales were reduced by $310 million resulting from new discounts associated with the Medicare Part D coverage gap. Marketing, selling and administrative expenses increased by $220 million due to the new annual non-tax-deductible pharmaceutical company fee. The incremental $0.14 impact was associated with the Medicare Part D coverage gap and the annual pharmaceutical company fee. The aggregate financial impact of U.S. healthcare reform over the next few years depends on a number of factors, including but not limited to pending implementation guidance, potential changes in sales volume eligible for the new rebates, discounts or fees, and the impact of cost sharing arrangements with certain alliance partners. A positive impact on our net sales from the expected increase in the number of people with healthcare coverage could potentially occur in the future, but is not expected until 2014 at the earliest.  In many markets outside the U.S., we operate in environments of government-mandated, cost-containment programs, or under other regulatory bodies or groups that can exert downward pressure on pricing. Pricing freedom is limited in the UK, for instance, by the operation of a profit control plan and in Germany by the operation of a reference price system. Many European countries have continuing fiscal challenges as healthcare payers, including government agencies, have reduced and are expected to continue to reduce the cost of healthcare through actions that directly or indirectly impose additional price restrictions. Companies also face significant delays in market access for new products as more than two years can elapse after drug approval before new medicines become available in some countries.  The growth of Managed Care Organizations (MCOs) in the U.S. has significantly impacted competition that surrounds the healthcare industry. MCOs seek to reduce healthcare expenditures for participants by making volume purchases and entering into long-term contracts to negotiate discounts with various pharmaceutical providers. Because of the market potential created by the large pool of participants, marketing prescription drugs to MCOs has become an important part of our strategy. Companies compete for inclusion in MCO formularies and we generally have been successful in having our key products included. We believe that developments in the managed care industry, including continued consolidation, have had and will continue to have a downward pressure on prices.  Pharmaceutical and biotechnology production processes are complex, highly regulated and vary widely from product to product. Shifting or adding manufacturing capacity can be a lengthy process requiring significant capital expenditures and regulatory approvals. Biologics manufacturing involves more complex processes than those of traditional pharmaceutical operations. As biologics become a larger percentage of our product portfolio, we will continue to make supply arrangements with third-party manufacturers and to make substantial investments to increase our internal capacity to produce biologics on a commercial scale. One such investment is a new, state-of-the-art manufacturing facility for the production of biologics in Devens, Massachusetts. We submitted the site for regulatory approval in 2012 and we expect the FDA to complete a review of our application by the end of the year.                                           36  -------------------------------------------------------------------------------- We have maintained a competitive position in the market and strive to uphold this position, which is dependent on our success in discovering, developing and delivering innovative, cost-effective products to help patients prevail over serious diseases.  We are the subject of a number of significant pending lawsuits, claims, proceedings and investigations. It is not possible at this time to reasonably assess the final outcomes of these investigations or litigations. For additional discussion of legal matters, see "Item 8. Financial Statements-Note 22. Legal Proceedings and Contingencies."  

Strategy

  Over the past few years, we have transformed our Company into a focused biopharmaceutical company, a transformation that encompasses all areas of our business and operations. This has not only focused our portfolio of products but has yielded and will continue to yield substantial cost savings and cost avoidance. This in turn increases our financial flexibility to take advantage of attractive market opportunities that may arise.  In May 2012, we expect to lose exclusivity in the U.S. for our largest product, PLAVIX*, after which time we expect a rapid, precipitous, and material decline in PLAVIX* net sales and a reduction in net income and operating cash flow. We also expect a decline in AVAPRO*/AVALIDE* (irbesartan/irbesartan-hydrochlorothiazide) net sales immediately following the loss of exclusivity in the U.S. in March 2012. Such events are the norm in the industry when companies experience the loss of exclusivity of a product. Recognizing this fact, we continue to focus on sustaining our business and building a robust foundation for the future. We plan to achieve this foundation by continuing to support and grow our currently marketed products, advancing our pipeline, and maintaining and improving our financial strength, all of which are part of an overall strategy to build the Company.  We continue to expand our biologics capabilities. We still rely significantly on small molecules as our strongest, most reliable starting point for discovering potential new medicines, but large molecules, or biologics, derived from recombinant DNA technologies, are becoming increasingly important. Currently, more than one in three of our pipeline compounds are biologics, as are four of our key marketed products, including YERVOY.  Our strategy also includes a focus on certain emerging markets, our acquisition and licensing strategy known as "string-of-pearls," optimizing our mature brands portfolio and managing costs. Our strategy in emerging markets is to develop and commercialize innovative products in key high-growth markets, tailoring the approach to each market. We are continuing to focus on our core biopharmaceuticals and maximizing the value of our mature brands portfolio.  

We completed the following strategic transactions in 2011:

        •   We acquired Amira Pharmaceutical, Inc. (Amira), a small-molecule          pharmaceutical company focused on fibrotic disease.    

• We entered into an agreement with Ono Pharmaceuticals Co., Ltd. (Ono) to

expand our territorial rights to develop and commercialize an antibody to

PD-1, an investigational cancer immunotherapy, and to create a strategic

         alliance for the codevelopment and cocommercialization of ORENCIA in          Japan.    

• We obtained exclusive worldwide rights from Ambrx Inc. (Ambrx) to

research, develop and commercialize novel biologics in diabetes and heart

         disease.    

• We obtained exclusive worldwide rights from Innate Pharma S.A. (Innate) to

develop and commercialize IPH 2102, a novel immune-oncology biologic in

         Phase I development.          •   We entered into a clinical collaboration with Roche to evaluate the          utility of YERVOY in combination with Roche's investigational BRAF          inhibitor, vermurafenib, in treating patients with a specific type of          metastatic melanoma.    

• We announced a licensing agreement with Gilead Sciences, Inc. (Gilead) for

the development and commercialization of a new fixed-dose combination

         containing REYATAZ and Gilead's cobicistat for the treatment of HIV.    

• We entered into a strategic partnership with ASLAN Pharmaceuticals for

development of BMS-777607, an investigational small molecule inhibitor of

         the MET receptor tyrosine kinase for treatment of solid tumors.          •   We entered into a clinical collaboration agreement with Tibotec

Pharmaceuticals (Tibotec), one of the Janssen Pharmaceutical Companies, to

evaluate the utility of daclatasvir (BMS-790052), our investigational NS5A

         replication complex inhibitor, in combination with Tibotec's          investigational NS3 protease inhibitor, TMC435, for the treatment of          chronic hepatitis C virus.    

• We agreed to codevelop BMS-795311, our preclinical small molecule

inhibitor of the Cholesteryl Ester Transfer Protein (CETP) that could

potentially raise HDL (good cholesterol) levels and help prevent

cardiovascular disease, with Simcere Pharmaceutical Group (Simcere).

         •   We entered into a clinical collaboration with Pharmasset, Inc.          (Pharmasset), now a wholly owned subsidiary of Gilead, to evaluate the          utility of declatasvir (BMS-790052), our NS5A replication complex          inhibitor, in combination with PSI-7977, Pharmasset's nucleotide

polymerase inhibitor for the treatment of chronic hepatitis C virus and

         subsequently announced the addition of four additional treatment arms to          the Phase IIa trial.  

In February 2012, we acquired Inhibitex, Inc. (Inhibitex), a clinical-stage biopharmaceutical company focused on developing products to treat the hepatitis C virus and other serious infectious diseases.

                                       37

--------------------------------------------------------------------------------

Product and Pipeline Developments

  We manage our research and development (R&D) programs on a portfolio basis, investing resources in each stage of research and development from early discovery through late-stage development. We continually evaluate our portfolio of R&D assets to ensure that there is an appropriate balance of early-stage and late-stage programs to support future growth. We consider our R&D programs that have entered into Phase III development to be significant, as these programs constitute our late-stage development pipeline. These Phase III development programs include both investigational compounds in Phase III development for initial indications and marketed products that are in Phase III development for additional indications or formulations. Spending on these programs represents approximately 30-40% of our annual R&D expenses. No individual investigational compound or marketed product represented 10% or more of our R&D expenses in any of the last three years. While we do not expect all of our late-stage development programs to make it to market, our late-stage development programs are the R&D programs that could potentially have an impact on our revenue and earnings within the next few years. The following are the recent significant developments in our marketed products and our late-stage pipeline:  YERVOY - a monoclonal antibody for the treatment of patients with unresectable (inoperable) or metastatic melanoma, which currently is also being studied for other indications including lung cancer as well as adjuvant melanoma and hormone-refractory prostate cancer    

• In July 2011, the Company announced that the European Commission approved

         YERVOY for the treatment of adult patients with previously-treated          advanced melanoma.          •   In June 2011, the Company announced at the 47th Annual Meeting of the          American Society of Clinical Oncology the results on the 024 study which          evaluated newly-diagnosed patients treated with YERVOY 10mg/kg in          combination with dacarbazine versus dacarbazine alone. There was a          significant improvement in overall survival for patients treated with          YERVOY plus dacarbazine versus those who received dacarbazine alone.

Higher estimated survival rates were observed at one year, two years and

three years in patients treated with YERVOY plus dacarbazine versus those

          that received dacarbazine alone.          •   In June 2011, the Company announced that it has entered into a clinical

collaboration with Roche to evaluate the utility of YERVOY in combination

with Roche's investigational BRAF inhibitor, vermurafenib, in treating

         patients with a specific type of metastatic melanoma.    

• In March 2011, the FDA approved YERVOY for the treatment of patients with

newly diagnosed or previously-treated unresectable (inoperable) or

metastatic melanoma.

   ELIQUIS - an oral Factor Xa inhibitor indicated in the EU for the prevention of venous thromboembolic events (VTE) in adult patients who have undergone elective hip or knee replacement surgery and in development for stroke prevention in patients with atrial fibrillation (AF) and the prevention and treatment of venous thromboembolic disorders that is part of our strategic alliance with Pfizer, Inc. (Pfizer)    

• In November 2011, the FDA accepted for review the NDA for ELIQUIS. The

Prescription Drug User Fee Act (PDUFA) goal date for a decision by the FDA

          is March 28, 2012. We also have a validated application in the EU.          •   In November 2011, the Company and Pfizer announced the results of the

Phase III ADOPT trial, which evaluated ELIQUIS versus enoxaparin in

acutely ill medical patients, did not meet the primary efficacy outcome of

superiority to enoxaparin for the endpoint of VTE and VTE-related deaths.

• In August 2011 at the European Society of Cardiology Congress, the Company

         and Pfizer announced the main results of the Phase III ARISTOTLE trial,          which evaluated ELIQUIS compared to warfarin for the prevention of stroke

or systemic embolism in patients with atrial fibrillation and at least one

risk factor for stroke. ELIQUIS as compared with warfarin significantly

          reduced the risk of stroke or systemic embolism by 21 percent, major          bleeding by 31 percent and mortality by 11 percent.          •   In June 2011, the Company and Pfizer announced that the Phase III          ARISTOTLE trial of ELIQUIS met the primary efficacy objective of

non-inferiority to warfarin on the combined outcome of stroke (ischemic,

hemorrhagic or unspecified type) and systemic embolism. In addition,

ELIQUIS met the key secondary endpoints of superiority on efficacy and on

International Society of Thrombosis and Haemostasis (ISTH) major bleeding

         compared to warfarin.    

• In May 2011, the Company and Pfizer announced that the European Commission

         approved ELIQUIS for the prevention of VTE in adult patients who have          undergone elective hip or knee replacement surgery.    

• In February 2011, the Company and Pfizer published the full results of the

AVERROES study of ELIQUIS in The New England Journal of Medicine. The

study demonstrated that, for patients with AF who were expected or

demonstrated to be unsuitable for a vitamin K antagonist therapy such as

warfarin, ELIQUIS was statistically superior to aspirin in reducing the

composite of stroke or systemic embolism, without a significant increase

in major bleeding, fatal bleeding or intracranial bleeding. There were no

significant differences in the risk of hemorrhagic stroke between ELIQUIS

and aspirin. The study results also showed that ELIQUIS demonstrated

superiority for its secondary efficacy endpoint in reducing the composite

of stroke, systemic embolism, myocardial infarction or vascular death for

         patients with AF when compared with aspirin.                                            38 

--------------------------------------------------------------------------------

NULOJIX - a fusion protein with novel immunosuppressive activity for the prevention of kidney transplant rejection

• In June 2011, the Company announced that the FDA and the European

         Commission approved NULOJIX for prophylaxis of organ rejection in adult          patients receiving a kidney transplant.    

• New data on NULOJIX was presented at the 2011 American Transplant Congress

and the European Society for Organ Transplantation (ESOT) meeting

including: (i) three-year outcomes from BENEFIT: A Phase III study of

NULOJIX vs. cyclosporine in kidney transplant recipients, (ii) three-year

safety profile of NULOJIX in kidney transplant recipients from the BENEFIT

and BENEFIT-EXT studies, (iii) renal function at two years in kidney

transplant recipients switched from cyclosporine or tacrolimus to NULOJIX:

results from the long-term extension of a Phase II study, and

(iv) three-year outcomes by donor type in Phase III studies of NULOJIX vs.

         cyclosporine in kidney transplantation (BENEFIT & BENEFIT-EXT).

Dapagliflozin - an oral SGLT2 inhibitor for the treatment of diabetes that is part of our strategic alliance with AstraZeneca PLC (AstraZeneca)

• In January 2012, the FDA issued a complete response letter regarding the

NDA for dapagliflozin. The complete response letter requests additional

clinical data to allow a better assessment of the benefit-risk profile for

dapagliflozin. This includes clinical trial data from ongoing studies and

may require information from new clinical trials. The companies will work

         closely with the FDA to determine the appropriate next steps for the          dapagliflozin application, and are in ongoing discussions with health

authorities in Europe and other countries as part of the application

         procedures.          •   In December 2011, the Company and AstraZeneca announced at the          International Diabetes Federation 2011 World Diabetes Conference the

results of a Phase III study of dapagliflozin that showed reductions on

blood sugar levels (glycosylated hemoglobin levels or HbA1c) seen at 24

weeks with dapagliflozin and existing glimepiride (sulfonylurea) therapy,

compared to placebo added to glimepiride were maintained at 48 weeks in

adults with type 2 diabetes. Patients taking dapagliflozin added to

glimepiride also maintained reductions in fasting plasma glucose levels,

         post-prandial glucose and total body weight.    

• In November 2011, the Company and AstraZeneca presented a meta-analysis of

clinical data on cardiovascular safety in adult patients with type 2

diabetes that showed that dapagliflozin was not associated with an

unacceptable increase in cardiovascular risk relative to all comparators

          pooled in the clinical programs.          •   In July 2011, the FDA's Endocrinologic and Metabolic Drugs Advisory

Committee voted nine to six that the efficacy and safety data did not

provide substantial evidence to support approval of the NDA for

dapagliflozin as an adjunct to diet and exercise to improve glycemic

         control in adults with type 2 diabetes mellitus.    

• In June 2011 at the American Diabetes Association meeting, the Company and

AstraZeneca presented the results from several Phase III clinical studies

         examining dapagliflozin added to metformin.          •   The MAA for dapagliflozin has been validated by the EMA. The MAA          submission for dapagliflozin was filed in December 2010.  

ORENCIA - a fusion protein indicated for rheumatoid arthritis

• In November 2011 at the American College of Rheumatology Annual Scientific

Meeting, the Company presented new data on ORENCIA from clinical trials

that support the recent FDA approval of the subcutaneous formulation of

ORENCIA for the reduction of signs and symptoms in adults with moderate to

severe arthritis. Other data presented included long-term immunogenicity

data with the intravenous formulation, long-term safety data in rheumatoid

arthritis and results from a Phase II/III study in lupus nephritis.

• In August 2011, the MAA for the subcutaneous formulation of ORENCIA was

         validated for review by the European Medicine Agency.    

• In July 2011, the FDA approved a subcutaneous formulation of ORENCIA for

the treatment of adults with moderate to severe rheumatoid arthritis.

ONGLYZA/KOMBIGLYZE (saxagliptin/saxagliptin and metformin) - a treatment for type 2 diabetes that is part of our strategic alliance with AstraZeneca

• In December 2011, the FDA approved ONGLYZA for use as a combination

therapy with insulin (with or without metformin) to improve blood sugar in

          adult patients with type 2 diabetes.          •   In November 2011, the European Commission approved KOMBIGLYZE (known in          the EU as KOMBOGLYZE) for the treatment of type 2 diabetes.          •   In November 2011, the European Commission approved ONGLYZA for use as a

combination therapy with insulin (with or without metformin) to improve

          blood sugar (glycemic) control in adult patients with type 2 diabetes.          •   In September 2011 at the 47th European Association for the Study of

Diabetes annual meeting, the Company and AstraZeneca announced results

from an investigational Phase IIIb clinical study which reported that

ONGLYZA 5 mg added to insulin (with or without metformin) maintained

glycemic control (glycosylated hemoglobin levels or HbA1c) in adult

patients with type 2 diabetes compared to the addition of placebo at 24 to

         52 weeks.                                            39 

--------------------------------------------------------------------------------

• In June 2011, the Company and AstraZeneca announced results from an

investigational Phase IIIb clinical study which reported that ONGLYZA 5 mg

added to insulin (with or without metformin) significantly reduced blood

sugar levels (glycosylated hemoglobin levels or HbA1c) at 24 weeks

compared to treatment with placebo added to insulin (with or without

         metformin).    

• In May 2011, the Company and AstraZeneca announced that the State Food and

Drug Administration approved ONGLYZA in China.          •   In February 2011, the Company and AstraZeneca announced that the European

         Commission approved a label update for ONGLYZA in the treatment of adults          with type 2 diabetes who have moderate or severe renal impairment making          ONGLYZA the first dipeptidyl peptidase-4 (DDP-4) inhibitor in Europe          available for type 2 diabetes patients with moderate or severe renal          impairment.    

     •   In February 2011, the Company and AstraZeneca announced that the FDA

approved the inclusion of data from two clinical studies in an update to

the ONGLYZA U.S. Prescribing Information for adults with type 2 diabetes.

The U.S. label update provides further evidence regarding use in renally

impaired adults with type 2 diabetes as well as comparisons between

glipizide and ONGLYZA in patients also taking metformin.

   SPRYCEL (dasatanib) - an oral inhibitor of multiple tyrosine kinases indicated for the treatment of adults with chronic, accelerated, or myeloid or lymphoid blast phase chronic myeloid leukemia with resistance or intolerance to prior therapy, including GLEEVEC* (imatinib meslylate) and first-line treatment of adults. SPRYCEL is part of our strategic alliance with Otsuka Pharmaceuticals, Inc. (Otsuka).   

• In September 2011, China'sState Food and Drug Administration approved

SPRYCEL for the treatment of adults with chronic, accelerated or lymphoid

         or myeloid chronic myeloid leukemia with resistance or intolerance to          prior therapy of imatinib.    

• In June 2011, regulatory authorities in Japan approved the use of SPRYCEL

          as a first-line treatment of chronic myeloid leukemia.          •   In June 2011, the Company and Otsuka announced that five-year follow up

data for SPRYCEL 100 mg once daily demonstrated 78% overall survival in

patients with chronic-phase myeloid leukemia resistant or intolerant to

         GLEEVEC*. The results were announced at the 47th Annual Meeting of the          American Society of Clinical Oncology.  

PLAVIX* - a platelet aggregation inhibitor that is part of our alliance with Sanofi

• In January 2011, the Company and Sanofi announced that the FDA has granted

the companies an additional six-month period of exclusivity to market

PLAVIX*. Exclusivity for PLAVIX* in the U.S. is now scheduled to expire on

May 17, 2012.

BARACLUDE (entecavir) - an oral antiviral agent for the treatment of chronic hepatitis B

• In November 2011 at the 62nd annual meeting of the American Association

         for the Study of Liver Disease, the Company announced the results of the          96-week BE-LOW study, a Phase IIIb clinical trial, that showed no          statistical difference between BARACLUDE monotherapy (0.5 mg once daily)          and BARACLUDE (0.5 mg once daily) plus tenovir (300 mg once daily) in

treatment-naïve adult patients with HBeAg-positive and HBeAg-negative

         chronic hepatitis B with compensated liver disease.          •   In February 2011, the European Commission approved BARACLUDE for the

         treatment of hepatitis B in adult patients with decompensated liver          disease.   

ABILIFY* (aripiprazole) - an antipsychotic agent for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder that is part of our strategic alliance with Otsuka

• In February 2011, the Company and Otsuka announced that the FDA approved

ABILIFY* as an adjunct to the mood stabilizers lithium or valproate for

         the maintenance treatment of Bipolar I Disorder. European approval for          this use was received in January 2011.   REYATAZ (atazanavir sulfate) - a protease inhibitor for the treatment of HIV         •   In February 2011, the FDA approved an update to the labeling for REYATAZ

to include dose recommendations in HIV-infected pregnant women. In HIV

combination therapy, treatment with the recommended adult dose of REYATAZ

300 mg, boosted with 100 mg of ritonavir, achieved minimum plasma

concentrations (24 hours post-dose) during the third trimester of

pregnancy comparable to that observed historically in HIV-infected adults.

During the post partum period, atazanavir concentrations may be increased;

         therefore, while no dose adjustment is necessary, patients should be          monitored for two months after delivery.                                            40 

-------------------------------------------------------------------------------- ERBITUX* (cetuximab) - a monoclonal antibody designed to exclusively target and block the Epidermal Growth Factor Receptor, which is expressed on the surface of certain cancer cells in multiple tumor types as well as normal cells and is currently indicated for use against colorectal cancer and head and neck cancer. ERBITUX* is part of our alliance with Eli Lilly and Company (Lilly).    

• In November 2011, the FDA approved ERBITUX*, in combination with

platinum-based chemotherapy with 5-fluorouracil, for the first line

treatment of recurrent locoregional or metastatic squamous cell carcinoma

of the head and neck.

Necitumumab (IMC-11F8) - an investigational anti-cancer agent, which is part of our strategic alliance with Lilly

• In February 2011, the Company and Lilly announced that enrollment was

stopped in the Phase III INSPIRE study of necitumumab as a first-line

treatment for advanced non-small cell lung cancer. The trial is evaluating

the addition of necitumumab to a combination of ALIMTA* (pemetrexed for

         injection) and cisplatin. The decision to stop enrollment followed an          independent Data Monitoring Committee (DMC) recommendation that no new or          recently enrolled patients continue treatment in the trial because of          safety concerns related to thromboembolism in the experimental arm of the          study. The DMC also noted that patients who have already received two or          more cycles of necitumumab appear to have a lower ongoing risk for these

safety concerns. Those patients could choose to remain on the trial, after

         being informed of the additional potential risks. Investigators will          continue to assess patients after two cycles to determine if there is a

potential benefit from treatment. Necitumumab continues to be studied in

another Phase III trial named SQUIRE. This study is evaluating necitumumab

as a potential treatment for a different type of lung cancer called

squamous non-small cell lung cancer in combination with GEMZAR*

(gemcitabine HCl for injection) and cisplatin. The same independent DMC

recommended that this trial continue because no safety concerns have been

observed.

Brivanib - an investigational anti-cancer agent

• In January 2012 at the American Society of Clinical Oncology (ASCO)

Gastrointestinal Cancers Symposium, the National Cancer Institute of

Canada (NCIC) Clinical Trials Group and the Australasian Gastro-Intestinal

Trials Group (AGITG) presented the results of a Phase III randomized trial

of cetuximab plus either brivanib alaninate or placebo in patients with

metastatic, chemotherapy refractory, K-RAS wild type colorectal carcinoma.

The primary endpoint of improvement in overall survival was not met in the

          trial.          •   In December 2011, the Company reported that the Phase III BRISK-PS

(Brivanib Study in HCC Patients at Risk Post Sorafenib) clinical trial in

patients with hepatocellular carcinoma (HCC; liver cancer) who failed or

are intolerant to sorafenib did not meet the primary endpoint of improving

overall survival versus placebo.

  RESULTS OF OPERATIONS  Net Sales 

The composition of the changes in net sales was as follows:

                                                            Year Ended December 31,                         2011 vs. 2010                             2010 vs. 2009                                                                 Net Sales                             Analysis of % Change                      Analysis of % Change                                                                                             Total                          Foreign       Total                     Foreign Dollars in Millions                                 2011          2010     

    2009        Change    Volume      Price    Exchange      Change   Volume   Price   Exchange United States                                     $  13,845     $  12,613     $  11,867        10%         3%        7%            -         6%       3%      3%          - Europe                                                3,667         3,448         3,625         6%         5%      (4)%           5%       (5)%       2%    (3)%       (4)% Japan, Asia Pacific and Canada                        1,862         1,651         1,522        13%         6%      (1)%           8%         8%       3%    (4)%         9% Latin America, the Middle East and Africa               894           856           843         4%         3%         -           1%         2%     (3)%      3%         2% Emerging Markets                                        887           804           753        10%        13%      (6)%           3%         7%       5%    (2)%         4% Other                                                    89           112           198      (21)%        N/A       N/A            -      (43)%      N/A     N/A          -  Total                                             $  21,244     $  19,484     $  18,808         9%         4%        3%           2%         4%       2%      1%         1%    Our total sales growth in both periods was attributable to higher volume, higher average net selling prices, favorable foreign exchange and reflects continued growth in most key products offset by declines in sales of AVAPRO*/AVALIDE* and mature brands across all regions and international sales of PLAVIX*.  The change in U.S. net sales attributed to price was a result of higher average net selling prices for PLAVIX* in both periods and ABILIFY* in 2011, partially offset by the reduction in our contractual share of ABILIFY* net sales from 65% to 58% in 2010 and a further reduction to 53.5% in 2011, and higher rebates and discounts resulting from U.S. healthcare reform legislation. The change in U.S. net sales in 2011 attributed to volume reflects the recent launch of YERVOY and increased demand for several key products partially offset by decreased prescription demand for AVAPRO*/AVALIDE* and PLAVIX*, which we expect to continue to                                           41 

--------------------------------------------------------------------------------

decrease as a result of the expected loss of exclusivity of each of those products in 2012. The change in U.S. net sales in 2010 attributed to volume reflects increased demand for several key products. See "-Key Products" for further discussion of sales by key product.

  Net sales in Europe increased in 2011 due to favorable foreign exchange and sales growth of most key products partially offset by lower sales of certain mature brands from divestitures and generic competition as well as generic competition for PLAVIX* and AVAPRO*/AVALIDE*. Net sales in Europe decreased in 2010 due to unfavorable foreign exchange and the previously mentioned generic competition which more than offset sales growth in most key products. Net sales in both periods were negatively impacted by continuing fiscal challenges in many European countries as healthcare payers, including government agencies, have reduced and are expected to continue to reduce the cost of healthcare through actions that directly or indirectly impose additional price reductions. These measures include, but are not limited to, mandatory discounts, rebates, other price reductions and other restrictive measures.  Net sales in Japan, Asia Pacific and Canada increased in both periods primarily due to higher demand for BARACLUDE and SPRYCEL. Net sales in 2011 also increased from the recent launch of ORENCIA in Japan and the approval of SPRYCEL for first line indication in Japan. These impacts were partially offset by generic competition for AVAPRO*/AVALIDE* in Canada in 2011 and lower sales of mature brands from generic competition and divestitures in both periods.  Our Emerging Markets region is comprised of Brazil, Russia, India, China, and Turkey. Net sales growth in both periods was driven by increased sales volume primarily in China and Brazil, which was partially offset by pricing pressures in Turkey and Russia. Higher net sales in China were primarily attributable to BARACLUDE and certain mature brands in both periods. Higher net sales in Brazil were primarily attributable to REYATAZ in 2011 and ABILIFY* in 2010.  

No single country outside the U.S. contributed more than 10% of our total net sales in 2011, 2010 or 2009.

  In general, our business is not seasonal. For information on U.S. pharmaceutical prescriber demand, reference is made to the table within "-Estimated End-User Demand" below, which sets forth a comparison of changes in net sales to the estimated total prescription growth (for both retail and mail order customers) for certain of our key products. U.S. and non-U.S. net sales are categorized based upon the location of the customer.  

We recognize revenue net of gross-to-net sales adjustments that are further described in "-Critical Accounting Policies" below. Our contractual share of ABILIFY* and ATRIPLA* sales is reflected net of all gross-to-net sales adjustments in gross sales.

The reconciliation of gross sales to net sales by each significant category of gross-to-net sales adjustments was as follows:

                                                                     Year Ended December 31, Dollars in Millions                                         2011           2010           2009 Gross Sales                                               $  24,007      $  21,681      $  20,555 Gross-to-Net Sales Adjustments Charge-Backs Related to Government Programs                    (767 )         (605 )         (513 ) Cash Discounts                                                 (282 )         (255 )         (253 ) Managed Healthcare Rebates and Other Contract Discounts        (752 )         (499 )         (439 ) Medicaid Rebates                                               (536 )         (453 )         (229 ) Sales Returns                                                   (76 )          (88 )         (101 ) Other Adjustments                                              (350 )         (297 )         (212 )  Total Gross-to-Net Sales Adjustments                         (2,763 )       (2,197 )       (1,747 )  Net Sales                                                 $  21,244      $  19,484      $  18,808                                             42 

--------------------------------------------------------------------------------

The activities and ending balances of each significant category of gross-to-net sales reserve adjustments were as follows:

                                                                                    Managed                                                                                Healthcare                                       Charge-Backs                             Rebates and                                        Related to                                 Other                                        Government             Cash              Contract            Medicaid           Sales              Other Dollars in Millions                     Programs            Discounts           Discounts           Rebates           Returns          Adjustments          Total Balance at January 1, 2010           $           42        $        26      

$ 199 $ 166 $ 169 $ 88

    $    690 Provision related to sales made in current period                               606                255                  496               454              118                  302     

2,231

 Provision related to sales made in prior periods                                 (1 )                -                    3                (1 )            (30 )                 (5 )           (34 ) Returns and payments                           (599 )             (252 )               (482 )            (292 )            (69 )               (256 )        (1,950 ) Impact of foreign currency translation                                       -                  -                    -                 -               (1 )                 (2 )   

(3 )

  Balance at December 31, 2010         $           48        $        29      

$ 216 $ 327 $ 187 $ 127

    $    934 Provision related to sales made in current period                               767                282                  752               541              120                  357     

2,819

 Provision related to sales made in prior periods                                  -                  -                    -                (5 )            (44 )                 (7 )           (56 ) Returns and payments                           (764 )             (283 )               (550 )            (452 )           (101 )               (296 )        (2,446 ) Impact of foreign currency translation                                       -                  -                   (1 )               -               (1 )                  -     

(2 )

  Balance at December 31, 2011         $           51        $        28        $         417        $      411        $     161        $         181        $  1,249    Gross-to-net sales adjustments as a percentage of worldwide gross sales were 11.5% in 2011, 10.1% in 2010 and 8.5% in 2009 and are primarily a function of gross sales trends, changes in sales mix and contractual and legislative discounts and rebates. Gross-to-net sales adjustments increased due to:    

• Charge-backs related to government programs increased in both periods

primarily due to reimbursements for price increases in excess of current

         inflation rates in the U.S.    

• Managed healthcare rebates and other contract discounts increased in 2011

due to the 50% discount for patients within the Medicare Part D coverage

          gap.          •   In 2010, Medicaid rebates increased due to the change in minimum rebates

on drug sales from 15.1% to 23.1% and the extension of the Medicaid rebate

rate to drugs sold to risk-based Medicaid managed care organizations. In

2011, Medicaid rebates continued to increase due to the full year impact

of the expansion of Medicaid rebates to drugs used in risk-based Medicaid

managed care plans and higher average net selling prices for PLAVIX*, and

         higher Medicaid channel sales.    

• The increase in unpaid rebates was due in part to timing and an increasing

          lag in payments attributed to government agencies administrative delays.          •   In 2011, sales returns included a $29 million reduction of a $44 million

U.S. return reserve established in 2010 in connection with a recall of

         certain lots of AVALIDE* due to lower returns than expected. Sales returns          attributable to 2012 sales are expected to increase as a result of the          loss of exclusivity of PLAVIX* and AVAPRO*/AVALIDE* in 2012.                                            43 

--------------------------------------------------------------------------------

Key Products

  Net sales of key products represented 86% of total net sales in 2011, 84% in 2010 and 81% in 2009. The following table presents U.S. and international net sales by key product, the percentage change from the prior period and the foreign exchange impact when compared to the prior period. Commentary detailing the reasons for significant variances for key products is provided below:                                                                                                                                                                          % Change                                                                                                                                                                   Attributable  to                                                                                   Year Ended December 31,                       % Change                          Foreign Exchange Dollars in Millions                                                        

2011 2010 2009 2011 vs. 2010 2010 vs. 2009

  2011 vs. 2010         2010 vs. 2009 Key Products PLAVIX* (clopidogrel bisulfate)                                              $  7,087     $  6,666     $  6,146                 6 %               8 %                 -                     - U.S.                                                                            6,622        6,154        5,556                 8 %              11 %                 -                     - Non-U.S.                                                                          465          512          590                (9)%             (13)%               3 %                   4 %  AVAPRO*/AVALIDE* (irbesartan/irbesartan-hydrochlorothiazide)                                       952        1,176        1,283               (19)%              (8)%               2 %                   2 % U.S.                                                                              521          642          722               (19)%             (11)%                 -                     - Non-U.S.                                                                          431          534          561               (19)%              (5)%               4 %                   3 %  ABILIFY* (aripiprazole)                                                         2,758        2,565        2,592                 8 %              (1)%               2 %                     - U.S.                                                                            2,037        1,958        2,082                 4 %              (6)%                 -                     - Non-U.S.                                                                          721          607          510                19 %              19 %               6 %                  (2)%  REYATAZ (atazanavir sulfate)                                                    1,569        1,479        1,401                 6 %               6 %               2 %                     - U.S.                                                                              760          754          727                 1 %               4 %                 -                     - Non-U.S.                                                                          809          725          674                12 %               8 %               5 %                  (1)%  SUSTIVA (efavirenz) Franchise                                                   1,485        1,368        1,277                 9 %               7 %               2 %                  (1)% U.S.                                                                              940          881          803                 7 %              10 %                 -                     - Non-U.S.                                                                          545          487          474                12 %               3 %               5 %                  (3)%  BARACLUDE (entecavir)                                                           1,196          931          734                28 %              27 %               5 %                   3 % U.S.                                                                              207          179          160                16 %              12 %                 -                     - Non-U.S.                                                                          989          752          574                32 %              31 %               7 %                    3%  ERBITUX* (cetuximab)                                                              691          662          683                 4 %              (3)%                 -                     - U.S.                                                                              672          646          671                 4 %              (4)%                 -                     - Non-U.S.                                                                           19           16           12                19 %              33 %               3 %                   5 %  SPRYCEL (dasatinib)                                                               803          576          421                39 %              37 %               3 %                     - U.S.                                                                              294          188          123                56 %              53 %                 -                     - Non-U.S.                                                                          509          388          298                31 %              30 %               6 %                   1 %  YERVOY (ipilimumab)                                                               360          N/A          N/A                 N/A               N/A               N/A                   N/A U.S.                                                                              322          N/A          N/A                 N/A               N/A               N/A                   N/A Non-U.S.                                                                           38          N/A          N/A                 N/A               N/A               N/A                   N/A  ORENCIA (abatacept)                                                               917          733          602                25 %              22 %               2 %                     - U.S.                                                                              615          547          467                12 %              17 %                 -                     - Non-U.S.                                                                          302          186          135                62 %              38 %               8 %                   1 %  NULOJIX (belatacept)                                                                3          N/A          N/A                 N/A               N/A               N/A                   N/A U.S.                                                                                3          N/A          N/A                 N/A               N/A               N/A                   N/A Non-U.S.                                                                            -          N/A          N/A                 N/A               N/A               N/A                   N/A  ONGLYZA/KOMBIGLYZE (saxagliptin/saxagliptin and metformin)                        473          158           24                  **                **               3 %                     - U.S.                                                                              339          119           22                  **                **                 -                     - Non-U.S.                                                                          134           39            2                  **                **                **                     -  Mature Products and All Other                                                   2,950        3,170        3,645                (7)%             (13)%               4 %                   1 % U.S.                                                                              513          545          534                (6)%               2 %                 -                     - Non-U.S.                                                                        2,437        2,625        3,111                (7)%             (16)%               5 %                   1 %    

** Change in excess of 100%.

                                           44 

--------------------------------------------------------------------------------

PLAVIX* - a platelet aggregation inhibitor that is part of our alliance with Sanofi

• U.S. net sales increased in both periods primarily due to higher average

net selling prices. Estimated total U.S. prescription demand decreased 5%

and 1% in 2011 and 2010, respectively. We expect a rapid and material

decline in PLAVIX* sales following the loss of exclusivity in May 2012.

PLAVIX* sales will depend on erosion rates from generic competition,

          wholesale and retail inventory levels and expected returns.          •   International net sales continue to be impacted by the launch of generic

clopidogrel products in the EU and Australia. This has a negative impact

on both our net sales in EU comarketing countries and Australia and our

equity in net income of affiliates as it relates to our share of sales

from our partnership with sanofi in Europe and Asia. We expect the

continued erosion of PLAVIX* net sales in the EU, which will impact both

our international net sales and our equity in net income of affiliates. We

also expect erosion of international net sales following the recent loss

         of exclusivity of PLAVIX* in Canada.          •   See "Item 8. Financial Statements-Note 22. Legal Proceedings and

Contingencies-PLAVIX* Litigation," for further discussion on PLAVIX*

exclusivity litigation in both the U.S. and EU.

AVAPRO*/AVALIDE* (known in the EU as APROVEL*/KARVEA*) - an angiotensin II receptor blocker for the treatment of hypertension and diabetic nephropathy that is also part of the Sanofi alliance

• U.S. net sales decreased in 2011 due to market share losses subsequent to

the AVALIDE* supply shortage in the first quarter of 2011 associated with

previously reported recalls. Total estimated U.S. prescription demand

decreased 39% in 2011. The decrease in U.S. net sales was partially offset

by higher average net selling prices and the reduction in 2011 of

previously established reserves for estimated returns in connection with

         the recall of certain lots of AVALIDE* during 2010 due to lower actual          returns than expected. We expect a rapid, material decline in          AVAPRO*/AVALIDE* sales following the loss of exclusivity in March 2012.

International net sales decreased in 2011 due to lower demand including

         generic competition in certain EU markets and Canada.          •   U.S. and international net sales decreased in 2010 primarily due to

decreased overall demand due to generic competition in the EU and reduced

supply of AVALIDE* in addition to a $44 million sales return adjustment

recorded as a result of the AVALIDE* recall. Estimated total U.S.

prescription demand decreased 17% in 2010.

   ELIQUIS - an oral Factor Xa inhibitor for the prevention of VTE in adult patients who have undergone elective hip or knee replacement surgery and in development for the prevention and treatment of venous thromboembolic disorders and stroke prevention in patients with atrial fibrillation that is part of our strategic alliance with Pfizer    

• ELIQUIS was approved in the EU for VTE prevention in May 2011 and was

launched in a limited number of EU countries beginning in May 2011. Net

sales were less than $1 million.

ABILIFY* - an antipsychotic agent for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder and is part of our strategic alliance with Otsuka

• U.S. net sales increased in 2011 due to higher overall demand and average

net selling prices partially offset by the reduction in our contractual

share of net sales from 58% in 2010 to 53.5% in 2011. Estimated total U.S.

          prescription demand increased 5% in 2011.          •   U.S. net sales decreased in 2010 primarily due to the reduction in our

contractual share of net sales from 65% to 58% and higher Medicaid rebates

from healthcare reform. The decrease was partially offset by higher

average net selling prices and overall demand. Estimated total U.S.

         prescription demand increased 5% in 2010.    

• In both periods, international net sales increased due to higher demand.

REYATAZ - a protease inhibitor for the treatment of HIV

         •   U.S. net sales were relatively flat in 2011 and increased in 2010          primarily due to higher demand. Estimated total prescription demand          increased 2% in 2011 and 4% in 2010.    

• In both periods, international net sales increased primarily due to higher

demand.

   SUSTIVA Franchise - a non-nucleoside reverse transcriptase inhibitor for the treatment of HIV, which includes SUSTIVA, an antiretroviral drug, and bulk efavirenz, which is also included in the combination therapy, ATRIPLA* (efavirenz 600 mg/emtricitabine 200 mg/tenofovir disoproxil fumarate 300 mg), a product sold through our joint venture with Gilead         •   U.S. net sales increased in 2011 primarily due to higher average net          selling prices and higher estimated total U.S. prescription demand of 7%.          U.S. net sales increased in 2010 primarily due to higher estimated total          U.S. prescription demand of 7%.  

• In both periods, international net sales increased primarily due to higher

         demand.                                            45 

--------------------------------------------------------------------------------

 BARACLUDE - an oral antiviral agent for the treatment of chronic hepatitis B      •   Net sales in both periods increased primarily due to higher demand.   ERBITUX* - a monoclonal antibody designed to exclusively target and block the Epidermal Growth Factor Receptor, which is expressed on the surface of certain cancer cells in multiple tumor types as well as normal cells and is currently indicated for use against colorectal cancer and head and neck cancer. ERBITUX* is part of our strategic alliance with Lilly.    

• Sold by us almost exclusively in the U.S., net sales increased in 2011

primarily due to higher demand, including demand from the approval of

ERBITUX* for the first-line treatment of recurrent locally or regionally

advanced metastatic squamous cell carcinoma of the head and neck. Net

sales in 2010 decreased primarily due to lower demand and lower average

net selling prices.

   SPRYCEL - an oral inhibitor of multiple tyrosine kinases indicated for the treatment of adults with chronic, accelerated, or myeloid or lymphoid blast phase chronic myeloid leukemia with resistance or intolerance to prior therapy, including GLEEVEC* (imatinib meslylate) and first-line treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia in chronic phase. SPRYCEL is part of our strategic alliance with Otsuka.    

• Net sales in both periods increased primarily due to higher demand and

average net selling prices. Demand in 2011 was positively impacted by the

approval of SPRYCEL for first-line treatment of adult patients with newly

diagnosed Philadelphia chromosome-positive chronic myeloid leukemia in

chronic phase in the U.S. and the EU in the fourth quarter of 2010.

YERVOY - a monoclonal antibody for the treatment of patients with unresectable (inoperable) or metastatic melanoma

         •   YERVOY was launched in the U.S. in the second quarter of 2011 and a          limited number of EU countries in the third and fourth quarters of 2011.          •   Net sales of $27 million were deferred until patient infusion due to a

returns policy established in the third quarter of 2011 in the U.S.

ORENCIA - a fusion protein indicated for adult patients with moderate to severe rheumatoid arthritis who have had an inadequate response to one or more currently available treatments, such as methotrexate or anti-tumor necrosis factor therapy

• U.S. net sales increased in both periods primarily due to higher demand,

including the launch of the ORENCIA subcutaneous formulation, and higher

          average net selling prices.          •   International net sales increased in both periods primarily due to higher

demand.

NULOJIX - a fusion protein with novel immunosuppressive activity targeted at prevention of kidney transplant rejection

     •   NULOJIX was approved and launched in the U.S. and EU during 2011.  

ONGLYZA/KOMBIGLYZE - treatment for type 2 diabetes

• ONGLYZA/KOMBIGLYZE increased in both periods primarily due to higher

overall demand and launches in various countries. KOMBIGLYZE was launched

in the U.S. in the fourth quarter of 2010.

Mature Products and All Other - includes products which lost exclusivity in major markets and over the counter brands

• International net sales decreased in 2010 due to continued generic erosion

of certain products, lower average net selling prices in Europe, the year

         over year impact of the rationalization and divestitures of our          non-strategic product portfolio and lower demand for certain over the          counter products.   The estimated U.S. prescription change data provided throughout this report includes information only from the retail and mail order channels and does not reflect product demand within other channels such as hospitals, home health care, clinics, federal facilities including Veterans Administration hospitals, and long-term care, among others. The data is provided by Wolters Kluwer Health (WK), except for SPRYCEL, and is based on the Source Prescription Audit. As of December 31, 2011, SPRYCEL demand is based upon information from the Next-Generation Prescription Service (NGPS) version 2.0 of the National Prescription Audit provided by the IMS Health (IMS). The data is a product of each respective service providers' own recordkeeping and projection processes and therefore subject to the inherent limitations of estimates based on sampling and may include a margin of error.  

Prior to December 31, 2011, SPRYCEL demand was calculated based upon data obtained from the IMS Health (IMS) National Sales Perspectives Audit. Since management believes information from IMS' National Prescription Audit more accurately reflects subscriber demands trends versus pill data from IMS' National Sales Perspectives Audit, all prior year SPRYCEL data has been restated to reflect information from IMS' National Prescription Audit.

                                       46  -------------------------------------------------------------------------------- We continuously seek to improve the quality of our estimates of prescription change amounts and ultimate patient/consumer demand by reviewing the calculation methodologies employed and analyzing internal and third-party data. We expect to continue to review and refine our methodologies and processes for calculation of these estimates and will monitor the quality of our own and third parties' data used in such calculations.  We calculated the estimated total U.S. prescription change on a weighted-average basis to reflect the fact that mail order prescriptions include a greater volume of product supplied, compared to retail prescriptions. Mail order prescriptions typically reflect a 90-day prescription whereas retail prescriptions typically reflect a 30-day prescription. The calculation is derived by multiplying mail order prescription data by a factor that approximates three and adding to this the retail prescriptions. We believe that a calculation of estimated total U.S. prescription change based on this weighted-average approach provides a superior estimate of total prescription demand in retail and mail order channels. We use this methodology for our internal demand reporting.  

Estimated End-User Demand

  The following tables set forth for each of our key products sold in the U.S. for the years ended December 31, 2011, 2010 and 2009: (i) change in reported U.S. net sales for each year; (ii) estimated total U.S. prescription change for the retail and mail order channels calculated by us based on third-party data on a weighted-average basis, and (iii) months of inventory on hand in the wholesale distribution channel.                                                Year Ended December 31,                                At December 31,                                Change in U.S.                    % Change in U.S.                     Months on                                   Net Sales                     Total Prescriptions                     Hand Dollars in Millions      2011        2010       2009        2011        2010       2009       2011      2010      2009 PLAVIX*                      8 %        11 %       13 %       (5) %       (1) %        4 %      0.5       0.5       0.5 AVAPRO*/AVALIDE*          (19) %      (11) %      (2) %      (39) %      (17) %      (9) %      0.6       0.4       0.4 ABILIFY*                     4 %       (6) %       24 %         5 %         5 %       26 %      0.5       0.4       0.4 REYATAZ                      1 %         4 %        9 %         2 %         4 %        8 %      0.5       0.5       0.5 SUSTIVA Franchise(a)         7 %        10 %       11 %         7 %         7 %       10 %      0.6       0.4       0.5 BARACLUDE                   16 %        12 %       14 %         9 %        12 %       13 %      0.6       0.6       0.5 ERBITUX*(b)                  4 %       (4) %      (9) %        N/ A        N/ A       N/ A      0.6       0.5       0.5 SPRYCEL                     56 %        53 %       34 %        30 %        21 %       27 %      0.7       0.6       0.7 YERVOY(b)(c)                N/ A        N/ A       N/ A        N/ A        N/ A       N/ A      0.6       N/A       N/A ORENCIA(b)                  12 %        17 %       29 %        N/ A        N/ A       N/ A      0.5       0.6       0.5 NULOJIX(b)(c)               N/ A        N/ A       N/ A        N/ A        N/ A       N/ A      3.5       N/A       N/A ONGLYZA/KOMBIGLYZE(d)        * *         * *       N/ A         * *         * *       N/ A      0.5       0.8       3.7    

(a) The SUSTIVA Franchise (total revenue) includes sales of SUSTIVA and revenue

of bulk efavirenz included in the combination therapy ATRIPLA*. The months on

hand relates only to SUSTIVA.

(b) ERBITUX*, YERVOY, ORENCIA and NULOJIX are parenterally administered products

and do not have prescription-level data as physicians do not write

prescriptions for these products.

(c) YERVOY and NULOJIX were launched in the U.S. in the second quarter of 2011.

(d) ONGLYZA was launched in the U.S. in the third quarter of 2009. KOMBIGLYZE was

launched in the U.S. in the fourth quarter of 2010. ONGLYZA had 0.5 month of

inventory on hand at December 31, 2010. KOMBIGLYZE had 51.8 months of

inventory on hand at December 31, 2010 to support the initial product launch.

   ** Change in excess of 100%.   Pursuant to the U.S. Securities and Exchange Commission (SEC) Consent Order described below under "-SEC Consent Order", we monitor the level of inventory on hand in the U.S. wholesaler distribution channel and outside of the U.S. in the direct customer distribution channel. We are obligated to disclose products with levels of inventory in excess of one month on hand or expected demand, subject to a de minimis exception. Estimated levels of inventory in the distribution channel in excess of one month on hand for these products were not material as of the dates indicated above. Below are U.S. products that had estimated levels of inventory in the distribution channel in excess of one month on hand at December 31, 2011, and international products that had estimated levels of inventory in the distribution channel in excess of one month on hand at September 30, 2011.  NULOJIX had 3.5 months of inventory on hand in the U.S. to support the initial product launch. The inventory is nominal and is expected to be worked down in less than that amount of time as demand for this new product increases post launch.  DAFALGAN, an analgesic product sold principally in Europe, had 1.1 months of inventory on hand at direct customers compared to 1.4 months of inventory on hand at December 31, 2010. The level of inventory on hand was primarily due to ordering patterns of pharmacists in France.  FERVEX, a cold and flu product, had 3.0 months of inventory on hand internationally at direct customers compared to 6.4 months of inventory on hand at December 31, 2010. The level of inventory on hand decreased due to higher demand in France and Russia.                                           47 

-------------------------------------------------------------------------------- LUFTAL, an antacid product, had 1.5 months of inventory on hand internationally at direct customers compared to 1.3 months of inventory on hand at December 31, 2010. The level of inventory on hand was primarily due to government purchasing patterns in Brazil.  In the U.S., for all products sold exclusively through wholesalers or through distributors, we generally determined our months on hand estimates using inventory levels of product on hand and the amount of out-movement provided by our three largest wholesalers, which account for approximately 90% of total gross sales of U.S. products, and provided by our distributors. Factors that may influence our estimates include generic competition, seasonality of products, wholesaler purchases in light of increases in wholesaler list prices, new product launches, new warehouse openings by wholesalers and new customer stockings by wholesalers. In addition, these estimates are calculated using third-party data, which may be impacted by their recordkeeping processes.  For our businesses outside of the U.S., we have significantly more direct customers. Limited information on direct customer product level inventory and corresponding out-movement information and the reliability of third-party demand information, where available, varies widely. In cases where direct customer product level inventory, ultimate patient/consumer demand or out-movement data does not exist or is otherwise not available, we have developed a variety of other methodologies to estimate such data, including using such factors as historical sales made to direct customers and third-party market research data related to prescription trends and end-user demand. Accordingly, we rely on a variety of methods to estimate direct customer product level inventory and to calculate months on hand. Factors that may affect our estimates include generic competition, seasonality of products, direct customer purchases in light of price increases, new product launches, new warehouse openings by direct customers, new customer stockings by direct customers and expected direct customer purchases for governmental bidding situations. As such, all of the information required to estimate months on hand in the direct customer distribution channel for non-U.S. business for the year ended December 31, 2011 is not available prior to the filing of this annual report on Form 10-K. We will disclose any product with levels of inventory in excess of one month on hand or expected demand, subject to a de minimis exception, in the next quarterly report on Form 10-Q.  Expenses                                                           Net Sales                              % Change                                                                                       2011 vs.         2010 vs.                                           2011           2010           2009            2010             2009 Cost of products sold                   $   5,598      $   5,277      $   5,140               6 %              3 % 

Marketing, selling and administrative 4,203 3,686 3,946

              14 %            (7) % Advertising and product promotion             957            977          1,136             (2) %           (14) % Research and development                    3,839          3,566          3,647               8 %            (2) % Provision for restructuring                   116            113            136               3 %           (17) % Litigation expense, net                         -            (19 )          132           (100) %                ** Equity in net income of affiliates           (281 )         (313 )         (550 )          (10) %           (43) % Other (income)/expense                       (169 )          126           (381 )               **               **  Total Expenses                          $  14,263      $  13,413      $  13,206               6 %              2 %     

** Change is in excess of 100%.

Cost of products sold

  Cost of products sold consists of material costs, internal labor and overhead from our owned manufacturing sites, third-party processing costs, other supply chain costs and the settlement of foreign currency forward contracts that are used to hedge forecasted intercompany inventory purchase transactions. Essentially all of these costs are managed primarily through our global manufacturing organization, referred to as Technical Operations. Discovery royalties attributed to licensed products in connection with alliances, profit sharing payments in certain collaborations, and the amortization of acquired developed technology costs from business combinations and milestone payments that occur on or after regulatory approval are also included in cost of products sold.  Cost of products sold can vary between periods as a result of product mix (particularly resulting from royalties and profit sharing expenses in connection with our alliances), price, inflation and costs attributed to the rationalization of manufacturing sites resulting in accelerated depreciation, impairment charges and other stranded costs. In addition, changes in foreign currency may also provide volatility given a high percentage of total costs are denominated in foreign currencies.  The increase in cost of products sold in both periods was primarily attributable to higher sales volume resulting in additional royalties, collaboration fees, and profit sharing expense, and unfavorable foreign exchange. Cost of products sold as a percentage of net sales were 26.4% in 2011, 27.1% in 2010, and 27.3% in 2009 and reflected more favorable product mix during 2011 and 2010.                                           48

--------------------------------------------------------------------------------

Marketing, selling and administrative

  Marketing, selling and administrative expenses consist of salary and benefit costs, third-party professional and marketing fees, outsourcing fees, shipping and handling costs and other expenses that are not attributed to product manufacturing costs or research and development expenses. Most of these expenses are managed through regional commercialization functions or global functions such as finance, law, information technology and human resources.    

• The increase in 2011 was primarily attributed to the annual pharmaceutical

         company fee ($220 million), unfavorable foreign exchange and higher          marketing costs to support new launches and key products and to a lesser          extent, higher bad debt expense in the EU, charitable funding and          information technology expenses.    

• The decrease in 2010 was primarily attributed to the reduction in sales

related activities of certain key products to coincide with their

respective life cycle; prior year impact of a $100 million funding payment

made to the BMS Foundation; reduction in our ABILIFY* sales force as

Otsuka established it own sales force for promotion of ABILIFY*, SPRYCEL

and IXEMPRA; reduced project standardization implementation costs from the

2009 role out of new accounting and human resource related systems; and

overall efficiencies gained from continuous improvement initiatives.

Advertising and product promotion

Advertising and product promotion expenses consist of related media, sample and direct to consumer programs.

• The decrease in 2010 was primarily attributed to lower spending on the

promotion of certain key products to coincide with their product life

cycle and Otsuka's reimbursement of certain ABILIFY*, SPRYCEL and IXEMPRA

advertising and product promotion expenses partially offset by increased

spending for the ONGLYZA launch and other pipeline products.

Research and development

  Research and development expenses consist of salary and benefit costs, third-party grants and fees paid to clinical research organizations, supplies and facility costs. Total research and development expenses include the costs of discovery research, preclinical development, early- and late-clinical development and drug formulation, as well as clinical trials and medical support of marketed products, proportionate allocations of enterprise-wide costs, and other appropriate costs. These expenses also include third-party licensing fees that are typically paid upfront as well as when regulatory or other contractual milestones are met. Certain expenses are shared with alliance partners based upon contractual agreements.  Most expenses are managed by our global research and development organization of which, approximately $2.0 billion of the total spend was attributed to development activities with the remainder attributed to preclinical and research activities. These expenses can vary between periods for a number of reasons, including the timing of upfront, milestone and other licensing payments.    

• The increase in 2011 was attributed to higher upfront, milestone and other

licensing payments, unfavorable foreign exchange, and additional

development costs resulting from the acquisition of ZymoGenetics. Upfront,

         milestone and other licensing payments were $207 million in 2011 which          included an $88 million payment associated with an amendment of an          intellectual property license agreement for YERVOY prior to its FDA          approval and payments to Abbott Laboratories (Abbott), Innate, Ambrx,

Alder Biopharmaceuticals, Inc. (Alder), and Nissan Chemical Industries,

Ltd. and Teijin Pharma Limited (Nissan and Teijin) for exclusive licenses

          to develop and commercialize certain programs and compounds.          •   The decrease in 2010 was attributed to lower upfront, milestone and other

licensing payments partially offset by additional spending to support our

maturing pipeline and compounds obtained from our string-of-pearls

strategy. Upfront, milestone and other licensing payments were $132

million in 2010 primarily attributed to Exelixis, Allergan Inc. and Abbott

and $347 million in 2009 primarily attributed to ZymoGenetics, Alder, and

          Nissan and Teijin.   Provision for restructuring  

The provision for restructuring was primarily attributable to employee termination benefits for continuous improvement initiatives.

Litigation expense, net

The 2009 amount was primarily due to a $125 million securities litigation settlement.

Equity in net income of affiliates

Equity in net income of affiliates was primarily related to our international partnership with Sanofi and varies based on international PLAVIX* net sales included within this partnership.

• The decrease in 2010 is attributed to the impact of an alternative salt

form of clopidogrel and generic clopidogrel competition on international

PLAVIX* net sales that commenced in 2009. For additional information, see

"Item 8. Financial Statements-Note 3. Alliances and Collaborations."

                                           49 

--------------------------------------------------------------------------------

Other (income)/expense

Other (income)/expense include:

                                                                    Year Ended December 31, Dollars in Millions                                          2011         2010         2009 Interest expense                                            $   145      $   145      $   184 Interest income                                                 (91 )        (75 )        (54 ) Impairment and loss on sale of manufacturing operations           -          236            - Gain on sale of product lines, businesses and assets            (37 )        (39 )       (360 ) Other income received from alliance partners                   (140 )       (136 )       (148 ) Pension curtailment and settlement charges                       10           28           43 Litigation charges/(recoveries)                                 (25 )          -            - Product liability charges/ (recoveries)                          31           17           (6 ) Other                                                           (62 )        (50 )        (40 )  Other (income)/expense                                      $  (169 )    $   126      $  (381 )     

• Impairment and loss on sale of manufacturing operations was primarily

attributed to the disposal of our manufacturing operations in Latina, Italy

     in 2010.    

• Gain on sale of product lines, businesses and assets was primarily related to

     the sale of mature brands, including businesses within Indonesia and      Australia in 2009.    

• Other income from alliance partners includes income earned from the Sanofi

     partnership and amortization of certain upfront, milestone and other      licensing payments related to other alliances.    

• Pension curtailment and settlement charges were primarily attributed to

amendments which eliminated the crediting of future benefits related to

service for U.S. pension plan participants. These amendments resulted in a

curtailment charge of $6 million and $25 million during 2010 and 2009,

respectively. The remainder of the charges resulted from lump sum payments in

certain plans which exceeded the sum of plan interest costs and service

costs, resulting in an acceleration of a portion of previously deferred

actuarial losses. Additional charges may be recognized in the future,

particularly with the U.S. pension plans due to a lower threshold resulting

from the elimination of service costs and potentially higher lump sum

payments. See "Item 8. Financial Statements-Note 19. Pension, Postretirement

     and Postemployment Liabilities" for further detail.    

• Product liability charges in 2011 and 2010 were for additional reserves in

connection with the breast implant settlement program and hormone replacement

      therapy products.   Non-GAAP Financial Measures  Our non-GAAP financial measures, including non-GAAP earnings and related EPS information, are adjusted to exclude certain costs, expenses, gains and losses and other specified items that due to their significant and/or unusual nature are evaluated on an individual basis. These items are excluded from segment income. Similar charges or gains for some of these items have been recognized in prior periods and it is reasonably possible that they could reoccur in future periods. Non-GAAP information is intended to portray the results of our baseline performance which include the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical products on a global basis and to enhance an investor's overall understanding of our past financial performance and prospects for the future. For example, non-GAAP earnings and EPS information is an indication of our baseline performance before items that are considered by us to not be reflective of our ongoing results. In addition, this information is among the primary indicators we use as a basis for evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods. This information is not intended to be considered in isolation or as a substitute for net earnings or diluted EPS prepared in accordance with GAAP.                                           50

--------------------------------------------------------------------------------

Specified items were as follows:

                                                                      Year Ended December 31, Dollars in Millions, except per share data                     2011          2010         2009 Cost of products sold*                                       $     75       

$ 113$ 123

  Process standardization implementation costs                       29           35          110 BMS foundation funding initiative                                   -       

- 100

  Marketing, selling and administrative                              29       

35 210

  Upfront, milestone and other licensing payments                   207          132          347 IPRD impairment                                                    28           10            -  Research and development                                          235          142          347  Provision for restructuring                                       116          113          136  Litigation expense/ (recoveries)                                    -       

(19 ) 132

  Impairment and loss on sale of manufacturing operations             -          236            - Gain on sale of product lines, businesses and assets              (12 )          -         (360 ) Pension curtailment and settlement charges                         13           18           36 Acquisition related items                                           -           10          (10 ) Litigation charges/(recoveries)                                   (22 )          -            - Product liability charges/(recoveries)                             31           17           (5 ) Loss on sale of investments                                         -            -           31 Debt repurchase                                                     -            -           (7 ) Upfront, milestone and other licensing receipts                   (20 )          -            -  Other (income)/expense                                            (10 )        281         (315 )  Decrease to pretax income                                         445          665          633 Income tax on items above                                        (136 )       (180 )       (205 ) Out-of period tax adjustment                                        -          (59 )          - Specified tax (benefit)/charge**                                  (97 )        207            -  Income taxes                                                     (233 )        (32 )       (205 )  Decrease to net earnings                                     $    212       $  633       $  428     

* Specified items included in cost of products sold include accelerated

depreciation, asset impairment, and other shutdown costs.

** The 2011 specified tax benefit relates to releases of tax reserves that were

specified in prior periods. The 2010 specified tax charge relates to a tax

charge from additional U.S. taxable income from earnings of foreign

subsidiaries previously considered to be permanently reinvested offshore.

The reconciliations from GAAP to Non-GAAP were as follows:

                                                                   Year Ended December 31, Dollars in Millions, except per share data                 2011          2010          2009 Net Earnings Attributable to BMS-GAAP                    $  3,709      $  3,102      $  3,239 Earnings attributable to unvested restricted shares            (8 )         

(12 ) (17 )

Net Earnings Attributable to BMS used for Diluted EPS Calculation-GAAP

$  3,701      $  

3,090 $ 3,222

   Net Earnings Attributable to BMS-GAAP                    $  3,709      $  3,102      $  3,239 Less Specified Items                                          212           633           428  Net Earnings Attributable to BMS-Non-GAAP                   3,921         3,735         3,667 Earnings attributable to unvested restricted shares            (8 )         

(12 ) (17 )

Net Earnings Attributable to BMS used for Diluted EPS Calculation-Non-GAAP

$  3,913      $  

3,723 $ 3,650

   Average Common Shares Outstanding-Diluted                   1,717         

1,727 1,978

  Diluted EPS Attributable to BMS-GAAP                     $   2.16      $   1.79      $   1.63 Diluted EPS Attributable to Specified Items                  0.12          

0.37 0.22

  Diluted EPS Attributable to BMS-Non-GAAP                 $   2.28      $   2.16      $   1.85    Income Taxes  The effective income tax rate on earnings from continuing operations before income taxes was 24.7% in 2011, 25.7% in 2010 and 21.1% in 2009. The effective income tax rate is lower than the U.S. statutory rate of 35% due to our decision to indefinitely reinvest the earnings for certain of our manufacturing operations in Ireland and Puerto Rico. We have favorable tax rates in Ireland and Puerto Rico under grants not scheduled to expire prior to 2023.                                           51  -------------------------------------------------------------------------------- Fluctuations in the effective tax rate were impacted by a $207 million tax charge in 2010, earnings mix between high and low tax jurisdictions, contingent tax matters and changes in prior period estimates upon finalizing tax returns. For a detailed discussion of changes in the effective tax rate, see "Item 8. Financial Statements-Note 8. Income Taxes." Our future effective tax rate will also be adversely affected if the research and development tax credit is not extended.  Discontinued Operations 

On December 23, 2009, we completed a split-off of our remaining interest in Mead Johnson by means of an exchange offer to BMS shareholders. See "Item 8. Financial Statements-Note 5. Mead Johnson Nutrition Company Initial Public Offering and Split-off."

Noncontrolling Interest

  Noncontrolling interest is primarily related to our partnerships with sanofi for the territory covering the Americas related to PLAVIX* net sales. See "Item 8. Financial Statements-Note 3. Alliances and Collaborations." The increase in noncontrolling interest corresponds to increased net sales of PLAVIX* in the U.S. Following the expected loss of exclusivity of PLAVIX* and AVAPRO*/AVALIDE* in the U.S. during 2012, we expect a significant decrease in net earnings attributable to noncontrolling interest. Net earnings from discontinued operations attributable to noncontrolling interest primarily relates to the 16.9% publicly owned portion of Mead Johnson prior to our complete divestiture from the split-off. A summary of noncontrolling interest is as follows:                                                                   Year Ended December 31, Dollars in Millions                                        2011          2010          2009 Sanofi partnerships                                      $  2,323      $  2,074      $  1,717 Other                                                          20            20            26  Noncontrolling interest-pre-tax                             2,343         2,094         1,743 Income taxes                                                 (792 )        

(683 ) (562 )

Net earnings from continuing operations attributable to noncontrolling interest-net of taxes

                     1,551         

1,411 1,181 Net earnings from discontinued operations attributable to noncontrolling interest-net of taxes

                         -             -            69  Net earnings attributable to noncontrolling interest-net of taxes                                    $  1,551      $  1,411      $  1,250   

Financial Position, Liquidity and Capital Resources

Our net cash position was as follows:

   Dollars in Millions                                               2011           2010 Cash and cash equivalents                                       $  5,776       $  5,033 Marketable securities-current                                      2,957          2,268 Marketable securities-non-current                                  2,909    

2,681

  Total cash, cash equivalents and marketable securities            11,642    

9,982

  Short-term borrowings, including current portion of long-term debt                                                      (115 )         (117 ) Long-term debt                                                    (5,376 )       (5,328 )   Net cash position                                               $  6,151       $  4,537    We maintain a significant level of working capital, which was approximately $7.5 billion at December 31, 2011 and $6.5 billion at December 31, 2010. In 2012 and future periods, we expect cash generated by our U.S. operations, together with existing cash, cash equivalents, marketable securities and borrowings from the capital markets, to be sufficient to cover cash needs for dividends, common stock repurchases, debt repurchases, strategic alliances and acquisitions (including the acquisition of Inhibitex for $2.5 billion), milestone payments, working capital and capital expenditures. We do not rely on short-term borrowings to meet our current liquidity needs.  Cash, cash equivalents and marketable securities held in the U.S. was $8.7 billion at December 31, 2011. Approximately $2.3 billion of the remaining $2.9 billion is held in low tax jurisdictions and is attributable to earnings that are expected to be indefinitely reinvested offshore. Cash repatriations are subject to restrictions in certain jurisdictions and may be subject to withholding and other taxes.  Our investment portfolio includes non-current marketable securities which are subject to changes in fair value as a result of interest rate fluctuations and other market factors, which may impact our results of operations. Our investment policy places limits on these investments and the amount and time to maturity of investments with any institution. The policy also requires that investments are only entered into with corporate and financial institutions that meet high credit quality standards. See "Item 8. Financial Statements-Note 10. Financial Instruments."                                           52 

-------------------------------------------------------------------------------- As discussed in "-Strategy" above, the loss of exclusivity in the U.S. for our largest product, PLAVIX*, in May 2012 is expected to result in a rapid, precipitous, material decline in operating cash flow. Additional regulations in the U.S. could be passed in the future which could further reduce our results of operations, operating cash flow, liquidity and financial flexibility. We also continue to monitor the potential impact of the economic conditions in certain European countries and the related impact on prescription trends, pricing discounts, creditworthiness of our customers, and our ability to collect outstanding receivables from our direct customers. Currently, we believe these economic conditions in the EU will not have a material impact on our liquidity, cash flow or financial flexibility.  As a mechanism to limit our overall credit exposures, and an additional source of liquidity, we sell trade receivables to third parties, principally from wholesalers in Japan and certain government-backed entities in Italy, Portugal and Spain. Sales of trade receivables totaled approximately $1.1 billion in 2011, $932 million in 2010, and $660 million in 2009. The amount of trade receivables sold in Italy, Portugal, and Spain was $484 million in 2011, $477 million in 2010, and $413 million in 2009, and may not be available to be factored in the future due to the ongoing European sovereign debt crisis. Our sales agreements do not allow for recourse in the event of uncollectibility and we do not retain interest to the underlying asset once sold.  In September 2011, the Company replaced its $2.0 billion revolving credit facility with a new $1.5 billion five year revolving credit facility from a syndicate of lenders, which contains customary terms and conditions and is extendable on any anniversary date with the consent of the lenders. There are no financial covenants under the new facility. There were no borrowings outstanding under either revolving credit facility at <chron>December 31, 2011 or December 31, 2010.  

We continue to manage our operating cash flows with initiatives designed to improve working capital items that are most directly affected by changes in sales volume, such as receivables, inventories, and accounts payable. The following summarizes these components expressed as a percentage of trailing twelve months' net sales:

                                                              % of Trailing                                % of Trailing                                      December 31,          Twelve Month           December 31,          Twelve Month Dollars in Millions                      2011                Net Sales                2010                Net Sales Net trade receivables               $        2,250                  10.6  %      $        1,985                  10.2  % Inventories                                  1,384                   6.5  %               1,204                   6.2  % Accounts payable                            (2,603 )               (12.2) %              (1,983 )               (10.2) %  Total                               $        1,031                   4.9  %      $        1,206                   6.2  %    Credit Ratings  Moody's Investors Service (Moody's) long-term and short-term credit ratings are currently A2 and Prime-1, respectively, and their long-term credit outlook remains stable. Standard & Poor's (S&P) long-term and short-term credit ratings are currently A+ and A-1, respectively, and their long-term credit outlook remains stable. Fitch Ratings (Fitch) long-term and short-term credit ratings are currently A+ and F1, respectively, and their long-term credit outlook remains negative. Our credit ratings are considered investment grade. These long-term ratings designate that we have a low default risk but are somewhat susceptible to adverse effects of changes in circumstances and economic conditions. These short-term ratings designate that we have the strongest capacity for timely repayment.  

Cash Flows

The following is a discussion of cash flow activities:

            Dollars in Millions                  2011          2010           2009         Cash flow provided by/(used in):         Operating activities               $  4,840      $  4,491         $  4,065         Investing activities                 (1,437 )      (3,812 )         (4,380 )         Financing activities                 (2,657 )      (3,343 )            (17 )   Operating Activities  Cash flow from operating activities represents the cash receipts and cash disbursements from all of our activities other than investing activities and financing activities. Operating cash flow is derived by adjusting net earnings for noncontrolling interest, non-cash operating items, gains and losses attributed to investing and financing activities and changes in operating assets and liabilities resulting from timing differences between the receipts and payments of cash and when the transactions are recognized in our results of operations. As a result, changes in cash from operating activities reflect the timing of cash collections from customers and alliance partners; payments to suppliers, alliance partners and employees; pension contributions and tax payments in the ordinary course of business. Our operating cash flow continued to benefit from improved operating performance, working capital initiatives, and higher unpaid rebates due in part to timing and an increasing lag in payments to managed care organizations attributed to government agencies' administrative delays.                                           53 

--------------------------------------------------------------------------------

Investing Activities

• Net purchases of marketable securities were $859 million in 2011, $2.6

billion in 2010 and $1.4 billion in 2009. Investments in time deposits and

highly-rated corporate debt securities with maturities greater than 90

         days were increased to manage our return on investment.          •   Cash was used to fund the acquisitions of Amira for $360 million

         (including a $50 million contingent payment) in 2011, ZymoGenetics for          $829 million in 2010 and Medarex for $2.2 billion in 2009.    

• Capital expenditures were $367 million in 2011, $424 million in 2010, and

$730 million in 2009, including costs related to our Devens biologics

facility and other costs to support several manufacturing initiatives.

• Proceeds of $310 million were received from the sale of businesses within

          the Asia-Pacific region in 2009.          •   Mead Johnson cash included in the 2009 split-off transaction was $561          million.   Financing Activities    

• Dividend payments were $2.3 billion in 2011, $2.2 billion in 2010 and $2.5

billion in 2009. Dividends declared per common share were $1.33 in 2011,

$1.29 in 2010 and $1.25 in 2009. In December 2011, we declared a quarterly

dividend of $0.34 per common share and expect to pay a dividend for the

         full year of 2012 of $1.36 per share. Dividend decisions are made on a          quarterly basis by our Board of Directors.    

• A $3.0 billion stock repurchase program was authorized in May 2010,

resulting in the repurchase of common stock of $1.2 billion in 2011 and

$576 million in 2010.    

• Management periodically evaluates potential opportunities to repurchase

certain debt securities and terminate certain interest rate swap contracts

prior to their maturity. Cash outflows related to the repurchase of debt

         were $78 million in 2011, $855 million in 2010 and $132 million in 2009.          Proceeds from the termination of interest rate swap contracts were $296          million in 2011, $146 million in 2010 and $194 million in 2009.    

• Proceeds from the issuances of common stock resulting from stock option

exercises were $601 million (including $48 million of cash retained from

excess tax benefits) in 2011, $252 million in 2010 and $45 million in

2009. The issuance of common stock as a result of stock option exercises

         will vary each period based upon fluctuations in the market value of our          stock relative to the exercise price of the stock options and other          factors.    

• Proceeds of $2.3 billion were received from the Mead Johnson initial

public offering and the issuance of Mead Johnson Notes in 2009.

Contractual Obligations

  Payments due by period for our contractual obligations at December 31, 2011 were as follows:                                                                    Obligations Expiring by Period Dollars in Millions                  Total         2012         2013        2014       2015        2016        Later Years Short-term borrowings              $     115     $    115     $      -     $    -     $    -     $      -     $           - Long-term debt                         4,669            -          597          -          -          652             3,420 

Interest on long-term debt(a) 4,733 251 252

  223        227          230             3,550 Operating leases                         722          136          122        113         96           93               162 Purchase obligations                   2,067          659          494        382        206          171               155 Uncertain tax positions(b)               105          105            -          -          -            -                 - Other long-term liabilities              384            -           59         43         41           33               208  Total(c)                           $  12,795     $  1,266     $  1,524     $  761     $  570     $  1,179     $       7,495     

(a) Includes estimated future interest payments on our short-term and long-term

debt securities. Also includes accrued interest payable recognized on our

consolidated balance sheets, which consists primarily of accrued interest on

short-term and long-term debt as well as accrued periodic cash settlements of

derivatives.

(b) Due to the uncertainty related to the timing of the reversal of uncertain tax

positions, only the short-term uncertain tax benefits have been provided in

the table above. See "Item 8. Financial Statements-Note 8. Income Taxes" for

further detail.

(c) The table above excludes future contributions by us to our pensions,

postretirement and postemployment benefit plans. Required contributions are

contingent upon numerous factors including minimum regulatory funding

requirements and the funded status of each plan. Due to the uncertainty of

such future obligations, they are excluded from the table. Contributions for

both U.S. and international plans are expected to be up to $430 million in

2012. See "Item 8. Financial Statements-Note 19. Pension, Postretirement and

Postemployment Liabilities" for further detail.

   In addition to the above, we are committed to $5.5 billion (in the aggregate) of potential future research and development milestone payments to third parties as part of in-licensing and development programs. Early stage milestones, defined as milestones achieved through Phase III clinical trials, comprised $1.0 billion of the total committed amount. Late stage milestones, defined as milestones achieved post Phase III clinical trials, comprised $4.5 billion of the total committed amount. Payments under these agreements generally are due and payable only upon achievement of certain developmental and regulatory milestones, for which the specific timing cannot be predicted. In addition to certain royalty obligations that are calculated as a percentage of net sales, some of these                                           54  -------------------------------------------------------------------------------- agreements also provide for sales-based milestones aggregating $2.0 billion that we would be obligated to pay to alliance partners upon achievement of certain sales levels. We also have certain manufacturing, development, and commercialization obligations in connection with alliance arrangements. It is not practicable to estimate the amount of these obligations. See "Item 8. Financial Statements-Note 3. Alliances and Collaborations" for further information regarding our alliances.  

For a discussion of contractual obligations, see "Item 8. Financial Statements-Note 19. Pension, Postretirement and Postemployment Liabilities," "-Note 10. Financial Instruments" and "-Note 21. Leases."

SEC Consent Order

  As previously disclosed, on August 4, 2004, we entered into a final settlement with the SEC, concluding an investigation concerning certain wholesaler inventory and accounting matters. The settlement was reached through a Consent, a copy of which was attached as Exhibit 10 to our quarterly report on Form 10-Q for the period ended September 30, 2004.  Under the terms of the Consent, we agreed, subject to certain defined exceptions, to limit sales of all products sold to our direct customers (including wholesalers, distributors, hospitals, retail outlets, pharmacies and government purchasers) based on expected demand or on amounts that do not exceed approximately one month of inventory on hand, without making a timely public disclosure of any change in practice. We also agreed in the Consent to certain measures that we have implemented including: (a) establishing a formal review and certification process of our annual and quarterly reports filed with the SEC; (b) establishing a business risk and disclosure group; (c) retaining an outside consultant to comprehensively study and help re-engineer our accounting and financial reporting processes; (d) publicly disclosing any sales incentives offered to direct customers for the purpose of inducing them to purchase products in excess of expected demand; and (e) ensuring that our budget process gives appropriate weight to inputs that come from the bottom to the top, and not just from the top to the bottom, and adequately documenting that process.  We have established a company-wide policy to limit our sales to direct customers for the purpose of complying with the Consent. This policy includes the adoption of various procedures to monitor and limit sales to direct customers in accordance with the terms of the Consent. These procedures include a governance process to escalate to appropriate management levels potential questions or concerns regarding compliance with the policy and timely resolution of such questions or concerns. In addition, compliance with the policy is monitored on a regular basis.  We maintain inventory management agreements (IMAs) with our U.S. pharmaceutical wholesalers, which account for nearly 100% of total gross sales of U.S. biopharmaceuticals products. Under the current terms of the IMAs, our wholesaler customers provide us with weekly information with respect to months on hand product-level inventories and the amount of out-movement of products. The three largest wholesalers currently account for approximately 90% of total gross sales of U.S. BioPharmaceuticals products. The inventory information received from our wholesalers, together with our internal information, is used to estimate months on hand product level inventories at these wholesalers. We estimate months on hand product inventory levels for our U.S. BioPharmaceuticals business's wholesaler customers other than the three largest wholesalers by extrapolating from the months on hand calculated for the three largest wholesalers. In contrast, for our biopharmaceuticals business outside of the U.S., we have significantly more direct customers, limited information on direct customer product level inventory and corresponding out-movement information and the reliability of third-party demand information, where available, varies widely. Accordingly, we rely on a variety of methods to estimate months on hand product level inventories for these business units.  

We believe the above-described procedures provide a reasonable basis to ensure compliance with the Consent.

Recently Issued Accounting Standards

See "Item 8. Financial Statements-Note 1. Accounting Policies" for discussion of the impact related to recently issued accounting standards.

Critical Accounting Policies

  We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our critical accounting policies are those that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. New discounts under the 2010 U.S. healthcare reform law, such as the Medicare coverage gap and managed Medicaid require additional assumptions due to the lack of historical claims experience and increasing lag in claims data. In addition, the new pharmaceutical company fee estimate is subject to external data including the Company's relative share of industry results. Because of the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may vary from these estimates. These accounting policies were discussed with the Audit Committee of the Board of Directors.                                           55

--------------------------------------------------------------------------------

Revenue Recognition

  Our accounting policy for revenue recognition has a substantial impact on reported results and relies on certain estimates. We recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed and determinable, collectability is reasonably assured and title and substantially all of the risks and rewards of ownership have transferred, which is generally at time of shipment (net of the gross-to-net sales adjustments discussed below, all of which involve significant estimates and judgments).  

Gross-to-Net Sales Adjustments

  The following categories of gross-to-net sales adjustments involve significant estimates and judgments and require us to use information from external sources. See "-Net Sales" above for further discussion and analysis of each significant category of gross-to-net sales adjustments.  

Charge-backs related to government programs

  Our U.S. businesses participate in programs with government entities, the most significant of which are the U.S. Department of Defense and the U.S. Department of Veterans Affairs, and other parties, including covered entities under the 340B Drug Pricing Program, whereby pricing on products is extended below wholesaler list price to participating entities. These entities purchase products through wholesalers at the lower program price and the wholesalers then charge us the difference between their acquisition cost and the lower program price. We account for these charge-backs by reducing accounts receivable in an amount equal to our estimate of charge-back claims attributable to a sale. Our estimate of these charge-backs is primarily based on historical experience regarding these programs' charge-backs and current contract prices under the programs. We consider chargeback payments, levels of inventory in the distribution channel, and our claim processing time lag and adjust the reserve to reflect actual experience.  

Cash discounts

  In the U.S. and certain other countries, we offer cash discounts as an incentive for prompt payment, generally approximating 2% of the sales price. We account for estimated cash discounts by reducing accounts receivable based on historical claims experience and adjust the reserve to reflect actual experience.  

Managed healthcare rebates and other contract discounts

  We offer rebates and discounts to managed healthcare organizations in the U.S. which manage prescription drug programs and Medicare Advantage prescription drug plans covering the Medicare Part D drug benefit in addition to their commercial plans, as well as globally to other contract counterparties such as hospitals and group purchasing organizations. Beginning in 2011, the rebates for the Medicare Part D program included a 50% discount on the Company's brand-name drugs to patients who fall within the Medicare Part D coverage gap. In addition, we accrue rebates under U.S. Department of Defense TRICARE Retail Pharmacy Refund Program. We account for these rebates and discounts by establishing an accrual primarily based on historical experience and current contract prices. We consider the sales performance of products subject to these rebates and discounts, an increasing level of unbilled claims, and levels of inventory in the distribution channel and adjust the accrual to reflect actual experience.  

Medicaid rebates

  Our U.S. businesses participate in state government Medicaid programs as well as certain other qualifying Federal and state government programs whereby discounts and rebates are provided to participating state and local government entities. Discounts and rebates provided through these programs are included in our Medicaid rebate accrual and are considered Medicaid rebates for the purposes of this discussion. Retroactive to January 1, 2010, minimum rebates on Medicaid drug sales increased from 15.1% to 23.1%. Medicaid rebates have also been extended to drugs used in managed Medicaid plans beginning in March 2010. We account for Medicaid rebates by establishing an accrual primarily based on historical experience as well as any expansion on a prospective basis of our participation in programs, legal interpretations of applicable laws, and any new information regarding changes in the Medicaid programs' regulations and guidelines that would impact the amount of the rebates. We consider outstanding Medicaid claims, an increasing amount of unbilled managed Medicaid claims, and levels of inventory in the distribution channel and adjust the accrual to reflect actual experience.  

Sales returns

  We account for sales returns by establishing an accrual in an amount equal to our estimate of sales recognized for which the related products are expected to be returned primarily as a result of product expirations. For returns of established products, we determine our estimate of the sales return accrual primarily based on historical experience regarding sales returns, but also consider other factors that could impact sales returns. These factors include levels of inventory in the distribution channel, estimated shelf life, product recalls,                                           56 

-------------------------------------------------------------------------------- product discontinuances, price changes of competitive products, introductions of generic products, introductions of competitive new products and instances of expected precipitous declines in demand such as following the loss of exclusivity. We consider all of these factors and adjust the accrual to reflect actual experience.  Sales returns accruals from new products are estimated and primarily based on the historical sales returns experience of similar products, such as those within the same line of product or those within the same or similar therapeutic category. In limited circumstances, where the new product is not an extension of an existing line of product or where we have no historical experience with products in a similar therapeutic category, such that we cannot reliably estimate expected returns of the new product, we defer recognition of revenue until the right of return no longer exists or until we have developed sufficient historical experience to estimate sales returns. Estimated levels of inventory in the distribution channel and projected demand are also considered for new products. YERVOY net sales of $27 million were deferred until patient infusion due to a returns policy established in the third quarter of 2011 in the U.S.  

Pharmaceutical Company Fee (Pharma Fee)

  In 2011, we began paying an annual non-tax-deductible fee to the federal government based on an allocation of our market share of branded prior year sales to certain government programs including Medicare, Medicaid, Department of Veterans Affairs, Department of Defense and TRICARE. The 2011 Pharma fee amount will not be finalized until 2012 and preliminary funding in 2011 was based on information that is on a one-year lag. The Pharma fee is calculated based on market data of the Company as well as other industry participants for which the Company does not have full visibility. This fee is classified for financial reporting purposes as an operating expense.  

Use of information from external sources

  We use information from external sources to estimate gross-to-net sales adjustments. Our estimate of inventory at the wholesalers are based on the projected prescription demand-based sales for our products and historical inventory experience, as well as our analysis of third-party information, including written and oral information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers and third-party market research data, and our internal information. The inventory information received from wholesalers is a product of their recordkeeping process and excludes inventory held by intermediaries to whom they sell, such as retailers and hospitals.  We have also continued the practice of combining retail and mail prescription volume on a retail-equivalent basis. We use this methodology for internal demand forecasts. We also use information from external sources to identify prescription trends, patient demand and average selling prices. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information was itself in the form of estimates, and reflect other limitations including lags between the date as of which third-party information is generated and the date on which we receive third-party information.  

Retirement Benefits

  Pension and postretirement benefit plans are accounted for using actuarial valuations that include key assumptions for discount rates and expected long-term rates of return on plan assets. In consultation with our actuaries, these key assumptions and others such as salary growth, retirement, turnover, healthcare trends and mortality rates are evaluated and selected based on expectations or actual experience during each remeasurement date. Pension expense could vary within a range of outcomes and have a material effect on reported earnings, projected benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors.  The yield on high quality corporate bonds that coincides with the cash flows of the plans' estimated payouts is used in determining the discount rate. The Citigroup Pension Discount curve is used for the U.S. plans. The U.S. plans' pension expense for 2011 was determined using a 5.25% weighted-average discount rate. The present value of benefit obligations at December 31, 2011 for the U.S. plans was determined using a 4.25% discount rate. If the discount rate used in determining the U.S. plans' pension expense for 2011 had been reduced by 1%, such expense would have increased by approximately $16 million. If the assumed discount rate used in determining the projected benefit obligation at December 31, 2011 had been reduced by 1%, the projected benefit obligation would have increased by approximately $1.1 billion.  The expected long-term rate of return on plan assets is estimated considering expected returns for individual asset classes with input from external advisors. We also consider long-term historical returns including actual performance compared to benchmarks for similar investments. The U.S. plans' pension expense for 2011 was determined using an 8.75% expected long-term rate of return on plan assets. If the expected long-term rate of return on plan assets used in determining the U.S. plans' pension expense for 2011 had been reduced by 1%, such expense would have increased by $42 million.  

For a more detailed discussion on retirement benefits, see "Item 8. Financial Statements-Note 19. Pension, Postretirement and Postemployment Liabilities."

                                           57  

--------------------------------------------------------------------------------

Business Combinations

  Assets acquired and liabilities assumed are recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. When determining the fair value of intangible assets, including IPRD, we typically use the "income method." This method starts with a forecast of all of the expected future net cash flows which are risk adjusted based on estimated probabilities of technical and regulatory success and are then adjusted to present value by applying an appropriate discount rate that reflects the risk associated with the cash flow streams. All assets are valued from a market participant view. The following approaches are utilized for specific intangible assets acquired:   

• IPRD values where we have a pre-existing relationship with the acquiree,

we consider the terms of the respective collaboration arrangement

including cost and profit sharing splits. The project's unit of account is

typically a global view and would consider all potential jurisdictions and

         indications.    

• Technology related to specific platforms is valued based upon the expected

annual number of antibodies achieving an early candidate nomination

         status.    

• Technology for commercial products is valued utilizing the multi-period

excess-earnings method of the income approach under the premise that the

         value of the intangible asset is equal to the present value of the          after-tax cash flows solely attributed to the intangible asset.    

• Licenses are valued utilizing a discounted cash flow method based on

estimates of future risk-adjusted milestone and royalty payments projected

to be earned over the respective products estimated economic term.

Some of the more significant estimates and assumptions include:

• Estimates of projected cash flows - Cash flow projections represent those

that would be realizable by a market participant purchaser. For IPRD, we

assume initial positive cash flows to commence shortly after the receipt

of expected regulatory approvals which typically may not occur for a

number of years. Actual cash flows attributed to the project are likely to

be different than those assumed since projections are subjected to

multiple factors including trial results and regulatory matters which

could materially change the respective IPRDs' ultimate commercial success

         as well as significantly alter the costs to develop the respective IPRD          into commercially viable products.    

• Probability to Regulatory Success (PTRS) Rate - PTRS rates are based upon

industry averages considering the respective IPRD's development stage and

sought after disease indications adjusted for specific information or data

known about the IPRD at the time of the acquisition. Subsequent clinical

results or other internal or external data obtained could alter the PTRS

         rate which can materially impact the intangible value.    

• Discount rate - We select a discount rate that measures the risks inherent

         in the future cash flows; the assessment of the asset's life cycle and the          competitive trends impacting the asset, including consideration of any          technical, legal, regulatory, or economic barriers to entry, as well as

expected changes in standards of practice for indications addressed by the

          asset.          •   Useful life - Determining the useful life of an intangible asset is based

upon the period over which it is expected to contribute to future cash

flows. All pertinent matters associated with the asset and the environment

         for which it operates are considered, including, legal, regulatory or          contractual provisions as well as the effects of any obsolescence, demand,          competition, and other economic factors.   See "Item 8. Financial Statements-Note 4. Acquisitions" for specific details and values assigned to assets acquired and liabilities assumed in our acquisitions of Amira on September 7, 2011, ZymoGenetics on October 12, 2010 and Medarex on September 1, 2009. Significant estimates utilized at the time of the valuations to support the fair values of the lead compounds within the acquisitions include:                                                                                                  Phase of                                 Year of first                                                                      Discount              Development as         PTRS Rate          projected positive Dollars in Millions                             Fair value         rate utilized         of acquisition date      utilized               cash flow Amira - AM152                                  $        160                  12.5 %           Phase II                  12.5 %                      

2020</p>

 ZymoGenetics - pegylated-interferon lambda              310                  13.5 %           Phase IIb                 47.6 %                      2015 Medarex - YERVOY                                      1,046                  12.0 %           Phase III                 36.2 %                      2011   Impairment  Goodwill  Goodwill is tested at least annually for impairment using a two-step process. The first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is considered impaired if the carrying amount of a reporting unit's goodwill exceeds its estimated fair value. Geographical reporting units are aggregated for impairment testing purposes. Based upon our most recent annual impairment test completed during the first quarter of 2011, the fair value of goodwill is substantially in excess of the related carrying value.                                           58  -------------------------------------------------------------------------------- For discussion on goodwill, acquired in-process research and development and other intangible assets, see "Item 8. Financial Statements-Note 1. Accounting Policies-Goodwill, Acquired In-Process Research and Development and Other Intangible Assets."  

Indefinite-Lived Intangible Assets, including IPRD

  Indefinite-lived intangible assets not subject to amortization are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. We consider various factors including the stage of development, current legal and regulatory environment and the competitive landscape. Adverse trial results, significant delays in obtaining marketing approval, and the inability to bring the respective product to market could result in the related intangible assets to be partially or fully impaired. For commercialized products, the inability to meet sales forecasts could result in the related intangible assets to be partially or fully impaired.  Considering the industry's success rate of bringing developmental compounds to market, IPRD impairment charges may occur in future periods. We recognized charges of $28 million in 2011 and $10 million in 2010 related to three Medarex projects for which development has ceased.  

Contingencies

  In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, contractual claims and tax matters. We recognize accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. These estimates are subject to uncertainties that are difficult to predict and, as such, actual results could vary from these estimates.  

For discussions on contingencies, see "Item 8. Financial Statements-Note 1. Accounting Policies-Contingencies," "-Note 8. Income Taxes" and "-Note 22. Legal Proceedings and Contingencies."

Income Taxes

  Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable income and the evaluation of tax planning initiatives. These judgments are subject to change. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made. Our deferred tax assets were $3.2 billion, net of valuation allowances of $3.9 billion at December 31, 2011 and $3.1 billion, net of valuation allowances of $1.9 billion at December 31, 2010.  We recognized deferred tax assets at December 31, 2011 related to a U.S. Federal net operating loss carryforward of $251 million and a U.S. Federal research and development tax credit carryforward of $109 million. The net operating loss carryforward expires in varying amounts beginning in 2022. The research and development tax credit carryforwards expire in varying amounts beginning in 2018. The realization of these carryforwards is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. Although realization is not assured, we believe it is more likely than not that these deferred tax assets will be realized.  We do not provide for taxes on undistributed earnings of foreign subsidiaries that are expected to be reinvested indefinitely offshore. During 2010, the Company completed an internal reorganization of certain legal entities which contributed to a $207 million tax charge recognized in the fourth quarter of 2010. It is possible that U.S. tax authorities could assert additional material tax liabilities arising from the reorganization. If such assertion were to occur, the Company would vigorously challenge any such assertion and believes it would prevail; however there can be no assurance of such a result.  Prior to the Mead Johnson split-off the following transactions occurred: (i) an internal spin-off of Mead Johnson shares while still owned by us; (ii) conversion of Mead Johnson Class B shares to Class A shares; and; (iii) conversion of Mead Johnson & Company to a limited liability company. These transactions as well as the split-off of Mead Johnson through the exchange offer should qualify as tax-exempt transactions under the Internal Revenue Code based upon a private letter ruling received from the Internal Revenue Service related to the conversion of Mead Johnson Class B shares to Class A shares, and outside legal opinions. We have relied upon certain assumptions, representations and covenants by Mead Johnson regarding the future conduct of its business and other matters which could effect the tax treatment of the exchange. For example, the current tax law generally creates a presumption that the exchange would be taxable to us, if Mead Johnson or its shareholders were to engage in transactions that result in a 50% or greater change in its stock ownership during a four year period beginning two years before the exchange offer, unless it is established that the exchange offer were not part of a plan or series of related transactions to effect such a change in ownership. If the internal spin-off or exchange offer were determined not to qualify as a tax exempt transaction, we could be subject to tax as if the exchange was a taxable sale by us at market value.                                           59 

-------------------------------------------------------------------------------- In addition, we had a negative basis or excess loss account (ELA) in our investment in stock of Mead Johnson prior to these transactions. We received an opinion from outside legal counsel to the effect that it is more likely than not that we eliminated the ELA as part of these transactions and do not have taxable income with respect to the ELA. The tax law in this area is complex and it is possible that even if the internal spin-off and the exchange offer is tax exempt under the Internal Revenue Code, the IRS could assert that we have additional taxable income for the period with respect to the ELA. We could be exposed to additional taxes if this were to occur. Based upon our understanding of the Internal Revenue Code and opinion from outside legal counsel, a tax reserve of $244 million was established reducing the gain on disposal of Mead Johnson included in discontinued operations.  We agreed to certain tax related indemnities with Mead Johnson as set forth in the tax sharing agreement. For example, Mead Johnson has agreed to indemnify us for potential tax effects resulting from the breach of certain representations discussed above as well as certain transactions related to the acquisition of Mead Johnson's stock or assets. We have agreed to indemnify Mead Johnson for certain taxes related to its business prior to the completion of the IPO and created as part of the restructuring to facilitate the IPO.  We established liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, transfer pricing matters, tax credits and deductibility of certain expenses. Such liabilities represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes known.  

For discussions on income taxes, see "Item 8. Financial Statements-Note 1. Accounting Policies-Income Taxes" and "-Note 8. Income Taxes."

Special Note Regarding Forward-Looking Statements

  This annual report on Form 10-K (including documents incorporated by reference) and other written and oral statements we make from time to time contain certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as "should", "expect", "anticipate", "estimate", "target", "may", "project", "guidance", "intend", "plan", "believe" and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, our goals, plans and projections regarding our financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly under "Item 1A. Risk Factors," that we believe could cause actual results to differ materially from any forward-looking statement.  Although we believe we have been prudent in our plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.                                           60

--------------------------------------------------------------------------------

Wordcount:

18922