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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
March 31, 2004
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
April 30, 2004:
Number of
Class Shares Outstanding
----- ------------------
Common Stock, $0.33-1/3 par value 1,333,489,921
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WYETH
INDEX
Page No.
--------
Part I - Financial Information (Unaudited) 2
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
March 31, 2004 and December 31, 2003 3
Consolidated Condensed Statements of Operations -
Three Months Ended March 31, 2004 and 2003 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity - Three Months Ended
March 31, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003 6
Notes to Consolidated Condensed Financial Statements 7-21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22-41
Item 3. Quantitative and Qualitative Disclosures about 42
Market Risk
Item 4. Controls and Procedures 42
Part II - Other Information 43
Item 1. Legal Proceedings 43-47
Item 6. Exhibits and Reports on Form 8-K 48
Signature 49
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 March 31, 2004 and December 31, 2003, the results
of its operations, changes in stockholders' equity and cash flows for the three
months ended March 31, 2004 and 2003. 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 2003 Annual
Report on Form 10-K and information contained in Current Reports on Form 8-K
filed since the filing of the 2003 Form 10-K.
We make available through our Company Internet 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's Internet website is www.wyeth.com.
2
WYETH
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
(Unaudited)
March 31, December 31,
2004 2003
----------- ------------
ASSETS
Cash and cash equivalents $4,691,340 $6,069,794
Marketable securities 1,131,231 1,110,297
Accounts receivable less allowances 2,379,324 2,529,613
Inventories:
Finished goods 816,300 821,637
Work in progress 1,185,508 1,141,916
Materials and supplies 389,517 448,631
----------- ------------
2,391,325 2,412,184
Other current assets including deferred taxes 2,764,884 2,840,354
----------- ------------
Total Current Assets 13,358,104 14,962,242
Property, plant and equipment 11,864,115 11,686,252
Less accumulated depreciation 3,150,983 3,025,201
----------- ------------
8,713,132 8,661,051
Goodwill 3,810,230 3,817,993
Other intangibles, net of accumulated amortization
(March 31, 2004-$135,793 and December 31, 2003-$128,137) 126,030 133,134
Other assets including deferred taxes 3,662,077 3,457,502
----------- ------------
Total Assets $29,669,573 $31,031,922
=========== ============
LIABILITIES
Loans payable $335,640 $1,512,845
Trade accounts payable 896,653 1,010,749
Accrued expenses 5,241,107 5,461,835
Accrued federal and foreign taxes 366,815 444,081
----------- ------------
Total Current Liabilities 6,840,215 8,429,510
Long-term debt 7,935,389 8,076,429
Accrued postretirement benefit obligations other than pensions 1,025,887 1,007,540
Other noncurrent liabilities 4,156,814 4,224,062
Contingencies and commitments (Note 7)
STOCKHOLDERS' EQUITY
$2.00 convertible preferred stock, par value $2.50 per share 42 42
Common stock, par value $0.33-1/3 per share 444,393 444,151
Additional paid-in capital 4,785,299 4,764,390
Retained earnings 4,555,219 4,112,285
Accumulated other comprehensive loss (73,685) (26,487)
----------- ------------
Total Stockholders' Equity 9,711,268 9,294,381
----------- ------------
Total Liabilities and Stockholders' Equity $29,669,573 $31,031,922
=========== ============
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months
Ended March 31,
---------------------------
2004 2003
---------- ----------
Net revenue $4,014,789 $3,689,057
---------- ----------
Cost of goods sold 1,097,916 928,304
Selling, general and administrative expenses 1,354,210 1,291,470
Research and development expenses 705,302 513,514
Interest expense, net 26,932 27,000
Other (income) expense, net (113,462) 6,735
Gain on sale of Amgen common stock - (860,554)
---------- ----------
Income before federal and foreign taxes 943,891 1,782,588
Provision for federal and foreign taxes 194,188 504,706
---------- ----------
Net income $749,703 $1,277,882
========== ==========
Basic earnings per share $0.56 $0.96
========== ==========
Diluted earnings per share $0.56 $0.96
========== ==========
Dividends paid per share of common stock $0.23 $0.23
========== ==========
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)
Three Months Ended March 31, 2004:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
----------- -------- ---------- ---------- ------------- -------------
Balance at January 1, 2004 $42 $444,151 $4,764,390 $4,112,285 $(26,487) $9,294,381
Net income 749,703 749,703
Currency translation adjustments (58,817) (58,817)
Unrealized gains on derivative contracts, net 9,170 9,170
Unrealized gains on marketable securities, net 2,449 2,449
-------------
Comprehensive income, net of tax 702,505
-------------
Cash dividends declared (1) (306,604) (306,604)
Common stock issued for stock options 167 13,181 13,348
Other exchanges 75 7,728 (165) 7,638
----------- -------- ---------- ---------- ------------- -------------
Balance at March 31, 2004 $42 $444,393 $4,785,299 $4,555,219 $(73,685) $9,711,268
=========== ======== ========== ========== ============= =============
Three Months Ended March 31, 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 1,277,882 1,277,882
Currency translation adjustments 115,342 115,342
Unrealized losses on derivative contracts, net (7,210) (7,210)
Unrealized gains on marketable securities, net 2,400 2,400
Realized gain on sale of Amgen stock
reclassified to net income (515,114) (515,114)
-------------
Comprehensive income, net of tax 873,300
-------------
Cash dividends declared (2) (305,101) (305,101)
Common stock issued for stock options 294 19,016 19,310
Other exchanges (1) 32 2,583 (306) 2,308
----------- -------- ---------- ---------- ------------- -------------
Balance at March 31, 2003 $45 $442,345 $4,604,372 $4,259,120 $(560,153) $8,745,729
=========== ======== ========== ========== ============= =============
(1) Includes the preferred stock cash dividend of $0.50 per share ($8 in the aggregate) declared March 4, 2004 and payable
on April 1, 2004.
(2) Includes the preferred stock cash dividend of $0.50 per share ($9 in the aggregate) declared March 5, 2003 and paid
on April 1, 2003.
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months
Ended March 31,
-------------------------------
2004 2003
---------- ----------
Operating Activities
- --------------------
Net income $749,703 $1,277,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of Amgen shares - (860,554)
Gains on sales of assets (132,480) (2,697)
Depreciation and amortization 147,394 131,100
Change in deferred income taxes 17,964 (1,871)
Diet drug litigation payments (98,643) (134,627)
Security fund deposit - (535,200)
Changes in working capital, net (230,587) 445,184
Other items, net 48,272 9,216
---------- ----------
Net cash provided by operating activities 501,623 328,433
---------- ----------
Investing Activities
- --------------------
Purchases of property, plant and equipment (291,583) (344,614)
Proceeds from sale of Amgen common stock - 1,579,917
Proceeds from sales of assets 228,836 7,860
Proceeds from sales and maturities of marketable securities 182,800 176,242
Purchases of marketable securities (200,487) (203,333)
---------- ----------
Net cash provided by (used for) investing activities (80,434) 1,216,072
---------- ----------
Financing Activities
- --------------------
Net repayments of commercial paper - (3,229,440)
Proceeds from issuance of long-term debt - 1,800,000
Repayments of long-term debt (1,500,000) -
Other borrowing transactions, net (4,981) (27,210)
Dividends paid (306,596) (305,092)
Exercises of stock options 13,348 19,310
---------- ----------
Net cash used for financing activities (1,798,229) (1,742,432)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (1,414) 3,262
---------- ----------
Decrease in cash and cash equivalents (1,378,454) (194,665)
Cash and cash equivalents, beginning of period 6,069,794 2,943,604
---------- ----------
Cash and cash equivalents, end of period $4,691,340 $2,748,939
========== ==========
Supplemental Information
- ------------------------
Interest payments $99,324 $155,240
Income tax payments, net of refunds 265,733 112,800
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 2003 Annual Report on Form 10-K:
Stock-Based Compensation: The Company has three Stock Incentive Plans
that it accounts for using the intrinsic value method in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. All
options granted under these plans have an exercise price equal to the
market value of the underlying common stock on the date of grant.
Accordingly, no stock-based employee compensation cost is reflected in
net income other than for the Company's restricted stock awards. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of SFAS No. 123, Accounting for Stock-Based Compensation as amended by
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, Amendment of SFAS No. 123, to stock-based employee
compensation:
Three Months
Ended March 31,
-------------------------
(In thousands except per share amounts) 2004 2003
-------------------------------------------------- -------- ----------
Net income, as reported $749,703 $1,277,882
Add: Stock-based employee compensation expense
included in reported net income, net of tax 2,493 1,316
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of tax (85,143) (83,691)
-------- ----------
Adjusted net income $667,053 $1,195,507
======== ==========
Earnings per share:
Basic - as reported $0.56 $0.96
======== ==========
Basic - adjusted $0.50 $0.90
======== ==========
Diluted - as reported $0.56 $0.96
======== ==========
Diluted - adjusted $0.50 $0.90
======== ==========
Goodwill and Other Intangibles: In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the changes in the carrying
amount of goodwill by reportable segment for the three months ended
March 31, 2004 are as follows:
Consumer Animal
(In thousands) Pharmaceuticals Healthcare Health Total
-------------------------------- --------------- ---------- -------- ----------
Balance at December 31, 2003 $2,691,772 $592,526 $533,695 $3,817,993
Currency translation adjustments (7,352) (266) (145) (7,763)
---------- -------- -------- ----------
Balance at March 31, 2004 $2,684,420 $592,260 $533,550 $3,810,230
========== ======== ======== ==========
7
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Earnings per Share
------------------
The following table sets forth the computations of basic earnings per
share and diluted earnings per share:
Three Months
Ended March 31,
---------------------------
(In thousands except per share amounts) 2004 2003
------------------------------------------------------- --------- ----------
Net income less preferred dividends $749,695 $1,277,873
Denominator:
Weighted average common shares outstanding 1,332,926 1,327,131
--------- ----------
Basic earnings per share $0.56 $0.96
========= ==========
Net income $749,703 $1,277,882
Denominator:
Weighted average common shares outstanding 1,332,926 1,327,131
Common stock equivalents of outstanding stock options
and deferred contingent common stock awards* 4,817 4,282
--------- ----------
Total shares* 1,337,743 1,331,413
--------- ----------
Diluted earnings per share* $0.56 $0.96
========= ==========
* At March 31, 2004 and 2003, 107,070 and 88,889, respectively, of
common shares related to options outstanding under the Company's
Stock Incentive Plans were excluded from the computation of
diluted earnings per share, as the effect would have been
antidilutive.
8
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Marketable Securities
---------------------
The cost, gross unrealized gains (losses) and fair value of
available-for-sale and held-to-maturity securities by major security
type at March 31, 2004 and December 31, 2003 were as follows:
Gross Gross
(In thousands) Unrealized Unrealized Fair
At March 31, 2004 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $107,500 $108 $(18) $107,590
Commercial paper 40,914 - - 40,914
Certificates of deposit 100,896 77 (5) 100,968
Corporate debt securities 224,271 250 (41) 224,480
Other debt securities 3,742 10 - 3,752
Equity securities 68,048 13,079 (173) 80,954
Institutional fixed income fund 525,688 19,181 - 544,869
---------- ---------- ---------- ----------
Total available-for-sale 1,071,059 32,705 (237) 1,103,527
---------- ---------- ---------- ----------
Held-to-maturity:
Commercial paper 27,704 - - 27,704
Certificates of deposit - - - -
---------- ---------- ---------- ----------
Total held-to-maturity 27,704 - - 27,704
---------- ---------- ---------- ----------
$1,098,763 $32,705 $(237) $1,131,231
========== ========== ========== ==========
Gross Gross
(In thousands) Unrealized Unrealized Fair
At December 31, 2003 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $152,851 $44 $(23) $152,872
Commercial paper 42,964 4 (4) 42,964
Certificates of deposit 63,643 22 (27) 63,638
Corporate debt securities 212,198 252 (32) 212,418
Other debt securities 4,296 - (11) 4,285
Equity securities 21,078 13,158 (188) 34,048
Institutional fixed income fund 522,847 16,868 - 539,715
---------- ---------- ---------- ----------
Total available-for-sale 1,019,877 30,348 (285) 1,049,940
---------- ---------- ---------- ----------
Held-to-maturity:
Commercial paper 60,107 - - 60,107
Certificates of deposit 250 - - 250
---------- ---------- ---------- ----------
Total held-to-maturity 60,357 - - 60,357
---------- ---------- ---------- ----------
$1,080,234 $30,348 $(285) $1,110,297
========== ========== ========== ==========
9
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The contractual maturities of debt securities classified as
available-for-sale at March 31, 2004 were as follows:
Fair
(In thousands) Cost Value
---------------------------------------- -------- --------
Available-for-sale:
Due within one year $331,683 $331,845
Due after one year through five years 128,557 128,769
Due after five years through 10 years 5,020 5,014
Due after 10 years 12,063 12,076
-------- --------
$477,323 $477,704
======== ========
All held-to-maturity debt securities are due within one year.
Note 4. New Credit Facility
-------------------
In February 2004, the Company replaced its $1,350.0 million, 364-day
credit facility entered into in March 2003 with a $1,747.5 million,
five-year facility. The new facility contains substantially identical
financial and other covenants, representations, warranties, conditions
and default provisions as the replaced facility.
Note 5. Pensions and Other Postretirement Benefits
------------------------------------------
In accordance with SFAS No. 132 (revised 2003), Employers' Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statement Nos. 87, 88, and 106 the following pension and other
postretirement benefit plan disclosures are now required in interim
financial statements.
Net periodic benefit cost for the Company's defined benefit plans for
the three months ended March 31, 2004 and 2003 (principally U.S.) was
as follows:
Other
Pensions Postretirement Benefits
(In thousands) ------------------- -----------------------
Components of Net Periodic Benefit Cost 2004 2003 2004 2003
--------------------------------------------------------------- -----------------------
Service cost $35,371 $29,753 $11,145 $9,515
Interest cost 62,293 61,970 23,560 23,546
Expected return on plan assets (76,304) (67,429) - -
Amortization of prior service cost 2,843 2,752 (3,709) (562)
Amortization of transition obligation (422) (379) - -
Recognized net actuarial loss 22,463 26,047 7,840 4,671
Settlement loss - 13,034 - -
------- ------- ------- -------
Net periodic benefit cost $46,244 $65,748 $38,836 $37,170
======= ======= ======= =======
10
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 2004, $13.7 million and $24.8 million of contributions
have been made to the Company's defined benefit pension plans and
other postretirement benefit plans, respectively. The Company
presently anticipates further contributions of approximately $150.0
million and $90.0 million to fund its defined benefit pension and
other postretirement benefit plans in 2004.
Note 6. Restructuring Program
---------------------
2003 Restructuring Charge and Related Asset Impairments
In December 2003, the Company recorded a special charge for
manufacturing restructurings and related asset impairments of $487.9
million. The Company recorded its 2003 restructuring charges,
including personnel and other costs, in accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, and
its asset impairments in accordance with SFAS No. 144, Accounting for
the Impairment of Long-Lived Assets. The restructuring and related
asset impairments impacted only the Pharmaceuticals segment and were
recorded to recognize the costs of closing certain manufacturing
facilities, as well as the elimination of certain positions at the
Company's facilities. As of March 31, 2004, the Company is continuing
with the 2003 restructuring program and expects total charges to
approximate $493.9 million and plans to record the majority of the
remaining $6.0 million in personnel charges during 2004, in accordance
with SFAS No. 146. The activity in the restructuring accruals was as
follows:
Reserve at Payments/ Reserve at
(In thousands) Total December 31, Non-cash March 31,
2003 Restructuring Charges 2003 Charges 2004
------------------------------------------------------------------------------------
Personnel costs $3,400 $3,400 $(700) $2,700
Asset impairments 419,400 - - -
Contract settlement costs 47,900 45,200 - 45,200
Other closure/exit costs 17,200 17,200 (6,900) 10,300
------------------------------------------------------
$487,900 $65,800 $(7,600) $58,200
======================================================
2002 Restructuring Charge and Related Asset Impairments
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 facilities 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).
11
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 March 31, 2004, the Company is continuing with the
2002 restructuring program and approximately 80 positions have yet to
be eliminated. The activity in the restructuring accruals was as
follows:
Payments/
Reserve at Non-cash Reserve at
(In thousands) Total December 31, Charges March 31,
2002 Restructuring Charges 2003 in 2004 2004
------------------------------------------------------------------------------------
Personnel costs $194,600 $36,800 $(10,800) $26,000
Asset impairments 68,700 - - -
Other closure/exit costs 77,500 27,900 (3,800) 24,100
------------------------------------------------------
$340,800 $64,700 $(14,600) $50,100
======================================================
Note 7. 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.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings (other than
the diet drug litigation discussed immediately below) will not have a
material adverse effect on the Company's financial position but could
be material to the results of operations or cash flows in any one
accounting period.
The Company has been named as a defendant in numerous legal actions
relating to 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,
which the Company estimated were used in the United States, prior to
their 1997 voluntary market withdrawal, by approximately 5.8 million
people. These actions allege, among other things, that the use of
REDUX and/or PONDIMIN, independently or in combination with
phentermine, caused certain serious conditions, including valvular
heart disease.
On October 7, 1999, the Company announced a nationwide class action
settlement (the settlement) to resolve litigation brought against the
Company regarding the use of the diet drugs REDUX or PONDIMIN. The
settlement covered all claims arising out of the use of REDUX or
PONDIMIN, except for claims of primary pulmonary hypertension (PPH),
and was open to all REDUX or PONDIMIN users in the United States.
12
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 April 14, 2004, the Trust had recorded
approximately 114,520 matrix-level claim forms. Approximately 29,630
of these forms were so deficient, incomplete or duplicative of other
forms filed by the same claimant that, in the Company's view, it is
unlikely that a significant number of these forms will result in
further claims processing.
The Company's understanding of the status of the remaining
approximately 84,890 forms, based on its analysis of data received
from the Trust through April 14, 2004, is as follows. Approximately
14,080 of the matrix claims had been processed to completion, with
those claims either paid (approximately 3,120 claims, with payments of
$1,212.0 million), denied (approximately 9,650) or withdrawn.
Approximately 2,750 claims were in some stage of the 100% audit
process ordered in late 2002 by the federal court overseeing the
national settlement. Approximately 20,040 claims alleged conditions
that, if true, would entitle the claimant to receive a matrix award;
these claims had not yet entered the audit process. Another
approximately 20,070 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 27,670 claim forms did not 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 280 claims were in the data
entry process and could not be assessed.
In addition to the approximately 114,520 matrix claims filed as of
April 14, 2004, 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 (i.e., mild or greater aortic regurgitation, or
moderate or greater mitral 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 understanding, based on data received from the Trust
through April 14, 2004, is that audits had produced preliminary or
final results on 3,994 of the claims that had begun the 100% audit
process since its inception. Of these, 1,421 were found to be payable
at the amount claimed and 120 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 of numerous issues concerning the audit process raised in
motions and related proceedings now pending before the federal court,
the Company cannot predict the ultimate outcome of the audit process.
13
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 20,040 matrix claimants who allege conditions that, if
true, would entitle them to an award (and approximately 99% of the
approximately 20,070 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
ranged from $192,111 to $643,500 on the settlement agreement's payment
matrix.)
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 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 17
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 20,070 matrix claims were
purportedly substantiated by the 17 physicians covered by the
Integrity Program as of April 14, 2004. 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 have 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 and the Trust's matrix
claim processing have been filed.
In late 2003, the Trust adopted a program to prioritize the handling
of those matrix claims that it believed were least likely to be
illegitimate. Under the program, claims under Levels III, IV and V
were to 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
14
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
conditions than, heart valve surgery.) The program prioritized 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 fewer than 20 matrix
claims.
On April 15, 2004, the Trust announced that it would cease temporarily
to audit or act on audit results of Level I and Level II matrix
claims. The Trust stated that it would continue to initiate audits
with respect to Level III, IV and V matrix claims and would continue
to act on the results of audits of Level III, IV and V claims. It also
announced that "[d]ue to concerns about the manner in which
echocardiograms have been taken, recorded and presented, the Trust is
reviewing all echocardiograms and related materials prior to payment
of claims on which they are based and, where possible, prior to
initiation of a medical audit. This will result in a temporary delay
in initiating audits and in payments following audit. Where the review
of the echocardiogram reveals substantial evidence of an intentional,
material misrepresentation that calls into question the validity of a
claim, the Trust will not pay the claim." Finally, the Trust stated
that, with respect to Level I and II matrix claims, it did not
anticipate the resumption of payments on claims previously approved
until May 17, 2004 and that it intended to return to and remain on a
monthly payment system as soon as feasible.
In a joint motion filed in the U.S. District Court for the Eastern
District of Pennsylvania on May 4, 2004, the Company, counsel for the
plaintiff class in the nationwide settlement and counsel for a number
of individual class members moved to stay for 60 days the processing
and payment of Level I and Level II matrix claims and certain
associated court proceedings. That motion was granted by the court on
May 10, 2004. The stay provides the parties with an opportunity to
draft and submit to the court a Seventh Amendment to the settlement
agreement that would create a new claims processing structure, funding
arrangement and payment schedule for these claims. The proposed
amendment would require court approval as well as final agreement by
the Company.
If finalized and approved, the proposed Seventh Amendment would
include the following key terms:
o The amendment would create an Alternate Claims Facility to
process the Level I and Level II matrix claims;
o The Company would make some initial payments to facilitate
notice to class members and to establish the Alternate
Claims Facility. Following approval by the federal court
overseeing the settlement and any appellate courts, the
Company would make an initial payment of $400 million. The
timing of additional payments would be dictated by the rate
of review and payment of claims by the Alternate Claims
Facility. The Company would ultimately deposit a total of
$1,275.0 million into the Alternate Claims Facility;
o The Alternate Claims Facility would be run by a claims
administrator approved by the court. All current matrix
Level I and II claimants who pass the Alternate Claims
Facility medical review and otherwise satisfy the
requirements of the
15
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
the settlement would receive a pro rata share of the
$1,275.0 million amount, net of expenses.
The pro rata amount would vary depending upon the number of
claimants, the nature of their claims, their age and other
factors. A current matrix Level I or II claimant who
chooses not to undergo the Alternate Claims Facility
medical review, or who does not qualify for an injury
payment after such medical review, would be paid $2,000 by
the Alternate Claims Facility;
o Class members who are currently eligible to file Level I and
Level II matrix claims in the future would receive a $2,000
payment out of the assets of the existing settlement Trust;
o If the participants in the Seventh Amendment later have
surgery or other more serious medical conditions on Matrix
Levels III-V within a specified period in the future, they
would remain eligible to submit claims to the existing
settlement Trust and be paid the current matrix amounts if
they qualify for such payments under the terms of the
settlement agreement. In the event the existing settlement
Trust is unable to pay those claims, the Company would
guarantee payment;
o Class members would have the right to opt out of the Seventh
Amendment and to remain bound by the terms of the existing
national settlement. The Company, however, would have the
right to withdraw from the Seventh Amendment if
participation by class members is inadequate or for other
reasons. All class members who participate in the Seventh
Amendment would give up any further opt-out rights.
There can be no assurance that an agreement between the Company and
the other parties will be reached, that the Company will ultimately
proceed with the amendment (based upon the level of participation in
the amendment or for other reasons), or that the amendment will be
approved by the court and upheld on appeal.
The Trust has indicated that one of the goals of the Integrity Program
referenced above is to recoup funds from those entities that caused
the Trust to pay illegitimate claims and the Trust has filed two
lawsuits to that end. 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 also filed a lawsuit
against a New York cardiologist who attested under oath to the
validity of 83 matrix claims, alleging that the cardiologist engaged
in, among other things, misrepresentation, fraud, conspiracy to commit
fraud, and gross negligence.
The Trust has filed a number of motions directed at the conduct of the
companies that performed the echocardiograms on which many matrix
claims are based. In a pair of motions related to the activities of a
company known as EchoMotion, the Trust has asked the court to stay
payment of claims already audited and found payable in whole or in
part if the echocardiogram was performed by EchoMotion and to
disqualify all echocardiograms by EchoMotion that have been used to
support matrix claims that have not yet been audited. In addition, the
Trust has filed a motion seeking discovery of 14
16
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
specific companies whose echocardiograms support a large number of
claims to determine whether their practices violate the settlement.
The Trust has also moved to stay and/or disqualify claims brought by
claimants represented by certain law firms or attested to by certain
physicians. The Company has joined in certain of these motions and has
filed its own motions addressing the abuse of the matrix claims
process and seeking an emergency stay of claim processing. The federal
court overseeing the settlement has set a hearing on the Company's
emergency stay motion for May 13, 2004, although it is not known
whether that procedure will proceed, in whole or in part, in light of
the joint motion of the parties for the 60-day stay described above.
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 fact have serious heart valve disease. If so, not
withstanding any agreement to, or approval of, the Seventh Amendment
described above, matrix claims found eligible for payment after audit
may cause total payments to 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 an additional 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 the end of 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
17
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 May 4, 2004 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 77,000 individuals had filed Intermediate
or Back-End opt out forms as of May 4, 2004.
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
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. The appeal has been fully briefed and was heard by a panel
of the U.S. Court of Appeals for the Third Circuit in December 2003.
The panel has asked for supplemental briefing, which has also been
filed. The Company cannot predict the timing or outcome of the appeal.
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 and lawsuits
attacking both the binding effect of the settlement and the
administration of the Trust, some of which have been decided against
class members and are currently on appeal. The Company cannot predict
the outcome of any of these motions or lawsuits.
As of May 4, 2004, approximately 50,000 individuals who had filed
Intermediate or Back-End opt out forms had served lawsuits on the
Company. 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
18
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 to vigorously defend these cases.
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. The Company intends vigorously to defend those
initial opt out cases that cannot be resolved prior to trial.
On April 27, 2004, a jury in Beaumont, Texas hearing the case of
Coffey, et al. v. Wyeth, et al., No. E-167,334, 172nd Judicial
District Court, Jefferson Cty., TX, returned a verdict in favor of the
plaintiffs for $113.353 million in compensatory damages and $900.0
million in punitive damages for the wrongful death of the plaintiffs'
decedent, allegedly as a result of PPH caused by her use of PONDIMIN.
Judgment has not yet been entered on the jury's verdict. Following
the trial court's entry of judgment, the Company will pursue motions
for a new trial or for judgment notwithstanding the verdict, including
a request for application of Texas' statutory cap on punitive damage
awards, which would significantly reduce the amount of the punitive
damage award. Plaintiffs have indicated that they believe that the
verdict returned by the jury provides a basis for the trial court to
deny application of the statutory cap. Should the trial court deny the
Company's motions, the Company believes that it has strong arguments
for reversal or reduction of the awards on appeal due to the
significant number of legal errors made during trial and in the charge
to the jury and due to a lack of evidence to support aspects of the
verdict. It would also contest on appeal any refusal by the trial
court to apply the statutory cap on punitive damages and believes that
it has strong arguments for application of the cap. In the event of an
appeal, the Company will be required to post a bond, which, under
Texas law, may not exceed $25.0 million. The appeal process is
expected to take one to two years at a minimum.
As of April 30, 2004, the Company was a defendant in approximately 350
lawsuits in which the plaintiff alleges a claim of PPH, alone or with
other alleged injuries. Almost all of these claimants must meet the
definition of PPH set forth in the national settlement agreement in
order to pursue their claims outside of the national settlement
(payment of such claims, by settlement or judgment, would be made by
the Company and not the Trust). Approximately 55 of these cases appear
to be eligible to pursue a PPH lawsuit under the terms of the national
settlement. In approximately 80 of these cases the Company expects the
PPH claims to be voluntarily dismissed by the claimants (although they
may continue to pursue other claims). In approximately 40 of these
cases the Company has filed or expects to file motions under the terms
of the national settlement to preclude plaintiffs from proceeding with
their PPH claims. For the balance of these cases, the Company
currently has insufficient medical information to assess whether or
not the claimants meet the definition of PPH under the national
settlement. The Company continues to work toward resolving the claims
of individuals who allege that they have developed PPH as a result of
their use of the diet drugs and intends vigorously to defend those PPH
cases that cannot be resolved prior to trial.
19
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In 2003, 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. The $3,417.9
million reserve at March 31, 2004 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 in the diet drug
litigation and believes it can marshal significant resources and legal
defenses to limit its ultimate liability. 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, and the effect, if any, of the proposed Seventh Amendment
referred to above, 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 8. Company Data by Segment
-----------------------
The Company has four reportable segments: Wyeth Pharmaceuticals
(Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare),
Fort Dodge Animal Health (Animal Health) and Corporate. The Company's
Pharmaceuticals, Consumer Healthcare and Animal Health reportable
segments are strategic business units that offer different products
and services. Beginning in the 2003 fourth quarter, the Company
changed its reporting structure to include the Animal Health business
as a separate reporting segment. The Animal Health business was
previously reported within the Pharmaceuticals segment. Prior period
information presented herein has been restated to be on a comparable
basis. The reportable segments are managed separately because they
manufacture, distribute and sell distinct products and provide
services that 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
20
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
overall management of the Company which are not allocated to the
other reportable segments.
Net Revenue Income before Taxes
------------------------- -----------------------
Three Months Three Months
Ended March 31, Ended March 31,
(In thousands) ------------------------- -----------------------
Segment 2004 2003 2004 2003
------------------- ---------- ---------- -------- ----------
Pharmaceuticals(1) $3,207,586 $2,975,058 $872,113 $917,654
Consumer Healthcare 588,351 532,004 109,458 80,204
Animal Health 218,852 181,995 37,694 26,228
Corporate(2) - - (75,374) 758,502
---------- ---------- -------- ----------
Total(3) $4,014,789 $3,689,057 $943,891 $1,782,588
========== ========== ======== ==========
(1) On March 31, 2004, the Company entered into an agreement with
Solvay Pharmaceuticals to co-develop and co-commercialize four
neuroscience compounds, most notably, bifeprunox, a late stage
compound in Phase 3 development for schizophrenia and other
possible uses. Pharmaceuticals income before taxes for the 2004
first quarter included a charge of $145,500 within Research and
development expenses in connection with the execution of the
agreement.
(2) Corporate for the 2003 first quarter included a gain of $860,554
relating to the sale of Amgen shares.
(3) Income before taxes for the 2004 first quarter included gains
from the divestiture of certain Pharmaceuticals and Consumer
Healthcare products amounting to approximately $140,700. The
divestitures included product rights to indiplon, DIAMOX (in
Japan), and the Company's nutritionals products in France.
Note 9. Immunex/Amgen Transactions
--------------------------
During the first quarter of 2003, the Company completed the sale of
31,235,958 shares of Amgen common stock held by the Company at
December 31, 2002. These 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).
21
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
Item 2. Results of Operations
---------------------
Overview
Wyeth is one of the world's largest research-based pharmaceutical and
health care products companies and is a leader in the discovery,
development, manufacturing and marketing of pharmaceuticals, vaccines,
biopharmaceuticals, non-prescription medicines and animal health care.
The Company has four reportable segments: Wyeth Pharmaceuticals
(Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare),
Fort Dodge Animal Health (Animal Health) and Corporate, which are
managed separately because they manufacture, distribute and sell
distinct products and provide services which require various
technologies and marketing strategies. These segments reflect how
senior management reviews the business, makes investing and resource
allocation decisions, and assesses operating performance.
Our Pharmaceuticals segment, which provided 80% of our consolidated
net revenue for the first quarter of 2004 and 81% in 2003,
manufactures, distributes and sells branded human ethical
pharmaceuticals, biologicals and nutritionals. Principal products
include neuroscience therapies, cardiovascular products, nutritionals,
gastroenterology drugs, anti-infectives, vaccines, oncology therapies,
musculoskeletal therapies, hemophilia treatments, immunological
products and women's health care products. These products are promoted
and sold worldwide primarily to wholesalers, pharmacies, hospitals,
physicians, retailers and other human health care institutions.
The Consumer Healthcare segment, which provided 15% of our
consolidated net revenue for the first quarter of 2004 and 14% in
2003, manufactures, distributes and sells over-the-counter health care
products, which include analgesics, cough/cold/allergy remedies,
nutritional supplements, and hemorrhoidal, asthma and other relief
items. These products generally are sold to wholesalers and retailers
and are promoted primarily to consumers worldwide through advertising.
Our Animal Health segment, which provided 5% of our consolidated net
revenue for the first quarter in both 2004 and 2003, manufactures,
distributes, and sells animal biological and pharmaceutical products,
including vaccines, pharmaceuticals, parasite control and growth
implants. These products are sold to wholesalers, retailers,
veterinarians and other animal health care institutions.
The Corporate segment is responsible for the treasury, tax and legal
operations of the Company's businesses. It maintains and/or incurs
certain assets, liabilities, income, expenses, gains and losses
related to the overall management of the Company that are not
allocated to the other reportable segments.
All of Wyeth's divisions exhibited strong revenue growth for the first
quarter of 2004 compared with the first quarter of 2003.
Pharmaceuticals had revenue growth of 8% to
22
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
$3,207.6 million, Consumer Healthcare rose 11% to $588.3 million and
Animal Health had revenue growth of 20% to $218.9 million.
Pharmaceuticals sales growth was spurred by the strong performance of
several key products in the 2004 first quarter:
o EFFEXOR (a neuroscience therapy) - up 31% to $775.7 million
o PROTONIX (a gastroenterology drug) - up 14% to $410.5
million
o ZOSYN/TAZOCIN (an infectious disease drug) - up 30% to
$181.4 million
o ENBREL (a musculoskeletal therapy) - up 216%
(internationally) to $135.0 million
o RAPAMUNE (an immunology product) - up 31% to $58.3 million
Collectively, sales of these products increased 32% for the first
quarter of 2004 compared with 2003. Strong sales of these products
internationally were led by growth in Europe where sales were up 39%
(or 21% excluding exchange rates).
Other areas of revenue growth for the Pharmaceuticals segment included
ZOTON, REFACTO and BENEFIX and alliance revenue from sales of ENBREL,
ALTACE and the CYPHER stent. (The active ingredient in RAPAMUNE,
sirolimus, coats the CYPHER coronary stent marketed by Johnson &
Johnson.)
The revenue growth from these products more than offset the loss of
revenue from the decline in sales of PREVNAR and the PREMARIN family
of products.
Both Consumer Healthcare and Animal Health posted strong results in
the 2004 first quarter. The increase in Consumer Healthcare sales
resulted primarily from global growth in core brands such as CENTRUM,
ADVIL, ROBITUSSIN and CALTRATE. Strong sales of its PROHEART 6 vaccine
helped boost Animal Health's growth.
Both Pharmaceuticals and Consumer Healthcare realized gains from
product divestitures amounting to approximately $140.7 million (in the
aggregate) for the first quarter of 2004, an increase of $137.4
million as compared with gains from product divestitures for the first
quarter of 2003.
In order to continue to succeed, the Company must overcome some
significant challenges over the next few years. One of the biggest
challenges is to defend the Company in the ongoing diet drug
litigation (see Note 7 to the consolidated condensed financial
statements). In this regard, we continue to support the appropriate
handling of valid claims under the national class action settlement.
At the same time, we are committed to vigorously defending the Company
and aggressively eliminating fraud and abuse in the settlement.
In order for us to sustain the growth of our core group of products,
we must continue to meet the global demand of our customers. Two of
our important core products are
23
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
PREVNAR and ENBREL, both biopharmaceutical products that are extremely
complicated and difficult to manufacture. We continue to seek to
improve manufacturing processes and overcome production issues. The
Company will continue to experience temporary supply limitations of
PREVNAR throughout the first half of 2004 due to strong demand and
supply constraints resulting from manufacturing and technical issues.
Overall, despite our challenges, supply in 2004 is expected to exceed
last year's supply.
The construction of the Company's Grange Castle facility in Ireland,
which remains on schedule to begin production in 2005, is critical to
further expand the production of ENBREL and enable this important
product to reach even more patients throughout the world.
In July 2002, the National Institutes of Health (NIH) announced that
it was discontinuing a portion of its Women's Health Initiative (WHI)
study assessing the value of combination estrogen plus progestin
therapy, and in early March 2004, the portion of the study addressing
estrogen-only therapy also was discontinued. The Company remains
committed to women's health care and stands behind the PREMARIN family
of products as the standard of therapy to help women address serious
menopausal symptoms. We have continued our efforts to inform
physicians and patients of the appropriate role of hormone therapy
(HT) for the short-term treatment of menopausal symptoms and have
introduced new, low-dose versions of PREMARIN and PREMPRO in 2003.
Despite these efforts, sales of the PREMARIN family of products
declined from approximately $402.7 million for the first quarter of
2003 to $265.9 million for the first quarter of 2004. The launch of
low-dose PREMARIN and PREMPRO has helped to moderate the decrease in
sales.
Wyeth's focus is on maximizing the strong growth potential and patent
protection of our core group of innovative products that we have
introduced in recent years as well as actively pursuing in-licensing
opportunities. In this regard, we have recently announced an important
alliance with Solvay Pharmaceuticals (Solvay) to co-develop and
co-commercialize four neuroscience compounds, most notably,
bifeprunox. This alliance is intended to address the challenge of a
near-term shortage of significant new product introductions facing the
Company.
The Company's principal strategy for success, notwithstanding these
challenges, is based on R&D innovations. The Company intends to
leverage its breadth of knowledge and resources across three
development platforms to produce first-in-class and best-in-class
therapies for significant unmet medical needs around the world.
Generally, the Company faces the same difficult challenges that all
research-based pharmaceutical companies are confronting, including
political pressures in countries around the world to reduce
prescription drug prices; increasingly stringent regulatory
requirements that are raising the cost of drug development and
manufacturing; and uncertainties about the outcome of key political
issues in the United States regarding drug importation.
24
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
Net Revenue
-----------
Worldwide net revenue for the 2004 first quarter increased 9% compared
with prior year levels and was due to increases in the
Pharmaceuticals, Consumer Healthcare and Animal Health segments.
Excluding the impact of foreign exchange, worldwide net revenue
increased 4% for the 2004 first quarter.
The following table sets forth worldwide net revenue results by
reportable segment together with the percentage changes from the
comparable period in the prior year:
Net Revenue
Three Months
Ended March 31,
(Dollars in millions) ---------------------
Segment 2004 2003 % Increase
--------------------- -------- -------- ----------
Pharmaceuticals $3,207.6 $2,975.1 8%
Consumer Healthcare 588.3 532.0 11%
Animal Health 218.9 182.0 20%
-------- -------- ----------
Total $4,014.8 $3,689.1 9%
======== ======== ==========
Pharmaceuticals
---------------
Worldwide Pharmaceuticals net revenue increased 8% for the 2004 first
quarter. The increase in net revenue was 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), ZOSYN/TAZOCIN and RAPAMUNE (each reflecting
growth in the U.S. and internationally) and increased alliance revenue
offset, in part, by lower sales of the PREMARIN family of products and
PREVNAR (supply constraints). Excluding the favorable impact of
foreign exchange, worldwide Pharmaceuticals net revenue increased 3%
for the 2004 first quarter.
25
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
The following table sets forth the significant worldwide
Pharmaceuticals net revenue by product for the three months ended
March 31, 2004 compared with the same period in the prior year:
Three Months
Ended March 31,
---------------------------
(In millions) 2004 2003
--------------------- -------- --------
EFFEXOR $775.7 $593.5
PROTONIX 410.5 360.0
PREMARIN family 265.9 402.7
Nutritionals 215.8 202.8
ZOSYN / TAZOCIN 181.4 140.1
PREVNAR 173.4 228.8
Oral Contraceptives 142.8 154.3
ENBREL 135.0 42.8
ZOTON 112.0 72.5
BENEFIX 74.5 58.6
REFACTO 60.3 52.3
RAPAMUNE 58.3 44.7
ATIVAN 51.6 55.0
SYNVISC 48.2 49.1
Alliance revenue 149.4 94.7
Other 352.8 423.2
-------- --------
Total Pharmaceuticals $3,207.6 $2,975.1
======== ========
Consumer Healthcare
-------------------
Worldwide Consumer Healthcare net revenue increased 11% for the 2004
first quarter showing continued solid performance in the U.S. and
internationally. The results were attributable to a number of factors,
including global growth in the division's core CENTRUM, ADVIL,
ROBITUSSIN and CALTRATE brands. Excluding the impact of foreign
exchange, worldwide Consumer Healthcare net revenue increased 6% for
the 2004 first quarter.
26
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
The following table sets forth significant worldwide Consumer
Healthcare net revenue by product for the three months ended March 31,
2004 compared with the same period in the prior year:
Three Months
Ended March 31,
---------------------
(In millions) 2004 2003
------------------------- ------ ------
CENTRUM $139.1 $119.7
ADVIL 114.4 108.9
ROBITUSSIN 48.4 36.6
CALTRATE 40.0 30.2
ADVIL COLD & SINUS 30.2 24.5
SOLGAR 29.7 28.5
CHAPSTICK 26.3 23.4
DIMETAPP 20.1 17.5
ALAVERT 17.6 21.0
Other 122.5 121.7
------ ------
Total Consumer Healthcare $588.3 $532.0
====== ======
Animal Health
-------------
Worldwide Animal Health net revenue increased 20% for the 2004 first
quarter due primarily to higher sales of companion animal products.
PROHEART products, the largest contributor to the companion animal
products growth, had sales of $14.4 million and $6.9 million for the
period ended March 31, 2004 and 2003, respectively. Excluding the
favorable impact of foreign exchange, worldwide Animal Health net
revenue increased 13% for the 2004 first quarter.
The following table sets forth significant worldwide Animal Health net
revenue by product category for the three months ended March 31, 2004
compared with the same period in the prior year:
Three Months
Ended March 31,
---------------------
(In millions) 2004 2003
------------------------- ------ ------
Livestock products $83.7 $72.8
Companion animal products 63.4 40.8
Equine products 47.9 46.8
Poultry products 23.9 21.6
------ ------
Total Animal Health $218.9 $182.0
====== ======
27
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
The following table sets forth the percentage changes in worldwide net
revenue by reportable segment and geographic area compared with the
prior year, including the effect volume, price and foreign exchange
had on these percentage changes:
% Increase (Decrease)
Three Months Ended March 31, 2004
---------------------------------------------
Foreign Total
Volume Price Exchange Net Revenue
------ ----- -------- -----------
Pharmaceuticals
-------------------
United States (11%) 7% - (4%)
International 17% - 13% 30%
---- --- --- ---
Total (1%) 4% 5% 8%
==== === === ===
Consumer Healthcare
-------------------
United States 2% - - 2%
International 12% 1% 13% 26%
---- --- --- ---
Total 6% - 5% 11%
==== === === ===
Animal Health
-------------------
United States 10% 11% - 21%
International 4% 1% 14% 19%
---- --- --- ---
Total 7% 6% 7% 20%
==== === === ===
Total
-------------------
United States (8%) 6% - (2%)
International 16% - 13% 29%
---- --- --- ---
Total - 4% 5% 9%
==== === === ===
Operating Expenses
------------------
Cost of goods sold, as a percentage of Net revenue, increased to 27.3%
for the 2004 first quarter compared with 25.2% for the 2003 first
quarter 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 PREVNAR, and
higher sales of lower margin products such as PROTONIX, ZOSYN/TAZOCIN
and ENBREL (internationally) offset, in part, by higher sales of
higher margin EFFEXOR XR and increased alliance revenue.
Selling, general and administrative expenses, as a percentage of Net
revenue, decreased to 33.7% for the 2004 first quarter compared with
35.0% for the 2003 first quarter as a result of lower marketing
expenses in the Pharmaceuticals segment and lower general expenses
associated with decreased pension and other employee benefit costs.
These
28
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
decreases were offset, in part, by higher selling expenses
related to an expansion in the Pharmaceuticals contract sales force.
Research and development expenses increased 37% for the 2004 first
quarter primarily due to an upfront payment of $145.5 million made in
connection with an agreement entered into between the Company and
Solvay to co-develop and co-commercialize four neuroscience compounds,
most notably, bifeprunox. The increase in research and development
expenses was also due to higher clinical grant spending in the
Pharmaceuticals segment and higher spending for projects related to
Animal Health combination products and line extensions offset, in
part, by lower other research operating expenses (including lower
chemical and material costs).
Interest Expense and Other Income
---------------------------------
Interest expense, net for the three months ended March 31, 2004 and
2003 consisted of the following:
Three Months
Ended March 31,
-----------------
(In millions) 2004 2003
---------------------------- ----- -----
Interest expense $70.8 $71.1
Interest income (23.4) (19.5)
Less: amount capitalized for
capital projects (20.5) (24.6)
----- -----
Total interest expense, net $26.9 $27.0
===== =====
Interest expense, net was flat for the 2004 first quarter due
primarily to higher interest income earned on the proceeds received
from the Company's December 2003 debt offering offset by lower
capitalized interest. Weighted average debt outstanding during the
2004 first quarter was $8,695.0 million compared with prior year
levels of $7,152.6 million. The impact of higher debt outstanding was
offset by lower interest rates. The lower capitalized interest
resulted from lower interest rates used for capitalization purposes
applied against the spending for long-term capital projects in
process. These projects include the new Grange Castle facility in
Ireland, as well as the expansion of an existing manufacturing
facility in Ireland.
Other income, net increased $120.2 million for the 2004 first quarter
as a result of gains from the divestiture of certain Pharmaceuticals
and Consumer Healthcare products amounting to approximately $140.7
million. The divestitures included product rights to indiplon, DIAMOX
(in Japan), and the Company's nutritionals products in France.
29
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
Income Before Taxes
-------------------
The following table sets forth worldwide income before taxes by
reportable segment together with the percentage changes from the
comparable period in the prior year:
Income Before Taxes
-----------------------------------
Three Months
Ended March 31,
-----------------------------------
(Dollars in millions) % Increase/
Segment 2004 2003 (Decrease)
--------------------- ------ -------- -----------
Pharmaceuticals(1) $872.1 $917.7 (5%)
Consumer Healthcare 109.5 80.2 37%
Animal Health 37.7 26.2 44%
Corporate(2) (75.4) 758.5 -
------ -------- -----------
Total(3) $943.9 $1,782.6 (47%)
====== ======== ===========
(1) Pharmaceuticals for the 2004 first quarter included a charge of
$145.5 within Research and development expenses related to an
upfront payment to Solvay in connection with the co-development
and co-commercialization of four neuroscience compounds.
Excluding the upfront payment from the 2004 first quarter
results, but including Pharmaceuticals product divestiture gains
discussed in footnote 3 below, Pharmaceuticals income before
taxes increased 11%.
(2) Corporate for the 2003 first quarter included a gain of $860.6
relating to the sale of Amgen shares. Excluding the gain on the
sale of Amgen shares from the 2003 first quarter results,
Corporate expenses decreased 26%.
(3) Income before taxes for the 2004 first quarter included gains
from the divestiture of certain Pharmaceuticals and Consumer
Healthcare products amounting to approximately $140.7. The
divestitures included product rights to indiplon, DIAMOX (in
Japan), and the Company's nutritionals products in France.
Worldwide Pharmaceuticals income before taxes decreased 5% for the
2004 first quarter while Pharmaceuticals net revenue increased 8% for
the 2004 first quarter. This difference is primarily attributable to
higher research and development expenses related to the upfront
payment to Solvay and lower gross profit margins earned on
Pharmaceuticals net revenue offset, in part, by higher other income,
net related to product divestiture gains.
Worldwide Consumer Healthcare income before taxes increased 37% for
the 2004 first quarter while Consumer Healthcare net sales increased
11%. This difference between the growth of income before taxes and
sales growth is primarily attributable to higher other income related
to product divestiture gains offset, in part, by lower gross profit
margins earned on worldwide sales of Consumer Healthcare products and
higher selling and general expenses.
30
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
Worldwide Animal Health income before taxes for the 2004 first quarter
increased 44%. The increase in the 2004 first quarter results was
primarily due to higher net revenue and increased gross profit margin
earned on worldwide sales of Animal Health products.
Corporate expenses for the 2004 first quarter were $75.4 million
compared with income before taxes attributed to the Corporate segment
for the 2003 first quarter of $758.5 million. Corporate income before
taxes for the 2003 first quarter included a gain of $860.6 million
from the sale of the Company's Amgen shares. Excluding this gain,
Corporate expenses would have decreased 26% for the 2004 first
quarter. The decrease was due primarily to lower general and
administrative expenses related to decreased pension and employee
benefit costs.
Excluding the impact of the certain significant items discussed below,
the effective tax rate remained flat at 22.5% for the 2004 first
quarter compared with 22.0% for the 2003 first quarter. The 2004 first
quarter rate was calculated assuming the benefit of certain research
and development tax credits. Since such credits expire in June 2004
and have yet to be renewed, only one-half of the annualized benefit
was included in the effective tax rate calculation for the first
quarter.
Consolidated Net Income and Diluted Earnings Per Share Results
--------------------------------------------------------------
As Reported
Net income and diluted earnings per share for the 2004 first quarter
were $749.7 million and $0.56, respectively, compared with net income
and diluted earnings per share of $1,277.9 million and $0.96 in the
prior year, decreases of 41% and 42%, respectively.
Before Certain Significant Items
Net income before certain significant items and diluted earnings per
share before certain significant items exclude from net income and
diluted earnings per share, respectively, the 2004 first quarter
upfront payment to Solvay and the 2003 first quarter gains related to
the Company's liquidation of Amgen shares received in connection with
Amgen's acquisition of Immunex.
The Company's management uses both generally accepted accounting
principles (GAAP) and non-GAAP 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. However, 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
GAAP. The Amgen gain and previous gains related to the Immunex/Amgen
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
31
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
position or results of operations to the significant extent of the
Immunex/Amgen common stock transactions. Additionally, the significant
upfront payment related to the co-development and co-commercialization
of the four neuroscience compounds being developed with Solvay was
immediately expensed and included in Research and development
expenses. Excluding the payment from the Company's results provides a
better view of its operations for this accounting period.
Net income before certain significant items and diluted earnings per
share before certain significant items for the 2004 first quarter were
$844.3 million and $0.63, respectively, compared with $719.2 million
and $0.54 for the 2003 first quarter. The increases were principally
due to higher net revenue and other income offset, in part, by higher
costs of goods sold, as a percentage of net revenue, higher research
and development spending and higher selling, general and
administrative expenses.
A reconciliation of reported net income and diluted earnings per share
as reported under GAAP to net income and diluted earnings per share
before certain significant items is presented in the following table:
Net Income Diluted EPS
---------------------- ----------------------
(In millions except per share amounts) 3/31/2004 3/31/2003 3/31/2004 3/31/2003
----------------------------------------------- --------- --------- --------- ---------
As reported $749.7 $1,277.9 $0.56 $0.96
Gain on sale of Amgen shares(1) - (558.7) - (0.42)
Co-development / co-commercialization charge(2) 94.6 - 0.07 -
--------- --------- --------- ---------
As adjusted, before certain significant items $844.3 $719.2 $0.63 $0.54
========= ========= ========= =========
(1) The 2003 first quarter included a gain of $860.6 ($558.7
after-tax or $0.42 per share-diluted) related to the sale of
31,235,958 shares of the Company's Amgen common stock holdings.
(2) The 2004 first quarter included a charge of $145.5 ($94.6
after-tax or $0.07 per share-diluted) within Research and
development expenses related to an upfront payment to Solvay.
Gains from products divestitures are not considered certain
significant items because they constitute an integral part of the
Company's analysis of divisional performance. However, they are
important to understanding changes in our reported net income.
Excluding the certain significant items and the gains from product
divestitures described above, net income and diluted earnings per
share were $751.8 million and $0.56 for the 2004 first quarter as
compared with $717.1 million and $0.54 in the 2003 first quarter.
Liquidity, Financial Condition and Capital Resources
----------------------------------------------------
Cash flows provided by operating activities totaling $501.6 million
during the 2004 first quarter were generated primarily by earnings of
$749.7 million. Driving the cash
32
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
outflows were payments of $310.3 million for trade accounts payable
and items included in accrued expenses and payments of $98.6 million
relating to the diet drug litigation (see Note 7 to the consolidated
condensed financial statements).
The Company used $291.6 million of cash during the 2004 first quarter
for investments in property, plant and equipment and $200.5 million of
cash for purchases of marketable securities. In addition, the Company
received investment proceeds through the sales and maturities of
marketable securities of $182.8 million and the sales of assets
totaling $228.8 million. The capital expenditures made during the 2004
first quarter were consistent with the Company's commitment to expand
existing manufacturing and research and development facilities
worldwide, and build new biotechnology facilities.
The Company's financing activities included repayments of debt
totaling $1,505.0 million and dividend payments of $306.6 million.
At March 31, 2004, the Company had outstanding $8,271.0 million in
total debt, which consisted of notes payable and other debt.
Maturities of the Company's obligations as of March 31, 2004 are set
forth below.
Less than Over
(In millions) Total 1 year 1-3 years 4-5 years 5 years
------------- -------- --------- --------- --------- --------
Total debt $8,271.0 $335.6 $320.2 $17.6 $7,597.6
The following represents the Company's credit ratings as of March 31,
2004 and as of May 7, 2004:
Moody's S&P Fitch
---------------- ---------------- ----------------
Short-term debt P-2 A-1 F-2
Long-term debt Baa1 A A-
Outlook Negative Negative Negative
Last rating update December 4, 2003 December 8, 2003 December 4, 2003
In light of the circumstances discussed in Note 7 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.
33
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
Certain Factors that May Affect Future Results
----------------------------------------------
Prempro / Premarin - HT Studies
In July 2002, the HT subset of the WHI study, involving women who
received a combination of conjugated estrogens and medroxyprogesterone
acetate (PREMPRO), was stopped early (after the patients were followed
in the study for an average of 5.2 years) because, according to the
predefined stopping rule, certain increased risks exceeded the
specified long-term benefits. Additional analyses of data from the HT
subset of the WHI study were released during 2003, and further
analyses of WHI data may be released in the future.
In early March 2004, the NIH announced preliminary findings from the
estrogen-only arm of the WHI study and that it had decided to stop the
study. NIH concluded that estrogen alone does not appear to affect
(either increase or decrease) coronary heart disease and did not
increase the risk of breast cancer. In addition, NIH found an
association with a decrease in the risk of hip fracture and an
increased risk of stroke similar to the increase seen in the HT subset
of the WHI study. NIH also stated that analysis of preliminary data
from the separate Women's Health Initiative Memory Study (WHIMS)
showed a trend toward increased risk of probable dementia and/or mild
cognitive impairment in women age 65 and older. The Company has not
had the opportunity to review final study data in order to analyze
these preliminary findings.
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 77% and 52%,
respectively, compared with the average weekly prescriptions written
during the eight-week period preceding the 2002 termination of the
study subset.
34
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
Set forth below are individual product operating results for
PREMPRO/PREMPHASE and PREMARIN for the three months ended March 31,
2004 and 2003:
Prempro/Premphase
-------------------
Three Months
Ended March 31,
-------------------
(In millions) 2004 2003
------------- ------ ------
Net revenue $57.3 $142.9
Gross profit 43.7 123.5
Premarin
-------------------
Three Months
Ended March 31,
-------------------
(In millions) 2004 2003
------------- ------ ------
Net revenue $208.6 $259.8
Gross profit 178.3 233.2
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 net revenue and results of operations.
PREMARIN's natural composition is not subject to patent protection
(although PREMPRO has patent protection). PREMARIN, PREMPRO and
PREMPHASE are indicated for the treatment of certain menopausal
symptoms. They also are approved for the prevention of osteoporosis, a
condition involving a loss of bone mass in postmenopausal women. Their
use for that purpose in women without symptoms should be limited to
cases where non-hormonal treatments have been seriously considered and
rejected. Estrogen-containing products manufactured by other companies
have been marketed for many years for the treatment of menopausal
symptoms. During the past several years, other manufacturers have
introduced products for the treatment and/or prevention of
osteoporosis. New products containing different estrogens and/or
different progestins than those found in PREMPRO and PREMPHASE,
utilizing various forms of delivery and having many forms of the same
indications, also have been introduced. Some companies have also
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
35
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
differences between the active ingredient of these products and
PREMARIN. Althoughthe 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 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. However, although
production is still expected in 2004 under this arrangement, certain
milestones under the manufacturing agreement, including obtaining FDA
approval for the manufacturing process, have not been met in the
pre-approved timeframe. 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.
Worldwide demand for PREVNAR continues to grow. The
manufacturing-related constraints that led to backorders throughout
2002 were resolved early in 2003. By April 2003, demand in the United
States and other markets where PREVNAR was available was met, and this
continued through October 2003. More than 20 million doses of PREVNAR
were produced in 2003. However, primarily as a result of a late 2003
shutdown of the filling lines at the Company's Pearl River, New York
facility as well as other manufacturing and testing issues, product
availability continues to be impacted in all markets. As a result of
delays in product availability, the Centers for Disease Control and
Prevention and the European Agency for the Evaluation of Medicinal
Products have
36
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
issued interim dosing recommendations to reduce usage during the
supply-constrained period. Capacity should be enhanced overall in 2004
due to internal improvements and third-party filling capacity, which
has recently received FDA approval. Although production issues are not
yet fully resolved, the Company believes 2004 production will exceed
the 2003 level.
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, 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,
the prior formulation of DIMETAPP, the prior formulation of
ROBITUSSIN, PREMPRO and PREMARIN, among others. 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 are accrued when
the liability is considered probable and the amount can be reasonably
estimated (see Note 7 to the consolidated condensed financial
statements for a discussion of the costs associated with the REDUX and
PONDIMIN diet drug litigation). 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. Prior to November 2003, the
Company was self-insured for product liability risks with excess
coverage on a claims-made basis from various insurance carriers in
excess of the self-insured amounts and subject to certain policy
limits. Effective November 2003, the Company became completely
self-insured for product liability risks. It is not possible to
predict whether any potential liability that might exceed amounts
already accrued will have a material
37
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
adverse effect on the Company's
financial condition, results of operations and/or cash flows. This is
discussed in greater detail in Note 7 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. Forward-looking statements may
appear in periodic reports filed with the Securities and Exchange
Commission (including the Company's Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q), in press releases, in the Company's
Annual Report to Stockholders and other reports to stockholders, and
in other communications made by the Company. These forward-looking
statements can be identified by their 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 United States 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 accuracy of our estimates and assumptions utilized in
our critical accounting policies;
38
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
o the future impact of presently known trends, including those
with respect to product performance and competition;
o future demand for our products;
o change in product mix;
o anticipated developments relating to sales of
PREMPRO/PREMARIN family of products and ENBREL and PREVNAR
product supply;
o anticipated amounts of future contractual obligations; and
o expectations regarding the impact of potential litigation
including litigation, inter alia, relating to PREMPRO,
PREMARIN, the prior formulation of ROBITUSSIN and the prior
formulation of 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 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. As permitted by
the Private Securities Litigation Reform Act of 1995, the Company is
hereby filing the following cautionary statements identifying
important factors, which among others, could cause the Company's
actual results to differ materially from expected and historical
results:
Economic factors over which we have no control such as changes in
business and economic conditions, including, but not limited to,
inflation and fluctuations in interest rates, foreign currency
exchange rates and market value of our equity investments and any
impacts of war or terrorist acts;
Interruptions of computer and communication systems including computer
viruses, that could impair the Company's ability to conduct business
and communicate internally with its customers;
Increasing pricing pressures, both in and outside the United States,
resulting from continued consolidation among health care providers,
rules and practices of managed care groups and institutional and
governmental purchasers, judicial decisions and governmental laws and
regulations relating to Medicare, Medicaid and health care reform,
pharmaceutical reimbursement and pricing in general;
Competitive factors, such as (i) new products developed by our
competitors that have lower prices or superior performance features or
that are otherwise competitive with our current products; (ii)
technological advances and patents attained by our competitors; (iii)
39
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
changes in promotional regulations or practices; (iv) development of
alternative therapies; (v) potential generic competition for PREMARIN
and for other health care products as such products mature and patents
or marketing exclusivity expire on such products; (vi) problems with
licensors, suppliers and distributors; (vii) business combinations
among our competitors and major customers; and (viii) ability to
attract and retain management and other key employees;
Government laws and regulations affecting U.S. and international
operations, including (i) trade, monetary and fiscal policies and
taxes; (ii) price controls, or reimbursement or access policies; (iii)
drug importation legislation; (iv) changes in governments and legal
systems; and (v) regulatory approval processes affecting approvals of
products and licensing, including, without limitation, uncertainties
of the FDA approval process that may delay or prevent the approval of
new products and result in lost market opportunity;
Difficulties and delays inherent in pharmaceutical research, product
development, manufacturing and commercialization, such as, (i) failure
of new product candidates to reach market due to efficacy or safety
concerns, inability to obtain necessary regulatory approvals and the
difficulty or excessive cost to manufacture; (ii) the inability to
identify viable new chemical compounds; (iii) difficulties in
successfully completing clinical trials; (iv) difficulties in
manufacturing complex products, particularly biological products, on a
commercial scale; (v) difficulty in gaining and maintaining market
acceptance of approved products; (vi) seizure or recall of products;
(vii) the failure to obtain, the imposition of limitations on the use
of, or loss of patent and other intellectual property rights; (viii)
failure to comply with current Good Manufacturing Practices and other
applicable regulations and quality assurance guidelines that could
lead to temporary manufacturing shutdowns, product shortages and
delays in product manufacturing; and (ix) other manufacturing or
distribution problems;
Difficulties or delays in product manufacturing or marketing,
including but not limited to, the inability to build up production
capacity commensurate with demand, the inability of our suppliers to
provide raw material, or the failure to predict market demand for or
to gain market acceptance of approved products;
Unexpected safety or efficacy concerns arising with respect to
marketed products, whether or not scientifically justified, leading to
product recalls, withdrawals, regulatory action on the part of the FDA
(or foreign counterparts) or declining sales;
Growth in costs and expenses, changes in product mix, and the impact
of any acquisitions or divestitures, restructuring and other unusual
items that could result from evolving business strategies, evaluation
of asset realization and organizational restructuring;
Legal difficulties, any of which can preclude or delay
commercialization of products or adversely affect profitability, such
as (i) product liability litigation related to our products including,
without limitation, litigation associated with the prior formulation
of DIMETAPP, the prior formulation of ROBITUSSIN, PREMPRO, PREMARIN,
and
40
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2004
our former diet drug products, REDUX and PONDIMIN; (ii) claims
asserting violations of antitrust, securities, or other laws; (iii)
tax matters; (iv) intellectual property disputes or changes in
intellectual property legal protections and remedies; (v)
environmental matters, including obligations under the Comprehensive
Environmental Response, Compensation and Liability Act, commonly known
as Superfund; and (vi) complying with the consent decree with the FDA;
Fluctuations in buying patterns of major distributors, retail chains
and other trade buyers which may result from seasonality, pricing,
wholesaler buying decisions or other factors; and
Changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Emerging Issues Task Force, the
Securities and Exchange Commission, and the American Institute of
Certified Public Accountants, which may require adjustments to our
financial statements.
This list should not be considered an exhaustive statement of all
potential risks and uncertainties.
41
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The market risk disclosures appearing on page 70 of the Company's 2003
Annual Report as incorporated by reference in the Form 10-K have not
materially changed from December 31, 2003. At March 31, 2004, 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) $1,396.8 $(2.1) $(2.1)
Option contracts (1) 1,196.1 (27.8) (27.8)
Interest rate swaps 5,300.0 292.8 292.8
Outstanding debt (2) 7,978.3 (8,271.0) (8,676.2)
(1) If the value of the U.S. dollar were to strengthen or weaken by
10%, in relation to all hedged foreign currencies, the net
payable on the forward and option contracts would decrease or
increase by approximately $143.0.
(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 $581.2.
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 forward contracts and
interest rate swaps reflects the present value of the future potential
gain or (loss) if settlement were to take place on March 31, 2004; the
fair value of option contracts reflects the present value of future
cash flows if the contracts were settled on March 31, 2004; and the
fair value of outstanding debt instruments reflects a current yield
valuation based on observed market prices as of March 31, 2004.
Item 4. Controls and Procedures
-----------------------
As of March 31, 2004, 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-15. 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. During
the 2004 first quarter, there were no significant changes in the
Company's internal control over financial reporting or in other
factors that could materially affect the Company's internal control
over financial reporting, nor were any corrective actions required to
be taken by the Company with regard to significant deficiencies or
material weaknesses in internal control over financial reporting.
42
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
-----------------
The Company and its subsidiaries are parties to numerous lawsuits and
claims arising out of the conduct of its business, including product
liability and other tort claims, the most significant of which are
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
The REDUX and PONDIMIN diet drug litigation is discussed in greater
detail in Note 7 to the consolidated condensed financial statements,
under the caption "Contingencies and Commitments."
Through March 31, 2004, payments into the REDUX and PONDIMIN national
settlement funds, individual settlement payments, legal fees and other
costs totaling $13,182.1 million were paid and applied against the
litigation accrual. At March 31, 2004, $3,417.9 million of the
litigation accrual remained.
In a joint motion filed in the U.S. District Court for the Eastern
District of Pennsylvania on May 4, 2004, the Company, counsel for the
plaintiff class in the nationwide settlement and counsel for a number
of individual class members moved to stay for 60 days the processing
and payment of Level I and Level II matrix claims and certain
associated court proceedings. That motion was granted by the court on
May 10, 2004. The stay provides the parties with an opportunity to
draft and submit to the court a Seventh Amendment to the settlement
agreement that would create a new claims processing structure, funding
arrangement and payment schedule for these claims. The proposed
amendment would require court approval as well as final agreement by
the Company.
If finalized and approved, the proposed Seventh Amendment would
include the following key terms:
o The amendment would create an Alternate Claims Facility to
process the Level I and Level II matrix claims;
o The Company would make some initial payments to facilitate
notice to class members and to establish the Alternate
Claims Facility. Following approval by the federal court
overseeing the settlement and any appellate courts, the
Company would make an initial payment of $400 million. The
timing of additional payments would be dictated by the rate
of review and payment of claims by the Alternate Claims
Facility. The Company would ultimately deposit a total of
$1,275.0 million into the Alternate Claims Facility;
o The Alternate Claims Facility would be run by a claims
administrator approved by the court. All current matrix
Level I and II claimants who pass the Alternate Claims
Facility medical review and otherwise satisfy the
requirements of the settlement would receive a pro rata
share of the $1,275.0 million amount, net of expenses.
The pro rata amount would vary depending upon the number
of claimants, the nature of their claims, their age and
other factors. A current matrix Level I or II claimant
who chooses not to undergo the Alternate
43
Claims Facility medical review, or who does not qualify
for an injury payment after such medical review, would be
paid $2,000 by the Alternate Claims Facility;
o Class members who are currently eligible to file Level I and
Level II matrix claims in the future would receive a $2,000
payment out of the assets of the existing settlement Trust;
o If the participants in the Seventh Amendment later have
surgery or other more serious medical conditions on matrix
Levels III-V within a specified period in the future, they
would remain eligible to submit claims to the existing
settlement Trust and be paid the current matrix amounts if
they qualify for such payments under the terms of the
settlement agreement. In the event the existing settlement
Trust is unable to pay those claims, the Company would
guarantee payment;
o Class members would have the right to opt out of the Seventh
Amendment and to remain bound by the terms of the existing
national settlement. The Company, however, would have the
right to withdraw from the Seventh Amendment if
participation by class members is inadequate or for other
reasons. All class members who participate in the Seventh
Amendment would give up any further opt-out rights.
There can be no assurance that an agreement between the Company and
the other parties will be reached, that the Company will ultimately
proceed with the amendment (based upon the level of participation in
the amendment or for other reasons), or that the amendment will be
approved by the court and upheld on appeal.
On April 27, 2004, a jury in Beaumont, Texas hearing the case of
Coffey, et al. v. Wyeth, et al., No. E-167,334, 172nd Judicial
District Court, Jefferson Cty., TX, returned a verdict in favor of the
plaintiffs for $113.353 million in compensatory damages and $900.0
million in punitive damages for the wrongful death of the plaintiffs'
decedent, allegedly as a result of PPH caused by her use of PONDIMIN.
Judgment has not yet been entered on the jury's verdict. Following the
trial court's entry of judgment, the Company will pursue motions for a
new trial or for judgment notwithstanding the verdict, including a
request for application of Texas' statutory cap on punitive damage
awards, which would significantly reduce the amount of the punitive
damage award. Plaintiffs have indicated that they believe that the
verdict returned by the jury provides a basis for the trial court to
deny application of the statutory cap. Should the trial court deny the
Company's motions, the Company believes that it has strong arguments
for reversal or reduction of the awards on appeal due to the
significant number of legal errors made during trial and in the charge
to the jury and due to a lack of evidence to support aspects of the
verdict. It would also contest on appeal any refusal by the trial
court to apply the statutory cap on punitive damages and believes that
it has strong arguments for application of the cap. In the event of an
appeal, the Company will be required to post a bond, which, under
Texas law, may not exceed $25.0 million. The appeal process is
expected to take one to two years at a minimum.
As of April 30, 2004, the Company was a defendant in approximately 350
lawsuits in which the plaintiff alleges a claim of PPH, alone or with
other alleged injuries. Almost all of these claimants must meet the
definition of PPH set forth in the national settlement agreement in
order to pursue their claims outside of the national settlement
(payment of
44
such claims, by settlement or judgment, would be made by the Company
and not the Trust). Approximately 55 of these cases appear to be
eligible to pursue a PPH lawsuit under the terms of the national
settlement. In approximately 80 of these cases the Company expects the
PPH claims to be voluntarily dismissed by the claimants (although they
may continue to pursue other claims). In approximately 40 of these
cases the Company has filed or expects to file motions under the terms
of the national settlement to preclude plaintiffs from proceeding with
their PPH claims. For the balance of these cases, the Company
currently has insufficient medical information to assess whether or
not the claimants meet the definition of PPH under the national
settlement. The Company continues to work toward resolving the claims
of individuals who allege that they have developed PPH as a result
of their use of the diet drugs and intends vigorously to defend those
PPH cases that cannot be resolved prior to trial.
In the litigation involving PREMARIN and PREMPRO, the Company's
estrogen and estrogen/progestin therapies, respectively, an additional
putative class action lawsuit has been filed. The putative class
representative in Gorner, et al. v. Wyeth, No. 518618, 19th Dist.,
Parish of E. Baton Rouge, La., is seeking to represent a class of
Louisiana women who purchased and ingested PREMPRO for at least five
years and subsequently developed lobular or ductal breast cancer or
ovarian cancer as a result. Compensatory and punitive damages are
being sought. The Company is currently defending approximately 345
individual actions and approximately 55 multi-plaintiff actions in
various courts for personal injuries allegedly arising out of the use
of PREMARIN or PREMPRO, including breast cancer, stroke and heart
disease. Together, these cases assert claims on behalf of
approximately 855 women allegedly injured by PREMPRO or PREMARIN.
In the litigation involving the Company's cough/cold products that
contained the ingredient phenylpropanolamine (PPA), the Company is
currently a named defendant in approximately 810 lawsuits (on behalf
of a total of approximately 1,550 plaintiffs). Eighteen PPA cases
involving the Company are currently scheduled for trial during 2004.
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 has
been served with approximately 360 lawsuits. Thirty-six former Vaccine
Court claimants are currently proceeding in civil actions against the
Company, having either elected to discontinue proceeding in the
Omnibus Autism Proceeding following expiration of the 240-day period
or having elected to reject an earlier judgment by the Vaccine Court.
Approximately 282 other claimants have proceeded in Vaccine Court for
over 240 days and are potentially eligible to withdraw from Vaccine
Court, but have not yet done so.
In the litigation involving allegations that the Company and other
pharmaceutical companies engaged in fraud relating to the alleged
manipulation of the Average Wholesale Price (AWP) of their drugs, two
previously-reported cases have been voluntarily dismissed. Turner, et
al. v. Wyeth, et al., No. C02-5006BZ, U.S.D.C., N.D. Cal., and
Thompson v. Abbott Laboratories, Inc., et al., No. C-02-4450-B2,
U.S.D.C.,
45
N.D. Cal., were putative class actions on behalf of
California patients and third-party payers who allegedly had been
injured by the defendants' alleged manipulation of the AWPs for their
pharmaceutical products. These cases sought equitable and injunctive
relief, including restitution under California's unfair and deceptive
practices statute.
In the litigation brought on behalf of direct and indirect purchasers
of K-Dur 20, in which the plaintiffs allege that the Company's
settlement of certain patent infringement litigation with
Schering-Plough Corporation unlawfully delayed the market entry of
generic competition for K-Dur 20, the Company recently entered into an
agreement to settle the putative class action brought on behalf of
direct purchasers of K-Dur 20. The settlement, pursuant to which the
Company makes no admission of wrongdoing or liability, will not become
final until approved by the federal district court overseeing the
Multi-District Litigation (MDL). In re K-Dur Antitrust Litigation,
MDL 1419, U.S.D.C., D.N.J. In addition, the MDL court recently
entered an order providing for the remand of certain actions that
were originally filed in various state courts. Pursuant to this order,
several state-filed actions that were being coordinated as part of the
MDL proceedings will be remanded to the state courts in which they
were originally filed.
In September 2003, the U.S. Court of Appeals for the Federal Circuit
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. The Company's petition for a rehearing en banc
was denied. University of Colorado et al. v. American Cyanamid
Company, No. 93-K-1657, U.S.D.C., D.Col. The Company paid the
outstanding judgment and the accrued post-judgment interest in the
amount of $58.13 million in January 2004. On April 19, 2004, the
Company's petition to the U.S. Supreme Court seeking a writ of
certiorari was denied, thereby concluding this action.
In September 2002, Israel Bio-Engineering Project (IBEP) filed an
action against Amgen, Immunex, the Company and one of the Company's
subsidiaries (Docket No. C02-6880 ER, D.Ca.) alleging infringement of
U.S. Patent 5,981,701, by the manufacture, offer for sale,
distribution and sale of ENBREL. IBEP is not the assignee of record of
this patent, but is alleging ownership. IBEP seeks an accounting of
damages and of any royalties or license fees paid to a third party and
seeks to have the damages trebled on account of alleged willful
infringement. IBEP also seeks to require the defendants to take a
compulsory non-exclusive license. Under its agreement with Amgen for
the promotion of ENBREL, the Company has an obligation to pay a
portion of the patent litigation expenses related to ENBREL in the
U.S. and Canada as well as a portion of any damages or other monetary
relief awarded in such patent litigation. Yeda Research and
Development Co., Ltd., the assignee of record of the patent,
intervened in the case and filed a summary judgment motion seeking a
ruling that it is the owner of the patent. On February 18, 2004, the
court granted summary judgment in favor of the defendants that IBEP
does not own the `701 Patent, which IBEP has appealed to the U.S.
Court of Appeals for the Federal Circuit.
46
In April 2004, the Company received notification from Teva
Pharmaceuticals USA and from Sandoz, Inc. that Abbreviated New Drug
Applications had been filed with the FDA seeking approval to market
generic pantoprazole sodium 20 mg and 40 mg delayed release tablets.
Pantoprazole sodium is the active ingredient used in PROTONIX. The
Orange Book lists two patents in connection with PROTONIX tablets. The
first of these patents covers pantoprazole and expires in July 2010.
The other listed patent is a formulation patent and expires in
December 2016. Wyeth's licensing partner Altana Pharma AG, is the
owner of these patents.
The Company intends to continue to defend all of the foregoing
litigation vigorously.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with pending litigation (other than the
litigation involving REDUX and PONDIMIN, the potential effects of
which are discussed in Note 7 to the consolidated condensed financial
statements, Contingencies and Commitments) will not have a material
adverse effect on the Company's financial position but could be
material to the results of operations or cash flows in any one
accounting period.
47
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
(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
-------------------
The following Current Reports on Form 8-K were filed or furnished
by the Company:
o January 22, 2004 relating to furnishing Wyeth's earnings
results for the 2003 fourth quarter and full year (Item 12
disclosure).
o April 21, 2004 relating to furnishing Wyeth's earnings
results for the 2004 first quarter (Item 12 disclosure).
o April 28, 2004 relating to information on Wyeth's diet drug
litigation (Item 5 disclosure).
o April 29, 2004 relating to furnishing additional information
on Wyeth's diet drug litigation (Item 9 disclosure).
48
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Wyeth
-----
(Registrant)
By /s/ Paul J. Jones
-----------------
Paul J. Jones
Vice President and Controller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: May 10, 2004
49
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
(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