General

Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS or the Company) was incorporated under the laws of the State of Delaware in August 1933 under the name Bristol-Myers Company, as successor to a New York business started in 1887. In 1989, Bristol-Myers Company changed its name to Bristol-Myers Squibb Company as a result of a merger. The Company, through its divisions and subsidiaries, is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceuticals and other healthcare related products.

Acquisitions and Divestitures

On October 1, 2001, the Company acquired the DuPont Pharmaceuticals business (DuPont Pharmaceuticals) from E.I. du Pont de Nemours and Company for $7.8 billion in cash. DuPont Pharmaceuticals was primarily a domestic pharmaceutical and imaging product business focused on research and development. In addition, in November 2001, the Company purchased 14.4 million shares of ImClone Systems Incorporated (ImClone) for $70 per share, or $1,007 million, which represented 19.9% of the shares outstanding just prior to the Company’s commencement of a public tender offer for ImClone shares. The equity investment in ImClone is part of a strategic agreement between the Company and ImClone that also includes an arrangement to codevelop and copromote the cancer drug, ERBITUX*. These transactions were financed with proceeds from the issuance of $1.5 billion of commercial paper, the issuance of $5.0 billion of medium-term notes and internal cash flows.

In 2000, as part of the Company’s strategy to focus on its pharmaceutical and other healthcare businesses, the Company decided to divest its Clairol and Zimmer businesses. Accordingly, the operations of these businesses have been reflected as discontinued operations in the accompanying consolidated financial statements. On November 15, 2001, the Company completed the sale of Clairol for $4.95 billion, and on August 6, 2001, the Company spun off Zimmer Holdings, Inc. in a tax-free distribution.

Bristol-Myers Squibb Website

The Company’s internet website address is www.bms.com . The Company makes available free of charge on its website its annual, quarterly and current reports, including amendments to such reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

Information relating to corporate governance at Bristol-Myers Squibb, including the Company’s Corporate Governance Guidelines, Standards of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers and information concerning the Company’s Executive Committee, Board of Directors, Board Committees, including Committee charters, and transactions in Bristol-Myers Squibb securities by Directors and officers, is available on the Company’s website at www.bms.com under the “Investors—Corporate Governance” caption. Any waivers to or material amendments to the Code of Ethics will be posted promptly on the Company’s website. Information relating to stockholder services, including the Company’s Dividend Reinvestment Plan and direct deposit of dividends, is available on the Company’s website at www.bms.com under the “Investors—Stockholder Services” caption.

The Company incorporates by reference certain information from parts of its proxy statement for the 2004 Annual Meeting of Stockholders. The SEC allows the Company to disclose important information by referring to it in that manner. Please refer to such information. The Company’s proxy statement for the 2004 Annual Meeting of Stockholders and 2003 Annual Report are available on the Company’s website (www.bms.com) under the “Investors—SEC Filings” caption.

Business Segments

The Company has four reportable segments—Pharmaceuticals, Oncology Therapeutics Network (OTN), Nutritionals and Other Healthcare. The Pharmaceuticals segment is made up of the global pharmaceutical and international (excluding Japan) consumer medicines business. The OTN segment provides oncology products, supportive care products and related supplies to office-based oncologists in the United States. The Nutritionals segment consists of Mead Johnson Nutritionals (Mead Johnson), primarily an infant formula business. The Other Healthcare segment consists of ConvaTec, Medical Imaging and Consumer Medicines (North America and Japan) businesses. For additional information about these segments, see “Item 8. Financial Statements—Note 19. Segment Information.”

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Pharmaceuticals Segment

The Pharmaceuticals segment discovers, develops, licenses, manufactures, markets, distributes and sells branded pharmaceuticals. These products are sold worldwide, primarily to wholesalers, retail pharmacies, hospitals, government entities and the medical profession. The Company manufactures these products in the United States and Puerto Rico and in fifteen foreign countries. Pharmaceuticals sales accounted for approximately 71% of the Company’s sales in 2003 and in 2002 and 75% of the Company’s sales in 2001. Domestic Pharmaceuticals sales accounted for 56% of total Pharmaceuticals sales in 2003, 57% of total Pharmaceuticals sales in 2002 and 62% of total Pharmaceuticals sales in 2001, while Pharmaceuticals sales in Europe accounted for 30% of total Pharmaceuticals sales in 2003, 28% of total Pharmaceuticals sales in 2002 and 23% of total Pharmaceuticals sales in 2001, and Pharmaceuticals sales in Japan accounted for 3% of total Pharmaceuticals sales in each of the years 2003, 2002 and 2001.

The Company’s strategy is to build its pipeline and support sustainable growth by focusing its discovery and development efforts in ten disease areas, increasing its sales and marketing emphasis on specialists and high value primary care prescribers, investing in research and development and establishing a biologics business. In addition to discovering and developing products through its own research and development efforts, the Company actively pursues products through research collaborations and strategic alliances with others in the pharmaceutical industry. For additional information, see “—Strategic Alliances” and “—Research and Development” below.

The Pharmaceuticals segment competes with other worldwide research-based drug companies, smaller research companies and generic drug manufacturers. The Company expects to lose certain revenues over the next several years as a result of the expiration of market exclusivity protection for certain of its products. It also believes that this revenue loss will be more or less offset by growth in its in-line products, including recently launched products, and (subject to regulatory approval) the introduction of late-stage pipeline products. However, revenues could be negatively impacted by competitive factors including those relating to PRAVACHOL and the outcome of the PLAVIX* litigation. For more information about these and other matters, see “—Products,” “—Competition” and “—Research and Development” below, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook for 2004,” and “Item 8. Financial Statements—Note 22. Legal Proceedings and Contingencies.”

Products

Most of the Company’s pharmaceutical revenues come from products in the following therapeutic classes: cardiovascular and metabolic, oncology, infectious diseases, including human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS), and affective (psychiatric) disorders.

In the pharmaceutical industry, the majority of an innovative product’s commercial value is usually realized during the period in which the product has market exclusivity. Market exclusivity is based upon patent rights and/or certain regulatory forms of exclusivity. When these patent rights and other forms of exclusivity expire and generic versions of a medicine are approved and marketed, there are often very substantial and rapid declines in the sales of the original innovative product. The Company’s business is focused on innovative pharmaceutical products, and the Company relies on patent rights and other forms of protection to maintain the market exclusivity of its products. For further discussion of patents rights and regulatory forms of exclusivity, see “—Intellectual Property and Product Exclusivity” below. For further discussion of the impact of generic competition on the Company’s business, see “—Generic Competition” below.

The chart below shows the net sales of key products in the Pharmaceuticals segment, together with the year in which the basic exclusivity loss (patent rights or data exclusivity) occurred or is expected to occur in the United States, the European Union (EU) and Japan. The Company also sells its pharmaceutical products in other countries; however, data is not provided on a country-by-country basis because individual country sales are not significant outside the United States, the EU and Japan. In most instances, the basic exclusivity loss date listed below is the expiration date of the patent that claims the active ingredient of the drug or the method of using the drug for the approved indication. In some instances, the basic exclusivity loss date listed in the chart is the expiration date of the data exclusivity period. In situations where there is only data exclusivity without patent protection, a competitor could seek regulatory approval by submitting its own clinical trial data to obtain marketing approval.

The Company assesses the market exclusivity period for each of its products on a case-by-case basis. The length of market exclusivity for any of the Company’s products is difficult to predict with certainty because of the complex interaction between patent and regulatory forms of exclusivity and other factors. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that the Company currently anticipates.

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Note: The currently expected year of basic exclusivity loss includes any statutory extensions of exclusivity that have been earned, but not those that are speculative. In some instances, there may be later-expiring patents that cover particular forms or compositions of the drug, as well as methods of manufacture or methods of using the drug. Such patents may sometimes result in a favorable market position for the Company’s product, but product exclusivity beyond the date specified cannot be predicted or assured.

++ The Company does not currently market the product in the jurisdiction indicated.

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Below is a summary of the indication, intellectual property position, licensing arrangements, if any, and third-party manufacturing arrangements, if any, for each of the above products in the United States and where applicable, the EU and Japan.

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ERBITUX* (cetuximab), a biologics product, is an IgG1 monoclonal antibody designed to exclusively target and block the Epidermal Growth Factor Receptor (EGFR), which is expressed on the surface of certain cancer cells in multiple tumor types as well as some normal cells. ERBITUX* is designed to bind to and internalize EGFR and prevent natural ligands called growth factors from binding to the receptor and activating signaling to the tumor. ERBITUX* was approved by the FDA on February 12, 2004 for the treatment in combination with irinotecan of patients with EGFR-expressing metastatic colorectal cancer who had failed an irinotecan-based regimen and as monotherapy for patients who are intolerant of irinotecan. ERIBTUX* is also being studied in earlier stages of colorectal cancer, as well as in other types of cancer that frequently express the EGF receptor, including lung, pancreatic, ovarian and head and neck cancers. ERBITUX* is marketed in North America by Bristol-Myers Squibb under a distribution and copromotion agreement with ImClone. In accordance with the agreement, the Company paid ImClone $250 million in March 2004 as a milestone payment for the approval of ERBITUX* by the FDA. The Company and ImClone will share distribution rights to ERBITUX* with Merck KGaA in Japan. For a description of the Company’s alliance with ImClone, see “—Strategic Alliances” below and “Item 8. Financial Statements—Note 3. Alliances and Investments.” For a description of the Company’s supply agreement with ImClone, see “—Manufacturing and Quality Assurance” below.

There is no composition of matter patent that specifically claims ERBITUX*. ERBITUX* has been approved for monotherapy, for which there is no use patent. The use of ERBITUX* in combination with an anti-neoplastic agent is also approved by the FDA. Such combination use is claimed in a granted U.S. patent that expires in 2017. For more information about biologics patents, see “—Intellectual Property and Product Exclusivity” below. The inventorship of this use patent is being challenged by three scientists from the Weizmann Institute who claim they should have been named as co-inventors. For more information about this litigation, see “Item 8. Financial Statements—Note 22. Legal Proceedings and Contingencies.” The European equivalent of this use patent has been opposed.

In addition to the pharmaceutical products discussed above, the Company’s Pharmaceuticals segment also includes the Company’s wholly owned UPSA business in Europe. The UPSA brand of acetaminophen, EFFERALGAN, is marketed for pain relief across the continent. The Company also markets ASPIRINE UPSA, DAFALGAN and FERVEX in Europe and other overseas markets.

Strategic Alliances

The Company enters into strategic alliances with third parties, which give the Company rights to develop, manufacture, market and/or sell pharmaceutical products, the rights to which are owned by such third parties. These alliances can take many forms, including licensing arrangements, codevelopment and comarketing agreements, copromotion arrangements and joint ventures. Such alliances reduce the risk of research and development expenses that do not lead to revenue-generating products; however, the gross margins on alliance products are generally lower, sometimes substantially so, than the gross margins on the Company’s own products because profits from alliance products are shared with the Company’s alliance partners. While there can be no assurance that new alliances will be formed, the Company actively pursues such arrangements, and views alliances as an important complement to its own discovery and development activities. The Company’s most significant current alliances are those with Sanofi for PLAVIX* and AVAPRO*, Otsuka for ABILIFY*, ImClone for ERBITUX* and Sankyo for PRAVACHOL. Additionally, the Company has licensing arrangements with RCT for PARAPLATIN, with Yale for ZERIT, with the U.S. Government for VIDEX, with Novartis for REYATAZ and with Kyorin for TEQUIN.

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Sanofi In 1993, the Company entered into a codevelopment and commercialization agreement, which was subsequently restructured in 1997, with Sanofi for two products: AVAPRO*/AVALIDE* (irbesartan), an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy, which is copromoted in certain countries in the EU under the trade name APROVEL* and comarketed in certain countries in the EU by the Company under the tradename KARVEA, and PLAVIX* (clopidogrel), a platelet aggregation inhibitor, which is copromoted in certain countries in the EU under the tradename PLAVIX* and comarketed in certain countries in the EU by the Company under the tradename ISCOVER. The worldwide alliance operates under the framework of two geographic territories: one in the Americas and Australia and the other in Europe and Asia. Two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished product to the individual countries. At the country level, agreements either to copromote or to comarket are in place. In the fourth quarter of 2001, the Company and Sanofi modified their commercialization arrangement for irbesartan in the United States to form a copromotion joint venture, as part of which, the Company contributed the irbesartan intellectual property and Sanofi agreed to pay the Company a total of $200 million in 2001 and $150 million in 2002.

The Company acts as the operating partner for the territory covering the Americas (principally the United States, Canada, Puerto Rico and Latin American countries) and Australia and owns the majority controlling interest in this territory. As such, the Company consolidates all country partnership results for this territory and records Sanofi’s share of the results as a minority interest expense, net of taxes, which was $351 million in 2003, $292 million in 2002 and $174 million in 2001. The Company recorded sales in this territory and in comarketing countries (Germany, Italy, Spain and Greece) of $3,224 million in 2003, $2,476 million in 2002 and $1,658 million in 2001.

Sanofi acts as the operating partner of the territory covering Europe and Asia and owns the majority controlling interest in this territory. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s share of net income from these partnership entities before taxes was $187 million in 2003, $120 million in 2002 and $78 million in 2001. For further discussion of this matter, see “Item 8. Financial Statements—Note 3. Alliances and Investments.”

Otsuka In 1999, the Company entered into a worldwide commercialization agreement with Otsuka, to codevelop and commercialize ABILIFY* (aripiprazole) for the treatment of schizophrenia. Total milestone payments made to Otsuka from 1999 through December 2002 were $207 million, which were expensed. The Company began copromoting the product with Otsuka in the United States and Puerto Rico in November 2002. The Company also has the right to copromote the product in several European countries if marketing approval is received from the European authorities. The Company records alliance revenue for its 65% share of the net sales in these copromotion countries and records all expenses related to the product. The Company also has an exclusive right to sell ABILIFY* in a number of countries in Europe, Latin America and Asia. In these countries, as sales commence, the Company will record 100% of the net sales and related cost of sales. The Company recorded revenue for ABILIFY* of $283 million in 2003 and $25 million in 2002. For further discussion of this matter, see “Item 8. Financial Statements—Note 3. Alliances and Investments.”

ImClone In November 2001, the Company purchased 14.4 million shares of ImClone for $70 per share, or $1,007 million, which represented approximately 19.9% of the ImClone shares outstanding just prior to the Company’s commencement of a public tender offer for those ImClone shares. ImClone is a biopharmaceutical company focused on developing targeted cancer treatments, which include growth factor blockers, cancer vaccines, and anti-angiogenesis therapeutics. The equity investment in ImClone is part of a strategic agreement between the Company and ImClone that also included an arrangement to codevelop and copromote the cancer drug, ERBITUX*, for a series of payments originally totaling $1 billion. The Company paid ImClone a milestone payment of $200 million in 2001. On March 5, 2002, the agreement with ImClone was revised to reduce the total payments to $900 million from $1 billion. Under the revised agreement, the Company paid ImClone $140 million in March 2002 and $60 million in March 2003. In accordance with the agreement, the Company paid ImClone in March 2004, $250 million as a milestone payment for the approval of ERBITUX* by the FDA. These payments have been capitalized and are being amortized to cost of products sold over the remaining term of the agreement. Under the agreement, ImClone will receive a distribution fee based on a flat rate of 39% of product revenues in North America. The Company will purchase all of its commercial requirements for bulk ERBITUX* from ImClone at a price equal to manufacturing cost plus 10%. For further discussion of this matter, see “Item 8. Financial Statements—Note 3. Alliances and Investments.”

In 2003, the Company entered into the following significant alliances for products in clinical development:

Corgentech On October 13, 2003, the Company and Corgentech Inc., a biotechnology company, entered into an agreement to jointly develop and commercialize Corgentech’s E2F Decoy (edifoligide), a novel treatment for the prevention of vein graft failure following coronary artery bypass graft and peripheral artery bypass graft surgery. The product is currently in Phase III clinical trials and the FDA has granted fast track status for both indications. The Company made and expensed an initial payment of

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$45 million in October 2003, with the potential for an additional $205 million in clinical and regulatory milestone payments over time, and arrangements for profit sharing.

Flamel Technologies S.A. On August 27, 2003, the Company entered into an exclusive license agreement with Flamel Technologies S.A. to develop and market BASULIN, the first controlled release, unmodified human insulin to be developed as a once-daily injection for patients with type 1 or type 2 diabetes. BASULIN has entered Phase II clinical development. Under the agreement, the Company will lead and assume the cost of future development and manufacturing efforts for BASULIN and will have exclusive worldwide rights to the product. The Company paid and expensed $20 million in October 2003, with the potential for an additional $145 million in clinical and regulatory milestone payments over time, and royalty payments on product sales.

For information on alliances relating to drug discovery, see “— Research and Development” below.

Oncology Therapeutics Network Segment

OTN is a leading specialty distributor of oncology drugs, supportive care products and related supplies to office-based oncologists in the United States. The wholesale market for cancer pharmaceuticals in the United States has seen a shift from the administration of chemotherapy almost exclusively in the hospital setting to increased administration of chemotherapy in physicians’ offices outside the hospital. Hospital-based oncologists are typically served by drug wholesalers, who provide daily deliveries of large quantities of pharmaceutical products, including oncology drugs and related supplies, to hospital pharmacies. Hospital-based oncologists rely on hospital pharmacies to order, receive and inventory drugs as well as to maintain clinical drug information. Office-based oncologists, lacking a hospital pharmacy and related services and support, generally face significant administrative burdens when ordering, stocking and paying for oncology drugs and related supplies. OTN’s objective is to address the cost containment needs and reduce the administrative burdens of office-based oncologists by attempting to serve as a convenient, cost-effective, single source of supply of oncology drugs and related supplies, to reduce inventory and other associated carrying costs, to increase the productivity of the oncology office, and to provide reliable, customer-oriented service. OTN contracts with individual healthcare providers as well as certain professional organizations, which negotiate discounts and terms on behalf of member healthcare providers.

OTN provides a full range of oncology products and supplies from a variety of manufacturers, eliminating the need for its customers to interact with multiple suppliers. OTN’s product catalog has over 2,700 line items from over 190 manufacturers. However, as is characteristic of the U.S. market for oncology pharmaceuticals, a small number of products account for a majority of OTN’s sales. OTN sales accounted for 11% of the Company’s net sales in 2003, 10% of the Company’s net sales in 2002 and 8% of the Company’s net sales in 2001. The dollar volume of products shipped by OTN in 2003 was $2,241 million compared to $1,900 million in 2002 and $1,433 million in 2001. Sales could be negatively affected by new Medicare legislation that could impact oncologists and their treatment patterns as reimbursement levels have been reduced. For further discussion of the new Medicare legislation, see “—Government Regulation and Price Constraints” below.

Nutritionals Segment

The Nutritionals segment, through Mead Johnson, manufactures, markets, distributes and sells infant formulas and other nutritional products, including the entire line of ENFAMIL products. In 2002, the Company commenced sales of ENFAMIL LIPIL, the first infant formula in the United States to contain the nutrients DHA (docosahexaenoic acid) and ARA (arachidonic acid). The Company obtains these nutrients from a sole provider under a licensing and supply arrangement. Also naturally found in breast milk, DHA and ARA are believed to support infant brain and eye development.

The Company’s Nutritionals products are generally sold by wholesalers and retailers and are promoted primarily to healthcare professionals. The Company also promotes Nutritionals products directly to consumers worldwide through advertising. The Company manufactures these products in the United States and in seven foreign countries. Nutritionals sales accounted for 10% of the Company’s sales in 2003, 2002 and 2001. Domestic Nutritionals sales accounted for 54% of total Nutritionals sales in 2003, 53% of total Nutritionals sales in 2002 and 57% of total Nutritionals sales in 2001, while international Nutritionals sales accounted for 46% of total Nutritionals sales in 2003, 47% of total Nutritionals sales in 2002 and 43% of total Nutritionals sales in 2001. Approximately one-half of U.S. sales of infant formula are subject to rebates issued under the Women, Infants and Children (WIC) program. Sales subject to WIC rebates have much lower margins than those of non-WIC sales.

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Net sales of selected products and product categories in the Nutritionals segment were as follows:

On December 13, 2003, as part of its strategy to focus on infant and children’s nutrition, Mead Johnson agreed to sell its Adult Nutritional business to Novartis Nutrition Corporation, a business unit of Novartis AG. Mead Johnson Adult Nutritional brands involved in the sale include BOOST, a complete oral nutritional beverage, ISOCAL, an isotonic tube-feeding formula, and ULTRACAL, a general tube-feeding formula. In 2003, Adult Nutritional products recorded sales of over $200 million. Under the terms of the agreement, Mead Johnson sold to Novartis the finished goods inventory, brands, trademarks, patents and intellectual property rights of the Mead Johnson global adult medical nutrition business for $385 million including $20 million contingent on a product conversion and a $22 million upfront payment for a supply agreement. Mead Johnson will continue to manufacture and supply the majority of the sold products. The transaction closed in February 2004 and a pre-tax gain of approximately $290 million is expected to be recorded in the first quarter of 2004.

Other Healthcare Segment

The Other Healthcare segment consists of ConvaTec, Medical Imaging and Consumer Medicines (North America and Japan). Other Healthcare sales accounted for 8% of the Company’s sales in 2003, 9% of the Company’s sales in 2002 and 7% of the Company’s sales in 2001. Domestic Other Healthcare sales accounted for 55% of total Other Healthcare sales in 2003, 57% of total Other Healthcare sales in 2002 and 51% of total Other Healthcare sales in 2001, while international Other Healthcare sales accounted for 45% of total Other Healthcare sales in 2003, 43% of total Other Healthcare sales in 2002 and 49% of total Other Healthcare sales in 2001.

ConvaTec

ConvaTec manufactures, distributes and sells ostomy and modern wound and skin care products. Principal brands of ConvaTec include NATURA, SUR-FIT, ESTEEM, AQUACEL and DUODERM. These products are marketed worldwide, primarily to hospitals, the medical profession and medical suppliers. The Company mainly relies on an internal sales force, and sales are made through various distributors around the world. The Company manufactures these products in the United States and the United Kingdom.

ConvaTec sales accounted for approximately 4% of the Company’s sales in each of 2003, 2002 and 2001. Domestic ConvaTec sales accounted for 33% of total ConvaTec sales in 2003 and 34% of total ConvaTec sales in 2002 and in 2001, while international ConvaTec sales accounted for 67% of total ConvaTec sales in 2003 and 66% of total ConvaTec sales in 2002 and in 2001.

The Company announced in January 2004 that it has agreed to acquire Acordis Speciality Fibres (Acordis), a privately held company based in the United Kingdom that licenses patent rights and supplies materials to ConvaTec for its Wound Therapeutics line. The transaction is subject to regulatory approval which has not been received. If the transaction is completed, the Company expects to record an in-process research and development charge between $50 to $70 million.

Medical Imaging

Medical Imaging manufactures, distributes and sells cardiovascular imaging products including radiopharmaceuticals and ultra-sound agents. Principal brands of Medical Imaging include CARDIOLITE and DEFINITY. These products are marketed through an internal sales force and sold worldwide, primarily to radiopharmacies, hospitals, clinics and the medical profession, using a small and concentrated network of radiopharmacies for distribution. In connection with the Company’s international business, Medical Imaging owns certain radiopharmacies outside the United States. CARDIOLITE is covered by a series of patents that claim its components. The patent coverage differs somewhat on a country-by-country basis. In the United States, these patents expire between December 2004 and 2008, and the Company’s currently expected year of basic exclusivity loss is 2008. In the EU, these patents expire between December 2006 through 2008. In Japan, these patents expire between August 2006 and 2008. The Company manufactures these products in the United States and Puerto Rico.

Medical Imaging was purchased as part of the DuPont Pharmaceuticals acquisition, which closed on October 1, 2001. Medical Imaging sales accounted for 2% of the Company’s sales in 2003, 3% of the Company’s sales in 2002 and 1% of the Company’s sales in 2001.

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Domestic Medical Imaging sales accounted for 85% of total Medical Imaging sales in 2003, 84% of total Medical Imaging sales in 2002 and 86% of total Medical Imaging sales in 2001, while international Medical Imaging sales accounted for 15% of total Medical Imaging sales in 2003, 16% of total Medical Imaging sales in 2002 and 14% of total Medical Imaging sales in 2001. On January 1, 2004, the Company entered into a new license and supply agreement with Cardinal Health Nuclear Pharmacy Services, which provides Cardinal the right to sell CARDIOLITE from its licensed pharmacy locations.

Consumer Medicines

Consumer Medicines manufactures, distributes and sells over-the-counter health care products. Principal consumer health care brands include the EXCEDRIN brand of products for headache relief, BUFFERIN analgesics, COMTREX for cold, cough and flu, and the KERI line of moisturizers. In addition, the Company began marketing its ChoiceDM line of diabetic care products in August 2003. These products are generally sold to retailers and promoted primarily to consumers in the United States and Japan through advertising. These products are manufactured in the United States, Puerto Rico and Japan.

Consumer Medicines sales accounted for 2% of the Company’s sales in each of 2003, 2002 and 2001. North American Consumer Medicines sales accounted for 67% of Consumer Medicines sales in 2003, 68% of Consumer Medicines sales in 2002 and 72% of Consumer Medicines sales in 2001, while Consumer Medicines sales in Japan accounted for 28% of Consumer Medicines sales in 2003 and in 2002 and 24% of Consumer Medicines sales in 2001.

Sources and Availability of Raw Materials

In general, Bristol-Myers Squibb purchases its raw materials in the open market. Substantially all such materials are obtainable from a number of sources, and the loss of any one source of supply would not likely have a material adverse effect on the Company. For further discussion of sourcing, see “—Manufacturing and Quality Assurance” below and discussions of particular products.

Manufacturing and Quality Assurance

The Company seeks to design and operate its manufacturing facilities and maintain inventory in a way that will allow it to meet all expected product demand while maintaining flexibility to reallocate manufacturing capacity to improve efficiency and respond to changes in supply and demand. Pharmaceutical production processes are complex, highly regulated and vary widely from product to product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital expenditures and regulatory approvals. For further discussion of the regulatory impact on the Company’s manufacturing, see “—Government Regulation and Price Constraints” below.

Pharmaceutical manufacturing facilities require significant ongoing capital investment for both maintenance and to comply with increasing regulatory requirements. In addition, as the Company adds to its product line and realigns its focus, the Company expects to close, partially close or modify many of its existing facilities and devote substantial resources in excess of historical levels to convert its facilities or to meet heightened processing standards that may be required for sterile or newly introduced products, in particular biologics. Biologics manufacturing involves more complex processes than those of traditional pharmaceutical operations. Although the Company does have the capacity to manufacture biologics for clinical trials and commercial launch, its capacity to manufacture larger commercial volumes of these products is limited. As biologics become more important to the Company’s product portfolio, the Company may continue to make arrangements with third-party manufacturers or may make substantial investments in facilities to increase and maintain its capacity to produce biologics on a commercial scale.

The Company relies on third parties to manufacture, or to supply it with active ingredients necessary for it to manufacture certain products, including PRAVACHOL, PLAVIX, ABILIFY*, COUMADIN, PARAPLATIN, SUSTIVA, TAXOL ^® , TEQUIN and VIDEX/VIDEX EC. To maintain a stable supply of these products, the Company takes a variety of actions designed to ensure that there is an adequate safety stock of these ingredients held by the third-party supplier, Bristol-Myers Squibb or both, so that the Company’s manufacturing operations are not interrupted. As an additional protection, in some cases, the Company takes steps to maintain an approved back-up source where available.

The Company relies on ImClone to supply ERBITUX* (cetuximab) for all of its bulk requirements for commercial use in North America and Japan. ImClone is currently seeking, with the Company’s support, FDA approval to manufacture ERBITUX* at ImClone’s manufacturing facility in Somerville, New Jersey. ImClone has contracted with Lonza Biologics plc (Lonza) to act as the manufacturer of cetuximab for commercial launch and Cardinal Health, Inc. (Cardinal) will provide the finishing. There can be no assurance that ImClone will be granted regulatory approval to manufacture ERBITUX*, or that such approval will occur before the supply of cetuximab obtained from Lonza is exhausted.

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The Company also expects to rely on Lonza to manufacture ABATACEPT and LEA29Y on a commercial scale if these products are commercialized. ABATACEPT and LEA29Y are investigational biologics compounds in late stage development. The Company has not made any filings with the FDA seeking approval for Lonza to manufacture or for the Company to market and sell these products, and there can be no assurance that regulatory approval of either of these products will be obtained. However, the Company has entered into an agreement with Lonza to reserve a portion of Lonza’s biologics manufacturing capacity for the Company’s future requirements of these products if regulatory approval is obtained. Under the terms of the agreement, the Company has minimum purchase requirements and will be obligated to pay Lonza a one-time termination fee if these products do not obtain regulatory approval. For additional information about ABATACEPT and LEA29Y, see “—Research and Development” below.

If the Company or any third-party manufacturer that the Company relies on for existing or future products is unable to maintain a stable supply of products, operate at sufficient capacity to meet its order requirements, comply with government regulations for manufacturing pharmaceuticals or meet the heightened processing requirements for biologics, the Company’s business performance and prospects could be negatively impacted. Additionally, if the Company or any of its third-party suppliers were to experience extended plant shutdowns or substantial unplanned increases in demand or suspension of manufacturing for regulatory reasons, the Company could experience an interruption in supply of certain products or product shortages until production could be resumed or expanded.

In connection with divestitures, licensing arrangements or distribution agreements of certain of the Company’s pharmaceuticals or in certain other circumstances, the Company has entered into agreements under which the Company has agreed to supply such products to third parties. In addition to liabilities that could arise from the Company’s failure to supply such products under the agreements, these arrangements could require the Company to invest in facilities for the production of non-strategic products, result in additional regulatory filings and obligations or cause an interruption in the manufacturing of its own products.

The Company’s success depends in great measure upon customer confidence in the quality of its products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of the Company’s operations, including research and development, purchasing, facilities planning, manufacturing, and distribution. The Company maintains quality-assurance procedures relating to the quality and integrity of scientific information and production processes.

Control of production processes involves rigid specifications for ingredients, equipment and facilities, manufacturing methods, processes, packaging materials, and labeling. The Company performs tests at various stages of production processes and on the final product to assure that the product meets all regulatory requirements and the Company’s standards. These tests may involve chemical and physical chemical analyses, microbiological testing, or a combination of these along with other analyses. Quality control is provided by business unit/site quality assurance groups that monitor existing manufacturing procedures and systems used by the Company, its subsidiaries and third-party suppliers.

Intellectual Property and Product Exclusivity

The Company owns or is licensed under a number of patents in the United States and foreign countries primarily covering its pharmaceutical products. The Company has also developed many brand names and trademarks for products in all areas. The Company considers the overall protection of its patent, trademark, license and other intellectual property rights to be of material value and acts to protect these rights from infringement.

In the pharmaceutical industry, the majority of an innovative product’s commercial value is usually realized during the period in which the product has market exclusivity. When market exclusivity expires and generic versions of a product are approved and marketed, there can often be very substantial and rapid declines in the product’s sales. The rate of this decline varies by country and by therapeutic category. For a discussion of how generic versions of a product can impact that product’s sales, see “—Generic Competition” below.

A product’s market exclusivity is generally determined by two forms of intellectual property: patent rights held by the innovator company and any regulatory forms of exclusivity to which the innovative drug is entitled.

Patents are a key determinant of market exclusivity for most branded pharmaceuticals. Patents provide the innovator with the right to exclude others from practicing an invention related to the medicine. Patents may cover, among other things, the active ingredient(s), various uses of a drug product, pharmaceutical formulations, drug delivery mechanisms and processes for (or intermediates useful in) the manufacture of products. Protection for individual products extends for varying periods in accordance with the expiration dates of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent, its scope of coverage and the availability of meaningful legal remedies in the country.

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Market exclusivity is also sometimes influenced by regulatory intellectual property rights. Many developed countries provide certain non-patent incentives for the development of medicines. For example, the United States, the EU and Japan each provide for a minimum period of time after the approval of a new drug during which the regulatory agency may not rely upon the innovator’s data to approve a competitor’s generic copy. Regulatory intellectual property rights are also available in certain markets as incentives for research on new indications, on orphan drugs and on medicines useful in treating pediatric patients.

Regulatory intellectual property rights are independent of any patent rights that the Company may possess and can be particularly important when a drug lacks broad patent protection. However, most regulatory forms of exclusivity do not prevent a competitor from gaining regulatory approval on the basis of the competitor’s own safety and efficacy data on its drug, even when that drug is identical to that marketed by the innovator.

The Company assesses the likely market exclusivity period for each of its products on a case-by-case basis. It is not possible to predict the length of market exclusivity for any of the Company’s products with certainty because of the complex interaction between patent and regulatory forms of exclusivity, and inherent uncertainties about the enforceability of certain intellectual property rights. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that the Company currently anticipates. The Company expects to have continued exclusivity challenges over the next several years. For further discussion of these exclusivity challenges, see “—Pharmaceuticals Segment” above and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook for 2004” below.

In addition to patents and regulatory forms of exclusivity, the Company also holds intellectual property in the form of trademarks, on products such as EXCEDRIN, ENFAMIL, THERAGRAN, KERI and BUFFERIN. Trademarks have no effect on market exclusivity for a product, but are considered to have marketing value. Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.

Specific aspects of the law governing market exclusivity for pharmaceuticals vary from country to country. The following summarizes key exclusivity rules in markets representing significant Company sales:

United States

A company seeking to market an innovative pharmaceutical in the United States must file a complete set of safety and efficacy data to the FDA. The type of application filed depends on whether the drug is a chemical (a small molecule) or a biological product (a large molecule). If the innovative pharmaceutical is a chemical, the company files a NDA. If the medicine is a biological product, a Biologics License Application is filed. The type of application filed affects regulatory exclusivity rights.

A competitor seeking to launch a generic substitute of a chemical innovative drug in the United States must file an Abbreviated New Drug Application (ANDA) with the FDA. In the ANDA, the generic manufacturer needs to demonstrate only “bioequivalence” between the generic substitute and the approved NDA drug. The ANDA relies upon the safety and efficacy data previously filed by the innovator in its NDA.

Medicines approved under an NDA can receive several types of regulatory data protection. An innovative chemical pharmaceutical (also known as a new chemical entity) is entitled to five years of regulatory data protection, during which an ANDA cannot be filed with the FDA. If an innovator’s patent is challenged, as described below, the generic manufacturer may file its ANDA after the fourth year of the five-year data protection period. A pharmaceutical drug product that contains an active ingredient that has been previously approved in an NDA, but is approved in a new formulation or for a new indication on the basis of new clinical trials, receives three years of data protection. Finally, an NDA that is designated as an Orphan Drug, which is a drug that gains an indication for treatment of a condition that occurs only rarely in the United States, can receive seven years of exclusivity for the orphan indication. During this time period neither NDAs nor ANDAs for the same drug product can be approved for the same orphan use.

Because a significant portion of patent life can be lost during the time it takes to obtain regulatory approval, the innovator can extend one patent to compensate the innovator for the lost patent term, at least in part. More specifically, the innovator may identify one patent, which claims the product or its approved method of use, and, depending on a number of factors, may extend the expiration of that patent. There are two limits to these extensions. First, the maximum a patent can be extended is 5 years, and second, the extension cannot cause the patent to be in effect for more than 14 years from the date of NDA approval.

A company may also earn six months of additional exclusivity for a drug where specific clinical trials are conducted at the written request of the FDA to study the use of the medicine to treat pediatric patients, and submission to the FDA is made prior to the loss of basic exclusivity. This six-month period extends all forms of exclusivity (patent and regulatory) that are listed with the FDA at the time the studies are completed and submitted to the FDA.

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Currently, generic versions of biological products cannot be approved under U.S. law; however, the FDA is taking steps toward allowing generic versions of biologics, and these laws could change in the near future. Competitors seeking approval of biological products must file their own safety and efficacy data.

Beyond the minimum period of regulatory exclusivity provided by U.S. law, many (but not all) innovative drugs are also covered by patents held by the NDA sponsor.

The innovator company is required to list certain of its patents covering the medicine with the FDA in what is commonly known as the Orange Book. Absent a successful patent challenge, the FDA cannot approve an ANDA until after the innovator’s listed patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA and allege that one or more of the patents listed in the Orange Book under an innovator’s NDA is either invalid or not infringed. This allegation is commonly known as a “Paragraph IV certification.” The innovator then must choose whether to file suit against the generic manufacturer to protect its patents. If one or more of the NDA-listed patents are successfully challenged, or if the innovator chooses not to sue, the first filer of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity as against all other generic manufacturers. From time to time ANDAs, including Paragraph IV certifications, are filed with respect to certain of the Company’s products. The Company evaluates these ANDAs on a case-by-case basis and, where warranted, files suit against the generic manufacturer to protect its patent rights.

Several recent developments in the United States have increased the likelihood of generic challenges to innovators’ intellectual property, and thus, increased the risk of loss of innovators’ market exclusivity. First, generic companies have increasingly sought to challenge innovators’ basic patents covering major pharmaceutical products. For a discussion of one such litigation related to patent challenges by generic companies, see “Item 8. Financial Statements—Note 22. Legal Proceedings and Contingencies—PLAVIX* Litigation.” This is a reflection of the statutory incentive to challenge patents—six months of semi-exclusivity in certain situations—as described above. Second, new statutory and regulatory provisions in the United States limit the ability of an innovator company to prevent generic drugs from being approved and launched while patent litigation is ongoing. Third, the FDA is actively considering abbreviated regulatory approval processes for drugs that are similar to, but not generic copies of, innovative drugs. As a result of all of these developments, it is not possible to predict the length of market exclusivity for a particular Company product with certainty based solely on the expiration of the relevant patent(s) or the current forms of regulatory exclusivity. For more information about new legislation, see “—Government Regulation and Price Constraints” below.

European Union

In the EU, most innovative pharmaceuticals are entitled to ten years of regulatory data protection if marketing approval is obtained via the centralized procedure. Consequently, regardless of whether or not the innovative medicine is covered by patents, generic copies relying on the innovator’s data usually cannot be approved for a minimum of ten years after approval. For innovative pharmaceuticals that gain marketing approval using the non-centralized mutual recognition procedure, this period is six or ten years depending on the individual EU member state. However, regardless of regulatory exclusivity, competitors may obtain approval of an identical product on the basis of their own safety and efficacy data at any time. For more information regarding the regulation of pharmaceutical products in the EU, see “—Government Regulation and Price Constraints” below.

Patents on pharmaceutical products are generally enforceable in the EU. However, in contrast to the United States, patents are not listed with regulatory authorities. Generic copies can be approved after data protection expires, regardless of whether the innovator holds patents covering its drug. Thus, it is possible that an innovator may be seeking to enforce its patents against a generic competitor that is already marketing its product. Also, the European patent system has an opposition procedure in which generic manufacturers may challenge the validity of patents covering innovator products within nine months of grant. As in the United States, patents in the EU may be extended to compensate for the patent term lost during the regulatory review process. Such extensions are granted on a country-by-country basis.

In general, EU law treats chemically synthesized drugs and biologically derived drugs the same with respect to intellectual property and market exclusivity.

Japan

In Japan, medicines of new chemical entities are entitled to six years of protection for approved indications and dosage. Patents on pharmaceutical products are enforceable. Generic copies can receive regulatory approval after data protection and patent expirations. As in the United States, patents in Japan may be extended to compensate for the patent term lost during the regulatory review process.

In general, Japanese law treats chemically synthesized and biologically derived drugs the same with respect to intellectual property and market exclusivity.

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Rest of World

In countries outside of the United States, the EU and Japan, there is a wide variety of legal systems with respect to intellectual property and market exclusivity of pharmaceuticals. Most other developed countries utilize systems similar to either the United States (e.g., Canada) or the EU (e.g., Switzerland). Among less developed countries, some have adopted patent laws and/or regulatory exclusivity laws, while others have not. Some less developed nations have formally adopted laws in order to comply with World Trade Organization (WTO) commitments, but have not taken steps to implement these laws in a meaningful way. Enforcement of WTO obligations is a long process, and there is no assurance of the outcome. Thus, in assessing the likely future market exclusivity of the Company’s innovative drugs in less developed countries, the Company takes into account not only formal legal rights but political and other factors as well.

Marketing, Distribution and Customers

In the Company’s Pharmaceuticals segment and in its ConvaTec and Medical Imaging businesses, the Company promotes its products in medical journals and directly to health care providers such as doctors, nurse practitioners, physician assistants, pharmacists, hospitals, Pharmacy Benefit Managers (PBMs), Managed Care Organizations (MCOs) and government agencies. The Company also markets directly to consumers in the United States through direct-to-consumer print, radio and television advertising. In addition, the Company sponsors general advertising to educate the public about its innovative medical research. For a discussion of the regulation of promotion and marketing of pharmaceuticals, see “—Government Regulation and Price Constraints” below.

Through the Company’s sales and marketing organizations, the Company explains the approved uses and advantages of its products to medical professionals. The Company works to gain access to health authority, PBM and MCO formularies (lists of recommended or approved medicines and other products) and reimbursement lists by demonstrating the qualities and treatment benefits of its products. The Company also works with MCOs and PBMs to assist them with disease management, patient education and other tools that benefit patients by improving their medical treatment routines.

Marketing of prescription pharmaceuticals is limited to the approved uses of the particular product, but the Company continues to develop information about its products and provides such information in response to inquiries from doctors and other medical professionals. All drugs must complete clinical trials required by regulatory authorities to show they are safe and effective for treating one or more medical problems. A manufacturer may choose, however, to undertake additional studies, including comparative clinical trials with competitive products, to demonstrate additional advantages of a compound. Those studies can be costly and take years to complete, and the results are uncertain. Balancing these considerations makes it difficult to decide whether and when to undertake such additional studies. But, when they are successful, such studies can have a major impact on approved marketing claims and strategies.

The Company’s operations include several pharmaceutical sales organizations. Each sales organization markets a distinct group of products and is typically based on particular therapeutic areas or physician groups. These sales organizations often focus on selling new products when they are introduced, and marketing to physicians is increasingly targeted at specialists and high value primary care physicians.

The Company’s prescription pharmaceutical products are sold principally to wholesalers, but the Company also sells directly to retailers, hospitals, clinics, government agencies and pharmacies. In 2003, sales to three pharmaceutical wholesalers in the United States, McKesson Corporation (McKesson), Cardinal and AmerisourceBergen Corporation (AmerisourceBergen) accounted for approximately 15%, 12% and 12%, respectively, of the Company’s total net sales. In 2002, sales to AmerisourceBergen and McKesson each accounted for approximately 14% of the Company’s total net sales and sales to Cardinal accounted for 13% of the Company’s total net sales. In 2001, sales to AmerisourceBergen, Cardinal and McKesson each accounted for approximately 14% of the Company’s total net sales. Sales to these U.S. wholesalers were concentrated in the Pharmaceuticals segment. Apart from these instances, none of the Company’s business segments is dependent on any one customer or group of related customers.

In April 2002, the Company disclosed a substantial buildup of wholesaler inventories in its U.S. pharmaceuticals business, and developed and subsequently undertook a plan to workdown in an orderly fashion these wholesaler inventory levels. In 2003, the Company took steps intended to moderate investment buying by U.S. pharmaceutical wholesalers, which can result in sales fluctuations unrelated to consumer demand. In 2003, the Company entered into new inventory management agreements (IMAs) with AmerisourceBergen, Cardinal, McKesson and other wholesalers. The agreements have terms of 2 years, cancelable by either parties after 1 year. The IMAs generally establish limits on inventory levels of BMS pharmaceutical products held by the wholesalers, permit limited buy-ins of BMS pharmaceutical products by the wholesalers after price increases, at pre-price increase prices and require the wholesalers to provide the Company with data in association with the wholesalers’ sales and inventory levels of BMS pharmaceutical products.

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OTN acts as BMS’s exclusive sales distributor for BMS oncology products to office-based oncologists. OTN believes that its extensive customer base, coupled with its overall competitive pricing and customer service, make it attractive to drug manufacturers that wish to serve the office-based oncologist community through a focused distribution channel. OTN provides services to manufacturers that include support for product launch, customer specific marketing programs, data services and rapid market research. In 2001, the Company entered into an agreement with McKesson under which McKesson acts as the exclusive distributor of pharmaceutical products to OTN. Under the terms of the agreement, McKesson provides warehousing, packing, shipping, purchasing and inventory management and administrative support services for BMS products and other pharmaceutical products, which are marketed, promoted and sold by OTN. OTN recognizes revenue under the terms of the McKesson agreement using the consignment model as described in “Item 8. Financial Statements—Note 1. Accounting Policies, Revenue Recognition.”

The Company is the exclusive distributor of ERBITUX* in North America through OTN. Under the terms of an agreement with McKesson, McKesson provides OTN with warehousing, packing and shipping for filling orders for ERBITUX*. To maintain the integrity of the product, special storage conditions and handling are required. Accordingly, all sales of ERBITUX*, including purchase requests from other wholesalers, are processed through OTN, and McKesson will only ship ERBITUX* to end-users of the product and not to other intermediaries to hold for later sales.

For information on sales and marketing of consumer medicines and nutritionals, see “—Nutritionals Segment” and “—Other Healthcare Segment—Consumer Medicines” above.

Competition

The markets in which Bristol-Myers Squibb competes are generally broad-based and highly competitive. The principal means of competition vary among product categories and business groups.

The Company’s Pharmaceuticals segment competes with other worldwide research-based drug companies, many smaller research companies with more limited therapeutic focus and generic drug manufacturers. Important competitive factors include product efficacy, safety and ease of use, price and demonstrated cost-effectiveness, marketing effectiveness, product labeling, service and research and development of new products and processes. Sales of the Company’s products can be impacted by new studies that indicate a competitor’s product has greater efficacy for treating a disease or particular form of disease than one of the Company’s products. The Company’s sales also can be impacted by additional labeling requirements for better tolerability, safety or convenience that may be imposed on its products by the FDA or by similar regulatory agencies in different countries. If competitors introduce new products and processes with therapeutic or cost advantages, the Company’s products can be subject to progressive price reductions or decreased volume of sales, or both. For example, in the growing market for statins, which reduce cholesterol, PRAVACHOL, the Company’s largest product by net sales, competes with established brands and new entrants of several of the world’s largest pharmaceutical companies. While the product is beginning to lose exclusivity in some markets, between now and its loss of U.S. exclusivity in 2006, its expected rate of decline in market share could be accelerated by recent clinical studies.

To successfully compete for business with managed care and pharmacy benefits management organizations, the Company must often demonstrate that its products offer not only medical benefits but also cost advantages as compared with other forms of care. Most new products that the Company introduces must compete with other products already on the market or products that are later developed by competitors. Manufacturers of generic pharmaceuticals typically invest far less in research and development than research-based pharmaceutical companies and therefore can price their products significantly lower than branded products. Accordingly, when a branded product loses its market exclusivity, it normally faces intense price competition from generic forms of the product. In certain countries outside the United States, patent protection is weak or nonexistent and the Company must compete with generic versions shortly after it launches its innovative product.

Many other companies, large and small, manufacture and sell one or more products that are similar to those marketed by the Company’s Nutritionals and Other Healthcare segments. Sources of competitive advantage include product quality and efficacy, brand identity, advertising and promotion, product innovation, broad distribution capabilities, customer satisfaction and price. Significant expenditures for advertising, promotion and marketing are generally required to achieve both consumer and trade acceptance of these products.

The Company believes its long-term competitive position depends upon its success in discovering and developing innovative, cost-effective products that serve unmet medical needs, together with its ability to manufacture the products efficiently and to market them effectively in a highly competitive environment. There can be no assurance that the Company’s research and development efforts will result in commercially successful products or that its products or processes will not become outmoded from time to time as a result of products or processes developed by its competitors.

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Managed Care Organizations

The growth of MCOs in the United States has been a major factor in the competitive make-up of the healthcare marketplace. Over half the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by MCOs, marketing of prescription drugs to them and the PBMs that serve many of those organizations has become important to the Company’s business. MCOs can include medical insurance companies, medical plan administrators, health-maintenance organizations, alliances of hospitals and physicians and other physician organizations. Those organizations have been consolidating into fewer, even larger entities, enhancing their purchasing strength and importance to the Company.

A major objective of MCOs is to contain and, where possible, reduce health care expenditures. They typically use formularies, volume purchases and long-term contracts to negotiate discounts from pharmaceutical providers. MCOs and PBMs typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their generally lower cost, generic medicines are often favored. The breadth of the products covered by formularies can vary considerably from one MCO to another, and many formularies include alternative and competitive products for treatment of particular medical problems. MCOs use a variety of means to encourage patients’ use of products listed on their formularies.

Exclusion of a product from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their products included. Where possible, companies compete for inclusion based upon unique features of their products, such as greater efficacy, better patient ease of use or fewer side effects. A lower overall cost of therapy is also an important factor. Products that demonstrate fewer therapeutic advantages must compete for inclusion based primarily on price. The Company has been generally, although not universally, successful in having its major products included on MCO formularies.

Generic Competition

One of the biggest competitive challenges that the Company faces in the United States and internationally is from generic pharmaceutical manufacturers. Upon the expiration or loss of market exclusivity on a product, the Company can lose the major portion of sales of that product in a very short period of time. In the United States, the FDA approval process exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, and allows generic manufacturers to rely on the safety and efficacy of the pioneer product. Therefore, generic competitors operate without the Company’s large research and development expenses and its costs of conveying medical information about the product to the medical community. For more information about market exclusivity, see “—Intellectual Property and Product Exclusivity” above.

The rate of sales decline of a product after the expiration of exclusivity varies by country. In general, the decline in the U.S. market is more rapid than in most other developed countries. Also, the declines in developed countries tend to be more rapid than in less developed countries.

The rate of sales decline after the expiration of exclusivity has also historically been influenced by product characteristics. For example, drugs that are used in a large patient population (e.g., those prescribed by primary care physicians) tend to experience more rapid declines than drugs in specialized areas of medicine (e.g., oncology). Drugs that are more complex to manufacture (e.g., sterile injectable products) usually experience a slower decline than those that are simpler to manufacture.

As noted above, MCOs that focus primarily on the immediate cost of drugs often favor generics over brand-name drugs. Many governments also encourage the use of generics as alternatives to brand-name drugs in their health care programs. Laws in the United States generally allow, and in some cases require, pharmacists to substitute generic drugs that have been rated under government procedures to be therapeutically equivalent to a brand-name drug. The substitution must be made unless the prescribing physician expressly forbids it. These laws and policies provide an added incentive for generic manufacturers to seek marketing approval as the automatic substitution removes the need for generic manufacturers to incur the sales and marketing costs, which innovators must incur.

Research and Development

The Company invests heavily in research and development because it believes it is critical to its long-term competitiveness. Pharmaceutical research and development is carried out by the Bristol-Myers Squibb Pharmaceutical Research Institute, which has major facilities in Princeton, Hopewell and New Brunswick, New Jersey and Wallingford, Connecticut. Pharmaceutical research and development is also carried out at various other facilities in the United States and in Belgium, Canada, France, and the United Kingdom. Management continues to emphasize leadership, innovation, productivity and quality as strategies for success in the Pharmaceutical Research Institute.

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The Company spent $2,279 million in 2003, $2,206 million in 2002 and $2,157 million in 2001 on Company sponsored research and development activities. Company sponsored pharmaceutical research and development spending (including certain payments under third-party collaborations and contracts), as a percentage of Pharmaceutical sales, was 14.2% in 2003, compared with 16.5% in 2002 and 15.5% in 2001. At the end of 2003, the Company employed approximately 7,000 people in research and development throughout the Company, including 5,300 in the Pharmaceutical Research Institute, including a substantial number of physicians, scientists holding graduate or postgraduate degrees and higher skilled technical personnel.

The Company concentrates its pharmaceutical research and development efforts in the following ten disease areas: Affective (psychiatric) Disorders, Alzheimer’s/Dementia, Atherosclerosis/Thrombosis, Diabetes, Hepatitis, HIV/AIDS, Obesity, Oncology, Rheumatoid Arthritis and Related Diseases and Solid Organ Transplant. However, the Company continues to analyze and selectively pursue promising leads in other therapeutic areas. In addition to discovering and developing new chemical compounds, the Company looks for ways to expand the value of existing products through new uses and formulations that can provide additional benefits to patients.

To supplement the Company’s internal efforts, the Company collaborates with independent research organizations, including educational institutions and research-based pharmaceutical and biotechnology companies, and the Company contracts with others for the performance of research in their facilities. The Company uses the services of physicians, hospitals, medical schools and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of new products. The Company actively seeks out investments in external research and technologies that hold the promise to complement and strengthen its own research efforts. These investments can take many forms, including licensing arrangements, codevelopment and comarketing agreements, copromotion arrangements and joint ventures.

Drug development is time-consuming, expensive and risky. In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through preclinical tests and controlled clinical evaluation. Before a new drug may be marketed in the United States, recorded data on preclinical and clinical experience are included in the NDA or the Biological Product License Application (BPLA) to the FDA for the required approval. The development of certain other products is also subject to government regulations covering safety and efficacy in the United States and many foreign countries. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed for any particular disease indication.

On average, only about one in ten thousand chemical compounds discovered by pharmaceutical industry researchers proves to be both medically effective and safe enough to become an approved medicine. The process from discovery to regulatory approval typically takes ten years or longer. Drug candidates can fail at any stage of the process, and even late-stage product candidates sometimes fail to receive regulatory approval. The Company believes its investments in research, both internally and in collaboration with others, have been rewarded by the number of new pharmaceutical compounds and indications it has in all stages of development.

Bristol-Myers Squibb’s drug discovery program includes many alliances and collaborative agreements. These agreements bring new products into the pipeline or help the company remain on the cutting edge of technology in the search for novel medicines. For example, in December 2003, the Company formed a partnership with Lexicon Genetics Incorporated (Lexicon) to develop drugs in the field of depression, anxiety, schizophrenia, pain and Alzheimer’s disease. Under the terms of the agreement, Lexicon will contribute the products of 13 of its drug discovery programs and the alliance will give the Company exclusive access to discoveries in the neurological sciences field from a Lexicon gene analysis program known as Genome5000. Lexicon received an upfront payment of $36 million from Bristol-Myers Squibb in the fourth quarter of 2003 (which was expensed by the Company) and will receive a minimum of $30 million in research funding over the first three years of the agreement. Bristol-Myers Squibb has the option to extend part of the agreement for another two years in return for providing additional research funding of up to $50 million. Lexicon will receive further funding for each novel drug developed under the alliance, and it will earn royalties on sales of any drugs commercialized by Bristol-Myers Squibb. On December 18, 2003, the Company also announced the extension and expansion of its oncology research collaboration with Exelixis, Inc. (Exelixis) under which the two companies will continue to identify and validate molecular targets implicated in the genesis of cancer. The original agreement was established for a three-year term in July 2001. Under the terms of the extended collaboration, BMS provided Exelixis with an upfront payment of $3 million and increased annual research funding and milestone payments on certain cancer targets arising from the collaboration. Exelixis and Bristol-Myers Squibb agreed to extend their collaboration until December 2006, and Bristol-Myers Squibb has the right to continue the collaboration until July 2009. The goal of the extension is to increase the total number and degree of validation of cancer targets that Exelixis will deliver to the Company. Exelixis and Bristol-Myers Squibb will each maintain the option to obtain exclusive worldwide rights to equal numbers of validated targets arising from the collaboration.

Listed below are several investigational compounds that the Company has in the later stages of development. All of these compounds are in or entering Phase IIb or Phase III clinical trials. Whether or not any of these investigational compounds ultimately becomes one of the Company’s marketed products depends on the results of pre-clinical and clinical studies, the competitive

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landscape of the potential product’s market and the manufacturing processes necessary to produce the potential product on a commercial scale. The Company expects to file for FDA approval of Abatacept, Entecavir and Muraglitazar in 2004 or early 2005. However, as noted above, there can be no assurance that the Company will seek regulatory approval of any of these compounds or that, if such approval is sought, it will be obtained. At this stage of development, the Company cannot determine all intellectual property issues or all the patent protection that may, or may not, be available for these investigational compounds. The patent coverage highlighted below does not include potential term extensions.

The Company’s competitors also devote substantial funds and resources to research and development. In addition, the consolidation that has occurred in the Company’s industry has created companies with substantial research and development resources. The extent to which the Company’s competitors are successful in their research could result in erosion of the sales of its products and unanticipated product obsolescence.

Government Regulation and Price Constraints

The pharmaceutical industry is subject to extensive global regulation by regional, country, state and local agencies. The Federal Food, Drug, and Cosmetic Act (FDC Act), other federal statutes and regulations, various state statutes and regulations, and laws and regulations of foreign governments govern to varying degrees the testing, approval, production, labeling, distribution, post-market surveillance, advertising, dissemination of information, and promotion of the Company’s products. The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for required governmental approvals is extremely costly and can significantly delay product introductions in a given market. Promotion, marketing,

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manufacturing, and distribution of pharmaceutical products are extensively regulated in all major world markets. In addition, the Company’s operations are subject to complex federal, state, local, and foreign environmental and occupational safety laws and regulations. The Company anticipates that the laws and regulations affecting the manufacture and sale of current products and the introduction of new products will continue to require substantial scientific and technical effort, time, expense and significant capital investment.

Of particular importance is the FDA in the United States. It has jurisdiction over virtually all of the Company’s businesses and imposes requirements covering the testing, safety, effectiveness, manufacturing, labeling, marketing, advertising and post-marketing surveillance of the Company’s pharmaceutical products. The FDA also regulates most of the Company’s Nutritionals and Other Healthcare products. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States.

The Company’s pharmaceutical products are subject to pre-market approval requirements in the United Sates. New drugs are approved under, and are subject to, the FDC Act and related regulations. Biological drugs are subject to both the FDC Act and the Public Health Service Act, known as the “PHS Act,” and related regulations. Biological drugs are licensed under the PHS Act.

The FDA mandates that drugs be manufactured, packaged and labeled in conformity with current Good Manufacturing Practices (cGMP) established by the FDA. In complying with cGMP regulations, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to ensure that the product meets applicable specifications and other requirements to ensure product safety and efficacy. The FDA periodically inspects drug manufacturing facilities to ensure compliance with applicable cGMP requirements. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or voluntary recall of a product. Adverse experiences with the use of products must be reported to the FDA and could result in the imposition of market restrictions through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.

The federal government has extensive enforcement powers over the activities of pharmaceutical manufacturers, including authority to withdraw product approvals, commence actions to seize and prohibit the sale of unapproved or non-complying products, to halt manufacturing operations that are not in compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and civil monetary and criminal penalties. Such a restriction or prohibition on sales or withdrawal of approval of products marketed by the Company could materially adversely affect its business, financial condition and results of operations.

Marketing authorization for the Company’s products is subject to revocation by the applicable governmental agencies. In addition, modifications or enhancements of approved products or changes in manufacturing locations are in many circumstances subject to additional FDA approvals, which may or may not be received and which may be subject to a lengthy application process.

The distribution of pharmaceutical products is subject to the Prescription Drug Marketing Act, known as “PDMA,” as part of the FDC Act, which regulates such activities at both the federal and state level. Under the PDMA and its implementing regulations, states are permitted to require registration of manufacturers and distributors who provide pharmaceuticals even if such manufacturers or distributors have no place of business within the state. States are also permitted to adopt regulations limiting the distribution of product samples to licensed practitioners. The PDMA also imposes extensive licensing, personnel record keeping, packaging, quantity, labeling, product handling and facility storage and security requirements intended to prevent the sale of pharmaceutical product samples or other diversions.

The Company is also subject to the jurisdiction of various other federal and state regulatory and enforcement departments and agencies, such as the Federal Trade Commission (FTC), the Department of Justice and the Department of Health and Human Services in the United States. The Company is also licensed by the U.S. Drug Enforcement Agency to procure and produce controlled substances. The Company is, therefore, subject to possible administrative and legal proceedings and actions by those organizations. Such actions may result in the imposition of civil and criminal sanctions, which may include fines, penalties and injunctive or administrative remedies.

Various federal and state agencies have regulatory authority regarding the manufacture, storage, transportation and disposal of many Medical Imaging products because of their radioactive nature.

The Company’s activities outside the United States are also subject to regulatory requirements governing the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of the Company’s products. These regulatory requirements vary from country to country. In the EU, there are two ways that a company can obtain marketing authorization for a pharmaceutical product. The first route is the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, but also is available for certain new chemical compounds and products. A product that receives approval under the centralized procedure automatically receives approval in every member state of the EU. However, a

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company then must obtain pricing and reimbursement for the pharmaceutical product, which is typically subject to member state law. The pricing and reimbursement procedure can take months, and sometimes years, to obtain. The second route to obtain marketing authorization in the EU is the “mutual recognition procedure.” Applications are made to a single member state, and if the member state approves the pharmaceutical product under a national procedure, then the applicant may submit that approval to the mutual recognition procedure of some or all other member states. As set forth above, pricing and reimbursement of the product continues to be the subject of member state law.

Whether or not FDA approval or approval of the European Medicines Evaluation Agency has been obtained for a product, approval of the product by comparable regulatory authorities of countries outside of the United States or the EU, as the case may be, must be obtained prior to marketing the product in those countries. The approval process may be more or less rigorous from country to country and the time required for approval may be longer or shorter than that required in the United States. Approval in one country does not assure that such product will be approved in another country.

In most markets outside the United States, the Company operates in an environment of government-mandated, cost-containment programs. Several governments have placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and/or enacted across-the-board price cuts as methods of cost control. With the exception of Germany and the United Kingdom, no European country has market pricing for new medicines. Pricing freedom is limited in the United Kingdom by the operation of a profit control scheme and in Germany by the operation of a reference price system. Companies also face significant delays in market access for new products, and more than two years can elapse before new medicines become available on some national markets. Additionally, member states of the EU have regularly imposed new or additional cost containment measures for pharmaceuticals. In recent years, Italy, for example, has imposed mandatory price decreases.

The existence of price differentials within Europe due to the different national pricing and reimbursement laws leads to significant parallel trade flows.

In recent years, Congress and some state legislatures have considered a number of proposals and have enacted laws that could effect major changes in the health care system, either nationally or at the state level. Driven in part by budget concerns, Medicaid access and reimbursement restrictions have been implemented in some states and proposed in many others. Similar issues exist in many foreign countries where the Company does business.

On December 8, 2003, new Medicare legislation was enacted that provides outpatient prescription drug coverage to senior citizens in the United States. Under the legislation, an interim drug discount card program is scheduled to begin in June 2004, while the main drug benefit, eligibility for a stand-alone drug plan, is scheduled to begin in 2006. The new drug benefit will be administered regionally through private insurance plans or pharmacy benefit managers, and the law allows Medicare to negotiate directly with pharmaceutical companies in regions without a private drug benefit program. The legislation allows for the importation of less expensive prescription drugs from Canada, but only if the U.S. Health and Human Services Department certifies safety, which it has so far not done. There can be no assurance that this certification requirement will be maintained in future legislation or that the certification will continue to be withheld. The Company cannot predict the potential impact that this legislation will have on its business, because it is not clear how the law will be implemented by regulators or received by consumers and physicians. The impact will be negative for the Company’s U.S. oncology business in 2004, as reimbursement levels have been reduced for certain oncology products administered in the outpatient setting, including PARAPLATIN. The impact could also be negative over the intermediate and longer term for the Company’s U.S. pharmaceutical business generally as greater federal involvement and budget constraints may increase the likelihood of pricing pressures or controls in the future.

Federal and state governments also have pursued direct methods to reduce the cost of drugs for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid, to provide discounts for outpatient medicines purchased by certain Public Health Service entities and “disproportionate share” hospitals (hospitals meeting certain criteria), and to provide minimum discounts off of a defined “non-federal average manufacturer price” for purchases by certain components of the federal government such as the Department of Veterans Affairs and the Department of Defense.

In the United States, governmental cost-containment efforts have extended to the federally funded Special Supplemental Nutrition Program for WIC. All states participate in WIC and have sought and obtained rebates from manufacturers of infant formula whose products are used in the program. All states have conducted competitive bidding for infant formula contracts, which require the use of specific infant formula products by the state WIC program, unless a physician requests a non-contract formula for WIC customer. States participating in WIC are required to engage in competitive bidding or to use another cost containment measure that yields savings equal to or greater than the savings generated by a competitive bidding system. Mead Johnson participates in this program and approximately 50% of its U.S. sales are subject to rebates under WIC.

Pending pharmaceutical legislation in the EU, which is expected to be adopted this year, will have an impact on the procedures for authorization of pharmaceutical products in the EU under both the centralized and mutual recognition procedures. In

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particular, the legislation contains new data protection provisions. All products (regardless of whether they have been approved under the centralized or the national/mutual recognition procedures) will be subject to an “8+2+1” regime. Eight years after the innovator has received its first community authorization for a medicinal product, a generic company may file a marketing authorization application for that product with the health authorities. However, the generic company may not commercialize the product until after either ten or eleven years have elapsed from the initial marketing authorization granted to the innovator. The possible one year extension is available if the innovator, during the first eight years of the marketing authorization, obtains an additional indication that is of significant clinical benefit in comparison with existing treatments. There is a transitional provision for these new data protection requirements, and it is expected that these provisions will apply as new innovator products are approved under the new legislation.

In Japan, recently adopted regulations for the filing of new drugs effective July 2003 may streamline the filing process for international companies introducing new compounds in Japan by allowing some international clinical and non-clinical data to be used in the filing process. The planned merger of two Japanese pharmaceutical regulatory offices may also lead to gains in efficiency and timeliness of drug registration in Japan. However, the pricing policy for pharmaceuticals in Japan remains challenging due to bi-annual government mandated price reductions.

Environmental Regulation

The Company’s facilities and operations are subject to extensive U.S. and foreign laws and regulations relating to environmental protection and human health and safety, including those governing discharges of pollutants into the air and water, the use, management and disposal of hazardous, radioactive and biological materials and wastes, and the cleanup of contamination. Pollution controls and permits are required for many of the Company’s operations, and these permits are subject to modification, renewal or revocation by the issuing authorities.

A corporate environment, health and safety group monitors operations around the world, providing the Company with an overview of regulatory requirements and overseeing the implementation of company standards for compliance. The Company also incurs operating and capital costs for such matters on an ongoing basis. The Company expended approximately $60 million and $55 million on capital environmental projects undertaken specifically to meet environmental requirements in 2002 and 2003, respectively, and expects to spend approximately $50 million in 2004. Although the Company believes that it is in substantial compliance with applicable environmental, health and safety requirements and the permits required for its operations, the Company nevertheless could incur additional costs, including civil or criminal fines or penalties, clean-up costs, or third-party claims for property damage or personal injury, for violations or liabilities under these laws.

Many of the Company’s current and former facilities have been in operation for many years, and, over time, the Company and other operators of those facilities have generated, used, stored or disposed of substances or wastes that are considered hazardous under environmental laws. As a result, the soil and groundwater at or under certain of these facilities is or may be contaminated, and the Company may be required to make significant expenditures to investigate, control and remediate such contamination. The Company is also potentially responsible for environmental conditions at a number of waste disposal or reprocessing facilities operated by third parties. Currently, the Company is involved in investigation or remediation activities at approximately 56 sites, and has been named as a potentially responsible party (PRP) under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) at approximately 24 of these sites.

CERCLA and similar state statutes may impose liability for the entire cost of investigation or remediation of contaminated sites on any party, regardless of fault or ownership at the time of the disposal or release. Generally, where there are multiple potentially responsible parties, liability has been apportioned based on the nature and amount of hazardous substances disposed of by each party at the site and the number of financially viable parties.

Based on the Company’s current estimates of cleanup costs and its expected share of financial responsibility, the Company does not expect expenditures in connection with CERCLA or other remediation matters to be material. Expenditures could rise in the future if substantial unknown contamination is discovered at one of the Company’s current or former facilities, or if other PRPs fail to participate in cost-sharing at any site at which it has financial responsibility.

For additional information about these matters, see “Item 8. Financial Statements—Note 22. Legal Proceedings and Contingencies.”

Employees

Bristol-Myers Squibb employed approximately 44,000 people at December 31, 2003.

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Foreign Operations

The Company has significant operations outside the United States. They are conducted both through the Company’s subsidiaries and through distributors, and involve three of the same business segments—Pharmaceuticals, Nutritionals and Other Healthcare—as the Company’s U.S. operations.

Revenues from operations outside the United States of $8.0 billion accounted for 38% of the Company’s total revenues in 2003. Revenues exceeded $500 million in each of six countries outside the United States in 2003. No single country outside the United States contributed more than 10% of the Company’s total revenues. For a geographic breakdown of net sales and year-end assets, see the table captioned Geographic in “Item 8. Financial Statements—Note 19. Segment Information.”

International operations are subject to certain risks, which are inherent in conducting business abroad, including currency fluctuations, possible nationalization or expropriation, price and exchange controls, limitations on foreign participation in local enterprises and other restrictive governmental actions. The Company’s international businesses are also subject to government-imposed constraints, including laws on pricing or reimbursement for use of products.

Depending on the direction of change relative to the U.S. dollar, foreign currency values can increase or reduce the reported dollar value of the Company’s net assets and results of operations. In 2003, the change in foreign exchange rates had a net favorable impact on revenues. While the Company cannot predict with certainty future changes in foreign exchange rates or the effect they will have on it, the Company attempts to mitigate their impact through operational means and by using various financial instruments. See the discussion under “Item 8. Financial Statements—Note 18. Financial Instruments.”

At December 31, 2003, approximately $5.4 billion of cash, cash equivalents and marketable securities was held by the Company’s foreign subsidiaries, which the Company does not expect to repatriate in the foreseeable future. In 2004, the Company expects cash generated by its U.S. operations, together with borrowings from the capital markets, to sufficiently cover cash needs for working capital, capital expenditures and dividends in the U.S. Repatriation of this cash to the United States would require additional tax provisions, which are not reflected in the consolidated financial statements. For a further discussion of this matter, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Income Taxes.”

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