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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number 1-1225
September 30, 2002
Wyeth
-----
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d)
of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------ --
The number of shares of Common Stock outstanding as of the close of business
on October 31, 2002:
Number of
Class Shares Outstanding
------ ------------------
Common Stock, $0.33-1/3 par value 1,325,650,877
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WYETH
INDEX
Page No.
--------
Part I - Financial Information 2
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 30,
2002 and 2001 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 2002 and 2001 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 32
Item 4. Controls and Procedures 33
Part II - Other Information 34
Item 1. Legal Proceedings 34-37
Item 5. Approval of Non-Audit Services 37
Item 6. Exhibits and Reports on Form 8-K 38
Signature 39
Certifications 40-43
Exhibit Index EX-1
Items other than those listed above have been omitted because they are not
applicable.
1
Part I - Financial Information
------------------------------
WYETH
The consolidated condensed financial statements included herein have been
prepared by Wyeth (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, the consolidated
condensed financial statements include all adjustments, all of which are normal
and recurring, necessary to present fairly the financial position of the Company
as of September 30, 2002 and December 31, 2001, the results of operations for
the three and nine months ended September 30, 2002 and 2001 and changes in
stockholders' equity and cash flows for the nine months ended September 30, 2002
and 2001. It is suggested that these consolidated condensed financial statements
and management's discussion and analysis of financial condition and results of
operations be read in conjunction with the financial statements and the notes
thereto included in the Company's 2001 Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002.
As of January 1, 2002, the Company adopted new authoritative accounting guidance
reflecting certain vendor allowances (e.g., cooperative advertising
arrangements) as reductions of revenues instead of selling and marketing
expenses. Financial information for all prior periods presented has been
reclassified to comply with the income statement classification requirements of
the new guidance.
As of January 1, 2002, the Company also adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets and
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 did not have any impact on the Company during the 2002 first nine
months. Refer to Note 3 of the consolidated condensed financial statements for
disclosure relating to the implementation of SFAS No. 142 and Note 12 relating
to the impact of SFAS No. 144 during the 2002 fourth quarter.
2
WYETH
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Cash and cash equivalents $2,381,548 $1,744,734
Marketable securities 1,499,128 1,281,988
Investment in Amgen 3,336,000 -
Accounts receivable less allowances 2,834,990 2,743,040
Inventories:
Finished goods 795,867 653,108
Work in progress 818,207 674,636
Materials and supplies 474,887 427,227
------------- ------------
2,088,961 1,754,971
Other current assets including deferred taxes 1,794,190 2,242,020
------------- ------------
Total Current Assets 13,934,817 9,766,753
Property, plant and equipment 9,809,491 8,944,451
Less accumulated depreciation 2,955,693 2,662,291
------------- ------------
6,853,798 6,282,160
Goodwill 3,749,618 3,725,547
Other intangibles, net of accumulated amortization
(September 30, 2002-$88,079 and December 31, 2001-$71,070) 115,660 126,387
Other assets including deferred taxes 2,974,241 3,067,075
------------- ------------
Total Assets $27,628,134 $22,967,922
============= ============
LIABILITIES
Loans payable $3,448,895 $2,097,354
Trade accounts payable 523,731 672,457
Dividends payable 304,900 -
Accrued expenses 3,551,964 4,257,523
Accrued federal and foreign taxes 498,126 229,847
------------- ------------
Total Current Liabilities 8,327,616 7,257,181
Long-term debt 7,557,786 7,357,277
Accrued postretirement benefit obligations other than pensions 955,833 925,098
Other noncurrent liabilities 4,056,350 3,355,793
STOCKHOLDERS' EQUITY
$2.00 convertible preferred stock, par value $2.50 per share 46 51
Common stock, par value $0.33-1/3 per share 441,870 440,190
Additional paid-in capital 4,513,226 4,295,051
Retained earnings 1,712,971 170,309
Accumulated other comprehensive income (loss) 62,436 (833,028)
------------- ------------
Total Stockholders' Equity 6,730,549 4,072,573
------------- ------------
Total Liabilities and Stockholders' Equity $27,628,134 $22,967,922
============= ============
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net revenue $3,623,672 $3,699,600 $10,770,041 $10,300,277
---------- ---------- ----------- -----------
Cost of goods sold 1,058,122 879,922 2,747,516 2,469,566
Selling, general and administrative expenses 1,216,073 1,241,458 3,796,457 3,753,462
Research and development expenses 518,608 473,755 1,525,681 1,402,277
Interest expense, net 52,367 40,472 161,326 93,965
Other income, net (21,850) (83,281) (155,188) (179,145)
Litigation charges 1,400,000 950,000 1,400,000 950,000
Gain related to Immunex/Amgen transaction (2,627,600) - (2,627,600) -
---------- ---------- ----------- -----------
Income before federal and foreign taxes 2,027,952 197,274 3,921,849 1,810,152
Provision (benefit) for federal and foreign taxes 626,553 (54,798) 1,048,671 347,530
---------- ---------- ----------- -----------
Net income $1,401,399 $252,072 $2,873,178 $1,462,622
========== ========== =========== ===========
Basic earnings per share $1.06 $0.19 $2.17 $1.11
========== ========== =========== ===========
Diluted earnings per share $1.05 $0.19 $2.15 $1.10
========== ========== =========== ===========
Dividends paid per share of common stock $0.23 $0.23 $0.69 $0.69
========== ========== =========== ===========
Dividends declared per share of common stock $0.23 $0.23 $0.92 $0.92
========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands Except Per Share Amounts)
(Unaudited)
Nine Months Ended September 30, 2002:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Income/(Loss) Equity
----------- -------- --------- ---------- ------------- -------------
Balance at January 1, 2002 $51 $440,190 $4,295,051 $170,309 $(833,028) $4,072,573
Net income 2,873,178 2,873,178
Currency translation adjustments 105,858 105,858
Net unrealized losses on derivative
contracts (21,898) (21,898)
Net unrealized gains on marketable
securities 811,504 811,504
------------
Comprehensive income 3,768,642
------------
Cash dividends declared (1) (1,219,147) (1,219,147)
Purchases of common stock for treasury (667) (5,472) (107,788) (113,927)
Common stock issued for stock options 2,206 203,852 206,058
Other exchanges (5) 141 19,795 (3,581) 16,350
----------- -------- ---------- ---------- ------------- ------------
Balance at September 30, 2002 $46 $441,870 $4,513,226 $1,712,971 $62,436 $6,730,549
=========== ======== ========== ========== ============= ============
Nine Months Ended September 30, 2001:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Accumulated Comprehensive Stockholders'
Stock Stock Capital Deficit Loss Equity
----------- -------- ---------- ----------- ------------- -------------
Balance at January 1, 2001 $55 $437,258 $3,952,457 $(899,118) $(672,559) $2,818,093
Net income 1,462,622 1,462,622
Currency translation adjustments (98,909) (98,909)
Net unrealized gains on derivative
contracts 2,700 2,700
Net unrealized gains on marketable
securities 4,855 4,855
------------
Comprehensive income 1,371,268
------------
Cash dividends declared (2) (1,210,741) (1,210,741)
Common stock issued for stock options 2,022 165,504 167,526
Other exchanges (3) 112 21,003 (2,885) 18,227
----------- -------- ---------- ---------- ------------- ------------
Balance at September 30, 2001 $52 $439,392 $4,138,964 $(650,122) $(763,913) $3,164,373
=========== ======== ========== ========== ============= ============
(1) Includes the common stock cash dividend of $0.23 per share ($304,891 in the aggregate) declared on September 26, 2002
and payable on December 1, 2002, and a preferred stock cash dividend of $0.50 per share ($9 in aggregate) declared on
the June 20, 2002 and payable on October 1, 2002.
(2) Includes the common stock cash dividend of $0.23 per share ($303,181 in the aggregate) declared on September 20, 2001
and payable on December 1, 2001.
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months
Ended September 30,
2002 2001
---------- ----------
Operating Activities
- --------------------
Net income $2,873,178 $1,462,622
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Litigation charges 1,400,000 950,000
Gain related to Immunex/Amgen transaction (2,627,600) -
Gains on sales of assets (111,299) (141,360)
Depreciation and amortization 365,510 433,173
Deferred income taxes 424,396 70,482
Changes in working capital, net (471,267) (559,322)
Diet drug litigation payments (1,047,416) (6,886,646)
Security fund deposit (415,000) -
Other items, net (222,490) (205,017)
---------- ----------
Net cash provided by (used for) operating activities 168,012 (4,876,068)
---------- ----------
Investing Activities
- --------------------
Purchases of property, plant and equipment (1,301,584) (1,274,654)
Proceeds from sales of assets 422,514 308,862
Proceeds from Immunex/Amgen transaction 1,005,201 -
Proceeds from sales and maturities of marketable securities 1,336,764 195,300
Purchases of marketable securities (1,537,504) (1,010,189)
---------- ----------
Net cash used for investing activities (74,609) (1,780,681)
---------- ----------
Financing Activities
- --------------------
Net proceeds from debt 1,365,339 6,770,322
Dividends paid (914,247) (907,560)
Purchases of common stock for treasury (113,927) -
Exercises of stock options 206,058 167,526
---------- ----------
Net cash provided by financing activities 543,223 6,030,288
---------- ----------
Effects of exchange rate changes on cash balances 188 (12,736)
---------- ----------
Increase (decrease) in cash and cash equivalents 636,814 (639,197)
Cash and cash equivalents, beginning of period 1,744,734 2,644,306
---------- ----------
Cash and cash equivalents, end of period $2,381,548 $2,005,109
========== ==========
Supplemental Information
- ------------------------
Interest payments $333,133 $269,756
Income tax payments, net of refunds 394,207 367,964
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
------------------------------------------
The following policies are in addition to those disclosed in Footnote
1 of the 2001 Annual Report on Form 10-K:
Property, Plant and Equipment is carried at cost. Depreciation is
provided over the estimated useful lives of the related assets,
principally on the straight-line method, as follows:
Buildings 10 - 50 years
Machinery and Equipment 3 - 20 years
Research and Development Expenses are expensed as incurred. Upfront
and milestone payments made to third parties in connection with
research and development collaborations are expensed as incurred up to
the point of regulatory approval. Payments made to third parties
subsequent to regulatory approval are capitalized and amortized over
the remaining useful life. Amounts capitalized for such payments are
included in Other intangibles, net of accumulated amortization.
Marketable securities: The Company has debt and marketable equity
securities, which are classified as either available-for-sale or
held-to-maturity, depending on management's investment intentions
relating to these securities. Available-for-sale securities are
marked-to-market based on quoted market values of the securities, with
the unrealized gains and losses, net of tax, reported as a component
of Accumulated other comprehensive income (loss). Realized gains and
losses on sales of available-for-sale securities are computed based
upon initial cost adjusted for any other-than-temporary declines in
fair value. Investments categorized as held-to-maturity are carried at
amortized cost because the Company has both the intent and ability to
hold these investments until they mature. Impairment losses are
charged to income for other-than-temporary declines in fair value.
Premiums and discounts are amortized or accreted into earnings over
the life of the related available-for-sale or held-to-maturity
security. Dividend and interest income are recognized when earned. The
Company owns no investments that are considered to be trading
securities.
Note 2. Acquisition of Immunex by Amgen
-------------------------------
Prior to July 15, 2002, the Company was the beneficial owner of
223,378,088 shares of common stock of Immunex Corporation (Immunex).
On July 15, 2002, Amgen Inc. (Amgen) completed its acquisition of
Immunex. Under the terms of the acquisition agreement, each share of
Immunex common stock was exchanged for 0.44 shares of Amgen common
stock and $4.50 in cash. Accordingly, the Company received 98,286,358
shares of Amgen common stock (representing approximately 7.7% of
Amgen's outstanding common stock) and $1,005.2 million in cash in
exchange for all of its shares of Immunex common stock, which had a
book value of $867.7 million at July 15, 2002. The Company has valued
its shares of Amgen common stock at $2,500.1 million, which is based
on the quoted market price in effect as of July 15, 2002 reduced
7
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
by an overall discount of approximately 18%. The discount rate was
based on valuations provided by independent valuation consultants in
light of the various restrictions on the stock's marketability
referred to below.
The gain of $2,627.6 million ($1,684.7 million after-tax) on the
exchange was recorded during the 2002 third quarter and was calculated
as follows:
(In millions)
-------------
Value received:
Cash $1,005.2
Amgen common stock 2,500.1
-------------
3,505.3
Less:
Equity investment in Immunex 867.7
Transaction costs 10.0
-------------
877.7
-------------
Gain before federal taxes 2,627.6
Provision for federal taxes 942.9
-------------
Net gain $1,684.7
=============
Pursuant to the terms of the acquisition, the Company and Amgen agreed
to certain standstill, voting, lock-up and sales volume limitation
provisions with respect to the Amgen common stock received by the
Company. These provisions prohibited the Company, without the consent
of Amgen, from disposing of greater than an aggregate of 20,000,000
shares of Amgen common stock in any calendar quarter, with certain
exceptions, including the right to request a limited number of
underwritten offerings.
At September 30, 2002, the Company has classified the portion of its
investment in Amgen that can be sold during the next year as
available-for-sale securities within Current assets. This amount
represents the value of 80,000,000 shares or $3,336.0 million, which
includes unrealized gains of $811.6 million, net of tax, relating to
the mark-to-market adjustment on the current portion of the
investment. The $811.6 million, net of tax, has been included as a
component of Accumulated other comprehensive income (loss), in
accordance with SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The remaining value of the investment,
18,286,358 shares or $412.7 million, were also available-for-sale
securities and were classified within Other assets including deferred
taxes at September 30, 2002, but were not marked-to-market because
such shares were restricted from being sold within the next year.
The Company and Amgen continue to co-promote ENBREL in the United
States and Canada with the Company having exclusive international
rights to ENBREL. The financial aspects of the existing licensing and
marketing rights to ENBREL remain unchanged.
8
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Goodwill and Other Intangibles
------------------------------
Transitional Disclosure:
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. With the adoption of SFAS No. 142, goodwill
and other intangibles with indefinite lives are no longer being
amortized but are subject to impairment by applying a fair-value based
test.
SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level utilizing a two step methodology. The initial
step requires the Company to determine the fair value of each
reporting unit and compare it to the carrying value, including
goodwill, of such unit. If the fair value exceeds the carrying value,
no impairment loss would be recognized. However, if the carrying value
of this unit exceeds its fair value, the goodwill of this unit may be
impaired. The amount, if any, of the impairment would then be measured
in the second step.
Goodwill in each reporting unit must be tested for impairment as of
the beginning of the fiscal year in which SFAS No. 142 is initially
adopted (transitional impairment test). The Company completed step one
of the transitional impairment test during the second quarter and
determined that there was no impairment of the recorded goodwill.
The Company's other intangibles, which all have finite lives, have
carrying values of $115.7 million and $126.4 million at September 30,
2002 and December 31, 2001, respectively and are being amortized over
their estimated useful lives ranging from three to 10 years.
The following table presents net income and basic and diluted earnings
per share for the three and nine months ended September 30, 2002 and
2001 to reflect the adoption of SFAS No. 142 as of January 1, 2002.
9
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
---------------------------------------- ---------- -------- ---------- ----------
As-reported net income $1,401,399 $252,072 $2,873,178 $1,462,622
Add back: goodwill amortization - 38,306 - 115,239
---------- -------- ---------- ----------
Adjusted net income $1,401,399 $290,378 $2,873,178 $1,577,861
========== ======== ========== ==========
Basic earnings per share:
As-reported $1.06 $0.19 $2.17 $1.11
Goodwill amortization - 0.03 - 0.09
---------- -------- ---------- ----------
Adjusted $1.06 $0.22 $2.17 $1.20
========== ======== ========== ==========
Diluted earnings per share:
As-reported $1.05 $0.19 $2.15 $1.10
Goodwill amortization - 0.03 - 0.09
---------- -------- ---------- ----------
Adjusted $1.05 $0.22 $2.15 $1.19
========== ======== ========== ==========
Goodwill:
The change in the carrying amount of goodwill by segment for the nine
months ended September 30, 2002, is as follows:
Consumer
(In thousands) Pharmaceuticals Healthcare Total
-------------------------------- --------------- ---------- ----------
Balance at January 1, 2002 $3,136,543 $589,004 $3,725,547
Currency translation adjustments 23,137 934 24,071
--------------- ---------- ----------
Balance at September 30, 2002 $3,159,680 $589,938 $3,749,618
=============== ========== ==========
Note 4. Credit Facilities
-----------------
At September 30, 2002, the Company had commercial paper outstanding of
$6,182.1 million. The commercial paper outstanding was supported by
$5,000.0 million of credit facilities, as follows:
o In March 2002, the Company renewed its $3,000.0 million credit
facility for an additional 364-day term. Any borrowings under the
$3,000.0 million, 364-day credit facility that are outstanding
upon its termination in March 2003 are extendible by the Company
for an additional year. The portion of commercial paper
outstanding at September 30, 2002 supported by the $3,000.0
million, 364-day credit facility was classified as Long-term debt
since the Company intends, and has the ability, to refinance
these obligations through the issuance of additional commercial
paper or through the use of its $3,000.0 million credit facility.
o Also in March 2002, the Company reduced its $2,000.0 million
credit facility to $1,000.0 million, which terminated on July 31,
2002. On August 8, 2002, following the termination, the Company
obtained a 364-day $2,000.0 million credit facility,
10
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
which contemplates a potential increase to $3,000.0 million if
the Company so requests and lenders agree to participate. The
facility will be reduced to 66.67% of its committed amount on
December 31, 2002 and to 33.34% of its committed amount on May 8,
2003. In addition, in the event the Company enters into certain
alternative financings or asset sales (excluding up to $1,000.0
million of proceeds from any sales of Amgen shares) the committed
amount will be reduced by the amount of proceeds received
therefrom. Since the $2,000.0 million credit facility terminates
in less than one year, commercial paper outstanding of $2,000.0
million, supported by this facility, was classified as current
debt in Loans payable at September 30, 2002.
The remaining commercial paper balance of $1,182.1 million, which is
classified as current debt in Loans payable because it is not
supported by the credit facilities, is supported by $3,880.7 million
of cash, cash equivalents and marketable securities.
Note 5. Contingencies and Litigation Settlement
---------------------------------------
The Company is involved in various legal proceedings, including
product liability and environmental matters of a nature considered
normal to its business. It is the Company's policy to accrue for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable.
On July 9, 2002, findings from the Women's Health Initiative (WHI)
study evaluating hormone replacement therapy were released and the
subset of the study involving use of the Company's PREMPRO product was
stopped early. This subset was stopped early because, according to the
predefined stopping rule, the increased risk of breast cancer and
cardiovascular events exceeded the specified long-term benefits. Since
that announcement, the Company has been named in eleven putative class
action lawsuits. Three of the eleven putative class actions seek to
represent a nationwide class of all women who have ever purchased or
ingested PREMPRO and seek, on behalf of the class, purchase price
refunds, personal injury damages, medical monitoring expenses and an
order requiring the Company to inform the public of the reported risks
of PREMPRO. Five putative class actions each seek to represent a
statewide class of women who have ingested the drug and seek purchase
price refunds and medical monitoring expenses. The remaining three
putative class actions have been voluntarily dismissed. An additional
nine cases claiming personal injury damages have been filed on behalf
of allegedly injured individuals. The Company expects that additional
PREMPRO cases may be filed in the future. At this time, the Company is
unable to determine any possible range of loss relating to the PREMPRO
litigation and has not established any reserve with respect to any
such litigation, but expects to incur costs in connection with the
defense of the PREMPRO litigation. The Company believes it has
meritorious defenses against these claims and intends to vigorously
defend any PREMPRO litigation.
The nationwide class action settlement to resolve litigation brought
against the Company regarding use of the diet drugs PONDIMIN (which in
combination with phentermine, a product that was not manufactured,
distributed or sold by the Company, was commonly referred to as
"fen-phen") or REDUX received final judicial approval effective
January
11
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3, 2002. The Company recorded an initial litigation charge of
$4,750.0 million, net of insurance, in connection with the REDUX and
PONDIMIN litigation in 1999, an additional charge of $7,500.0 million
in 2000, a third litigation charge of $950.0 million in the 2001 third
quarter and a fourth charge of $1,400.0 million in the 2002 third
quarter. The principal reason for the charge taken in the 2002 third
quarter was that the volume and size of the claims filed in the
nationwide diet drug settlement were greater than anticipated.
These charges are intended to cover the total amount required to
resolve all diet drug litigation, including anticipated funding
requirements for the nationwide class action settlement, anticipated
costs to resolve the claims of any members of the settlement class who
in the future may exercise an intermediate or back-end opt out right,
costs to resolve the claims of primary pulmonary hypertension (PPH)
claimants and initial opt out claimants, and administrative and
litigation expenses.
During the 2002 first nine months, payments to the nationwide class
action settlement funds, individual settlement payments, legal fees
and other costs totaling $1,047.4 million were paid and applied
against the litigation accrual. As of September 30, 2002, $2,210.3
million of the litigation accrual remained.
On January 18, 2002, as collateral for the Company's financial
obligations under the settlement, the Company established a security
fund in the amount of $370.0 million and recorded such amount in Other
assets including deferred taxes. In April 2002, pursuant to an
agreement among the Company, class counsel and representatives of the
settlement trust, an additional $45.0 million, also included in Other
assets including deferred taxes, was added to the security fund,
bringing the total amount in the security fund to $415.0 million. The
funds are owned by the Company and will earn interest income for the
Company while residing in the security fund. The Company will be
required to deposit an additional $180.0 million in the security fund
and earned interest will remain in the fund if the Company's credit
rating, as reported by both Moody's and Standard & Poor's (S&P), falls
below investment grade.
Under the terms of the nationwide class action settlement, the period
during which class members could register to receive a screening
echocardiogram from the settlement trust ended on August 1, 2002.
Those echocardiograms, as well as echocardiograms that class members
choose to receive on their own outside the settlement, must be
completed by January 3, 2003, unless that date is extended by the
court. Class members whose echocardiograms demonstrate FDA-positive
levels of heart valve regurgitation (mild or greater aortic valve
regurgitation or moderate or greater mitral valve regurgitation) must
elect either to remain in the settlement or to withdraw from the
settlement and proceed as an intermediate opt-out (with specific
rights and limitations defined in the settlement) by May 3, 2003.
Based upon the information available at this time, the Company
believes that the balance remaining in its reserves will be adequate
to cover the remaining obligations relating to the diet drug
litigation. However, in light of the inherent uncertainty in
estimating litigation exposure it is possible that additional reserves
will be required.
12
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings will not have
a material adverse effect on the Company's financial position but
could be material to the results of operations or cash flows in any
one accounting period.
Note 6. Restructuring Programs
----------------------
In December 1998, the Company recorded a special charge for
restructuring and related asset impairments of $321.2 million to
recognize costs of the reorganization of its worldwide supply chains
and U.S. distribution systems, and the globalization of certain
business units. The restructuring will ultimately result in the
elimination of approximately 4,100 positions worldwide offset, in
part, by 1,000 newly created positions in the same functions at other
locations. At September 30, 2002, approximately 3,980 positions had
been eliminated, and two distribution centers owned by the Company and
a leased distribution center had been closed. The Company anticipates
closing a total of 14 manufacturing plants, of which eight were closed
in 2000 and two were closed during 2001. The Company currently
anticipates utilizing most of the remainder of the restructuring
accruals in 2002, assuming no further delays in regulatory approval.
The activity in the restructuring accruals was as follows:
Personnel Other Closure/
(In thousands) Costs Exit Costs Total
-------------------------------------------- --------- -------------- -------
Restructuring accruals at December 31, 2001 $9,037 $30,619 $39,656
Cash expenditures (2,644) (8,071) (10,715)
------ ------- -------
Restructuring accruals at September 30, 2002 $6,393 $22,548 $28,941
====== ======= =======
Note 7. Company Data by Operating Segment
---------------------------------
The Company has three reportable segments: Pharmaceuticals, Consumer
Healthcare and Corporate. The Company's Pharmaceuticals and Consumer
Healthcare reportable segments are strategic business units that are
managed separately because they manufacture, distribute and sell
distinct products and provide services, which require various
technologies and marketing strategies.
13
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Net Revenue (1)
-------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
($ in millions) ------------------- ---------------------
Operating Segment 2002 2001 2002 2001
----------------------- -------- -------- --------- ---------
Pharmaceuticals $3,025.1 $3,110.1 $9,183.8 $8,683.4
Consumer Healthcare 598.6 589.5 1,586.2 1,616.9
-------- -------- --------- ---------
Total $3,623.7 $3,699.6 $10,770.0 $10,300.3
======== ======== ========= =========
Income Before Taxes (2)
-------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
($ in millions) ------------------- ---------------------
Operating Segment 2002 2001 2002 2001
----------------------- -------- -------- --------- ---------
Pharmaceuticals $659.9 $1,035.1 $2,469.7 $2,551.8
Consumer Healthcare (3) 183.6 182.5 486.5 418.6
-------- -------- --------- ---------
843.5 1,217.6 2,956.2 2,970.4
Corporate (4) 1,184.5 (1,020.3) 965.6 (1,160.2)
-------- -------- --------- ---------
Total $2,028.0 $197.3 $3,921.8 $1,810.2
======== ======== ========= =========
(1) The Company adopted new authoritative accounting guidance as of
January 1, 2002 reflecting the cost of certain vendor
considerations (e.g., cooperative advertising payments) as
reductions of revenue instead of selling and marketing expenses.
Financial information for all prior periods presented has been
reclassified to comply with the income statement classification
requirements of the new guidance. These reclassifications had no
effect on total net revenue fluctuations between the periods
presented.
(2) In accordance with new authoritative accounting guidance, adopted
as of January 1, 2002, the Company has ceased amortizing
goodwill. The 2001 third quarter goodwill amortization was as
follows: Pharmaceuticals - $34.3 and Consumer Healthcare - $5.9.
The 2001 first nine months goodwill amortization was as follows:
Pharmaceuticals - $103.0 and Consumer Healthcare - $17.8.
(3) Consumer Healthcare included a gain of $78.9 for the 2002 first
nine months related to a settlement regarding price fixing by
certain vitamin suppliers.
(4) Corporate for the 2002 third quarter and first nine months
included a gain of $2,627.6 relating to the acquisition of
Immunex by Amgen and an additional litigation charge of $1,400.0
relating to the litigation brought against the Company regarding
the use of the diet drugs REDUX or PONDIMIN.
Corporate for the 2001 third quarter and first nine months
included a litigation charge of $950.0 relating to the litigation
brought against the Company regarding the use of the diet drugs
REDUX or PONDIMIN.
14
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Earnings per Share
------------------
The following table sets forth the computations of basic earnings per
share and diluted earnings per share:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
(In thousands except per share amounts) 2002 2001 2002 2001
--------------------------------------- ---------- --------- ---------- ----------
Net income less preferred dividends $1,401,399 $252,072 $2,873,149 $1,462,590
Denominator:
Average number of common shares
outstanding 1,325,930 1,318,359 1,325,294 1,316,091
---------- --------- ---------- ----------
Basic earnings per share $1.06 $0.19 $2.17 $1.11
========== ========= ========== ==========
Net income $1,401,399 $252,072 $2,873,178 $1,462,622
Denominator:
Average number of common shares
outstanding 1,325,930 1,318,359 1,325,294 1,316,091
Common stock equivalents of
outstanding stock options and
deferred common stock awards 5,138 13,183 10,004 14,010
---------- --------- ---------- ----------
Total shares 1,331,068 1,331,542 1,335,298 1,330,101
---------- --------- ---------- ----------
Diluted earnings per share $1.05 $0.19 $2.15 $1.10
========== ========= ========== ==========
At September 30, 2002 and 2001, the equivalent of 91.0 million and
20.2 million common shares, respectively, issuable under the Company's
stock incentive plans, were excluded from the computation of diluted
earnings per share because their effect would have been antidilutive.
15
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Marketable Securities
---------------------
The cost, gross unrealized gains, gross unrealized (losses) and fair
value of available-for-sale and held-to-maturity securities by major
security type at September 30, 2002 and December 31, 2001, were as
follows:
Gross Gross
($ in millions) Unrealized Unrealized Fair
At September 30, 2002 Cost Gains (Losses) Value
---------------------------- -------- ---------- ---------- --------
Available-for-sale:
U.S. Treasury securities $153.6 $0.6 - $154.2
Commercial paper 126.6 0.1 - 126.7
Certificates of deposit 48.0 - - 48.0
Mutual fund 509.6 14.3 - 523.9
Corporate debt securities 231.0 1.6 (0.2) 232.4
Other debt securities 5.6 - - 5.6
-------- ---------- ---------- --------
Total available-for-sale $1,074.4 $16.6 $(0.2) $1,090.8
-------- ---------- ---------- --------
Held-to-maturity:
Time / Term deposits $185.2 - - $185.2
U.S. Treasury securities 1.0 - - 1.0
Commercial paper 58.7 - - 58.7
Certificates of deposit 156.5 - - 156.5
Corporate debt securities 4.8 - - 4.8
Other debt securities 2.1 - - 2.1
-------- ---------- ---------- --------
Total held-to-maturity $408.3 - - $408.3
-------- ---------- ---------- --------
$1,482.7 $16.6 $(0.2) $1,499.1
======== ========== ========== ========
Gross Gross
($ in millions) Unrealized Unrealized Fair
At December 31, 2001 Cost Gains (Losses) Value
---------------------------- -------- ---------- ---------- --------
Held-to-maturity:
Time / Term deposits $900.9 - - $900.9
Commercial paper 363.6 - - 363.6
Certificates of deposit 7.6 - - 7.6
Government securities 7.9 - - 7.9
Other debt securities 2.0 - - 2.0
-------- ---------- ---------- --------
Total held-to-maturity $1,282.0 - - $1,282.0
======== ========== ========== ========
16
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The contractual maturities of debt securities classified as
available-for-sale and held-to-maturity as of September 30, 2002 are
as follows:
Fair
($ in millions) Cost Value
----------------------------------------- ------ ------
Available-for-sale:
Due within one year $263.6 $263.7
Due after one year through five years 289.7 291.6
Due after five years through ten years - -
Due after 10 years 11.5 11.6
------ ------
$564.8 $566.9
====== ======
Held-to-maturity:
Due within one year $408.3 $408.3
Due after one year through five years - -
Due after five years through ten years - -
Due after 10 years - -
------ ------
$408.3 $408.3
====== ======
Note 10. Sale of Rhode Island Facility
-----------------------------
During the first quarter of 2002, the Company completed the sale of a
manufacturing plant located in West Greenwich, Rhode Island, to
Immunex (subsequently acquired by Amgen) for $487.8 million. The
Company received $189.2 million of these proceeds in 2001 and the
remaining $298.6 million during the 2002 first quarter. The Company
did not recognize a gain on this transaction because the facility was
sold at net book value. The facility will be dedicated to expanding
the production capacity of ENBREL.
Note 11. Pending Sale of Lederle Generic Injectables
-------------------------------------------
A definitive agreement has been signed with Baxter Healthcare
Corporation for the sale of certain assets related to the Company's
generic human injectables. Under the terms of the agreement, which is
subject to customary conditions at closing, including certain
regulatory approvals, the Company will receive approximately $305.0
million in cash at closing, subject to certain adjustments. The
Company anticipates that the closing of this transaction will occur in
the 2002 fourth quarter.
17
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Recently Issued Accounting Standards
------------------------------------
During the 2002 second quarter, the Financial Accounting Standards
Board (FASB) issued Statements No. 145 and 146. The new standards
require the following:
o SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections,
primarily relates to the reporting of gains and losses from the
extinguishment of debt. With the issuance of this Statement,
extinguishment of debt is not to be considered extraordinary if
it is part of an entity's risk management strategy. The Company
does not anticipate the adoption of this Statement to have any
impact on its financial position or results of operations.
o SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities requires that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is
incurred. This Statement nullifies Emerging Issues Task Force
(EITF) No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring) which
permitted recognition of a liability for an exit cost at the date
of an entity's commitment to an exit plan.
The effective date for both Statements is January 1, 2003. The Company
anticipates recording a charge during the 2002 fourth quarter for
restructuring and related asset impairments. The Company will record
its asset impairments in accordance with SFAS No. 144 and its
restructuring charges, including personnel and other costs, in
accordance with EITF No. 94-3. The Company does not plan to early
adopt SFAS No. 146. However, if the Company records restructuring
charges subsequent to January 1, 2003, such charges will be recorded
in accordance with SFAS No. 146. This will spread the recognition of
the restructuring expenses over a number of accounting periods as
compared with EITF No. 94-3.
18
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The Company adopted new authoritative accounting guidance as of
January 1, 2002 reflecting the cost of certain vendor considerations
(e.g., cooperative advertising payments) as reductions of revenue
instead of selling and marketing expenses. Financial information for
the prior periods presented has been reclassified to comply with the
income statement classification requirements of the new guidance.
These reclassifications had no effect on total net revenue
fluctuations between the periods presented.
Worldwide net revenue for the 2002 third quarter and first nine months
was 2% lower and 5% higher, respectively, compared with prior period
levels. There was no foreign exchange impact on worldwide net revenue
for either the 2002 third quarter or first nine months. The following
table sets forth worldwide net revenue results by operating segment
together with the percentage changes from the comparable period in the
prior year:
Net Revenue
-----------------------
Three Months
Ended September 30,
($ in millions) ----------------------- % Increase
Operating Segment 2002 2001 (Decrease)
------------------- --------- --------- ----------
Pharmaceuticals $3,025.1 $3,110.1 (3)%
Consumer Healthcare 598.6 589.5 2%
--------- --------- ----------
Total $3,623.7 $3,699.6 (2)%
========= ========= ==========
Net Revenue
-----------------------
Nine Months
Ended September 30,
($ in millions) ----------------------- % Increase
Operating Segment 2002 2001 (Decrease)
------------------- --------- --------- ----------
Pharmaceuticals $9,183.8 $8,683.4 6%
Consumer Healthcare 1,586.2 1,616.9 (2)%
--------- --------- ----------
Total $10,770.0 $10,300.3 5%
========= ========= ==========
19
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Pharmaceuticals
---------------
Worldwide pharmaceutical net revenue decreased 3% for the 2002 third
quarter and increased 6% for the 2002 first nine months. The decrease
for the 2002 third quarter was due primarily to lower sales of U.S.
human and animal health pharmaceuticals, while the increase for the
2002 first nine months was primarily due to higher sales of worldwide
human pharmaceuticals. There was no foreign exchange impact on
worldwide pharmaceutical net revenue for either the 2002 third quarter
or 2002 first nine months.
Worldwide human pharmaceutical net revenue was flat for the 2002 third
quarter and increased 7% for the 2002 first nine months. The 2002
third quarter and first nine months fluctuations were impacted by
increases in sales of PROTONIX, as a result of higher volume caused by
an increase in prescriptions and a wholesalers' incentive program
before the September 2002 price increase, and EFFEXOR, as a result of
higher volume. These increases were partially offset by decreases in
the sales of the PREMARIN family of products; PREVNAR, due primarily
to manufacturing related constraints on finished product availability;
and generic products, as a result of the discontinuance of certain
oral generics. Additionally, the 2002 first nine months net revenue
increase was impacted by higher sales of CORDARONE and alliance
revenue. Refer to the "Prempro / Premarin - HRT Studies" and "Product
Supply" sections herein for further discussion of the issues affecting
the PREMARIN family of products and PREVNAR, respectively. Excluding
the positive impact of foreign exchange for the 2002 third quarter,
worldwide human pharmaceutical net revenue decreased 1%, however,
there was no foreign exchange impact on worldwide human pharmaceutical
net revenue for the 2002 first nine months.
Worldwide animal health product net revenue decreased 37% for the 2002
third quarter and 14% for the 2002 first nine months due primarily to
lower sales and higher returns of ProHeart 6 offset, in part, by
higher sales of the Company's West Nile Virus biological vaccine for
horses, which was introduced in the 2001 third quarter and is being
sold in North America under a conditional biological license.
20
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
The following table sets forth the significant worldwide human
pharmaceutical and animal health net revenue product fluctuations for
the three and nine months ended September 30, 2002 compared with the
same periods in the prior year:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
($ in millions) $ Increase % Increase $ Increase % Increase
Products (Decrease) (Decrease) (Decrease) (Decrease)
--------------------------- ---------- ---------- ---------- ----------
PROTONIX $182.8 113% $329.8 73%
EFFEXOR 49.4 12% 409.3 38%
CORDARONE 7.4 8% 102.3 52%
ReFacto 16.7 46% 33.6 31%
PREVNAR (53.6) (32)% (159.5) (28)%
PREMARIN family (165.0) (28)% (104.1) (6)%
Oral generics (40.3) - (133.0) -
Alliance revenue 39.6 47% 85.1 42%
Other (45.1) (3)% 12.7 -
---------- ---------- ---------- ----------
Total human pharmaceuticals (8.1) - 576.2 7%
---------- ---------- ---------- ----------
ProHeart 6 (74.6) - (88.5) -
Other (2.3) (1)% 12.7 3%
---------- ---------- ---------- ----------
Total animal health (76.9) (37)% (75.8) (14)%
---------- ---------- ---------- ----------
Total pharmaceuticals $(85.0) (3)% $500.4 6%
========== ========== ========== ==========
Consumer Healthcare
-------------------
Worldwide consumer healthcare net revenue increased 2% for the 2002
third quarter and decreased 2% for the 2002 first nine months. The
increase for the 2002 third quarter was due primarily to higher sales
of ADVIL, CALTRATE and various other products offset, in part, by
lower sales of the CENTRUM product line and DENOREX, which was
divested in February 2002. The decrease for the 2002 first nine months
was due primarily to lower sales of cough/cold/allergy products,
DENOREX, CALTRATE and CHAP STICK offset, in part, by higher sales of
the CENTRUM product line and various other products. There was no
foreign exchange impact on worldwide consumer healthcare net revenue
for either the 2002 third quarter or first nine months.
21
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
The following table sets forth the significant worldwide consumer
healthcare net revenue product fluctuations for the three and nine
months ended September 30, 2002 compared with the same periods in the
prior year:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
($ in millions) $ Increase % Increase $ Increase % Increase
Products (Decrease) (Decrease) (Decrease) (Decrease)
--------------------------- ---------- ---------- ---------- ----------
ADVIL* $3.0 2% $(1.0) -
CALTRATE 2.2 6% (4.6) (4)%
CENTRUM (3.9) (3)% 13.1 4%
DENOREX (4.1) (100)% (10.7) (92)%
CHAP STICK (1.4) (6)% (4.1) (6)%
Cough/cold/allergy products (0.4) - (42.2) (13)%
Other 13.7 11% 18.8 5%
---------- ---------- ---------- ----------
Total consumer healthcare $9.1 2% $(30.7) (2)%
========== ========== ========== ==========
* ADVIL COLD AND SINUS is included within the cough/cold/allergy
product line.
The following table sets forth the percentage changes in worldwide net
revenue by operating segment compared with the same periods in the
prior year, including the effect volume, price and foreign exchange
had on these percentage changes:
% Increase (Decrease) % Increase (Decrease)
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
----------------------------------------- -----------------------------------------
Foreign Total Foreign Total
Volume Price Exchange Net Revenue Volume Price Exchange Net Revenue
------ ----- -------- ----------- ------ ----- -------- -----------
Pharmaceuticals
-------------------
United States (16)% 9% - (7)% (1)% 7% - 6%
International 2% 2% 1% 5% 5% 1% (1)% 5%
----- ---- --- ---- ---- --- ---- ----
Total (10)% 7% - (3)% 1% 5% - 6%
===== ==== === ==== ==== === ==== ====
Consumer Healthcare
-------------------
United States 2% (1)% - 1% (4)% - - (4)%
International (1)% 3% - 2% 1% 2% (1)% 2%
----- ---- --- ---- ---- --- ---- ----
Total 1% 1% - 2% (3)% 1% - (2)%
===== ==== === ==== ==== === ==== ====
Total
-------------------
United States (13)% 7% - (6)% (1)% 6% - 5%
International 2% 2% 1% 5% 4% 2% (1)% 5%
----- ---- --- ---- ---- --- ---- ----
Total (8)% 6% - (2)% 1% 4% - 5%
===== ==== === ==== ==== === ==== ====
22
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Cost of goods sold, as a percentage of Net revenue, increased to 29.2%
for the 2002 third quarter compared with 23.8% for the 2001 third
quarter and increased to 25.5% for the 2002 first nine months compared
with 24.0% for the 2001 first nine months. The increase in Cost of
goods sold, as a percentage of Net revenue, for both the 2002 third
quarter and first nine months is attributable to a change in product
mix, the costs of addressing various manufacturing issues as described
in the "Product Supply" section, herein, and the write-off of
approximately $35.0 million of FluShield inventory. The unfavorable
change in product mix reflects decreased sales of the higher margin
PREMARIN family and PREVNAR products and higher sales of lower margin
products such as PROTONIX and ReFacto offset, in part, by the
discontinuance of the lower margin oral generics business in the
pharmaceuticals segment. The unfavorable change in product mix is also
partially offset by increased alliance revenue recorded in 2002 net
revenue compared with 2001 net revenue. There are no costs of goods
sold relating to alliance revenue, and therefore any net revenue
fluctuations impacted by alliance revenue also impact gross margins.
Selling, general and administrative expenses, as a percentage of Net
revenue, increased to 33.6% for the 2002 third quarter compared with
32.5% for the 2001 third quarter and remained flat at 35.3% for the
2002 first nine months (excluding the effect of goodwill amortization
from the 2001 third quarter and first nine months). The slight
increase relating to the third quarter was primarily due to spending
for various selling programs and general and administrative expenses
outpacing net revenue growth.
Research and development expenses increased 9% for both the 2002 third
quarter and first nine months due primarily to an increased number of
employees and other research operating expenses, including higher
chemical and material costs, clinical grant spending and cost sharing
expenditures relating to pharmaceutical collaborations offset, in
part, by lower payments under licensing agreements.
Interest expense, net increased 29% for the 2002 third quarter and 72%
for the 2002 first nine months due primarily to higher weighted
average debt outstanding and lower interest income, as compared with
prior year levels. Weighted average debt outstanding during the 2002
third quarter and first nine months was $10,817.0 million and
$10,380.8 million, respectively, compared with prior year levels of
$8,466.0 million and $6,654.0 million, respectively. The impact of
higher debt outstanding was partially offset by lower interest rates
on outstanding commercial paper.
Other income, net decreased 74% for the 2002 third quarter and 13% for
the 2002 first nine months due primarily to lower gains on sales of
non-strategic assets. The decrease for the 2002 first nine months was
partially offset by the proceeds received from a settlement regarding
price fixing by certain vitamin suppliers.
23
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
The following table sets forth worldwide income before taxes by
operating segment together with the percentage changes from the
comparable period in the prior year:
Income Before Taxes (1)
------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ in millions) % Increase % Increase
Operating Segment 2002 2001 (Decrease) 2002 2001 (Decrease)
----------------------- -------- -------- ---------- -------- -------- ----------
Pharmaceuticals $659.9 $1,035.1 (36)% $2,469.7 $2,551.8 (3)%
Consumer Healthcare (2) 183.6 182.5 1% 486.5 418.6 16%
-------- -------- ----- -------- -------- ----
843.5 1,217.6 (31)% 2,956.2 2,970.4 -
Corporate (3) 1,184.5 (1,020.3) - 965.6 (1,160.2) -
-------- -------- ----- -------- -------- ----
Total $2,028.0 $197.3 - $3,921.8 $1,810.2 -
======== ======== ===== ======== ======== ====
(1) In accordance with new authoritative accounting guidance, adopted
as of January 1, 2002, the Company has ceased amortizing
goodwill. The 2001 third quarter goodwill amortization was as
follows: Pharmaceuticals - $34.3 and Consumer Healthcare - $5.9.
The 2001 first nine months goodwill amortization was as follows:
Pharmaceuticals - $103.0 and Consumer Healthcare - $17.8.
Excluding goodwill amortization from the 2001 third quarter and
first nine months results, Pharmaceuticals and Consumer
Healthcare income before taxes decreased 38% and 3%,
respectively, for the 2002 third quarter and decreased 7% and
increased 11%, respectively, for the 2002 first nine months.
(2) Consumer Healthcare included a gain of $78.9 for the 2002 first
nine months related to a settlement regarding price fixing by
certain vitamin suppliers. Excluding goodwill amortization and
the settlement gain from the 2002 first nine months results,
Consumer Healthcare income before taxes decreased 7%.
(3) Corporate for the 2002 third quarter and first nine months
included a gain of $2,627.6 relating to the acquisition of
Immunex by Amgen and an additional litigation charge of $1,400.0
relating to the litigation brought against the Company regarding
the use of the diet drugs REDUX or PONDIMIN. In addition, the
2001 third quarter and first nine months also included a diet
drug litigation charge of $950.0. Excluding these items from the
2002 and 2001 third quarter and first nine months results,
Corporate expenses, net decreased 39% and increased 25%,
respectively.
Worldwide pharmaceutical income before taxes decreased 38% for the
2002 third quarter and 7% for the 2002 first nine months (excluding
goodwill amortization from the 2001 third quarter and first nine
months) due primarily to shortfalls in worldwide sales of human
pharmaceuticals, higher costs of goods sold, as a percentage of net
revenue, higher research and development expenses and lower other
income, net (primarily due to lower gains on sales of non-strategic
assets).
Worldwide consumer healthcare income before taxes decreased 3% for the
2002 third quarter and increased 11% for the 2002 first nine months
(excluding goodwill amortization from the 2001 third quarter and first
nine months) while consumer healthcare net sales increased 2% for the
2002 third quarter and decreased 2% for the 2002 first nine months.
The difference in the growth rates for the 2002 first nine months is
primarily attributable to the settlement gain relating to price fixing
by certain vitamin
24
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
suppliers, higher gains on asset sales and lower selling, general and
administrative expenses as a percentage of net sales.
Corporate expenses, net decreased 39% for the 2002 third quarter and
increased 25% for the 2002 first nine months, excluding the following
unusual items: a 2002 third quarter gain of $2,627.6 million relating
to the acquisition of Immunex by Amgen; a 2002 third quarter charge of
$1,400.0 million to increase the reserve relating to the REDUX and
PONDIMIN diet drug litigation; and a 2001 third quarter diet drug
litigation charge of $950.0 million. The decrease in corporate
expenses, net for the 2002 third quarter, excluding the unusual items
identified above, was due primarily to lower general and
administrative expenses. The increase for the 2002 first nine months,
excluding the unusual items, was due primarily to higher interest
expense, resulting from higher weighted average debt outstanding and
lower interest income.
The effective tax rate decreased to 21.9% and 22.1% for the 2002 third
quarter and first nine months, respectively, compared with 24.0% for
both the 2001 third quarter and first nine months (excluding the
effect of goodwill amortization and the 2002 and 2001 unusual items).
The tax rate reduction occurring in the 2002 third quarter and first
nine months was primarily due to an increased benefit from products
manufactured in lower taxed jurisdictions.
Consolidated Net Income and Diluted Earnings Per Share Results
--------------------------------------------------------------
Net income and diluted earnings per share for the 2002 third quarter
increased to $1,401.4 million and $1.05 compared with $252.1 million
and $0.19. On January 1, 2002, the Company adopted SFAS No. 142, which
eliminated the amortization of goodwill. Excluding the after-tax
goodwill amortization of $38.3 million and $0.03 per share-diluted
from the 2001 third quarter results, as well as the 2002 and 2001
unusual items, net income and diluted earnings per share for the 2002
third quarter both decreased 31% to $626.7 million and $0.47,
respectively, compared with $905.4 million and $0.68 in the 2001 third
quarter. The decreases in net income and diluted earnings per share
for the 2002 third quarter, excluding the unusual items, was
principally due to sales shortfalls of several product categories,
including:
o The PREMARIN family of products, which is directly related
to the findings from the WHI study evaluating hormone
replacement therapy, published on July 9, 2002.
o The vaccine business, due to manufacturing related
constraints on PREVNAR product availability.
o Products in the animal health and consumer healthcare
divisions, including lower sales and higher than projected
returns of the animal health division product, ProHeart 6
and lower cough/cold product sales and reductions in
retailer inventories in the consumer healthcare division.
25
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Additionally, the decline in net income, excluding the unusual items,
was impacted by higher cost of goods sold, as a percentage of net
revenue, and higher research and development expenses and interest
expense, as well as lower other income, net.
Net income and diluted earnings per share for the 2002 first nine
months increased to $2,873.2 million and $2.15 compared with $1,462.6
million and $1.10 in the prior year. Excluding the after-tax goodwill
amortization of $115.2 million and $0.09 per share-diluted from the
2001 first nine months results, as well as the unusual items
identified above, net income and diluted earnings per share for the
2002 first nine months decreased 4% and 5%, respectively, to $2,098.5
million and $1.57, respectively, compared with $2,192.9 million and
$1.65 in the 2001 first nine months. The same items that impacted the
2002 third quarter decrease in net income also impacted the 2002 first
nine months.
Liquidity, Financial Condition and Capital Resources
----------------------------------------------------
The Company generated net cash from operating activities totaling
$168.0 million during the 2002 first nine months. Most of the earnings
generated during the 2002 first nine months were offset by the
following items:
o payments of $1,047.4 million relating to the diet drug
litigation (see Note 5 to the Consolidated Condensed
Financial Statements),
o payments of $415.0 million to a security fund as collateral
for the Company's financial obligations under the diet drug
settlement,
o payments made on outstanding payables and accrued expenses
totaling $320.7 million, and
o an increase in inventories of $315.2 million due primarily
to production planning.
The Company used $1,301.6 million of cash during the 2002 first nine
months for investments in property, plant and equipment. The capital
expenditures made during the 2002 first nine months were consistent
with the Company's commitment to expand existing manufacturing and
research and development facilities worldwide, and build new
biotechnology facilities. The Company received investment proceeds
through the sales and maturities of marketable securities and the
sales of assets totaling $1,759.3 million. Included in the proceeds
from sales of assets in 2002 is approximately $298.6 million relating
to the sale of the Company's retrofitted Rhode Island facility to
Immunex (subsequently acquired by Amgen). Additionally, the Company
received $1,005.2 million in cash in connection with the acquisition
of Immunex by Amgen.
The Company received cash through various financing activities
including net proceeds from debt totaling $1,365.3 million and cash
provided by stock option exercises totaling $206.1 million. These
proceeds were partially offset by dividend payments of $914.2 million
and purchases of treasury stock of $113.9 million.
26
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
At September 30, 2002, the Company had outstanding $11,006.7 million
in total debt. The Company's total debt consisted of commercial paper
of $6,182.1 million, and notes payable and other debt of $4,824.6
million. Current debt at September 30, 2002, classified as Loans
payable, consisted of:
o $2,000.0 million of commercial paper supported by the
$2,000.0 million credit facility that terminates in less
than one year,
o $1,182.1 million of commercial paper that is in excess of
the $3,000.0 million credit facility and is supported by
$3,880.7 million of cash, cash equivalents and marketable
securities, and
o $266.8 million of notes payable and other debt that is due
within one year.
The portion of commercial paper outstanding at September 30, 2002
supported by the $3,000.0 million, 364-day credit facility was
classified as Long-term debt since the Company intends, and has the
ability, to refinance these obligations through the issuance of
additional commercial paper or through the use of its $3,000.0 million
credit facility.
Following the termination of its $1,000.0 million credit facility on
July 31, 2002, the Company obtained a 364-day $2,000.0 million credit
facility, which contemplates a potential increase to $3,000.0 million
if the Company so requests and lenders agree to participate. The
facility will be reduced to 66.67% of its committed amount on December
31, 2002 and to 33.34% of its committed amount on May 8, 2003. In
addition, in the event the Company enters into certain alternative
financings or asset sales (excluding up to $1,000.0 million of
proceeds from any sales of Amgen shares) the committed amount will be
reduced by the amount of proceeds received therefrom.
Management believes that this new facility, together with the
Company's existing $3,000.0 million credit facility, its investment in
Amgen and significant cash balances (including the $1,005.2 million
received in July in connection with the acquisition of Immunex by
Amgen), should provide for adequate liquidity needs of the Company for
the foreseeable future. Although the Company offers its commercial
paper in a liquid market commensurate with its short-term credit
ratings from Moody's (P2), S&P (A1) and Fitch (F1), the credit markets
have been increasingly volatile and sensitive to unfavorable
developments. Accordingly, and in light of the relatively large size
of the Company's commercial paper program, the Company is currently
evaluating financing alternatives to support longer term liquidity
requirements.
On September 27, 2002, Moody's affirmed the Company's Prime-2
short-term rating and placed the Company's A3 long-term senior
unsecured debt rating under review for possible downgrade. Since then,
the Company has held discussions with Moody's and has provided
additional information requested to facilitate their review. To date,
Moody's has not taken action with respect to the Company's A3
long-term rating.
Management remains confident that cash flows from operating activities
and existing and prospective financing resources will be adequate to
fund the Company's operations, pay opt out settlement payments and
fund the nationwide class action settlement relating to
27
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
the PONDIMIN (which in combination with phentermine, a product that
was not manufactured, distributed or sold by the Company, was commonly
referred to as "fen-phen") and REDUX diet drug litigation, pay
dividends, maintain the ongoing programs of capital expenditures, and
repay both the principal and interest on its outstanding obligations,
without requiring the disposition of any significant strategic core
assets or businesses.
Certain Factors that May Affect Future Results
----------------------------------------------
Prempro / Premarin - HRT Studies
Two subsets of the WHI enrolled a total of 27,000 predominantly
healthy postmenopausal women to assess the risks and benefits of
either long-term estrogen replacement therapy (ERT) or long-term
hormone replacement therapy (HRT). The primary endpoint of the WHI
study was coronary heart disease, with invasive breast cancer as the
primary adverse outcome studied. The HRT subset of the WHI study,
involving women who received a combination of conjugated estrogens and
medroxyprogesterone acetate (PREMPRO), was stopped early (after the
patients were followed in the study for an average of 5.2 years)
because, according to the predefined stopping rule, increased risks of
breast cancer and cardiovascular events exceeded the specified
long-term benefits. The study observed an increased incidence of
cardiovascular disease and, over time, breast cancer among women on
HRT compared to those on placebo. The study also observed a reduction
in the incidence of hip, vertebral and other osteoporotic fractures
and of colon cancer among women on HRT compared to those on placebo.
The study did not evaluate the use of HRT for the treatment of
menopausal symptoms, the main indications of the product. These
findings provide additional information about the risks of breast
cancer and cardiovascular disease which were identified as potential
adverse events in the labeling for the Company's HRT products. A great
deal of media attention has been focused on this subject.
As a result, sales of PREMPRO and other PREMARIN family products have
been and will continue to be adversely affected even though the study
subset that was terminated focused on the long-term use of PREMPRO and
did not involve PREMARIN (ERT). Based on the most recent available
market data, average weekly prescriptions written for PREMPRO and
PREMARIN decreased approximately 50% and 20%, respectively, compared
to the average weekly prescriptions written during the eight week
period preceding the termination of the study subset. PREMPRO sales
(including PREMPHASE) for the three and nine months ended September
30, 2002 represented approximately 5% of consolidated net revenue for
both periods. Set forth below are individual product operating results
for PREMPRO/PREMPHASE and PREMARIN for both the three and nine months
ended September 30, 2002 and 2001.
28
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Prempro/Premphase
-------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
($ in millions) 2002 2001 2002 2001
--------------- ------ ------ -------- ------
Net revenue $153.1 $264.9 $540.7 $700.8
Gross profit 132.4 230.6 465.3 607.9
Premarin
-------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
($ in millions) 2002 2001 2002 2001
--------------- ------ ------ -------- ------
Net revenue $268.3 $321.5 $1,001.6 $945.6
Gross profit 239.8 288.4 916.0 862.6
Competition
The Company operates in the highly competitive pharmaceutical and
consumer health care industries. PREMARIN, the Company's principal
conjugated estrogens product manufactured from pregnant mare's urine,
and related products PREMPRO and PREMPHASE (which are single tablet
combinations of the conjugated estrogens in PREMARIN and the progestin
medroxyprogesterone acetate), are the leaders in their categories and
contribute significantly to the Company's net revenue and results of
operations. PREMARIN's natural composition is not subject to patent
protection (although PREMPRO has patent protection). The principal
indications of PREMARIN, PREMPRO and PREMPHASE are to manage the
symptoms of menopause and to prevent osteoporosis, a condition
involving a loss of bone mass in postmenopausal women.
Estrogen-containing products manufactured by other companies have been
marketed for many years for the treatment of menopausal symptoms.
During the past several years, other manufacturers have introduced
products for the treatment and/or prevention of osteoporosis. New
products containing different estrogens and/or different progestins
than those found in PREMPRO and PREMPHASE, utilizing various forms of
delivery and having one or more of the same indications have also been
introduced. Some companies have attempted to obtain approval for
generic versions of PREMARIN. These products, if approved, would be
routinely substitutable for PREMARIN and related products under many
state laws and third-party insurance payer plans. In May 1997, the FDA
announced that it would not approve certain synthetic estrogen
products as generic equivalents of PREMARIN given known compositional
differences between the active ingredient of these products and
PREMARIN. Although the FDA has not approved any generic equivalent to
PREMARIN to date, PREMARIN will continue to be subject to competition
from existing and new competing estrogen and other products for its
approved indications and may be subject to generic competition from
either synthetic or natural conjugated estrogens products in the
future. At least one other company has announced that it is in the
process of developing a generic version of PREMARIN from the same
natural source, and the Company currently cannot predict the timing or
outcome of these or any other efforts.
29
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
The marketing exclusivity for CORDARONE I.V. expired on August 3, 2002
and the Company's application for a six month pediatric extension of
the marketing exclusivity was denied by the FDA. Accordingly, sales of
CORDARONE I.V. will be materially decreased by the introduction of
generic products, several of which have been approved by the FDA.
CORDARONE I.V. had net sales of $286.4 million during the first nine
months of 2002.
Product Supply
Although the market demand for ENBREL is increasing, the sales growth
currently is constrained by limits on the existing source of supply.
This is expected to continue until the retrofitting of a Rhode Island
facility owned by Amgen is completed and approved, which is currently
anticipated to occur in the first quarter of 2003, although there is
no assurance that this estimate will prove accurate. If the market
demand continues to grow, there may be further supply constraints even
after the Rhode Island facility begins producing ENBREL. In April
2002, Immunex (prior to being acquired by Amgen) announced it entered
into a manufacturing agreement with Genentech, Inc. to produce ENBREL
beginning in 2004, subject to FDA approval. The current plan for the
longer term includes an additional manufacturing facility, which is
being constructed by the Company in Ireland and is expected to be
completed during 2005.
The Company has been experiencing inconsistent results on dissolution
testing of certain dosage forms of PREMARIN and is working with the
FDA to resolve this issue. Until this issue is resolved, supply
shortages of one or more dosage strengths may occur. Although these
shortages may adversely affect PREMARIN sales in one or more
accounting periods, the Company believes that, as a result of current
inventory levels and the Company's enhanced process controls, testing
protocols and the ongoing formulation improvement project, as well as
reduced demand (see also Prempro / Premarin - HRT Studies), overall
PREMARIN family sales will not be significantly impacted by the
dissolution issues.
Sales of PREVNAR continue to be affected by manufacturing related
constraints on product availability. The Company is in the process of
implementing manufacturing improvements and allocating additional
personnel and equipment to increase the production of PREVNAR. The
Company's efforts are not expected to significantly increase supply
until 2003 and, as a result, 2002 PREVNAR sales will not exceed prior
year levels. The manufacturing processes for this product are very
complex and there can be no assurance that manufacturing related
difficulties will not constrain PREVNAR sales in 2003 or beyond.
Sales growth of ReFacto (a recombinant factor VIII product for
hemophilia A) has been constrained by limits on existing product
supply sources, which are being alleviated as new manufacturing
capacity becomes available. However, the overall supply of the
competitive recombinant factor VIII products has recently increased
and this, along with certain ongoing labeling revisions and related
issues concerning assay methodology and potency, may adversely affect
demand for ReFacto.
30
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Litigation and Contingent Liabilities
The Company is involved in various legal proceedings, including
product liability and environmental matters that arise from time to
time in the ordinary course of business, the most significant of which
are described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002 and this Quarterly
Report on Form 10-Q. These include allegations of injuries caused by
drugs, vaccines and over-the-counter products, including PONDIMIN
(which in combination with phentermine, a product that was not
manufactured, distributed or sold by the Company, was commonly
referred to as "fen-phen"), REDUX, DIMETAPP, ROBITUSSIN and PREMPRO.
In addition, the Company has responsibility for environmental, safety
and cleanup obligations under various local, state and federal laws,
including the Comprehensive Environmental Response, Compensation and
Liability Act, commonly known as Superfund.
The estimated costs that the Company expects to pay in these cases are
accrued when the liability is considered probable and the amount can
be reasonably estimated. In many cases, future environmental-related
expenditures cannot be quantified with a reasonable degree of
accuracy. As investigations and cleanups proceed,
environmental-related liabilities are reviewed and adjusted as
additional information becomes available. In addition, the Company is
self-insured against ordinary product liability risks and has
liability coverage, in excess of certain limits and subject to certain
policy ceilings, from various insurance carriers. It is the opinion of
the Company that any potential liability that might exceed amounts
already accrued will not have a material adverse effect on the
Company's financial position but could be material to the results of
operations or cash flows in any one accounting period.
Cautionary Statements for Forward-Looking Information
-----------------------------------------------------
This Form 10-Q, including management's discussion and analysis set
forth above, contains certain forward-looking statements, including,
among other things, statements regarding the Company's results of
operations, competition, liquidity, financial condition and capital
resources, PREVNAR sales, PREMPRO/PREMARIN performance, product
supply, foreign currency and interest rate risk, the nationwide class
action settlement relating to REDUX and PONDIMIN, and additional
litigation charges related to REDUX and PONDIMIN including those for
opt outs. These forward-looking statements are based on current
expectations of future events that involve risks and uncertainties
including, without limitation, risks associated with the inherent
uncertainty of pharmaceutical research, product development,
manufacturing, commercialization, economic conditions including
interest and currency exchange rate fluctuations, access to capital
markets, the impact of competitive or generic products, product
liability and other types of lawsuits, the impact of legislation and
regulatory compliance and obtaining approvals and patents. From time
to time, we also may provide oral or written forward-looking
statements in other materials we release to the public. However, the
Company assumes no obligation to publicly update any forward-looking
statements, whether as a
31
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
result of new information, future events or otherwise. Certain factors
which could cause the Company's actual results to differ materially
from expected and historical results are discussed herein and others
have been identified by the Company in Exhibit 99 to the Company's
2001 Annual Report on Form 10-K, which exhibit is incorporated herein
by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The market risk disclosures appearing on pages 64 and 65 of the
Company's 2001 Annual Report on Form 10-K have not materially changed
from December 31, 2001.
At September 30, 2002, the fair values of the Company's financial
instruments were as follows:
($ in millions) Notional/
Description Contract Amount Carrying Value Fair Value
--------------------- --------------- -------------- ----------
Forward contracts (1) $633.0 $11.4 $11.4
Interest rate swaps 1,500.0 198.3 198.3
Outstanding debt (2) 10,812.9 11,006.7 11,140.8
(1) If the value of the U.S. dollar were to increase or decrease by
10%, in relation to all hedged foreign currencies, the net
receivable on the forward contracts would decrease or increase by
approximately $40.3.
(2) If the interest rates were to increase or decrease by one
percentage point, the fair value of the outstanding debt would
increase or decrease by approximately $202.6.
The estimated fair values approximate amounts at which these financial
instruments could be exchanged in a current transaction between
willing parties. Therefore, fair values are based on estimates using
present value and other valuation techniques that are significantly
affected by the assumptions used concerning the amount and timing of
estimated future cash flows and discount rates that reflect varying
degrees of risk. Specifically, the fair value of outstanding debt
instruments reflects a current yield valuation based on observed
market prices as of September 30, 2002; and the fair value of interest
rate swaps and forward contracts reflects the present value of the
future potential gain or (loss) if settlement were to take place on
September 30, 2002.
32
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2002
Item 4. Controls and Procedures
-----------------------
Within the 90 days prior to the date of filing this Quarterly Report
on Form 10-Q, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures are reasonably effective in design and
practice to alert them, in a timely manner, to material information
relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.
Subsequent to the date of that evaluation, there have been no
significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls, nor were
any corrective actions required with regard to significant
deficiencies or material weaknesses.
33
Part II - Other Information
Item 1. Legal Proceedings
-----------------
The Company and its subsidiaries are parties to numerous lawsuits and
claims arising out of the conduct of its business, including product
liability and other tort claims, the most significant of which are
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002.
On July 9, 2002, findings from the WHI study evaluating hormone
replacement therapy were released and the subset of the study
involving use of the Company's PREMPRO product was stopped early.
Since that announcement, the Company has been named in eleven putative
class action lawsuits. Three of the eleven putative class actions seek
to represent a nationwide class of all women who have ever purchased
or ingested PREMPRO and seek, on behalf of the class, purchase price
refunds, personal injury damages, medical monitoring expenses and an
order requiring the Company to inform the public of the reported risks
of PREMPRO. Favela, et al. v. Wyeth, No. 02-05893DT, U.S.D.C., C.D.
Ca.; Lewers, et al. v. Wyeth, No.02C4970, U.S.D.C., N.D. Ill.; and
Szabo, et al. v. Wyeth, No. SA02-757, U.S.D.C., C.D. Ca. Five putative
class actions each seek to represent a statewide class of women who
have ingested the drug and seek purchase price refunds and medical
monitoring expenses. Albertson, et al. v. Wyeth, No. 002944 Ct. Comm.
Pleas, Philadelphia Cty., PA; Cook, et al. v. Wyeth, No.
4-02-CV-00529WRW, U.S.D.C., E.D. Pa.; Finnigan, et al. v. Wyeth, No.
00007, Ct. Comm. Pleas, Philadelphia Cty., PA; Gallo, et al. v. Wyeth,
No. 002857, Ct. Comm. Pleas, Philadelphia Cty., PA.; Koenig, et al. v.
Wyeth, No. 02-18165CA27, U.S.D.C., S.D.Fl. The remaining three
putative class actions (the previously reported Bloch, Geller and
Goldstein cases) have been voluntarily dismissed. An additional nine
cases claiming personal injury damages have been filed on behalf of
allegedly injured individuals. The Company expects that additional
PREMPRO cases may be filed in the future.
In the litigation involving those formulations of the Company's
DIMETAPP and ROBITUSSIN cough/cold products that contained the
ingredient phenylpropanolamine (PPA), California Superior Court Judge
Anthony J. Mohr, who is supervising the California state court PPA
litigation, has denied class certification in the four California
putative class actions seeking damages for alleged economic losses.
The Company is currently named as a defendant in more than 450
lawsuits involving approximately 1,800 named plaintiffs. Of these
lawsuits, six are purported class actions. Of the class actions suits,
three allege economic injury caused by alleged misrepresentations
regarding the risks involved with products containing PPA and three
allege personal injury. The Company expects that additional PPA cases
may be filed in the future against it and the other companies that
marketed PPA-containing products.
In the litigation involving allegations that the cumulative effect of
thimerosal, a preservative used in certain vaccines manufactured and
distributed by the Company as well as by other vaccine manufacturers,
causes severe neurological damage, including autism in children, one
additional class action has been filed. Ashton, et al. v. Aventis
Pasteur, Inc., et al., No. 004026, Ct. Comm. Pleas, Philadelphia Cty.,
PA, is a putative nationwide class action seeking medical monitoring,
a court-supervised research program
34
and compensatory and punitive damages. The Company has now been named
as a defendant in more than 140 lawsuits involving approximately 550
named plaintiffs. Of these lawsuits, eleven are purported class
actions. The Company expects that additional thimerosal cases may be
filed in the future against it and the other companies that marketed
thimerosal-containing products.
The Company is unable at the present time to estimate a range of
potential exposure, if any, with respect to the PREMPRO, PPA and
thimerosal litigations but expects to incur costs in connection with
the defense of these matters.
The Company has been named as a defendant in three additional lawsuits
alleging Medicare fraud arising out of the alleged manipulation of the
Average Wholesale Price (AWP) of Medicare Part B "Covered Drugs." AWP
is utilized in determining the reimbursement amount of the Medicare
Part B Covered Drugs and in calculating Medicare rebates. Thompson, et
al. v. Abbott Laboratories, Inc., et al., No. C-024450, U.S.D.C., N.D.
Cal.; Turner, et al. v. Abbott Laboratories, et al., No. 412357,
Super. Ct., San Francisco Cty., CA.; and Virag, et al. v. Allergan,
Inc., et al., No. BC282690, Super. Ct., Los Angeles Cty., CA., are
putative class actions on behalf of California patients and
third-party payers who allegedly have been injured by the defendants'
alleged manipulation of the AWPs for their pharmaceutical products. In
each case, plaintiffs seek equitable and injunctive relief, including
restitution and disgorgement pursuant to the provisions of Section
17200 of the California Business and Professions Code, which is the
state's unfair and deceptive trade practices statute. The Company is
currently a defendant in six putative class action lawsuits relating
to AWP.
The Company's Wyeth Medica Ireland (WMI) subsidiary has received a
summons filed in the Irish High Court in Dublin by Schuurmans & Van
Ginneken (SvG), a Netherlands-based molasses and liquid storage
concern. The summons puts WMI on notice that SvG intends to file a
formal complaint with the High Court alleging, inter alia, that WMI
conspired with its waste disposal contractors to improperly dispose of
a sugar water process stream that contained medroxyprogesterone
acetate (MPA). SvG purchased sugar recovered from that process stream
for use in its molasses refining operations. SvG has indicated that it
seeks compensation for the contamination and disposal of up to 26,000
tons of molasses allegedly contaminated with MPA. SvG further seeks
compensation on behalf of an unspecified number of its animal feed
customers who are alleged to have used contaminated molasses in their
livestock feed formulations. The summons does not specify the amount
of damages sought. SvG has obtained an order of attachment of certain
assets of the Company's AHP Manufacturing, B.V. subsidiary in
connection with the WMI matter.
On July 7, 1997, plaintiffs were awarded $44.0 million in compensatory
damages and $1.0 million in punitive damages in an action, which was
commenced in U.S. District Court in August 1993 (University of
Colorado et al. v. American Cyanamid Company, Docket No. 93-K-1657,
D.Col.). The plaintiffs had accused American Cyanamid Company
(Cyanamid) of misappropriating the invention of, and patenting as its
own, the formula for the current MATERNA multi-vitamins. The complaint
also contained allegations of conversion, fraud, misappropriation,
wrongful naming of inventor, and copyright and patent infringement.
The patent, whose ownership and inventorship is in dispute, was
granted to Cyanamid in 1984. The Court had previously granted
35
Cyanamid's summary judgment motions dismissing all counts for relief
except for unjust enrichment and fraud, which were the issues tried
before the court in a three-week bench trial in May 1996. Although the
plaintiffs had earlier been granted summary judgment on their
copyright infringement claim, the court declined to award plaintiffs
damages on that claim. Plaintiffs' post-trial motions seeking to
increase the damages to approximately $111.0 million (allegedly
representing Cyanamid's gross profit for 1982-1995 from the sale of
the reformulated MATERNA product) and to recover approximately $0.8
million of attorneys' fees were denied. In November 1999, the Court of
Appeals affirmed in part and vacated in part the District Court's
judgment, and remanded this case to the District Court for further
proceedings. Under this ruling, the $45.0 million judgment against the
Company was vacated. Following remand, the District Court conducted an
oral hearing on the inventorship issue and, in March 2001, a trial on
damages issues was held. The District Court concluded that University
of Colorado employees are the sole inventors of the disputed patent.
In August 2002, the District Court handed down its final findings of
fact and conclusion of law and entered its judgment awarding
plaintiffs compensatory damages of $55.7 million plus punitive damages
of $1.0 million. The Company has filed a Notice of Appeal to the U.S.
Court of Appeals for the Federal Circuit, appealing the District
Court's earlier holding of liability (i.e., that the University of
Colorado employees are the sole inventors of the MATERNA formulation
patent) as well as the damage awards.
In September 2002, Israel Bio-Engineering Project (IBEP) filed an
action against Amgen, Immunex, the Company and one of the Company's
subsidiaries (Docket No. C02-6880 ER, D. Ca.) alleging infringement of
U.S. Patent 5,981,701, by the manufacture, offer for sale,
distribution and sale of ENBREL. IBEP is not the legal title holder of
this patent, but is alleging equitable ownership. IBEP has requested a
jury trial. IBEP seeks an accounting of damages and of any royalties
or license fees paid to a third party and seeks to have the damages
trebled on account of alleged willful infringement. IBEP also seeks to
require the defendants to take a compulsory non-exclusive license. The
matter is in a preliminary stage. In March 2002, Zymogenetics, Inc.
filed an action for patent infringement against Immunex, subsequently
acquired by Amgen, alleging that the manufacture and sale of ENBREL
willfully infringes six U.S. patents relating to specified fusion
proteins and specified processes for making those proteins
(Zymogenetics, Inc. v. Immunex Corp., Docket No. C02-561R, D. Wash.).
Zymogenetics seeks a declaration of infringement and available
remedies under the patent laws, including monetary damages and
injunctive relief and has requested a jury trial. Immunex has denied
infringement and has asserted patent invalidity as an affirmative
defense and counterclaim. In May 2002, the District Court ordered
bifurcation of the liability (infringement and validity) issues from
the damages and willfulness issues. Amgen has advised the Company that
it intends to vigorously defend this litigation. Under its agreement
with Amgen for the promotion of ENBREL, the Company has an obligation
to pay a portion of the patent litigation expenses related to ENBREL
in the U.S. and Canada as well as a portion of any damages or other
monetary relief awarded in such patent litigation.
On July 26, 2002, a Brazilian Federal Public Attorney filed a public
civil action against the Federal Government of Brazil, Laboratorios
Wyeth-Whitehall Ltda. (LWWL), a Brazilian subsidiary of the Company,
and Colgate Palmolive Company, as represented by its Brazilian
subsidiary, Kolynos do Brasil Ltda. (Kolynos), seeking to nullify and
36
overturn the April 11, 2000 decision by the Brazilian First Board of
Tax Appeals which had found that the capital gain of LWWL from its
divestiture of its oral healthcare business was not taxable in Brazil.
The action seeks to hold LWWL jointly and severally liable with
Kolynos and the Brazilian Federal Government. The amount of taxes
originally attributable to the transaction was approximately $80.0
million. Management believes that this action is without merit.
The Company intends to defend all of the foregoing litigation
vigorously. In the opinion of the Company, although the outcome of any
legal proceedings cannot be predicted with certainty, the ultimate
liability of the Company in connection with its legal proceedings will
not have a material adverse effect on the Company's financial position
but could be material to the results of operations or cash flows in
any one accounting period.
Item 5. Approval of Non-Audit Services
------------------------------
On September 26, 2002, the Company's Audit Committee approved
utilization of the Company's outside auditors to perform services
related to analysis and review of the consolidated and local foreign
tax provisions, preparation of local foreign tax returns, assistance
in foreign tax audits and transfer pricing documentation related to
the year ending December 31, 2002.
37
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
(12) Computation of Ratio of Earnings to Fixed Charges.
(99.1) Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.2) Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
The following Current Reports on Form 8-K were filed by the
Company during the 2002 third quarter:
o On July 29, 2002, relating to the exchange of Immunex
shares in the acquisition of Immunex by Amgen (including
disclosure on Items 2 and 7).
o On August 8, 2002, to file the CEO and CFO certifications
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
in connection with the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (including
disclosure under Regulation FD on Items 7 and 9).
38
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Wyeth
-----
(Registrant)
By /s/ Paul J. Jones
-----------------
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: November 13, 2002
39
Certifications
--------------
I, Robert Essner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wyeth (the
registrant);
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
40
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ Robert Essner
-----------------
Robert Essner
President and Chief Executive Officer
Date: November 13, 2002
41
Certifications
--------------
I, Kenneth J. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wyeth (the
registrant);
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
42
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ Kenneth J. Martin
---------------------
Kenneth J. Martin
Executive Vice President and Chief Financial Officer
Date: November 13, 2002
43
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
(12) Computation of Ratio of Earnings to Fixed Charges.
(99.1) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99.2) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
EX-1