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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, 2003
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
------ --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
------ --
The number of shares of Common Stock outstanding as of the close of business on
October 31, 2003:
Number of
Class Shares Outstanding
----- ------------------
Common Stock, $0.33-1/3 par value 1,331,804,873
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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, 2003 and December 31, 2002 3
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 30,
2003 and 2002 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 2003 and 2002 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 6
Notes to Consolidated Condensed Financial Statements 7-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-35
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 36
Item 4. Controls and Procedures 36
Part II - Other Information 37
Item 1. Legal Proceedings 37-39
Item 5. Approval of Audit-Related and Tax Services 39
Item 6. Exhibits and Reports on Form 8-K 40
Signature 41
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 (SEC). 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 reflect all adjustments, including those that are
normal and recurring, considered necessary to present fairly the financial
position of the Company as of September 30, 2003 and December 31, 2002, the
results of its operations for the three and nine months ended September 30, 2003
and 2002, and changes in stockholders' equity and cash flows for the nine months
ended September 30, 2003 and 2002. 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 2002 Annual
Report on Form 10-K, Current Reports on Form 8-K and Quarterly Reports on Form
10-Q for the quarters ended March 31, 2003 and June 30, 2003.
We make available through our Company website, free of charge, our Company
filings with the SEC as soon as reasonably practicable after we electronically
file them with, or furnish them to, the SEC. The reports we make available
include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, proxy statements, registration statements, and any
amendments to those documents. The Company website is www.wyeth.com.
2
WYETH
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Cash and cash equivalents $3,107,281 $2,943,604
Marketable securities 1,291,065 1,003,275
Amgen investment - 1,509,947
Accounts receivable less allowances 2,516,942 2,379,819
Inventories:
Finished goods 845,358 736,360
Work in progress 1,133,101 808,711
Materials and supplies 458,351 447,653
------------- ------------
2,436,810 1,992,724
Other current assets including deferred taxes 2,819,907 1,766,483
------------- ------------
Total Current Assets 12,172,005 11,595,852
Property, plant and equipment 11,221,276 9,834,985
Less accumulated depreciation 2,933,078 2,599,293
------------- ------------
8,288,198 7,235,692
Goodwill 3,795,029 3,745,749
Other intangibles, net of accumulated amortization
(September 30, 2003-$116,189 and December 31, 2002-$95,223) 157,192 145,915
Other assets including deferred taxes 3,828,957 3,271,741
------------- ------------
Total Assets $28,241,381 $25,994,949
============= ============
LIABILITIES
Loans payable $510,600 $804,894
Trade accounts payable 693,156 672,633
Dividends payable 306,290 -
Accrued expenses 4,997,114 3,788,653
Accrued federal and foreign taxes 1,060,810 209,479
------------- ------------
Total Current Liabilities 7,567,970 5,475,659
Long-term debt 6,629,285 7,546,041
Accrued postretirement benefit obligations other than pensions 1,008,523 965,081
Other noncurrent liabilities 4,362,291 3,852,256
Contingencies and commitments (Note 3)
STOCKHOLDERS' EQUITY
$2.00 convertible preferred stock, par value $2.50 per share 43 46
Common stock, par value $0.33-1/3 per share 443,887 442,019
Additional paid-in capital 4,707,330 4,582,773
Retained earnings 3,777,292 3,286,645
Accumulated other comprehensive loss (255,240) (155,571)
------------- ------------
Total Stockholders' Equity 8,673,312 8,155,912
------------- ------------
Total Liabilities and Stockholders' Equity $28,241,381 $25,994,949
============= ============
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,
------------------------ --------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net revenue $4,081,609 $3,623,672 $11,517,222 $10,770,041
---------- ---------- ----------- -----------
Cost of goods sold 1,126,356 1,058,122 3,074,555 2,747,516
Selling, general and administrative expenses 1,313,870 1,216,073 3,967,362 3,796,457
Research and development expenses 502,758 518,608 1,517,123 1,525,681
Interest expense, net 24,304 52,367 77,182 161,326
Other income, net (5,732) (21,850) (269,299) (155,188)
Diet drug litigation charges 2,000,000 1,400,000 2,000,000 1,400,000
Gains related to Immunex/Amgen
common stock transactions - (2,627,600) (860,554) (2,627,600)
---------- ---------- ----------- -----------
Income (loss) before federal and foreign taxes (879,947) 2,027,952 2,010,853 3,921,849
Provision (benefit) for federal and foreign taxes (453,589) 626,553 294,924 1,048,671
---------- ---------- ----------- -----------
Net income (loss) $(426,358) $1,401,399 $1,715,929 $2,873,178
========== ========== =========== ===========
Basic earnings (loss) per share $(0.32) $1.06 $1.29 $2.17
========== ========== =========== ===========
Diluted earnings (loss) per share $(0.32) $1.05 $1.29 $2.15
========== ========== =========== ===========
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, 2003:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
----------- -------- ---------- ---------- ------------- -------------
Balance at January 1, 2003 $46 $442,019 $4,582,773 $3,286,645 $(155,571) $8,155,912
Net income 1,715,929 1,715,929
Currency translation adjustments 413,008 413,008
Unrealized gains on derivative contracts, net 24 24
Unrealized gains on marketable securities, net 2,413 2,413
Realized gain reclassified to net income (515,114) (515,114)
-------------
Comprehensive income, net of tax 1,616,260
-------------
Cash dividends declared (1) (1,223,091) (1,223,091)
Common stock issued for stock options 1,807 104,380 106,187
Other exchanges (3) 61 20,177 (2,191) 18,044
----------- -------- ---------- ---------- ------------- -------------
Balance at September 30, 2003 $43 $443,887 $4,707,330 $3,777,292 $(255,240) $8,673,312
=========== ======== ========== ========== ============= =============
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
Unrealized losses on derivative contracts, net (21,898) (21,898)
Unrealized gains on marketable securities, net 811,504 811,504
-------------
Comprehensive income, net of tax 3,768,642
-------------
Cash dividends declared (2) (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
=========== ======== ========== ========== ============= =============
(1) Included in cash dividends declared were the following dividends payable at September 30, 2003:
- Common stock cash dividend of $0.23 per share ($306,281 in the aggregate) declared on September 25, 2003 and
payable on December 1, 2003; and
- Preferred stock cash dividends of $0.50 per share ($9 in the aggregate) declared on June 25, 2003 and paid
on October 1, 2003.
(2) Included in cash dividends declared were the following dividends payable at September 30, 2002:
- Common stock cash dividend of $0.23 per share ($304,891 in the aggregate) declared on September 26, 2002 and
paid on December 1, 2002; and
- Preferred stock cash dividends of $0.50 per share ($9 in the aggregate) declared on June 20, 2002 and paid
on October 1, 2002.
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,
----------------------------
2003 2002
---------- ----------
Operating Activities
- --------------------
Net income $1,715,929 $2,873,178
Adjustments to reconcile net income to net cash
provided by operating activities:
Diet drug litigation charges 2,000,000 1,400,000
Gains related to Immunex/Amgen common stock transactions (860,554) (2,627,600)
Gains on sales of assets (289,561) (111,299)
Depreciation and amortization 398,064 365,510
Change in deferred income taxes (727,809) 424,396
Diet drug litigation payments (336,059) (1,047,416)
Security fund deposit (535,200) (415,000)
Changes in working capital, net 451,425 (471,267)
Other items, net (24,398) (222,490)
---------- ----------
Net cash provided by operating activities 1,791,837 168,012
---------- ----------
Investing Activities
- --------------------
Purchases of property, plant and equipment (1,245,673) (1,301,584)
Proceeds from sales of Amgen common stock 1,579,917 -
Proceeds from Amgen acquisition of Immunex - 1,005,201
Proceeds from sales of assets 332,956 422,514
Proceeds from sales and maturities of marketable securities 775,674 1,336,764
Purchases of marketable securities (1,059,125) (1,537,504)
---------- ----------
Net cash provided by (used for) investing activities 383,749 (74,609)
---------- ----------
Financing Activities
- --------------------
Net proceeds from (repayments of) commercial paper (2,996,030) 1,364,883
Proceeds from issuance of long-term debt 1,800,000 -
Other borrowing transactions, net (25,159) 456
Dividends paid (916,801) (914,247)
Purchases of common stock for treasury - (113,927)
Exercises of stock options 106,187 206,058
---------- ----------
Net cash provided by (used for) financing activities (2,031,803) 543,223
---------- ----------
Effects of exchange rate changes on cash balances 19,894 188
---------- ----------
Increase in cash and cash equivalents 163,677 636,814
Cash and cash equivalents, beginning of period 2,943,604 1,744,734
---------- ----------
Cash and cash equivalents, end of period $3,107,281 $2,381,548
========== ==========
Supplemental Information
- ------------------------
Interest payments $275,940 $333,133
Income tax payments, net of refunds 395,371 394,207
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 required interim updates to those disclosed
in Footnote 1 of the 2002 Annual Report on Form 10-K:
Stock-Based Compensation: The Company has five Stock Incentive Plans
which it accounts for using the intrinsic value method in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. No
stock-based employee compensation cost is reflected in net income
(loss), as all options granted under those plans have an exercise
price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied
the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
(In thousands except per share amounts) 2003 2002 2003 2002
------------------------------------------------ --------- ---------- ---------- ----------
Net income (loss), as reported $(426,358) $1,401,399 $1,715,929 $2,873,178
Deduct: total stock-based employee
compensation expense determined under fair
value-based method for all awards, net of tax 77,965 81,901 233,518 222,611
--------- ---------- ---------- ----------
Pro forma net income (loss) $(504,323) $1,319,498 $1,482,411 $2,650,567
========= ========== ========== ==========
Earnings (loss) per share:
Basic - as reported $(0.32) $1.06 $1.29 $2.17
========= ========== ========== ==========
Basic - pro forma $(0.38) $1.00 $1.12 $2.00
========= ========== ========== ==========
Diluted - as reported $(0.32) $1.05 $1.29 $2.15
========= ========== ========== ==========
Diluted - pro forma $(0.38) $0.99 $1.11 $1.99
========= ========== ========== ==========
Goodwill and Other Intangibles: On January 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets. With the
adoption of SFAS No. 142, goodwill is no longer being amortized but is
subject to at least an annual assessment for impairment by applying a
fair value-based test. The same applies to other intangibles that have
been determined to have indefinite useful lives. However, other
intangibles with finite lives will continue to be amortized. The
Company's other intangibles, which all have finite lives, are being
amortized over their estimated useful lives ranging from three to 10
years.
7
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The changes in the carrying amount of goodwill by segment for the nine
months ended September 30, 2003, are as follows:
Consumer
(In thousands) Pharmaceuticals Healthcare Total
-------------------------------- --------------- ---------- ----------
Balance at December 31, 2002 $3,155,403 $590,346 $3,745,749
Currency translation adjustments 47,989 1,291 49,280
---------- -------- ----------
Balance at September 30, 2003 $3,203,392 $591,637 $3,795,029
========== ======== ==========
Note 2. Issuance of Notes and Credit Facilities
---------------------------------------
Issuance of $1,800.0 Million of Notes:
On February 11, 2003, the Company issued $1,800.0 million of Notes.
The issuance consisted of two tranches of Notes, which pay interest
semiannually, as follows:
o $300.0 million 4.125% Notes due March 1, 2008 with interest
payments due on March 1 and September 1
o $1,500.0 million 5.25% Notes due March 15, 2013 with
interest payments due on March 15 and September 15
The interest rate payable on each of these tranches of Notes is
subject to an increase of 0.25 percentage points per level of
downgrade in the Company's credit rating by Moody's or S&P. There is
no adjustment to the interest rate payable on either series of Notes
for the first single-level downgrade in the Company's credit rating by
S&P. If Moody's or S&P subsequently were to increase the Company's
credit rating, the interest rate payable on each series of Notes is
subject to a decrease of 0.25 percentage points for each level of
credit rating increase. The interest rate payable for both series of
Notes cannot be reduced below the original coupon rate of either
series of Notes. However, the total adjustment to the interest rate
for either series of Notes cannot exceed two percentage points and the
interest rate in effect on March 15, 2006, for both series of Notes,
will become the fixed interest rate until maturity. The Company would
incur a total of approximately $4.5 million of additional annual
interest expense for every 0.25 percentage point increase in the
interest rate.
The Company entered into two interest rate swaps with an aggregate
notional amount of $300.0 million relating to the $300.0 million
4.125% Notes and two interest rate swaps with an aggregate notional
amount of $1,500.0 million relating to the $1,500.0 million 5.25%
Notes whereby the Company effectively converted the fixed rate of
interest on these Notes to a floating rate, which is based on LIBOR.
8
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
New Credit Facility:
In March 2003, the Company's $3,000.0 million credit facility
terminated. Concurrent with this termination, the Company entered into
new credit facilities totaling $2,700.0 million. These credit
facilities are composed of a $1,350.0 million, 364-day facility and a
$1,350.0 million, three-year facility. The maturity date of any
borrowings under the $1,350.0 million, 364-day credit facility that
are outstanding upon its termination in March 2004 is extendible by
the Company for an additional year. The credit facilities contain
substantially identical financial and other covenants,
representations, warranties, conditions and default provisions as the
terminated facility.
At September 30, 2003, the Company had commercial paper outstanding of
$791.1 million, which is supported by the credit facilities identified
above and was classified as Long-term debt.
Note 3. Contingencies and Commitments
-----------------------------
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.
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 3, 2002.
As previously reported, the number of individuals who have filed
claims within the settlement that allege significant heart valve
disease (known as "matrix" claims) has been higher than had been
anticipated. The settlement agreement grants the Company access to
claims data maintained by the settlement trust (the Trust). Based on
its review of that data, the Company understands that, as of October
29, 2003, the Trust had recorded approximately 108,400 matrix-level
claim forms. Approximately 24,300 of these forms are so deficient,
incomplete or duplicative of other forms filed by the same claimant
that they are, in the Company's view, unlikely to result in a
significant number of matrix claims to be processed further.
The Company's current understanding of the status of the remaining
approximately 84,100 forms, based on its analysis of data received
from the Trust through October 29, 2003, is as follows. Approximately
10,400 of the matrix claims have been processed to completion, with
those claims either paid (approximately 2,850 claims, with payments of
$1,074.2 million), denied (approximately 7,100) or withdrawn.
Approximately 2,300 claims have begun the 100% audit process ordered
in late 2002 by the federal court
9
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
overseeing the national settlement. Approximately 25,000 claims allege
conditions that, if true, would entitle the claimant to receive a
matrix award; these claims have not yet entered the audit process.
Another approximately 16,800 claims with similar allegations have been
purportedly substantiated by physicians whose claims are now subject
to the outcome of the Trust's Integrity Program, discussed below.
Approximately 29,400 claim forms do not currently contain sufficient
information even to assert a matrix claim, although some of those
claim forms could be made complete by the submission of additional
information and could therefore become eligible to proceed to audit in
the future. The remaining approximately 200 claims are currently in
the data entry process and cannot be assessed at this time.
In addition to the approximately 108,400 matrix claims filed as of
October 29, 2003, additional matrix claims may be filed through 2015
by class members who develop a matrix condition in the future if they
have registered with the Trust by May 3, 2003, and have demonstrated
FDA+ regurgitation or mild mitral regurgitation on an echocardiogram
conducted after diet drug use and obtained either outside of the Trust
by January 3, 2003 or within the Trust's screening program.
The Company's current understanding, based on data received from the
Trust through October 29, 2003, is that audits have been completed on
1,064 of the approximately 2,300 claims that have begun the 100% audit
process. Of these, 351 were found to be payable at the amount claimed
and 21 were found to be payable at a lower amount than had been
claimed. The remaining claims were found ineligible for a matrix
payment, although the claimants may appeal that determination to the
federal court overseeing the settlement. Because it remains unclear
whether the claims audited to date are a representative sample of the
claims that might proceed to audit, the Company cannot predict the
ultimate outcome of the audit process.
Both the volume and types of claims seeking matrix benefits received
by the Trust to date differ materially from the epidemiological
projections on which the court's approval of the settlement agreement
was predicated. Based upon data received from the Trust, approximately
94% of the 25,000 matrix claimants who allege conditions that, if
true, would entitle them to an award (and approximately 99% of the
approximately 16,800 claims certified by physicians currently subject
to the Trust's Integrity Program) seek an award under Level II of the
five-level settlement matrix. (Level II covers claims for moderate or
severe mitral or aortic valve regurgitation with complicating factors;
depending upon the claimant's age at the time of diagnosis, and
assuming no factors are present that would place the claim on one of
the settlement's reduced payment matrices, awards under Level II range
from $192,111 to $643,500.)
An ongoing investigation which the Company understands is being
conducted by counsel for the Trust and discovery conducted to date by
the Company in connection with certain Intermediate and Back-End opt
out cases (brought by some of the same lawyers who have filed these
Level II claims and supported by some of the same cardiologists who
have certified the Level II claims) cast substantial doubt on the
merits of many of these
10
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
matrix claims and their eligibility for a matrix payment from the
Trust. Therefore, in addition to the 100% audit process, the Trust has
embarked upon an Integrity Program, which is designed to protect the
Trust from paying illegitimate or fraudulent claims.
Pursuant to the Integrity Program, the Trust has required additional
information concerning matrix claims purportedly substantiated by
thirteen identified physicians in order to determine whether to permit
those claims to proceed to audit. Based upon data obtained from the
Trust, the Company believes that approximately 16,800 matrix claims
were purportedly substantiated by the thirteen physicians currently
covered by the Integrity Program. It is the Company's understanding
that additional claims substantiated by additional physicians might be
subjected to the same requirements of the Integrity Program in the
future. As an initial step in the integrity review process, each of
the identified physicians has been asked to complete a comprehensive
questionnaire regarding each claim and the method by which the
physician reached the conclusion that it was valid. The ultimate
disposition of any or all claims that are subject to the Integrity
Program is at this time uncertain. Counsel for certain claimants
affected by the program recently challenged the Trust's authority to
implement the Integrity Program and to require completion of the
questionnaire before determining whether to permit those claims to
proceed to audit. While that motion was denied by the court,
additional challenges to the Integrity Program are possible.
The Trust has also adopted a program to prioritize the handling of
those matrix claims that it believes are least likely to be
illegitimate. Under the plan, claims under Levels III, IV and V will
be processed and audited on an expedited basis. (Level III covers
claims for heart valve disease requiring surgery to repair or replace
the valve, or conditions of equal severity. Levels IV and V cover
complications from, or more serious conditions than, heart valve
surgery.) The policy will also prioritize the auditing of, inter alia,
Level I claims, all claims filed by a claimant without counsel (i.e.,
on a pro se basis) and Level II claims substantiated by physicians who
have attested to 20 or fewer matrix claims.
Finally, the Trust has filed a suit alleging violations of the
Racketeer Influenced and Corrupt Organizations (RICO) Act against a
Kansas City cardiologist who attested under oath to the validity of
over 2,500 matrix claims. The suit alleges that the cardiologist
intentionally engaged in a pattern of racketeering activity to defraud
the Trust. The Trust has indicated that one of the goals of the
Integrity Program is to recoup funds from those entities that caused
the Trust to pay illegitimate claims.
The Company continues to monitor the progress of the Trust's audit
process and its Integrity Program and has brought and will continue to
bring to the attention of the Trust and the court overseeing the
settlement any additional irregularities that it uncovers in the
matrix claim process. Even if substantial progress is made by the
Trust, through its Integrity Program or other means, in reducing the
number of illegitimate matrix claims, a significant number of the
claims which proceed to audit might be interpreted as satisfying the
matrix eligibility criteria, notwithstanding the possibility that the
claimants may not in
11
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
fact have serious heart valve disease. If so, matrix claims found
eligible for payment after audit may exceed the $3,750.0 million cap
of the settlement fund.
Should the settlement fund be exhausted, most of the matrix claimants
who filed their matrix claim on or before May 3, 2003 and who pass the
audit process at a time when there are insufficient funds to pay their
claim may pursue the opt out right created by the Sixth Amendment to
the settlement agreement, unless the Company first elects, in its sole
discretion, to pay the matrix benefit after audit. Sixth Amendment opt
out claimants may then sue the Company in the tort system, subject to
the settlement's limitations on such claims. In addition to the
limitations on all Intermediate and Back-End opt outs (such as the
prohibition on seeking punitive damages and the requirement that the
claimant sue only on the valve condition that gave rise to the claim),
a Sixth Amendment opt out may not sue any defendant other than the
Company and may not join his or her claim with the claim of any other
opt out. The Company cannot predict the ultimate number of individuals
who might be in a position to elect a Sixth Amendment opt out or who
may in fact elect to do so, but that number could be substantial.
If the settlement fund were to be exhausted, some individuals who
registered to participate in the settlement by May 3, 2003, who had
demonstrated either FDA+ level regurgitation or mild mitral
regurgitation on an echocardiogram completed after diet drug use and
conducted either outside of the settlement prior to January 3, 2003 or
within the settlement's screening program, and who subsequently
develop (at any time before 2015) a valvular condition that would
qualify for a matrix payment might elect to pursue a Back-End opt out.
Such individuals may pursue a Back-End opt out within 120 days of the
date on which they first discover or should have discovered their
matrix condition. The Company cannot predict the ultimate number of
individuals who may be in a position to elect a Back-End opt out or
who may in fact elect to do so, but that number could also be
substantial.
The Company's current understanding is that approximately 76,000
Intermediate opt out forms were submitted by May 3, 2003, the
applicable deadline for most class members (other than qualified class
members receiving echocardiograms through the Trust after January 3,
2003, who may exercise intermediate opt out rights within 120 days
after the date of their echocardiogram). The number of Back-End opt
out forms received as of the 2003 third quarter is estimated to be
approximately 20,000, although certain additional class members may
elect to exercise Back-End opt out rights in the future (under the
same procedure as described above) even if the settlement fund is not
exhausted. After eliminating forms that are duplicative of other
filings, forms that are filed on behalf of individuals who have
already either received payments from the Trust or settlements from
the Company, and forms that are otherwise invalid on their face, it
appears that approximately 78,000 individuals have filed Intermediate
or Back-End opt out forms.
Purported Intermediate or Back-End opt outs (as well as Sixth
Amendment opt outs) who meet the settlement's medical eligibility
requirements may pursue lawsuits against the Company, but must prove
all elements of their claims - including liability, causation and
12
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
damages - without relying on verdicts, judgments or factual findings
made in other lawsuits. They also may not seek or recover punitive,
exemplary or multiple damages and may sue only for the valvular
condition giving rise to their opt out right. To effectuate these
provisions of the settlement, the federal court overseeing the
settlement has issued orders limiting the evidence that may be used by
plaintiffs in such cases. Those orders, however, are being challenged
on appeal and the Company cannot predict the outcome of those appeals.
In addition to the specific matters discussed herein, the federal
court overseeing the national settlement has issued a number of
rulings concerning the processing of matrix claims and the rights of,
and limitations placed on, class members by the terms of the
settlement. Several of those rulings are being challenged on appeal.
Certain class members have also filed a number of motions, as well as
a lawsuit, attacking both the binding effect of the settlement and the
administration of the Trust. While most of those motions have been
denied, one remains pending and several of those that have been denied
are being challenged on appeal. The Company cannot predict the outcome
of any of these appeals or of the lawsuit.
To date, approximately 27,000 individuals who have filed Intermediate
or Back-End opt out forms have filed lawsuits, most of which have been
filed in the past few months. The claims of most of these 27,000
plaintiffs are now pending in federal courts and have been or will be
transferred for pretrial proceedings to the federal court overseeing
the national settlement. The Company expects to challenge vigorously
all Intermediate and Back-End opt out claims of questionable validity
or medical eligibility and the number of such claims that meet the
settlement's opt out criteria will not be known for some time. As a
result, the Company cannot predict the ultimate number of purported
Intermediate or Back-End opt outs that will satisfy the settlement's
opt out requirements, but that number could be substantial. As to
those opt outs who are found eligible to pursue a lawsuit, the Company
also intends vigorously to defend these cases on their merits.
The Company has resolved the claims of all but a small percentage of
the "initial" opt outs (i.e., those individuals who exercised their
right to opt out of the settlement class) and continues to work toward
resolving the rest. It also continues to work toward resolving the
claims of individuals who allege that they have developed Primary
Pulmonary Hypertension (PPH) as a result of their use of the diet
drugs. The Company intends vigorously to defend those initial opt out
and PPH cases that cannot be resolved prior to trial.
On November 6, 2003, a jury in the District Court of Texas, 60th
Judicial District, Jefferson County, returned a verdict in favor of
the plaintiff in the case of Hayes v. American Home Products, et al.,
No. B-165,374, the first intermediate opt out case to go to trial. The
jury in the Hayes case awarded plaintiff $1.36 million in compensatory
damages for injuries allegedly sustained by the plaintiff due to her
use of REDUX and PONDIMIN. The Company intends to pursue post-trial
motions and an appeal if necessary.
13
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
During the 2003 third quarter, the Company increased its reserves in
connection with the REDUX and PONDIMIN diet drug matters by $2,000.0
million, bringing the total of the charges taken to date to $16,600.0
million. Through September 30, 2003, payments into the national
settlement funds, individual settlement payments, legal fees and other
costs totaling $12,985.4 million were paid and applied against the
litigation accrual. At September 30, 2003, and including the most
recent increase, $3,614.6 million of the litigation accrual remained.
The balance remaining represents management's best estimate of the
minimum aggregate amount anticipated to cover payments in connection
with the Trust up to its cap, initial opt outs, PPH claims,
Intermediate, Back-End or Sixth Amendment opt outs (collectively, the
"downstream" opt outs), and the Company's legal fees related to the
diet drug litigation. Due to its inability to estimate the ultimate
number of valid downstream opt outs, and the merits and value of their
claims, as well as the inherent uncertainty surrounding any
litigation, the Company is unable to estimate the amount of any
additional financial exposure represented by the downstream opt out
litigation. However, the amount of financial exposure beyond that
which has been recorded could be significant.
The Company intends to defend itself vigorously and believes it can
marshal significant resources and legal defenses to limit its ultimate
liability in the diet drug litigation. However, in light of the
circumstances discussed above, including the unknown number of valid
matrix claims and the unknown number and merits of valid downstream
opt outs, it is not possible to predict the ultimate liability of the
Company in connection with its diet drug legal proceedings. It is
therefore not possible to predict whether, and if so when, such
proceedings will have a material adverse effect on the Company's
financial condition, results of operations and/or cash flows and
whether cash flows from operating activities and existing and
prospective financing resources will be adequate to fund the Company's
operations, pay all liabilities related to the diet drug litigation,
pay dividends, maintain the ongoing programs of capital expenditures,
and repay both the principal and interest on its outstanding
obligations without the disposition of significant strategic core
assets and/or reductions in certain cash outflows.
Note 4. Restructuring Program
---------------------
In December 2002, the Company recorded a special charge for
restructuring and related asset impairments of $340.8 million to
recognize the costs of closing certain manufacturing lines and two
research facilities, as well as the elimination of certain positions
at the Company's facilities. The Company recorded its asset
impairments in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets and its restructuring
charges, including personnel and other costs, in accordance with 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).
14
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The restructuring will ultimately result in the elimination of
approximately 3,150 positions worldwide. The reductions in workforce
are permanent and affected all of the Company's segments, including
Corporate. As of September 30, 2003, the Company is continuing the
process of closing certain manufacturing lines and has eliminated
approximately 2,850 positions. The activity in the restructuring
accruals was as follows:
Personnel Other Closure/
(In thousands) Costs Exit Costs Total
-------------------------------------------- --------- -------------- --------
Restructuring accruals at December 31, 2002 $163,700 $73,000 $236,700
Cash expenditures (109,300) (36,100) (145,400)
--------- -------------- --------
Restructuring accruals at September 30, 2003 $54,400 $36,900 $91,300
========= ============== ========
Note 5. Earnings (Loss) per Share
-------------------------
The following table sets forth the computations of basic earnings
(loss) per share and diluted earnings (loss) per share:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
(In thousands except per share amounts) 2003 2002 2003 2002
------------------------------------------ --------- ---------- ---------- ----------
Net income (loss) less preferred dividends $(426,358) $1,401,399 $1,715,902 $2,873,149
Denominator:
Weighted average number of common
shares outstanding 1,331,958 1,325,930 1,329,492 1,325,294
--------- ---------- ---------- ----------
Basic earnings (loss) per share $(0.32) $1.06 $1.29 $2.17
========= ========== ========== ==========
Net income (loss) $(426,358) $1,401,399 $1,715,929 $2,873,178
Denominator:
Weighted average number of common
shares outstanding 1,331,958 1,325,930 1,329,492 1,325,294
Common stock equivalents of
outstanding stock options and
deferred common stock awards* - 5,138 5,823 10,004
--------- ---------- ---------- ----------
Total shares* 1,331,958 1,331,068 1,335,315 1,335,298
--------- ---------- ---------- ----------
Diluted earnings (loss) per share* $(0.32) $1.05 $1.29 $2.15
========= ========== ========== ==========
* The total weighted average number of common shares outstanding for
diluted loss per share for the 2003 third quarter did not include
common stock equivalents as the effect would have been antidilutive.
Diluted earnings per share excluded 85.8 million and 91.0 million
common shares related to options outstanding under the Company's Stock
Incentive Plans at September 30, 2003 and 2002, respectively, as the
exercise price per share of these options was greater than the average
market value, resulting in an antidilutive effect on diluted earnings
per share.
15
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Marketable Securities
---------------------
The cost, gross unrealized gains and (losses), and fair value of
available-for-sale and held-to-maturity securities by major security
type at September 30, 2003 and December 31, 2002, were as follows:
Gross Gross
(In thousands) Unrealized Unrealized Fair
At September 30, 2003 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $240,039 $746 $(158) $240,627
Commercial paper 82,909 6 (2) 82,913
Certificates of deposit 38,601 12 (21) 38,592
Corporate debt securities 226,652 581 (76) 227,157
Other debt securities 9,624 226 - 9,850
Institutional fixed income fund 535,280 3,025 - 538,305
---------- ---------- ---------- ----------
Total available-for-sale 1,133,105 4,596 (257) 1,137,444
---------- ---------- ---------- ----------
Held-to-maturity:
Commercial paper 58,839 - - 58,839
Certificates of deposit 78,150 - - 78,150
Other debt securities 16,632 - - 16,632
---------- ---------- ---------- ----------
Total held-to-maturity 153,621 - - 153,621
---------- ---------- ---------- ----------
$1,286,726 $4,596 $(257) $1,291,065
========== ========== ========== ==========
Gross Gross
(In thousands) Unrealized Unrealized Fair
At December 31, 2002 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $105,583 $615 $(15) $106,183
Commercial paper 57,397 - - 57,397
Certificates of deposit 29,218 77 - 29,295
Corporate debt securities 214,127 1,202 (388) 214,941
Other debt securities 9,702 150 - 9,852
Institutional fixed income fund 510,574 16,312 - 526,886
---------- ---------- ---------- ----------
Total available-for-sale 926,601 18,356 (403) 944,554
---------- ---------- ---------- ----------
Held-to-maturity:
Time / term deposits 30,002 - - 30,002
U.S. Treasury securities 1,996 - - 1,996
Commercial paper 10,473 - - 10,473
Certificates of deposit 15,251 - - 15,251
Other debt securities 999 - - 999
---------- ---------- ---------- ----------
Total held-to-maturity 58,721 - - 58,721
---------- ---------- ---------- ----------
$985,322 $18,356 $(403) $1,003,275
========== ========== ========== ==========
16
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The contractual maturities of debt securities classified as
available-for-sale at September 30, 2003 were as follows:
Fair
(In thousands) Cost Value
---------------------------------------- -------- --------
Available-for-sale:
Due within one year $306,655 $306,713
Due after one year through five years 280,955 282,202
Due after five years through 10 years - -
Due after 10 years 10,215 10,224
-------- --------
$597,825 $599,139
======== ========
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $153.6 million at September 30, 2003.
Note 7. Company Data by Segment
-----------------------
The Company has three segments: Pharmaceuticals, Consumer Healthcare
and Corporate. The Company's Pharmaceuticals and Consumer Healthcare
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. The Company's Corporate segment is responsible for the
treasury, tax and legal operations of the Company's businesses and
maintains and/or incurs certain assets, liabilities, income, expense,
gains and losses related to the overall management of the Company
which are not allocated to the other segments.
17
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Net Revenue
-----------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) ------------------------- ---------------------------
Segment 2003 2002 2003 2002
----------------------- ---------- ---------- ----------- -----------
Pharmaceuticals $3,420,774 $3,025,060 $9,771,298 $9,183,812
Consumer Healthcare 660,835 598,612 1,745,924 1,586,229
---------- ---------- ----------- -----------
Total $4,081,609 $3,623,672 $11,517,222 $10,770,041
========== ========== =========== ===========
Income (Loss) Before Taxes
-----------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) ------------------------- ---------------------------
Segment 2003 2002 2003 2002
----------------------- ---------- ---------- ----------- -----------
Pharmaceuticals (1) $997,663 $659,922 $3,024,911 $2,469,737
Consumer Healthcare (2) 191,424 183,579 420,628 486,515
Corporate (3) (2,069,034) 1,184,451 (1,434,686) 965,597
---------- ---------- ----------- -----------
Total ($879,947) $2,027,952 $2,010,853 $3,921,849
========== ========== =========== ===========
(1) Pharmaceuticals for the 2003 first nine months included gains of
$231,453 as a result of the divestiture of product rights to
ATIVAN, ISORDIL, DIAMOX, ZIAC, ZEBETA, AYGESTIN and SONATA.
(2) Consumer Healthcare for the 2003 first nine months included a
gain of $34,000 related to the divestiture of ANACIN. In
addition, a gain of $78,950 was included in the 2002 first nine
months results related to a class action settlement regarding
price fixing by certain vitamin suppliers.
(3) Corporate for the 2003 third quarter and first nine months
included an additional charge of $2,000,000 related to the
litigation brought against the Company regarding the use of the
diet drugs REDUX or PONDIMIN. In addition, Corporate for the 2003
first nine months included a gain of $860,554 relating to the
sale of the Company's remaining Amgen common stock holdings.
Corporate for the 2002 third quarter and first nine months
included a gain of $2,627,600 related to the acquisition of
Immunex by Amgen and a charge of $1,400,000 related to the
litigation brought against the Company regarding the use of the
diet drugs REDUX or PONDIMIN.
Note 8. Immunex/Amgen Transactions
--------------------------
During the first quarter of 2003, the Company completed the sale of
the remaining 31,235,958 shares of Amgen common stock held by the
Company at December 31, 2002. These remaining shares netted proceeds
of $1,579.9 million and resulted in a gain of $860.6 million ($558.7
million after-tax or $0.42 per share-diluted).
During the third quarter of 2002, Amgen completed its acquisition of
Immunex. Under the terms of the acquisition agreement, the Company
received 98,286,358 shares of Amgen common stock and $1,005.2 million
in cash in exchange for all of its shares of Immunex common stock. As
a result of the exchange, a gain of $2,627.6 million
18
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($1,684.7 million after-tax or $1.26 per share-diluted) was recorded
during the 2002 third quarter, which represented the excess of the
cash received plus the fair value of the Amgen shares received,
$2,500.1 million, over the Company's book basis of its investment in
Immunex and certain transaction costs.
19
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
Item 2. Results of Operations
---------------------
Worldwide net revenue for the 2003 third quarter and first nine months
was 13% and 7% higher, respectively, compared with prior year levels.
The increase in worldwide net revenue for the 2003 third quarter and
first nine months was due primarily to higher worldwide net revenue of
both pharmaceuticals and consumer healthcare. Excluding the impact of
foreign exchange, worldwide net revenue increased 9% for the 2003
third quarter and 3% for the 2003 first nine months.
The following table sets forth worldwide net revenue results by
segment together with the percentage changes from the comparable
period in the prior year:
Net Revenue
----------------------
Three Months
Ended September 30,
(Dollars in millions) ----------------------
Segment 2003 2002 % Increase
-------------------------- --------- --------- ----------
Pharmaceuticals $3,420.8 $3,025.1 13%
Consumer Healthcare 660.8 598.6 10%
--------- --------- ----------
Total $4,081.6 $3,623.7 13%
========= ========= ==========
Net Revenue
----------------------
Nine Months
Ended September 30,
(Dollars in millions) ----------------------
Segment 2003 2002 % Increase
-------------------------- --------- --------- ----------
Pharmaceuticals $9,771.3 $9,183.8 6%
Consumer Healthcare 1,745.9 1,586.2 10%
--------- --------- ----------
Total $11,517.2 $10,770.0 7%
========= ========= ==========
Pharmaceuticals
---------------
Worldwide pharmaceutical net revenue increased 13% for the 2003 third
quarter and 6% for the 2003 first nine months. Excluding the favorable
impact of foreign exchange, worldwide pharmaceutical net revenue
increased 9% and 2% for the 2003 third quarter and first nine months,
respectively.
Worldwide human pharmaceutical net revenue increased 11% for the 2003
third quarter and 5% for the 2003 first nine months. The increases in
net revenue were due primarily to higher sales of Effexor XR (global
growth and higher volume caused by an increase in prescriptions),
Protonix (strong prescription volume growth), ENBREL
(internationally), PREVNAR and ZOSYN (each reflecting consistent
increased manufacturing capability) and increased alliance revenue
offset, in part, by lower sales of the PREMARIN family of products and
CORDARONE I.V. (market exclusivity ended October 2002). Excluding the
favorable impact of foreign exchange, worldwide human
20
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
pharmaceutical net revenue increased 7% and 1% for the 2003 third
quarter and first nine months, respectively.
Worldwide animal health product net revenue increased 63% for the 2003
third quarter and 25% for the 2003 first nine months as a result of
higher domestic sales of ProHeart 6 compared with the similar periods
in the prior year which were impacted by significant ProHeart 6
product returns. The increase in sales for the 2003 first nine months
was also due to higher domestic sales of the Company's WEST NILE -
INNOVATOR, a biological vaccine for horses. Excluding the favorable
impact of foreign exchange, worldwide animal health product net
revenue increased 57% and 21% for the 2003 third quarter and first
nine months, respectively.
The following table sets forth the significant worldwide human
pharmaceutical and animal health net revenue by product for the three
and nine months ended September 30, 2003 compared with the same
periods in the prior year:
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions) ---------------------- ----------------------
Products 2003 2002 2003 2002
--------------------------- -------- -------- -------- --------
EFFEXOR $645.3 $456.0 $1,875.2 $1,483.6
PROTONIX 407.0 344.5 1,077.4 783.8
PREMARIN family 346.0 422.9 1,025.3 1,545.8
PREVNAR 242.5 115.7 736.2 413.3
Nutritionals 214.5 210.9 632.6 610.2
ZOSYN / TAZOCIN 173.5 99.1 458.6 276.9
Oral Contraceptives 144.0 133.9 432.9 448.0
ZOTON 93.2 77.2 252.3 224.4
ENBREL 85.9 42.0 193.3 112.4
BENEFIX 64.1 59.4 185.2 161.2
ReFacto 57.8 52.8 166.6 143.6
SYNVISC 55.0 61.0 165.1 167.2
ATIVAN 48.4 52.7 158.4 154.2
RAPAMUNE 38.9 34.0 124.4 85.1
CORDARONE 3.8 96.6 12.0 297.8
Alliance revenue 184.1 124.5 435.3 288.6
Other 407.6 513.5 1,235.4 1,503.9
-------- -------- -------- --------
Total human pharmaceuticals 3,211.6 2,896.7 9,166.2 8,700.0
-------- -------- -------- --------
WEST NILE - INNOVATOR 10.5 29.1 60.2 45.5
ProHeart 6 7.1 (39.9) 26.2 (27.1)
Other 191.6 139.2 518.7 465.4
-------- -------- -------- --------
Total animal health 209.2 128.4 605.1 483.8
-------- -------- -------- --------
Total pharmaceuticals $3,420.8 $3,025.1 $9,771.3 $9,183.8
======== ======== ======== ========
21
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
Consumer Healthcare
-------------------
Worldwide consumer healthcare net revenue increased 10% in each of the
2003 third quarter and first nine months due primarily to sales of
ALAVERT (introduced in the 2002 fourth quarter) and higher sales of
CENTRUM, ADVIL and CALTRATE. The 2003 first nine months increase was
also attributable to higher sales of ADVIL COLD & SINUS and other
cough/cold/allergy products. Excluding the impact of foreign exchange,
worldwide consumer healthcare net revenue increased 7% in each of the
2003 third quarter and first nine months.
The following table sets forth the significant worldwide consumer
healthcare net revenue by product for the three and nine months ended
September 30, 2003 compared with the same periods in the prior year:
Three Months Nine Months
Ended September 30, Ended September 30,
(In millions) ------------------- ----------------------
Products 2003 2002 2003 2002
--------------------------------- ------ ------ -------- --------
CENTRUM $148.3 $121.8 $402.3 $385.1
ADVIL 126.9 117.9 335.3 321.3
Other cough/cold/allergy products 111.3 119.4 248.9 235.1
CALTRATE 44.1 37.9 113.0 100.4
ADVIL COLD & SINUS 35.3 38.5 87.8 78.5
SOLGAR 26.9 24.8 82.1 77.8
ALAVERT 25.8 - 77.5 -
CHAP STICK 29.9 23.6 69.3 67.1
Other 112.3 114.7 329.7 320.9
------ ------ -------- --------
Total consumer healthcare $660.8 $598.6 $1,745.9 $1,586.2
====== ====== ======== ========
22
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
The following table sets forth the percentage changes in worldwide net
revenue by segment compared with 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, 2003 Nine Months Ended September 30, 2003
--------------------------------------------- ---------------------------------------------
Foreign Total Foreign Total
Volume Price Exchange Net Revenue Volume Price Exchange Net Revenue
------ ----- -------- ----------- ------ ----- -------- -----------
Pharmaceuticals
-------------------
United States 6% 3% - 9% (4%) 5% - 1%
International 8% 1% 10% 19% 3% 2% 10% 15%
--- --- --- --- --- --- --- ---
Total 7% 2% 4% 13% (2%) 4% 4% 6%
=== === === === === === === ===
Consumer Healthcare
-------------------
United States 2% 1% - 3% 3% 2% - 5%
International 14% 3% 10% 27% 8% 3% 9% 20%
--- --- --- --- --- --- --- ---
Total 6% 1% 3% 10% 5% 2% 3% 10%
=== === === === === === === ===
Total
-------------------
United States 5% 3% - 8% (3%) 5% - 2%
International 9% 1% 10% 20% 3% 3% 10% 16%
--- --- --- --- --- --- --- ---
Total 7% 2% 4% 13% (1%) 4% 4% 7%
=== === === === === === === ===
Operating Expenses
------------------
Cost of goods sold, as a percentage of Net revenue, decreased to 27.6%
for the 2003 third quarter compared with 29.2% for the 2002 third
quarter due in part to the non-recurrence of certain additional costs
that were incurred in the 2002 third quarter to address various
manufacturing issues, as well as a 2002 third quarter write-off of
approximately $35.0 million of FluShield inventory. Cost of goods
sold, as a percentage of Net revenue, increased to 26.7% for the 2003
first nine months compared with 25.5% for the 2002 first nine months
due primarily to higher manufacturing costs and a less profitable
product mix caused by lower sales of higher margin products, including
the PREMARIN family of products and CORDARONE I.V., and higher sales
of lower margin products such as PROTONIX, ZOSYN and ENBREL
(internationally) offset, in part, by higher sales of EFFEXOR XR and
PREVNAR, high margin products. Gross margin for the 2003 third quarter
and first nine months was also impacted by increased alliance revenue
recorded during the 2003 third quarter and first nine months as
compared with the similar periods in the prior year. There are no
costs of goods sold relating to alliance revenue. Therefore, any net
revenue fluctuations impacted by alliance revenue will also impact
gross margins.
Selling, general and administrative expenses, as a percentage of Net
revenue, decreased to 32.2% for the 2003 third quarter and 34.4% for
the 2003 first nine months compared with 33.6% for the 2002 third
quarter and 35.3% for the 2002 first nine months as a result of cost
containment efforts initiated in the second half of 2002 offset, in
part, by higher
23
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
general expenses related to increased pension expense, general
insurance and other employee benefit expenses.
Research and development expenses decreased 3% for the 2003 third
quarter and 1% for the 2003 first nine months primarily due to reduced
spending for licensing and operating expenses, including lower
chemical and material costs and salaries, offset, in part by higher
spending for clinical studies. Research and development spending is
expected to increase during the 2003 fourth quarter as a result of the
commencement of several Phase III clinical development programs.
Interest Expense and Other Income
---------------------------------
Interest expense, net for the three and nine months ended September
30, 2003 and 2002 consisted of the following:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In millions) 2003 2002 2003 2002
---------------------------- ----- ------ ------ ------
Interest expense $73.8 $101.5 $217.6 $291.3
Interest income (19.5) (25.5) (57.9) (69.0)
Less: amount capitalized for
capital projects (30.0) (23.6) (82.5) (61.0)
----- ------ ------ ------
Total interest expense, net $24.3 $52.4 $77.2 $161.3
===== ====== ====== ======
Interest expense, net decreased 54% for the 2003 third quarter and 52%
for the 2003 first nine months due primarily to lower weighted average
debt outstanding, compared with prior year levels. Weighted average
debt outstanding during the 2003 third quarter and first nine months
was $7,329.2 million and $7,392.3 million, respectively, compared with
prior year levels of $10,817.0 million and $10,380.8 million,
respectively. The decrease in interest expense for the 2003 first nine
months was also affected by higher capitalized interest resulting from
spending for long-term capital projects in process. These projects
include a new bio-pharmaceutical and vaccine manufacturing facility in
Ireland, as well as the expansion of an existing manufacturing
facility in Ireland.
Other income, net decreased 74% for the 2003 third quarter and
increased 74% for the 2003 first nine months. The decrease for the
2003 third quarter was primarily due to lower gains on sales of
non-strategic assets. The increase for the 2003 first nine months was
a result of significant second quarter gains from the divestiture of
certain pharmaceutical and consumer healthcare products amounting to
approximately $265.5 million. The divestitures included product rights
in some or all territories to ATIVAN, ISORDIL, DIAMOX, ZIAC, ZEBETA,
AYGESTIN, ANACIN and SONATA. The sales, profits and net assets of
these divested products, individually or in the aggregate,
24
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
were not material to either business segment or the Company's
consolidated financial position or results of operations.
Income (Loss) Before Taxes
--------------------------
The following table sets forth worldwide income (loss) before taxes by
segment together with the percentage changes from the comparable
period in the prior year:
Income (Loss) Before Taxes
---------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------- ----------------------------------
(Dollars in millions) % Increase
Segment 2003 2002 % Increase 2003 2002 (Decrease)
----------------------- -------- -------- ---------- -------- -------- ----------
Pharmaceuticals (1) $997.7 $659.9 51% $3,024.9 $2,469.7 22%
Consumer Healthcare (2) 191.4 183.6 4% 420.6 486.5 (14%)
Corporate (3) (2,069.0) 1,184.5 - (1,434.6) 965.6 -
-------- -------- --- -------- -------- ----
Total ($879.9) $2,028.0 - $2,010.9 $3,921.8 (49%)
======== ======== === ======== ======== ====
(1) Pharmaceuticals for the 2003 first nine months included gains of
$231.5 as a result of the divestiture of product rights to
ATIVAN, ISORDIL, DIAMOX, ZIAC, ZEBETA, AYGESTIN and SONATA.
Excluding these divestiture gains, Pharmaceuticals income before
taxes increased 13% for the 2003 first nine months.
(2) Consumer Healthcare for the 2003 first nine months included a
gain of $34.0 related to the divestiture of ANACIN. In addition,
a gain of $78.9 was included in the 2002 first nine months
results related to a class action settlement regarding price
fixing by certain vitamin suppliers. Excluding the divestiture
and settlement gain, Consumer Healthcare income before taxes
decreased 5% for the 2003 first nine months.
(3) Corporate for the 2003 third quarter and first nine months
included a charge of $2,000.0 related to the REDUX and PONDIMIN
diet drug litigation. In addition, the 2003 first nine months
results included a gain of $860.6 relating to the sale of the
Company's remaining Amgen common stock holdings. Corporate for
the 2002 third quarter and first nine months results included a
gain a $2,627.6 related to the acquisition of Immunex by Amgen
and an additional diet drug litigation charge of $1,400.0.
Excluding these items from the 2003 and 2002 third quarter and
first nine months results, Corporate expenses, net increased 60%
and 13%, respectively.
Worldwide pharmaceutical income before taxes increased 51% for the
2003 third quarter primarily due to higher net revenue and increased
gross profit margins earned on worldwide sales of human
pharmaceuticals and animal health products and lower selling, general
and administrative expenses offset, in part, by lower other income,
net. Worldwide pharmaceuticals income before taxes increased 22% for
the 2003 first nine months due primarily to higher net revenue and
other income, as a result of 2003 second quarter gains from the
divestiture of certain products and lower selling, general and
administrative expenses offset, in part, by lower gross profit margins
earned on worldwide sales of human pharmaceuticals.
25
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
Worldwide consumer healthcare income before taxes increased 4% for the
2003 third quarter and decreased 14% for the 2003 first nine months
while consumer healthcare sales increased 10% for both the 2003 third
quarter and first nine months. This difference between sales growth
and the growth of income before taxes for the 2003 third quarter and
first nine months is primarily attributable to lower gross profit
margins earned on worldwide sales of consumer healthcare products and
higher selling, general and administrative expenses as a result of
increased marketing expenses associated with the launch of ALAVERT.
The 2003 first nine months difference was additionally impacted by the
non-recurrence of income received in 2002 in connection with a class
action settlement gain relating to price fixing by certain vitamin
suppliers.
Corporate loss before taxes for the 2003 third quarter and first nine
months was $2,069.0 million and $1,434.6 million, respectively,
compared with income before taxes for the 2002 third quarter and first
nine months of $1,184.5 million and $965.6 million, respectively.
Corporate includes a 2003 first quarter gain of $860.6 million from
the sale of the Company's remaining Amgen shares; a 2003 third quarter
charge of $2,000.0 million to increase the reserve related to the
REDUX and PONDIMIN diet drug litigation; a 2002 third quarter gain of
$2,627.6 million relating to the acquisition of Immunex by Amgen; and
a 2002 third quarter diet drug litigation charge of $1,400.0 million.
Excluding these items, Corporate expenses would have increased 60% for
the 2003 third quarter and 13% for the 2003 first nine months. The
increase was due primarily to higher general and administrative
expenses related to increased employee benefit and compensation
expenses, offset, in part, by lower interest expense, net.
The effective tax rate was 51.5% (benefit) for the 2003 third quarter
and 14.7% (charge) for the 2003 first nine months, compared with 30.9%
and 26.7% (charges) for the 2002 third quarter and first nine months,
respectively. Excluding the impact of the diet drug and Amgen items
referred to above, the effective tax rate remained flat at 22.0% for
both the 2003 third quarter and first nine months compared with 21.9%
and 22.1% for the 2002 third quarter and first nine months.
Consolidated Net Income (Loss) and Diluted Earnings (Loss) Per Share
--------------------------------------------------------------------
Results
-------
As Reported
Net loss and diluted loss per share for the 2003 third quarter were
$426.4 million and $0.32, respectively, compared with net income and
diluted earnings per share of $1,401.4 million and $1.05 in the prior
year, both decreases of 130%. Net income and diluted earnings per
share each decreased 40% for the 2003 first nine months to $1,715.9
million and $1.29, respectively, compared with $2,873.2 million and
$2.15 in the prior year.
26
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
Before Certain Significant Items
Net income before certain significant items and diluted earnings per
share before certain significant items exclude from net income (loss)
and diluted earnings (loss) per share, respectively, the impact of
additional charges recorded to increase the reserve relating to 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 and the
gains related to the receipt and subsequent liquidation of Amgen
shares received in connection with Amgen's acquisition of Immunex.
The Company's management uses these measures to manage and evaluate
the Company's performance and believes it is appropriate to disclose
these non-GAAP measures to assist investors with analyzing business
performance and trends. The additional diet drug charges increase the
reserve balance for a continuing legal matter that first resulted in a
charge in 1999 and have been excluded due to their magnitude. The
gains related to the Amgen / Immunex common stock transactions have
been excluded due to the fact that the Company had not previously nor
does it currently hold a position for investment purposes in an entity
that, if acquired by another entity, would impact the Company's
financial position or results of operations to the significant extent
of the Amgen / Immunex common stock transactions.
These measures should not be considered in isolation or as a
substitute for the results of operations and diluted earnings per
share prepared in accordance with generally accepted accounting
principles (GAAP).
Net income before certain significant items and diluted earnings per
share before certain significant items for the 2003 third quarter were
$873.6 million and $0.65, respectively, compared with $626.7 million
and $0.47 for the 2002 third quarter, increases of 39% and 38%,
respectively. The increases were principally due to higher net
revenue, lower costs of goods sold, as a percentage of net revenue,
and decreased interest expense offset, in part, by higher selling,
general and administrative expenses and lower other income, net.
Net income before certain significant items and diluted earnings per
share before certain significant items for the 2003 first nine months
both increased 17% to $2,457.2 million and $1.84, respectively,
compared with $2,098.5 million and $1.57 in the 2002 first nine
months. These increases were impacted by increases in net revenue and
other income and lower interest expense, partially offset by higher
costs of goods sold, as a percentage of net revenue.
27
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
A reconciliation of net income before certain significant items and
diluted earnings per share before certain significant items to net
income (loss) and diluted earnings (loss) per share as reported under
GAAP is presented in the following table:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
(In millions except per share amounts) 2003 2002 2003 2002
-------------------------------------- -------- -------- -------- --------
Net income before certain
significant items $873.6 $626.7 $2,457.2 $2,098.5
Gains related to Immunex/Amgen
common stock transactions (1) - 1,684.7 558.7 1,684.7
Diet drug litigation charges (1,300.0) (910.0) (1,300.0) (910.0)
-------- -------- -------- --------
As reported net income (loss) $(426.4) $1,401.4 $1,715.9 $2,873.2
======== ======== ======== ========
Diluted earnings per share before
certain significant items including
the dilutive effect of common stock
equivalents (CSE) $0.65 $0.47 $1.84 $1.57
Dilutive effect of CSE (2) 0.01 - - -
Gains related to Immunex/Amgen
common stock transactions (1) - 1.26 0.42 1.26
Diet drug litigation charges (3) (0.98) (0.68) (0.97) (0.68)
-------- -------- -------- --------
As reported diluted earnings (loss)
per share (3) $(0.32) $1.05 $1.29 $2.15
======== ======== ======== ========
(1) The gains related to the Immunex/Amgen common stock transactions
consist of the following:
o $2,627.6 ($1,684.7 after-tax or $1.26 per share-diluted)
recorded during the 2002 third quarter related to the
acquisition of Immunex by Amgen. The gain represents the
excess of $1,005.2 in cash plus the fair value of 98,286,358
Amgen shares received, $2,500.1, over the Company's book
basis of its investment in Immunex and certain transaction
costs.
o $860.6 ($558.7 after-tax or $0.42 per share-diluted)
recorded during the 2003 first quarter related to the gain
on the sale of the remaining 31,235,958 shares of the
Company's Amgen common stock holdings.
(2) The $0.01 per share benefit represents the impact on diluted
earnings per share of excluding the dilutive effect of CSE.
(3) The average number of common shares outstanding used to calculate
the diet drug litigation charges and the diluted loss per share
for the 2003 third quarter does not include CSE, as the effect on
these items would be antidilutive.
28
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
Liquidity, Financial Condition and Capital Resources
----------------------------------------------------
Cash flows provided by operating activities totaling $1,791.8 million
during the 2003 first nine months were generated primarily by earnings
of $2,565.8 million (which excludes non-cash gains related to the sale
of the remaining Amgen shares, sales of other assets and the 2003
third quarter diet drug litigation charge). Driving the cash outflows
were payments of $336.1 million relating to the diet drug litigation
(see Note 3 to the consolidated condensed financial statements) and an
additional $535.2 million payment added by the Company to the security
fund and recorded in Other assets including deferred taxes. The
Company established the security fund as collateral for the Company's
financial obligations under the settlement. The amounts in the
security fund are owned by the Company and will earn interest income
for the Company while residing in the security fund. An increase in
inventories of $329.8 million due primarily to production planning
also impacted cash outflows.
The Company generated $383.7 million of cash from investing activities
during the 2003 first nine months due primarily to proceeds received
of $1,579.9 million relating to the sale of the Company's remaining
31,235,958 shares of Amgen common stock. In addition, the Company
received investment proceeds through the sales and maturities of
marketable securities and the sales of assets totaling $1,108.6
million. The Company used $2,304.8 million for investments in
property, plant and equipment and marketable securities. The capital
expenditures made during the 2003 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 proceeds of $1,800.0 million through financing
activities from the issuance of two tranches of Notes in February 2003
(see Note 2 to the consolidated condensed financial statements). These
proceeds were offset by repayments of commercial paper and other
borrowing transactions totaling $3,021.2 million and dividend payments
of $916.8 million.
At September 30, 2003, the Company had outstanding $7,139.9 million in
total debt. The Company's total debt consisted of commercial paper of
$791.1 million and notes payable and other debt of $6,348.8 million.
The Company offers its commercial paper in a very liquid market
commensurate with its short-term credit ratings from Moody's (P2), S&P
(A1) and Fitch (F2). On October 22, 2003, Moody's placed the Company's
A3 senior unsecured rating under review for possible downgrade pending
discussions with the Company; on the same day, Moody's confirmed the
Company's Prime-2 (P2) short-term rating. In addition, on October 24,
2003, Fitch Ratings downgraded the Company's senior unsecured credit
rating (long-term rating) to "A-" from "A", its commercial paper
rating (short-term rating) to "F2" from "F1" and placed both ratings
on "Rating Watch Negative" pending further discussions with the
Company. Finally, on November 10, 2003, S&P placed the Company's "A"
long-term and "A-1" short-term corporate credit ratings on
"CreditWatch" with negative implications pending discussions with the
Company. As a result of the short-term credit rating downgrade by
Fitch, the Company's
29
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
commercial paper, which previously traded in the Tier 1 commercial
paper market, now trades in the Tier 2 commercial paper market. Given
the size of the Company's commercial paper program, management
believes that the Company will have access to adequate liquidity to
meet its short-term funding needs in the Tier 2 commercial paper
market. Current debt at September 30, 2003, classified as Loans
payable, consisted of $510.6 million of notes payable and other debt
that is due within one year. All of the commercial paper outstanding
at September 30, 2003 was supported by the Company's new credit
facilities, totaling $2,700.0 million, and is classified as Long-term
debt. Debt obligations of the Company as of September 30, 2003 are set
forth below.
Less than Over
(In millions) Total 1 year 1-3 years 4-5 years 5 years
------------- -------- --------- --------- --------- --------
Total debt $7,139.9 $510.6 $2,818.3 $315.1 $3,495.9
In light of the circumstances discussed in Note 3 to the consolidated
condensed financial statements, including the unknown number of valid
matrix claims and the unknown number and merits of valid downstream
opt outs, it is not possible to predict the ultimate liability of the
Company in connection with its diet drug legal proceedings. It is
therefore not possible to predict whether, and if so when, such
proceedings will have a material adverse effect on the Company's
financial condition, results of operations and/or cash flows and
whether cash flows from operating activities and existing and
prospective financing resources will be adequate to fund the Company's
operations, pay all liabilities related to the diet drug litigation,
pay dividends, maintain the ongoing programs of capital expenditures,
and repay both the principal and interest on its outstanding
obligations without the disposition of significant strategic core
assets and/or reductions in certain cash outflows.
Certain Factors that May Affect Future Results
----------------------------------------------
Prempro / Premarin - HT Studies
In July 2002, the hormone replacment therapy (HT) subset of the
Women's Health Initiative (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, certain increased risks exceeded the
specified long-term benefits. Additional analyses of data from the HT
subset of the WHI study have been released during 2003, and further
analyses of WHI data are expected to be released in the future.
Sales of PREMPRO and other PREMARIN family products have been and will
continue to be adversely affected by the WHI results. Based on the
most recent available market data, average weekly prescriptions
written for PREMPRO and PREMARIN decreased approximately 75% and 44%,
respectively, compared to the average weekly
30
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
prescriptions written during the eight-week period preceding the
termination of the study subset. PREMPRO sales (including PREMPHASE)
for both the three and nine months ended September 30, 2003
represented approximately 2% of consolidated net revenue.
Set forth below are individual product operating results for both
PREMPRO/PREMPHASE and PREMARIN for the three and nine months ended
September 30, 2003 and 2002.
Prempro/Premphase
------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In millions) 2003 2002 2003 2002
---------------- ------ ------ ------ --------
Net revenue $66.0 $153.0 $231.0 $540.8
Gross profit (*) 47.1 132.4 162.2 465.4
Premarin
------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In millions) 2003 2002 2003 2002
---------------- ------ ------ ------ --------
Net revenue $280.1 $269.9 $794.3 $1,005.0
Gross profit 236.3 241.1 693.0 918.7
(*) The Company recorded a $60.0 reserve in the 2003 second quarter
for anticipated returns in connection with a projected shift in
prescriptions toward the recently approved lower dosage forms of
PREMPRO. This $60.0 reserve was calculated by reviewing
wholesalers' inventory levels as of June 30, 2003, after
deducting projected PREMPRO sales by wholesalers using the
first-in, first-out (FIFO) method and excluding "out of date"
inventory (it is the Company's policy to accept returns of
product with expiration dates of six months or less). The Company
fully reserved for the value of this remaining inventory, which
approximated $60.0.
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
31
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
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. One other company
has announced that it has applied for FDA approval of a generic
version of PREMARIN derived from the same natural source. Following a
bench trial in November 2002, a federal court found, in an order
issued on October 2, 2003, that the company which had developed the
estrogens to be used in this product, Natural Biologics, Inc., had
misappropriated certain of the Company's trade secrets relating to the
manufacture of PREMARIN. The court has entered a permanent injunction
that, inter alia, bars Natural Biologics, Inc. from using the
misappropriated trade secrets and from engaging in the research,
development, production or manufacture of estrogens from urine. Wyeth
v. Natural Biologics, Inc., et al., No. 98-2469 (JNE/JGL), U.S.D.C.,
D. Minn. Natural Biologics, Inc. has filed an appeal from the court's
injunction. The Company cannot predict the timing or outcome of the
appeal or of any other effort by any other company along these lines.
Product Supply
Market demand for ENBREL is strong; however the sales growth had been
constrained by limits on the existing source of supply. In December
2002, the retrofitted Rhode Island facility owned by Amgen was
completed and manufacturing production was approved by the FDA.
Consequently, manufacturing capacity for ENBREL has significantly
increased in 2003. Market demand has continued to grow and additional
manufacturing supply is projected to be required. 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 expansion of the Rhode
Island facility, both of which are expected to be completed during
2005.
32
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
Supply Chain
Management continually reviews the Company's supply chain structure
with respect to utilization of production capacities as well as
manufacturing efficiencies. Changes in product demand periodically
create capacity imbalances within the manufacturing network. When such
imbalances result in overcapacity which management considers to be
other than temporary, the network is restructured to gain optimal
efficiency and to reduce production costs. As a result, additional
restructuring charges may occur in future periods.
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, 2002, Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2003 and June 30, 2003, a Current Report on
Form 8-K (filed on October 22, 2003) 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, PREMPRO and PREMARIN. 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 not possible
to predict whether any potential liability that might exceed amounts
already accrued will have a material adverse effect on the Company's
financial condition, results of operations and/or cash flows. This is
discussed in greater detail in Note 3 to the consolidated condensed
financial statements.
Cautionary Statements Regarding Forward-Looking Information
-----------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This quarterly report,
including management's discussion and analysis set forth herein, as
well as our annual, quarterly, current and special reports,
33
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
proxy statements and other information filed with the SEC and other
written or oral statements made by us or on our behalf may include
forward-looking statements reflecting our current views at the time
these statements were made with respect to future events and financial
performance. These forward-looking statements can be identified by the
use of words such as "anticipates," "expects," "is confident,"
"plans," "could," "will,""believes," "estimates," "forecasts,"
"projects" and other words of similar meaning. These forward-looking
statements address various matters, including:
o our anticipated results of operations, liquidity position,
financial condition and capital resources;
o the benefits that we expect will result from our business
activities and certain transactions we announced or
completed, such as increased revenues, decreased expenses,
and avoided expenses and expenditures;
o statements of our expectations, beliefs, future plans and
strategies, anticipated developments and other matters that
are not historical facts;
o the timing and successfulness of research and development
activities;
o trade buying patterns;
o the impact of competitive or generic products;
o economic conditions, including interest rate and foreign
currency exchange rate fluctuation;
o changes in generally accepted accounting principles;
o any changes in political or economic conditions due to the
threat of terrorist activity worldwide and related U.S.
military action internationally;
o costs related to product liability, patent protection,
government investigations and other legal proceedings;
o our ability to protect our intellectual property, including
patents;
o the impact of legislation or regulation affecting pricing,
reimbursement or access, both in the U.S. and
internationally;
o impact of managed care or health care cost containment;
o governmental laws and regulations affecting our U.S. and
international businesses, including tax obligations;
o environmental liabilities;
o the future impact of presently known trends, including those
with respect to product performance and competition;
o changes in product mix;
o anticipated developments related to sales of
PREMPRO/PREMARIN products and ENBREL product supply; and
o expectations regarding the impact of potential litigation
relating to PREMPRO, PREMARIN, ROBITUSSIN and DIMETAPP; the
nationwide class action settlement relating to REDUX and
PONDIMIN; and additional litigation charges related to REDUX
and PONDIMIN, including those for opt outs from the national
settlement.
All forward-looking statements address matters involving numerous
assumptions, risks and uncertainties, which may cause actual results
to differ materially from those
34
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2003
expressed or implied by us in those statements. Accordingly, we
caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they were made.
From time to time, we also may provide oral or written forward-looking
statements in other materials we release to the public. Additionally,
we undertake no obligation to publicly update or revise any
forward-looking statements,whether as a result of new information,
future developments 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 2002 Annual
Report on Form 10-K, which exhibit is incorporated herein by
reference, and in our periodic reports, including Current Reports on
Form 8-K and Quarterly Reports on Form 10-Q, filed with the SEC.
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The market risk disclosures appearing on page 65 of the Company's 2002
Annual Report as incorporated by reference in the Form 10-K have not
materially changed from December 31, 2002. At September 30, 2003, the
fair values of the Company's financial instruments were as follows:
Carrying Fair
Notional/ Value Value
(In millions) Contract -------------------------
Description Amount Assets (Liabilities)
--------------------- -------------------------------------------
Forward contracts (1) $1,068.7 $0.6 $0.6
Option contracts (1) 260.1 0.3 0.3
Interest rate swaps 3,300.0 191.8 191.8
Outstanding debt (2) 6,954.0 (7,139.9) (7,442.4)
(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 and option contracts would decrease or
increase by approximately $60.2.
(2) If the interest rates were to increase or decrease by one
percentage point, the fair value of the outstanding debt would
decrease or increase by approximately $309.2.
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, 2003; 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, 2003; and the fair value of option contracts reflects
the present value of future cash flows if the contracts were settled
on September 30, 2003.
Item 4. Controls and Procedures
-----------------------
During the 2003 third quarter, 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.
36
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
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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, 2002, a Current Report on Form 8-K (filed on
October 22, 2003) and Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2003 and June 30, 2003.
During the 2003 third quarter, the Company increased its reserves in
connection with the REDUX and PONDIMIN diet drug litigation by
$2,000.0 million, bringing the total of the charges taken to date to
$16,600.0 million. Through September 30, 2003, payments into the
national settlement funds, individual settlement payments, legal fees
and other costs totaling $12,985.4 million were paid and applied
against the litigation accrual. At September 30, 2003, and including
the most recent increase, $3,614.6 million of the litigation accrual
remained.
On November 6, 2003, a jury in the District Court of Texas, 60th
Judicial District, Jefferson County, returned a verdict in favor of
the plaintiff in the case of Hayes v. American Home Products, et al.,
No. B-165,374, the first Intermediate opt out case to go to trial. The
jury in the Hayes case awarded plaintiff $1.36 million in compensatory
damages for injuries allegedly sustained by the plaintiff due to her
use of REDUX and PONDIMIN. The Company intends to pursue post-trial
motions and an appeal if necessary.
The REDUX and PONDIMIN diet drug litigation is discussed in greater
detail in Note 3 to the consolidated condensed financial statements,
under the caption "Contingencies and Commitments" herein.
In the litigation involving PREMPRO, the Company's estrogen and
progestin replacement therapy, an additional putative class action
lawsuit was filed during the 2003 third quarter. Jenkins, et al. v.
Wyeth, No. 03-2250, U.S.D.C., E.D. La. Plaintiff seeks to represent a
class of Louisiana women who have ingested the drug and seeks purchase
price refunds, medical monitoring expenses damages and injunctive
relief on their behalf. In addition to the 21 pending putative class
actions, the Company was defending approximately 180 individual
actions and approximately 35 multi-plaintiff actions in various courts
for personal injuries including breast cancer, stroke and heart
disease as of the 2003 third quarter. Together with the class actions,
these cases asserted claims on behalf of approximately 590 women
alleged injured by PREMPRO or PREMARIN.
In the litigation involving the Company's cough/cold products that
contained the ingredient phenylpropanolamine (PPA), the first trial of
PPA lawsuits against the Company is scheduled to begin in December
2003. Nineteen additional trials are scheduled for 2004. Two trials
previously scheduled for earlier this year have recently been settled:
Walker, et al. v. Whitehall-Robins, et al., No. 0105-05204, Super.
Ct.,
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Multnomah Cty., OR, and Palmer, et al. v. Eon Labs Manufacturing,
Inc., et al., No. 00-2-15370-8SEA, Super. Ct., King Cty., WA. As of
the 2003 third quarter, the Company was defending approximately 1,200
lawsuits on behalf of approximately 1,950 plaintiffs.
In the litigation alleging 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, the Company had
been served with approximately 300 thimerosal lawsuits (including
eleven purported class actions), involving approximately 1,900 named
plaintiffs as of the 2003 third quarter. The Company is also in the
process of filing motions to dismiss in many of the individual cases
for failure of the minor plaintiffs to file in the first instance
under the Vaccine Compensation Act (the Act). The Act mandates that
vaccine recipients alleging injury from childhood vaccines first bring
a claim under the Act. If a claim under the Act has not been
adjudicated within 240 days, the claimant may be released from
proceeding under the Act and may pursue a lawsuit against the
manufacturer. Four claimants who have not elected to participate in
the Omnibus Autism Proceeding currently being conducted under the
auspices of the Act have filed lawsuits against the Company following
the expiration of the 240-day period, and an unknown number of
additional claimants are expected to do likewise.
In July 2002, the United States Court of Federal Claims, which
administers the compensation program established by the Vaccine
Compensation Act, issued Autism General Order No. 1 (the Order)
accepting jurisdiction of the thimerosal matters by establishing an
Omnibus Autism Proceeding. (Participation in the Omnibus Proceeding is
not mandatory, although many petitioners who claim to suffer from
allegedly thimerosal-related autism have elected to participate.) The
Order established a two-step procedure. The first step will be for the
Office of Special Masters (OSM) to conduct an inquiry into the general
causation issues involved in the cases (i.e., to consider whether
thimerosal can cause autism); the second step will be for the OSM to
apply the causation conclusions to the individual cases. In an Order
issued September 24, 2003, the Special Master indefinitely postponed
future calendar dates originally set in the Omnibus Autism Proceeding,
including the date for the hearing on the issue of general causation.
In the litigation alleging that the Company, along with various other
pharmaceutical manufacturers, allegedly improperly inflated the
Average Wholesale Price (AWP) of certain of its products, two
additional lawsuits have been filed. The complaints in both County of
Westchester v. Wyeth, et al., CV 03 6178, U.S.D.C., S.D.N.Y., and
County of Rockland v. Wyeth, et al., CV 03 7055, U.S.D.C., S.D.N.Y.,
allege that each of the counties and their citizens have been injured
by defendants' alleged practices. Plaintiffs seek injunctive relief
and compensatory and punitive damages as a result of defendants'
alleged unlawful scheme to overcharge for prescription medications
paid for by Medicaid. In addition, the plaintiff state attorneys
general in State of Montana v. Wyeth, et al., No. CV 02-09-H-DWM,
U.S.D.C., D. Mont., and State of Nevada v. Wyeth et al., No. CV
N-02-0202, U.S.D.C., D. Nev., have filed amended complaints that have
dropped the Company as a defendant.
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The Company has been served with a lawsuit alleging that the
plaintiff, a former employee at the Company's Sanford, North Carolina
facility, was terminated in December 2002 in violation of the
whistleblower provisions of the Sarbanes-Oxley Act when he complained
about Good Manufacturing Practices (GMP) deficiencies in training
programs and reported alleged violations of federal law in the
manufacture and release of a vaccine to the Company's Office of Ethics
and Business Conduct and Office of Compliance. Livingston v. Wyeth
Inc., et al., No. 03CV00919, U.S.D.C., M.D.N.C. Plaintiff seeks
reinstatement and unspecified compensatory and punitive damages. The
Company does not believe that the lawsuit has merit and intends to
defend this matter vigorously.
The U.S. Court of Appeals for the Federal Circuit has affirmed the
District Court's holding of liability that the University of Colorado
employees are the sole inventors of the MATERNA formulation patent and
the awards of $55.7 million in compensatory damages, together with
$1.0 million in exemplary damages and post judgment interest and the
Company's petition for a rehearing en banc has been denied. University
of Colorado et al. v. American Cyanamid Company, No. 93-K-1657,
U.S.D.C., D. Col.
The U.S. Court of Appeals for the Federal Circuit has affirmed the
decision in August 2002 in favor of the Company by the U.S. District
Court for the District of New Jersey that claims 1 and 3 of Schering's
patent claiming a metabolite of loratadine were invalid. Schering
Corp. v. Geneva Pharmaceuticals, Inc., et al., Nos. 02-1545 and
02-1549, U.S.C.A., Fed. Cir. The Company had been sued by Schering for
infringing this patent as a result of filing applications with the FDA
seeking to market generic and over-the-counter loratadine products.
Schering's petition seeking rehearing in the U.S. Court of Appeals for
the Federal Circuit was denied on October 28, 2003. Schering has
ninety days in which to seek certiorari from the U.S. Supreme Court.
The Company intends to continue to defend all of the foregoing
litigation vigorously.
Item 5. Approval of Audit-Related and Tax Services
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On September 25, 2003 the Audit Committee of Wyeth's Board of
Directors approved utilization of the Company's outside auditors to
perform audit-related services primarily for the audits of Wyeth's
Benefit Plans, and other services, including but not limited to;
assistance with registration statements, comfort letters for debt
issuances and audit support services related to the Company's approach
and methodology to comply with certain requirements of the
Sarbanes-Oxley Act. The Audit Committee also approved utilization of
the Company's outside auditors to perform tax services primarily
related to the 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.
The majority of the aforementioned audit-related and tax services
relate to the year ending December 31, 2003.
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Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
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Exhibit No. Description
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(12) Computation of Ratio of Earnings to Fixed Charges.
(31.1) Certification of disclosure as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of disclosure as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32.2) 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
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The following Current Reports on Form 8-K were filed by the
Company:
o July 23, 2003 to furnish the Press Release reporting the
Company's earnings results for the 2003 second quarter.
o October 22, 2003 to furnish the Press Release reporting the
Company's results for the 2003 third quarter and to furnish
an update on the Company's diet drug litigation.
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Signature
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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
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(Registrant)
By /s/ Paul J. Jones
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Paul J. Jones
Vice President and Controller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: November 12, 2003
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Exhibit Index
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Exhibit No. Description
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(12) Computation of Ratio of Earnings to Fixed Charges.
(31.1) Certification of disclosure as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of disclosure as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32.2) Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
EX-1