ALLIANCES

BMS enters into collaboration arrangements with third parties for the development and commercialization of certain products. Although each of these arrangements is unique in nature, both parties are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. BMS may either in-license intellectual property owned by the other party or out-license its intellectual property to the other party. These arrangements also typically include research, development, manufacturing, and/or commercial activities and can cover a single investigational compound or commercial product or multiple compounds and/or products in various life cycle stages. We refer to these collaborations as alliances and our partners as alliance partners. Several key products such as Abilify*, Sprycel, Sustiva (Atripla*), Erbitux* and Eliquis, as well as products comprising the diabetes alliance discussed below and certain mature and other brands are included in alliance arrangements.

Selected financial information pertaining to our alliances was as follows, including net product sales when BMS is the principal in the third-party customer sale for products subject to the alliance. Expenses summarized below do not include all amounts attributed to the activities for the products in the alliance, but only the payments between the alliance partners or the related amortization if the payments were deferred or capitalized.



	Three Months Ended September 30,						Nine Months Ended September 30,
Dollars in Millions	2014			2013			2014			2013
Revenues from alliances:
Net product sales	$	816		$	1,100		$	2,493		$	3,177
Alliance and other revenues	958			969			2,909			2,736
Total Revenues	$	1,774		$	2,069		$	5,402		$	5,913

Payments to/(from) alliance partners:
Cost of products sold	$	338		$	337		$	1,016		$	964
Marketing, selling and administrative	31			(28		)	34			(97		)
Advertising and product promotion	6			(34		)	73			(56		)
Research and development	(20		)	(38		)	(55		)	(93		)
Other (income)/expense	(411		)	(66		)	(964		)	(238		)

Noncontrolling interest, pre-tax	7			(4		)	18			19



Selected Alliance Balance Sheet information:
Dollars in Millions	September 30, 2014		December 31, 2013
Receivables - from alliance partners	$	1,061	$	1,122
Accounts payable - to alliance partners	1,766		1,396
Deferred income from alliances^(a)	1,515		5,089


(a)	Included deferred income classified as liabilities related to assets held-for-sale of $3,671 million at December 31, 2013.

Specific information pertaining to each of our significant alliances is discussed in our 2013 Form 10-K, including their nature and purpose, the significant rights and obligations of the parties, and specific accounting policy elections. Significant developments and updates related to alliances during the nine months ended September 30, 2014 are set forth below.

AstraZeneca

In February 2014, BMS and AstraZeneca terminated their alliance agreements and BMS sold to AstraZeneca substantially all of the diabetes business comprising the alliance. Previously, BMS had an alliance with AstraZeneca consisting of three worldwide codevelopment and commercialization agreements covering (1) Onglyza* and related combination products sold under various names, (2) Farxiga* and related combination products and, (3) beginning in August 2012 after BMS's acquisition of Amylin Pharmaceuticals, Inc. (Amylin), Amylin's portfolio of products including Bydureon*, Byetta*, Symlin* and Myalept*, as well as certain assets owned by Amylin, including a manufacturing facility located in West Chester, Ohio.

The divestiture included the shares of Amylin and the resulting transfer of its Ohio manufacturing facility; the intellectual property related to Onglyza* and Farxiga* (including BMS's interest in the out-licensing agreement for Onglyza* in Japan); and the future purchase of BMS’s manufacturing facility located in Mount Vernon, Indiana in 2015. Substantially all employees dedicated to the diabetes business were transferred to AstraZeneca. The sale of the business has been completed in all jurisdictions. For accounting purposes AstraZeneca is the principal for the end-customer product sales in all markets.

In connection with the sale, BMS and AstraZeneca entered into several agreements, including a transitional services agreement, a supply agreement and a development agreement. Under those agreements, BMS is obligated to provide transitional services such as accounting, financial services, customer service, distribution, regulatory, development, information technology and certain other administrative services for various periods in order to facilitate the orderly transfer of the business operations; to supply certain products, including the active product ingredients for Onglyza* and Farxiga* through 2020; and to perform ongoing development activities for certain clinical trial programs through 2016, among other things. The annual costs attributed to the development agreement are not expected to exceed approximately $227 million in 2014, $127 million in 2015 and $84 million in 2016.

Consideration for the transaction includes a $2.7 billion payment at closing; contingent regulatory and sales-based milestone payments of up to $1.4 billion (including $800 million related to approval milestones and $600 million related to sales-based milestones, payable in 2020); royalty payments based on net sales through 2025 and payments up to $225 million if and when certain assets are transferred to AstraZeneca. AstraZeneca will also pay BMS for any required product supply at a price approximating the product cost as well as negotiated transitional service fees.

Royalty rates on net sales are as follows:



	2014		2015		2016		2017 - 2025
Onglyza* and Farxiga* Worldwide Net Sales up to $500 million	44	%	35	%	27	%	12-25%
Onglyza* and Farxiga* Worldwide Net Sales over $500 million	3	%	7	%	9	%	12-25%
Amylin products U.S. Net Sales	—		2	%	2	%	5-12%

The stock and asset purchase agreement contains multiple elements to be delivered subsequent to the closing of the transaction, including the China diabetes business (transferred during the third quarter of 2014), the Mount Vernon manufacturing facility, and the activities under the development and supply agreements. Each of these elements was determined to have a standalone value. As a result, a portion of the consideration received at closing was allocated to the undelivered elements using the relative selling price method after determining the best estimated selling price for each element. The remaining amount of consideration was included in the calculation for the gain on sale of the diabetes business. Contingent milestone and royalty payments are similarly allocated among the underlying elements if and when the amounts are determined to be payable to BMS. Amounts allocated to the sale of the business are immediately recognized in the results of operations. Amounts allocated to the other elements are recognized in the results of operations only to the extent each element has been delivered.

Consideration of $3.8 billion was accounted for in 2014, substantially all in the first quarter (including royalties and $700 million of contingent regulatory milestone payments related to the approval of Farxiga* in both the U.S. and Japan). Approximately $3.3 billion of the consideration was allocated to the sale of the business and the remaining $491 million was allocated to the undelivered elements described above. The gain on sale of the diabetes business was $539 million, including $292 million during the third quarter of 2014 resulting primarily from the transfer of the China diabetes business to AstraZeneca. The gain was based on the difference between the consideration allocated to the sale of the business (net of transaction fees) and the carrying value of the diabetes business net assets (including a $600 million allocation of goodwill and the reversal of $821 million of net deferred tax liabilities attributed to Amylin). The consideration includes $226 million of earned royalties, of which $184 million was allocated to the sale of the business and included in other income and $42 million was allocated to the undelivered elements.

Consideration allocated to the Mount Vernon manufacturing facility will continue to be deferred until transferred to AstraZeneca. Consideration allocated to the development and supply agreements will continue to be amortized over the applicable service periods. Amortization of deferred income attributed to the development agreement was included in other income as the sale of these services are not considered part of BMS’s ongoing major or central operations. Revenues attributed to the supply agreement were included in alliance and other revenues.

Consideration for the transaction is presented for cash flow purposes based on the allocation process described above, either as an investing activity if attributed to the sale of the business or related assets or as an operating activity if attributed to the transitional services, supply arrangement or development agreement.

Summarized financial information related to the AstraZeneca alliances was as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
Dollars in Millions	2014			2013			2014			2013
Revenues from AstraZeneca alliances:
Net product sales	$	2		$	429		$	163		$	1,216
Alliance and other revenues	40			3			85			12
Total Revenues	$	42		$	432		$	248		$	1,228

Payments to/(from) AstraZeneca:
Cost of products sold:
Profit sharing	$	1		$	169		$	78		$	493
Amortization of deferred income	—			(78		)	—			(227		)

Cost reimbursements to/(from) AstraZeneca recognized in:
Cost products sold	—			(10		)	(9		)	(19		)
Marketing, selling and administrative	—			(30		)	(7		)	(101		)
Advertising and product promotion	—			(10		)	(4		)	(28		)
Research and development	(1		)	(21		)	(10		)	(64		)

Other (income)/expense:
Amortization of deferred income	(23		)	(8		)	(57		)	(23		)
Provision for restructuring	—			4			(2		)	(21		)
Royalties	(46		)	—			(184		)	—
Transitional services	(18		)	—			(83		)	—
Gain on sale of business	(292		)	—			(539		)	—

Selected Alliance Cash Flow information:
Deferred income	19			—			308			80
Proceeds from sale of business	94			—			3,248			—
Other investing activities	114			—			167			—



Selected Alliance Balance Sheet information:
Dollars in Millions	September 30, 2014		December 31, 2013
Deferred income attributed to:
Non-refundable upfront, milestone and other licensing receipts^(a)	$	—	$	3,671
Assets not yet transferred to AstraZeneca	176		—
Services not yet performed for AstraZeneca	250		—


(a)	Included in liabilities related to assets held-for-sale at December 31, 2013.

Otsuka

BMS's commercialization rights to Abilify* in European Union (EU) countries expired in June 2014.

As described in the 2013 Form 10-K, BMS recognizes revenue for Abilify* in the U.S. based on the expected annual contractual share using a forecast of net sales for the year. The percentage is estimated each quarter and determined to be 33% and 34% for the nine months ended September 30, 2014 and 2013, respectively.

Gilead

As described in the 2013 Form 10-K, effective January 1, 2014, following the European loss of exclusivity for Sustiva, the percentage of Atripla* net sales in Europe recognized by BMS is equal to the difference between the average net selling prices of Atripla* and Truvada* (emtricitabine and tenofovir disoproxil fumarate). This alliance will continue in Europe until either party terminates the arrangement or the last patent expiration occurs for Atripla*, Truvada* or Sustiva.

Pfizer

As described in the 2013 Form 10-K, BMS has an alliance with Pfizer relating to Eliquis. In 2014, BMS received $60 million of milestone payments from Pfizer related to the acceptance of the filing in the U.S. for the treatment of venous thromboembolism indication and the launch for the prevention of deep vein thrombosis in patients who have undergone hip or knee replacement surgery in the U.S.

The Medicines Company

As described in the 2013 Form 10-K, BMS has an alliance with The Medicines Company for Recothrom on a global basis. In August 2014, The Medicines Company notified BMS that it will exercise its option to acquire the trademarks, intellectual property and inventory exclusively related to the product at a price (expected to be approximately $120 million) determined based on a multiple of sales plus the cost of inventory. The closing is expected to occur in February 2015.

Valeant

As described in the 2013 Form 10-K, BMS has an alliance with Valeant for certain mature brands in Europe. In March 2014, Valeant notified BMS that it will exercise its option to acquire the trademarks and intellectual property exclusively related to the products at a price (expected to be approximately $60 million) determined based on a multiple of sales. The closing is expected to occur in January 2015. A $16 million charge was included in other expense to increase the fair value of the option to $34 million in the first quarter of 2014.

Reckitt Benckiser Group plc

As described in the 2013 Form 10-K, BMS has an alliance with Reckitt Benckiser Group plc (Reckitt) covering certain BMS over-the-counter products sold primarily in Mexico and Brazil. Reckitt also has an option to acquire all remaining rights in such products for those markets and related inventories at the end of the alliance period (May 2016). In April 2014, the alliance was modified to provide an option to Reckitt to purchase the BMS manufacturing facility located in Mexico primarily dedicated to the products included in the alliance. The options can only be exercised together. Substantially all employees at the facility are expected to be transferred to Reckitt if the option is exercised. A $15 million charge was included in other expense to increase the fair value of the option to $129 million in the second quarter of 2014.