================================================================================
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
June 30, 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
July 30, 2004:
Number of
Class Shares Outstanding
----- ------------------
Common Stock, $0.33-1/3 par value 1,333,808,583
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WYETH
INDEX
Page No.
--------
Part I - Financial Information (Unaudited) 2
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
June 30, 2004 and December 31, 2003 3
Consolidated Condensed Statements of Operations -
Three and Six Months Ended June 30, 2004 and 2003 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity - Six Months Ended
June 30, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2004 and 2003 6
Notes to Consolidated Condensed Financial Statements 7-24
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25-47
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 48
Item 4. Controls and Procedures 48
Part II - Other Information 49
Item 1. Legal Proceedings 49-56
Item 4. Submission of Matters to a Vote of Security Holders 57
Item 6. Exhibits and Reports on Form 8-K 58-59
Signature 60
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 June 30, 2004 and December 31, 2003, the results
of its operations for the three and six months ended June 30, 2004 and 2003, and
changes in stockholders' equity and cash flows for the six months ended June 30,
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,
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 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)
June 30, December 31,
2004 2003
----------- ------------
ASSETS
Cash and cash equivalents $4,315,184 $6,069,794
Marketable securities 1,678,643 1,110,297
Accounts receivable less allowances 2,635,054 2,529,613
Inventories:
Finished goods 803,563 821,637
Work in progress 1,229,837 1,141,916
Materials and supplies 351,231 448,631
----------- ------------
2,384,631 2,412,184
Other current assets including deferred taxes 2,854,054 2,840,354
----------- ------------
Total Current Assets 13,867,566 14,962,242
Property, plant and equipment 12,029,364 11,686,252
Less accumulated depreciation 3,243,511 3,025,201
----------- ------------
8,785,853 8,661,051
Goodwill 3,810,140 3,817,993
Other intangibles, net of accumulated amortization
(June 30, 2004-$142,458 and December 31, 2003-$128,137) 120,110 133,134
Other assets including deferred taxes 3,350,175 3,457,502
----------- ------------
Total Assets $29,933,844 $31,031,922
=========== ============
LIABILITIES
Loans payable $334,676 $1,512,845
Trade accounts payable 880,554 1,010,749
Dividends payable 306,771 -
Accrued expenses 5,239,102 5,461,835
Accrued federal and foreign taxes 344,200 444,081
----------- ------------
Total Current Liabilities 7,105,303 8,429,510
Long-term debt 7,592,038 8,076,429
Accrued postretirement benefit obligations other than pensions 1,028,910 1,007,540
Other noncurrent liabilities 4,292,605 4,224,062
Contingencies and commitments (Note 7)
STOCKHOLDERS' EQUITY
$2.00 convertible preferred stock, par value $2.50 per share 41 42
Common stock, par value $0.33-1/3 per share 444,572 444,151
Additional paid-in capital 4,797,529 4,764,390
Retained earnings 4,768,813 4,112,285
Accumulated other comprehensive loss (95,967) (26,487)
----------- ------------
Total Stockholders' Equity 9,914,988 9,294,381
----------- ------------
Total Liabilities and Stockholders' Equity $29,933,844 $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 Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net revenue $4,223,205 $3,746,556 $8,237,994 $7,435,613
---------- ---------- ---------- ----------
Cost of goods sold 1,130,033 1,019,895 2,227,949 1,948,199
Selling, general and administrative expenses 1,427,494 1,362,022 2,781,704 2,653,492
Research and development expenses 584,255 500,851 1,289,557 1,014,365
Interest expense, net 31,896 25,878 58,828 52,878
Other income, net (13,551) (270,302) (127,013) (263,567)
Gain on sale of Amgen common stock - - - (860,554)
---------- ---------- ---------- ----------
Income before federal and foreign taxes 1,063,078 1,108,212 2,006,969 2,890,800
Provision for federal and foreign taxes 235,733 243,807 429,921 748,513
---------- ---------- ---------- ----------
Net income $827,345 $864,405 $1,577,048 $2,142,287
========== ========== ========== ==========
Basic earnings per share $0.62 $0.65 $1.18 $1.61
========== ========== ========== ==========
Diluted earnings per share $0.62 $0.65 $1.18 $1.61
========== ========== ========== ==========
Dividends paid per share of common stock $0.23 $0.23 $0.46 $0.46
========== ========== ========== ==========
Dividends declared per share of common stock $0.46 $0.46 $0.69 $0.69
========== ========== ========== ==========
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)
Six Months Ended June 30, 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 1,577,048 1,577,048
Currency translation adjustments (83,008) (83,008)
Unrealized gains on derivative contracts, net 26,159 26,159
Unrealized losses on marketable securities, net (12,631) (12,631)
-------------
Comprehensive income, net of tax 1,507,568
-------------
Cash dividends declared (1) (920,083) (920,083)
Common stock issued for stock options 327 25,257 25,584
Other exchanges (1) 94 7,882 (437) 7,538
----------- -------- ---------- ---------- ------------- -------------
Balance at June 30, 2004 $41 $444,572 $4,797,529 $4,768,813 $(95,967) $9,914,988
=========== ======== ========== ========== ============= =============
Six Months Ended June 30, 2003:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
----------- -------- ---------- ---------- ------------- -------------
Balance at January 1, 2003 $46 $442,019 $4,582,773 $3,286,645 $(155,571) $8,155,912
Net income 2,142,287 2,142,287
Currency translation adjustments 421,842 421,842
Unrealized losses on derivative contracts, net (14,014) (14,014)
Unrealized gains on marketable securities, net 6,206 6,206
Realized gain on sale of Amgen stock
reclassified to net income (515,114) (515,114)
-------------
Comprehensive income, net of tax 2,041,207
-------------
Cash dividends declared (2) (916,761) (916,761)
Common stock issued for stock options 1,617 87,489 89,106
Other exchanges (2) 57 17,202 (1,908) 15,349
----------- -------- ---------- ---------- ------------- -------------
Balance at June 30, 2003 $44 $443,693 $4,687,464 $4,510,263 $(256,651) $9,384,813
=========== ======== ========== ========== ============= =============
(1) Included in cash dividends declared were the following dividends payable at June 30, 2004:
- Common stock cash dividend of $0.23 per share ($306,755 in the aggregate) declared on June 16, 2004 and payable on
September 1, 2004; and
- Preferred stock cash dividends of $0.50 per share ($16 in the aggregate) declared on April 22, 2004 and paid on
July 1, 2004 and declared on June 16, 2004 and payable on October 1, 2004.
(2) Included in cash dividends declared were the following dividends payable at June 30, 2003:
- Common stock cash dividend of $0.23 per share ($306,148 in the aggregate) declared on June 25, 2003 and paid on
September 1, 2003; and
- Preferred stock cash dividends of $0.50 per share ($18 in the aggregate) declared on April 24, 2003 and paid on
July 1, 2003 and declared on June 25, 2003 and paid on October 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)
Six Months
Ended June 30,
--------------------------
2004 2003
---------- ----------
Operating Activities
- --------------------
Net income $1,577,048 $2,142,287
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 (167,165) (290,154)
Depreciation and amortization 301,076 262,589
Change in deferred income taxes 94,039 (7,344)
Diet drug litigation payments (255,173) (248,434)
Security fund deposit - (535,200)
Changes in working capital, net (588,124) 459,299
Other items, net 243,185 27,891
---------- ----------
Net cash provided by operating activities 1,204,886 950,380
---------- ----------
Investing Activities
- --------------------
Purchases of property, plant and equipment (589,227) (792,265)
Proceeds from sale of Amgen common stock - 1,579,917
Proceeds from sales of assets 315,921 317,973
Proceeds from sales and maturities of marketable securities 374,596 485,306
Purchases of marketable securities (959,459) (609,717)
---------- ----------
Net cash provided by (used for) investing activities (858,169) 981,214
---------- ----------
Financing Activities
- --------------------
Net repayments of commercial paper - (3,329,485)
Proceeds from issuance of long-term debt - 1,800,000
Repayments of long-term debt (1,500,000) -
Other borrowing transactions, net (6,720) (26,573)
Dividends paid (613,312) (610,595)
Exercises of stock options 25,584 89,106
---------- ----------
Net cash used for financing activities (2,094,448) (2,077,547)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (6,879) 18,969
---------- ----------
Decrease in cash and cash equivalents (1,754,610) (126,984)
Cash and cash equivalents, beginning of period 6,069,794 2,943,604
---------- ----------
Cash and cash equivalents, end of period $4,315,184 $2,816,620
========== ==========
Supplemental Information
- ------------------------
Interest payments $106,625 $160,510
Income tax payments, net of refunds 424,123 312,927
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 Six Months
Ended June 30, Ended June 30,
-------------------- ------------------------
(In thousands except per share amounts) 2004 2003 2004 2003
------------------------------------------ -------- -------- ---------- ----------
Net income, as reported $827,345 $864,405 $1,577,048 $2,142,287
Add: Stock-based employee compensation
expense included in reported net income,
net of tax 3,875 6,763 6,368 8,079
Deduct: Total stock-based employee
compensaton expense determined
under fair value-based method for all
awards, net of tax (76,185) (79,941) (161,328) (163,632)
-------- -------- ---------- ----------
Adjusted net income $755,035 $791,227 $1,422,088 $1,986,734
======== ======== ========== ==========
Earnings per share:
Basic - as reported $0.62 $0.65 $1.18 $1.61
======== ======== ========== ==========
Basic - adjusted $0.57 $0.60 $1.07 $1.50
======== ======== ========== ==========
Diluted - as reported $0.62 $0.65 $1.18 $1.61
======== ======== ========== ==========
Diluted - adjusted $0.56 $0.59 $1.06 $1.49
======== ======== ========== ==========
7
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 six months ended June
30, 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 (7,455) (243) (155) (7,853)
---------- -------- -------- ----------
Balance at June 30, 2004 $2,684,317 $592,283 $533,540 $3,810,140
========== ======== ======== ==========
The Company's other intangibles consist primarily of license
agreements which are being amortized over their estimated useful lives
ranging from three to 10 years.
Note 2. Earnings per Share
------------------
The following table sets forth the computations of basic earnings per
share and diluted earnings per share:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ------------------------
(In thousands except per share amounts) 2004 2003 2004 2003
--------------------------------------- --------- --------- ---------- ----------
Net income less preferred dividends $827,329 $864,387 $1,577,024 $2,142,260
Denominator:
Weighted average common shares
outstanding 1,333,505 1,329,333 1,333,215 1,328,238
--------- --------- ---------- ----------
Basic earnings per share $0.62 $0.65 $1.18 $1.61
========= ========= ========== ==========
Net income $827,345 $864,405 $1,577,048 $2,142,287
Denominator:
Weighted average common shares
outstanding 1,333,505 1,329,333 1,333,215 1,328,238
Common stock equivalents of
outstanding stock options and
deferred contingent common stock
awards* 3,646 5,853 4,232 5,068
--------- --------- ---------- ----------
Total shares* 1,337,151 1,335,186 1,337,447 1,333,306
--------- --------- ---------- ----------
Diluted earnings per share* $0.62 $0.65 $1.18 $1.61
========= ========= ========== ==========
* At June 30, 2004 and 2003, 128,502 and 86,789, 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 Company has marketable debt and equity securities, which are
classified as either available-for-sale or held-to-maturity, depending
on management's investment intentions relating to these securities.
The cost, gross unrealized gains (losses) and fair value of
available-for-sale and held-to-maturity securities by major security
type at June 30, 2004 and December 31, 2003 were as follows:
Gross Gross
(In thousands) Unrealized Unrealized Fair
At June 30, 2004 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $81,063 $25 $(599) $80,489
Commercial paper 50,742 - (11) 50,731
Certificates of deposit 114,585 11 (169) 114,427
Corporate debt securities 196,131 122 (169) 196,084
Other debt securities 2,527 - (15) 2,512
Equity securities 47,493 7,083 (4,813) 49,763
Institutional fixed income fund 528,550 15,883 (2,967) 541,466
---------- ---------- ---------- ----------
Total available-for-sale 1,021,091 23,124 (8,743) 1,035,472
---------- ---------- ---------- ----------
Held-to-maturity:
Commercial paper 449,493 - - 449,493
Certificates of deposit 144,461 - - 144,461
Other debt securities 49,217 - - 49,217
---------- ---------- ---------- ----------
Total held-to-maturity 643,171 - - 643,171
---------- ---------- ---------- ----------
$1,664,262 $23,124 $(8,743) $1,678,643
========== ========== ========== ==========
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 June 30, 2004 were as follows:
Fair
(In thousands) Cost Value
---------------------------------------- -------- --------
Available-for-sale:
Due within one year $266,809 $266,613
Due after one year through five years 167,098 166,505
Due after five years through 10 years - -
Due after 10 years 11,141 11,125
-------- --------
$445,048 $444,243
======== ========
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $643.2 million at June 30, 2004.
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.
10
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 and six months ended June 30, 2004 and 2003 (principally
U.S.) was as follows:
Pensions
-----------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands) ------------------- ---------------------
Components of Net Periodic Benefit Cost 2004 2003 2004 2003
--------------------------------------- ------- ------- -------- --------
Service cost $38,172 $29,627 $73,543 $59,380
Interest cost 65,896 62,465 128,189 124,435
Expected return on plan assets (78,843) (67,617) (155,147) (135,046)
Amortization of prior service cost 2,834 2,763 5,677 5,515
Amortization of transition obligation (405) (373) (827) (752)
Recognized net actuarial loss 27,691 26,081 50,154 52,128
Settlement loss - - - 13,034
------- ------- -------- --------
Net periodic benefit cost $55,345 $52,946 $101,589 $118,694
======= ======= ======== ========
Other Postretirement Benefits
---------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands) ------------------- -------------------
Components of Net Periodic Benefit Cost 2004 2003 2004 2003
--------------------------------------- ------- ------- ------- -------
Service cost $10,550 $9,524 $21,695 $19,039
Interest cost 22,613 23,572 46,173 47,118
Amortization of prior service cost (4,478) (563) (8,187) (1,125)
Recognized net actuarial loss 3,771 4,676 11,611 9,347
------- ------- ------- -------
Net periodic benefit cost $32,456 $37,209 $71,292 $74,379
======= ======= ======= =======
As of June 30, 2004, $19.8 million and $50.1 million of contributions
have been made in 2004 to the Company's defined benefit pension plans
and other postretirement benefit plans, respectively. The Company
presently anticipates further contributions of approximately $256.0
million and $90.0 million to fund its defined benefit pension and
other postretirement benefit plans in 2004.
The Financial Accounting Standards Boards (FASB) Staff Position No.
106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, was
recently issued to provide guidance on the accounting for the effects
of the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the Act). The Act provides for a federal subsidy to sponsors
of retiree health care benefit plans that provide a benefit that is at
least actuarially
11
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
equivalent to Medicare Part D. The federal subsidy is based on 28% of
an individual beneficiary's annual prescription drug costs between
$250 and $5,000 (subject to indexing and the provisions of the Act as
to "allowable retiree costs"). Wyeth provides prescription drug
coverage to retirees meeting certain age and service requirements. For
retirees covered under the plan, the Company's management believes the
coverage provided by Wyeth affords retirees lower out-of-pocket costs
than would result if coverage were provided under Medicare Part D. As
such, the Company's management has concluded that Wyeth's plan is at
least actuarially equivalent to Medicare Part D.
The Company adopted FASB Staff Position No. 106-2 during the 2004
second quarter. Accordingly, the Company's postretirement benefit
obligation has been remeasured as of January 1, 2004 in order to
reflect the impact of the Act. As a result of the remeasurement, an
unrecognized actuarial gain was realized during the 2004 second
quarter, which reduced the Company's accumulated postretirement
benefit obligation by approximately $195.4 million. This unrecognized
actuarial gain is being amortized over the average working life (which
approximates 10 years) of the Company's employees eligible for
postretirement benefits beginning January 1, 2004. The effect of the
Act also decreased the Company's 2004 first half postretirement
benefits expense by approximately $15.4 million. This reduction
consisted of lower service and interest costs of $3.0 million and $6.1
million, respectively, as well as decreased amortization of $6.3
million related to recognized actuarial losses.
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 these 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 charges 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 June 30, 2004, the
Company is continuing with the 2003 restructuring program. The
majority of the contract settlement costs are scheduled to be paid
over an extended period of time based on the contractual terms of the
agreements, which extend through 2005.
12
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The activity in the restructuring accruals was as follows:
Reserve at Payments/ Reserve at
(In thousands) Total December 31, Non-cash June 30,
2003 Restructuring Charges 2003 Charges 2004
------------------------- -------- ------------ --------- ----------
Personnel costs $3,400 $3,400 $(2,700) $700
Asset impairments 419,400 - - -
Contract settlement costs 47,900 45,200 (4,300) 40,900
Other closure/exit costs 17,200 17,200 (16,300) 900
-------- ------------ --------- ----------
$487,900 $65,800 $(23,300) $42,500
======== ============ ========= ==========
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 these
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).
The restructuring will ultimately result in the elimination of
approximately 3,150 positions worldwide. The reductions in workforce,
which are permanent and affected all of the Company's segments,
including Corporate, are substantially complete. As of June 30, 2004,
the Company is continuing with the 2002 restructuring program. The
timing of the remaining personnel costs to be paid has been delayed
since, in many instances, the terminated employees elected or were
required to receive their severance payments over an extended period
of time. However, substantially all of the payments are expected to be
made during 2004. The activity in the restructuring accruals was as
follows:
Payments/
Reserve at Non-cash Reserve at
(In thousands) Total December 31, Charges June 30,
2002 Restructuring Charges 2003 in 2004 2004
------------------------ -------- ------------ --------- ----------
Personnel costs $194,600 $36,800 $(17,500) $19,300
Asset impairments 68,700 - - -
Other closure/exit costs 77,500 27,900 (11,200) 16,700
-------- ------------ --------- ----------
$340,800 $64,700 $(28,700) $36,000
======== ============ ========= ==========
13
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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.
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 July 14, 2004, the Trust had recorded
approximately 116,710 matrix claim forms. Approximately 31,380
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 85,330 forms, based on its analysis of data received
from the Trust through July 14, 2004, is as follows. Approximately
19,200 of the matrix claims had been processed to completion, with
those claims either paid (approximately 3,330 payments, totaling
$1,230.1 million, had been made to approximately 3,190 claimants),
denied or in show cause proceedings (approximately 14,340) or
withdrawn. Approximately 2,760 claims were in some stage of the 100%
audit process ordered in late 2002 by the federal court overseeing the
14
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
national settlement. Approximately 16,980 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 23,730 claims with similar allegations have been
purportedly substantiated by physicians or filed by law firms whose
claims are now subject to the outcome of the Trust's Claims Integrity
Program, discussed below. Approximately 22,490 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 170 claims were in
the data entry process and could not be assessed.
In addition to the approximately 116,710 matrix claims filed as of
July 14, 2004, additional class members may progress to the matrix
stage through 2015 if they develop a matrix condition in the future,
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 July 14, 2004, is that audits had produced preliminary or
final results on 4,396 of the claims that had begun the 100% audit
process since its inception. Of these, 1,539 were found to be payable
at the amount claimed and 137 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.
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
93% of the 16,980 matrix claimants who allege conditions that, if
true, would entitle them to an award (and approximately 98% of the
approximately 23,730 claims certified by physicians and/or law firms
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
15
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 a
Claims Integrity Program, which is designed to protect the Trust from
paying illegitimate or fraudulent claims.
Pursuant to the Claims Integrity Program, the Trust has required
additional information concerning matrix claims purportedly
substantiated by 18 identified physicians or filed by two law firms 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 23,730 matrix claims were purportedly substantiated by
the 18 physicians and/or filed by the two law firms covered by the
Claims Integrity Program as of July 14, 2004. It is the Company's
understanding that additional claims substantiated by additional
physicians or filed by additional law firms might be subjected to the
same requirements of the Claims 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 Claims Integrity Program is at this
time uncertain. Counsel for certain claimants affected by the program
have challenged the Trust's authority to implement the Claims
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 Claims Integrity Program and to 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 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
16
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
evidence of an intentional, material misrepresentation that calls into
question the validity of a claim, the Trust will not pay the claim."
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 was intended to provide 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.
On July 13, 2004, the District Court extended the stay, which had
expired on July 9, 2004, until July 21, 2004. On July 21, the parties
informed the Court that an agreement had been reached on the terms of
the proposed Seventh Amendment and that the parties had placed the
signed agreement in escrow with the Court's Special Master while the
parties finalized the exhibits to the agreement, including the
proposed Form of Notice to the class. At the parties' request, the
Court extended the stay on the processing and payment of Level I and
Level II claims until August 4, 2004. On August 5, the stay was again
extended, through August 10, 2004. If the parties file a motion for
preliminary approval of the proposed Seventh Amendment by August 10,
the stay will automatically be extended until the District Court
enters an order granting or denying that motion.
The proposed Seventh Amendment would require preliminary court
approval, notice to the class and an opportunity for class members to
opt out of the Seventh Amendment process, final agreement by the
Company following the opt out period, trial court approval and final
judicial approval. If finalized and approved, the proposed Seventh
Amendment would include the following key terms:
o The amendment would create a new Supplemental Fund, to be
administered by a Fund Administrator who will be appointed by the
District Court and who will process the Level I and Level II
matrix claims;
o The Company would make initial payments of up to $50.0 million to
facilitate the establishment of the Supplemental Fund. Following
approval by the federal court overseeing the settlement and any
appellate courts, the Company would make an initial payment of
$400.0 million. The timing of additional payments would be
dictated by the rate of review and payment of claims by the Fund
Administrator. The Company would ultimately deposit a total of
$1,275.0 million, net of certain credits, into the Supplemental
Fund;
o All current matrix Level I and II claimants who qualify under the
Seventh Amendment, who pass the Settlement Fund's medical review
and who otherwise satisfy the requirements of the settlement
would receive a pro rata share of the $1,275.0 million
Supplemental Fund, after deduction of certain expenses and other
amounts from the Supplemental Fund. The pro rata amount would
vary depending upon the number of claimants who pass medical
review, the nature of their claims, their age and other factors.
A Seventh Amendment participant who
17
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
does not qualify for a payment after such medical review would be
paid $2,000 from the Supplemental Fund;
o Participating class members who would in the future have been
eligible to file Level I and Level II matrix claims would be
eligible to receive a $2,000 payment from the settlement Trust;
such payments would be funded by the Company apart from its other
funding obligations under the national settlement;
o If the participants in the Seventh Amendment have surgery or
other more serious medical conditions on Matrix Levels III-V by
the earlier of fifteen years from the date of their last diet
drug ingestion or by December 31, 2011, 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 terms modified by the Seventh Amendment. In the event the
existing settlement Trust is unable to pay those claims, the
Company would guarantee payment; and
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. Approval of the Seventh Amendment would also
preclude any lawsuits by the Trust or the Company to recover any
amounts previously paid to class members by the Trust, as well as
terminate the Claims Integrity Program as to all claimants who do
not opt out of the Seventh Amendment.
There can be no assurance 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 Claims 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
18
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. All of
these motions, as well as the Trust lawsuits referenced above, have
also been stayed pending the resolution of the outstanding issues
involving the proposed Seventh Amendment. As indicated above, approval
of the Seventh Amendment would result in the withdrawal of these
motions as to claimants who do not opt out of the Seventh Amendment.
The Company continues to monitor the progress of the Trust's audit
process and its Claims Integrity Program. Even if substantial progress
is made by the Trust, through its Claims 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, notwithstanding 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 claims on or before May 3, 2003 and who pass
the audit process at a time when there are insufficient funds to pay
their claims 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. Several class members affected by the
terms of the Sixth Amendment opposed the approval of the amendment on
the ground that, should the settlement fund be exhausted, they should
be entitled to pursue tort claims, including a claim for punitive
damages, without the limitations imposed by the Sixth Amendment. While
the District Court overruled those objections and approved the
amendment, the class members have appealed to the United States Court
of Appeals for the Third Circuit. That appeal has been fully briefed
and argued and is awaiting decision. The Company cannot predict the
outcome of this appeal.
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
19
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 may elect to pursue a Back-End opt out. Such
individuals may pursue a Back-End opt out within 120 days of the date
on which they first discover or should have discovered their matrix
condition. The Company cannot predict the ultimate number of
individuals who may be in a position to elect a Back-End opt out or
who may in fact elect to do so, but that number could also be
substantial.
The Company's current understanding is that approximately 76,000
Intermediate opt out forms were submitted by May 3, 2003, the
applicable deadline for most class members (other than qualified class
members receiving echocardiograms through the Trust after January 3,
2003, who may exercise Intermediate opt out rights within 120 days
after the date of their echocardiogram). The number of Back-End opt
out forms received as of July 14, 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 July 14, 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 had issued orders limiting the evidence that could be used
by plaintiffs in such cases. Those orders, however, were challenged on
appeal and were reversed by a panel of the U.S. Court of Appeals for
the Third Circuit in May 2004. The Company's petition to the Third
Circuit for a rehearing or rehearing en banc was subsequently denied.
The Company is considering a petition to the United States Supreme
Court for a writ of certiorari.
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.
20
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
As of July 19, 2004, approximately 53,000 individuals who had filed
Intermediate or Back-End opt out forms had served lawsuits on the
Company. The claims of approximately 42% of the plaintiffs in the
Intermediate and Back-End opt out cases served on the Company are
pending in federal court, with approximately 36% pending in state
courts. The claims of approximately 22% of the Intermediate and
Back-End opt out plaintiffs have been removed from state courts to
federal court, but are still subject to a possible remand to state
court. The Company expects to challenge vigorously all Intermediate
and Back-End opt out claims of questionable validity or medical
eligibility and a number of cases have already been dismissed on
eligibility grounds. However, the total number of filed lawsuits that
meet the settlement's opt out criteria will not be known for some
time. As a result, the Company cannot predict the ultimate number of
purported Intermediate or Back-End opt outs that will satisfy the
settlement's opt out requirements, but that number could be
substantial. As to those opt outs who are found eligible to pursue a
lawsuit, the Company also intends 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 July 27, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the Intermediate opt
out cases of Istnick v. Wyeth, et al., No. 021200268, and Clepper v.
Wyeth, et al., No. 021202456, returned a verdict finding that
plaintiff Istnick had not been damaged by her use of PONDIMIN and that
plaintiff Clepper had been damaged in the amount of $48,000 by the use
of PONDIMIN. The Istnick case was thereupon dismissed and the parties
resolved the Clepper case. On July, 30, 2004, a Philadelphia jury in
the Pennsylvania Court of Common Pleas, First Judicial District,
hearing the Intermediate opt out case of Cannon v. Wyeth, et al., No.
021201534, returned a defense verdict finding that plaintiff Cannon
had not proven that she had valvular heart disease. The
Istnick/Clepper and the Cannon cases were tried under a reverse
bifurcation procedure, in which the parties first try the issue of the
plaintiff's alleged injury and damages, and only proceed to a trial of
the Company's liability for the jury's award if any damages are found.
Because the Istnick/Clepper and Cannon cases were resolved by the
damage phase, the cases did not proceed to the liability phase. On
August 6, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the combined Back-End
opt out cases of Davis v. Wyeth, et al., No. 021101477, Sidwell v.
Wyeth, et al., No 021101431, Roberts v. Wyeth, et al., No. 021102564,
May v. Wyeth, et al., No. 021103564, and Rogowski v. Wyeth, et al.,
No. 021201594 returned a verdict in favor of the plaintiffs, awarding
plaintiff Davis $1,000 in damages and the remaining plaintiffs $750
each in damages.
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
21
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
$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. On May 17, 2004, the trial court entered judgment on
behalf of the plaintiffs for the full amount of the jury's verdict, as
well as $4.2 million in pre-judgment interest and $188,737 in guardian
ad litem fees. On July 26, 2004, the trial court denied in their
entirety the Company's motions for a new trial or for judgment
notwithstanding the verdict, including the Company's request for
application of Texas's statutory cap on punitive damage awards. The
Company intends to file an appeal from the judgment entered by the
trial court and 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. In connection
with its 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 July 16, 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 75 of these cases appear
to be eligible to pursue a PPH lawsuit under the terms of the national
settlement. In approximately 50 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 45 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 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 $3,261.3
million reserve balance at June 30, 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. In
analyzing its reserve requirements, the Company has not considered
final implementation of the
22
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
proposed Seventh Amendment to be more likely than not because there
can be no assurance 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. However, if the proposed Seventh Amendment
is implemented, it is likely that additional reserves will be
required. Any such additional reserves cannot be estimated at this
time, but the amount of such additional reserves could be significant.
The Company intends to vigorously defend itself 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 overall management of the Company which are not
allocated to the other reportable segments.
23
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Net Revenue
--------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands) ------------------------- -------------------------
Segment 2004 2003 2004 2003
------------------------ ---------- ---------- ---------- ----------
Pharmaceuticals $3,392,977 $2,979,528 $6,600,563 $5,954,586
Consumer Healthcare 591,402 553,085 1,179,753 1,085,089
Animal Health 238,826 213,943 457,678 395,938
---------- ---------- ---------- ----------
Total $4,223,205 $3,746,556 $8,237,994 $7,435,613
========== ========== ========== ==========
Income Before Taxes
--------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands) ------------------------- -------------------------
Segment 2004 2003 2004 2003
------------------------ ---------- ---------- ---------- ----------
Pharmaceuticals(1) $965,840 $1,045,233 $1,837,953 $1,962,887
Consumer Healthcare 104,635 149,000 214,093 229,204
Animal Health 50,341 38,133 88,035 64,361
Corporate(2) (57,738) (124,154) (133,112) 634,348
---------- ---------- ---------- ----------
Total(3) $1,063,078 $1,108,212 $2,006,969 $2,890,800
========== ========== ========== ==========
(1) Pharmaceuticals for the 2004 first half included a first quarter
charge of $145,500 within Research and development expenses
related to the upfront payment to Solvay in connection with the
co-development and co-commercialization of four neuroscience
compounds, most notably, bifeprunox, a late stage compound in
Phase 3 development for schizophrenia and other possible uses.
(2) Corporate for the 2003 first half included a first quarter gain
of $860,554 related to the sale of Amgen shares.
(3) Income before taxes included $12,900 and $153,600 for the 2004
second quarter and first half, respectively, and $287,500 and
$290,200 for the 2003 second quarter and first half,
respectively, related to gains from the divestiture of certain
Pharmaceuticals and Consumer Healthcare products. The 2004
divestitures included product rights to indiplon, DIAMOX (in
Japan), and the Company's nutritionals products in France. The
2003 divestitures included product rights in various territories
to ATIVAN, ISORDIL, DIAMOX (excluding Japan), ZIAC, ZEBETA,
AYGESTIN, ANACIN and SONATA.
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).
24
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 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 half of both 2004 and 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 14% of our
consolidated net revenue for the first half of 2004 and 15% for the
first half of 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 6% of our consolidated net
revenue for the first half of 2004 and 5% for the first half of 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 business units exhibited strong revenue growth for the
2004 first half compared with the first half of 2003. Pharmaceuticals
had net revenue growth of 11% to
25
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
$6,600.6 million, which was spurred by the strong performance of
several key products in the 2004 first half:
o EFFEXOR (a neuroscience therapy) - up 31% to $1,607.5 million
o PROTONIX (a gastroenterology drug) - up 19% to $799.7 million
o ZOSYN/TAZOCIN (an infectious disease drug) - up 28% to $363.7
million
o ENBREL (a musculoskeletal therapy) - up 171% (internationally) to
$291.0 million
o RAPAMUNE (an immunology product) - up 34% to $114.4 million
Collectively, sales of these products increased 34% for the first half
of 2004 compared with the first half of 2003.
Other areas of revenue growth for the Pharmaceuticals segment for the
2004 first half included ZOTON, BENEFIX and rhBMP-2 and alliance
revenue from sales of ENBREL and the CYPHER* stent.
The combined revenue increase from the Company's growth products more
than offset the loss of revenue from the decline in sales of PREVNAR
and the PREMARIN family of products in the 2004 first half.
Both Consumer Healthcare and Animal Health posted strong results in
the 2004 first half. Consumer Healthcare net revenue rose 9% to
$1,179.7 million and Animal Health had net revenue growth of 16% to
$457.7 million. The increase in Consumer Healthcare sales resulted
primarily from global growth in the core brands ADVIL, CENTRUM,
CALTRATE and ROBITUSSIN. The moxidectin family of products, led by
strong sales of PROHEART 6 vaccine, were the principal drivers of
Animal Health's growth.
On a combined basis, Pharmaceuticals and Consumer Healthcare realized
aggregate pre-tax gains from product divestitures amounting to
approximately $153.6 million for the first half of 2004, $136.6
million less than gains from product divestitures for the first half
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,
which would be impacted by the implementation of the Seventh Amendment
(see Note 7 to the consolidated condensed financial statements). At
the same time, we are committed to vigorously defending the Company
and aggressively eliminating fraud and abuse in the settlement.
* The active ingredient in RAPAMUNE, sirolimus, coats the CYPHER
coronary stent marketed by Johnson & Johnson.
26
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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 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. Necessary upgrades and
improvements to the Company's PREVNAR filling line, which extended the
planned plant shutdown in late 2003 and early 2004, have been
completed and that line is now operational. During the 2004 second
quarter, additional vial filling capacity became available through a
third party filler and a second Wyeth bulk vaccine formulation suite
became operational. Overall, supply in 2004 is expected to exceed the
2003 level of 20 million doses.
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
introduced low-dose versions of PREMARIN and PREMPRO in 2003. Despite
these efforts, sales of the PREMARIN family of products declined from
approximately $679.3 million for the first half of 2003 to $488.6
million for the first half of 2004. The launch of low-dose PREMARIN
and PREMPRO has helped to moderate the decrease in sales.
In April 2004, the Company announced the dissolution of our
collaboration with MedImmune, Inc. (MedImmune) for the nasal flu
vaccine FLUMIST (Influenza Virus Vaccine Live, Intranasal) and an
investigational second-generation liquid formulation, Cold Adapted
Influenza Vaccine-Trivalent (CAIV-T). As a result of the dissolution,
MedImmune has worldwide rights to these products and will assume full
responsibility for the manufacturing, marketing, and selling of
FLUMIST. As part of the dissolution process, MedImmune will acquire
Wyeth's distribution facility in Louisville, Kentucky. The Company is
providing bulk manufacturing materials and will transfer clinical
trial data, as well as provide manufacturing services, during a
transition that the companies expect to complete in large part by
fourth quarter 2004.
The Company entered into inventory management agreements with the
majority of full-line wholesalers in the 2004 second quarter. While
the specific terms are confidential, essentially the wholesalers have
agreed to maintain inventory at certain targeted levels. In return,
the Company has agreed that the wholesalers will receive the
opportunity to
27
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
buy specific amounts of product at pre-price increase prices whenever
Wyeth implements a price increase. As a result, we expect that both
Wyeth and our wholesaler partners will be able to manage product flow
and inventory levels in a way that more closely follows trends in
prescriptions.
Wyeth's focus is on maximizing the strong growth potential of our core
group of patent protected innovative products that we have introduced
in recent years as well as actively pursuing in-licensing
opportunities. In March 2004, we 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 supplement new product introductions expected to begin
primarily in the 2006-2007 time period.
The Company's principal strategy for success is based on R&D
innovations. The Company intends to leverage its breadth of knowledge
and resources across three development platforms (traditional
pharmaceuticals, biopharmaceuticals and vaccines) 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.
Net Revenue
-----------
Worldwide net revenue for the 2004 second quarter and first half
increased 13% and 11%, respectively, 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 11% for the 2004 second quarter and 8%
for the 2004 first half.
28
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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 June 30,
(Dollars in millions) ----------------------
Segment 2004 2003 % Increase
------------------------ -------- -------- ----------
Pharmaceuticals $3,393.0 $2,979.5 14%
Consumer Healthcare 591.4 553.1 7%
Animal Health 238.8 214.0 12%
-------- -------- ----------
Total $4,223.2 $3,746.6 13%
======== ======== ==========
Net Revenue
----------------------
Six Months
Ended June 30,
(Dollars in millions) ----------------------
Segment 2004 2003 % Increase
------------------------ -------- -------- ----------
Pharmaceuticals $6,600.6 $5,954.6 11%
Consumer Healthcare 1,179.7 1,085.1 9%
Animal Health 457.7 395.9 16%
-------- -------- ----------
Total $8,238.0 $7,435.6 11%
======== ======== ==========
Pharmaceuticals
---------------
Worldwide Pharmaceuticals net revenue increased 14% for the 2004
second quarter and 11% for the 2004 first half. The increases in net
revenue were due primarily to higher sales of EFFEXOR XR (global
growth resulting primarily from higher volume), PROTONIX (strong
prescription volume growth), ENBREL (internationally), ZOSYN/TAZOCIN
and RAPAMUNE (each reflecting growth in the U.S. and internationally),
ZOTON, BENEFIX and rhBMP-2, offset, in part, by lower sales of the
PREMARIN family of products and PREVNAR (supply constraints). Alliance
revenue also contributed to the 2004 first half increase in net
revenue, but declined in the 2004 second quarter due to ALTACE (lower
volume caused by higher trade inventory levels). Excluding the
favorable impact of foreign exchange, worldwide Pharmaceuticals net
revenue increased 12% and 8% for the 2004 second quarter and first
half, respectively.
29
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
The following table sets forth the significant worldwide
Pharmaceuticals net revenue by product for the three and six months
ended June 30, 2004 compared with the same periods in the prior year:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
(In millions) 2004 2003 2004 2003
--------------------- -------- -------- -------- --------
EFFEXOR $831.8 $636.4 $1,607.5 $1,229.9
PROTONIX 389.2 310.4 799.7 670.4
PREMARIN family 222.7 276.6 488.6 679.3
Nutritionals 228.3 215.3 444.1 418.1
PREVNAR 219.1 264.9 392.5 493.7
ZOSYN / TAZOCIN 182.3 145.0 363.7 285.1
ENBREL 156.0 64.6 291.0 107.4
Oral Contraceptives 141.0 134.6 283.8 288.9
ZOTON 114.7 86.6 226.7 159.1
BENEFIX 76.5 62.5 151.0 121.1
REFACTO 64.0 56.4 124.3 108.8
RAPAMUNE 56.1 40.8 114.4 85.5
SYNVISC 53.4 61.0 101.6 110.1
ATIVAN 47.7 55.0 99.3 110.0
rhBMP-2 53.5 15.8 76.6 22.4
Alliance revenue 152.0 156.5 301.4 251.2
Other 404.7 397.1 734.4 813.6
-------- -------- -------- --------
Total Pharmaceuticals $3,393.0 $2,979.5 $6,600.6 $5,954.6
======== ======== ======== ========
Consumer Healthcare
-------------------
Worldwide Consumer Healthcare net revenue increased 7% for the 2004
second quarter and 9% for the 2004 first half, exhibiting continued
solid performance in the U.S. and internationally. The results were
attributable to a number of factors, including global growth in the
core brands CENTRUM, ADVIL and CALTRATE. The 2004 first half increase
was also due to higher sales of ROBITUSSIN. Excluding the impact of
foreign exchange, worldwide Consumer Healthcare net revenue increased
6% for both the 2004 second quarter and first half.
30
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
The following table sets forth significant worldwide Consumer
Healthcare net revenue by product for the three and six months ended
June 30, 2004 compared with the same periods in the prior year:
Three Months Six Months
Ended June 30, Ended June 30,
---------------- --------------------
(In millions) 2004 2003 2004 2003
------------------------- ------ ------ -------- --------
CENTRUM $155.4 $134.4 $294.5 $254.0
ADVIL 123.0 99.6 237.4 208.4
CALTRATE 45.0 38.7 85.0 68.9
ROBITUSSIN 28.9 30.4 77.3 67.0
SOLGAR 25.5 26.7 55.2 55.2
ADVIL COLD & SINUS 21.4 27.9 51.6 52.5
CHAPSTICK 17.2 16.0 43.5 39.4
DIMETAPP 14.7 12.5 34.8 30.0
ALAVERT 15.9 30.7 33.5 51.7
Other 144.4 136.2 266.9 258.0
------ ------ -------- --------
Total Consumer Healthcare $591.4 $553.1 $1,179.7 $1,085.1
====== ====== ======== ========
Animal Health
-------------
Worldwide Animal Health net revenue increased 12% for the 2004 second
quarter and 16% for the 2004 first half, due primarily to higher sales
of companion animal and livestock products offset, in part, by lower
sales of equine products as a result of decreases in sales of WEST
NILE-INNOVATOR (dosing transition and product competition).
PROHEART products, the largest contributor to the companion animal
products sales growth, had sales of $21.3 million and $35.6 million
for the three and six months ended June 30, 2004 compared with $14.3
million and $21.2 million for the similar periods in the prior year.
Excluding the favorable impact of foreign exchange, worldwide Animal
Health net revenue increased 10% for the 2004 second quarter and 11%
for 2004 first half.
31
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
The following table sets forth worldwide Animal Health net revenue by
product category for the three and six months ended June 30, 2004
compared with the same periods in the prior year:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
(In millions) 2004 2003 2004 2003
------------------------- ------ ------ ------ ------
Livestock products $92.5 $78.6 $176.2 $151.3
Companion animal products 78.2 66.5 141.6 107.3
Equine products 43.9 48.0 91.8 94.8
Poultry products 24.2 20.9 48.1 42.5
------ ------ ------ ------
Total Animal Health $238.8 $214.0 $457.7 $395.9
====== ====== ====== ======
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) % Increase (Decrease)
Three Months Ended June 30, 2004 Six Months Ended June 30, 2004
------------------------------------------ ------------------------------------------
Foreign Total Foreign Total
Volume Price Exchange Net Revenue Volume Price Exchange Net Revenue
------ ----- -------- ----------- ------ ----- -------- -----------
Pharmaceuticals
-------------------
United States 8% 3% - 11% (2%) 5% - 3%
International 13% 1% 4% 18% 15% 1% 8% 24%
--- --- -- --- --- --- -- ---
Total 10% 2% 2% 14% 5% 3% 3% 11%
=== === == === === === == ===
Consumer Healthcare
-------------------
United States 8% (3%) - 5% 5% (1%) - 4%
International 3% 3% 3% 9% 7% 2% 8% 17%
--- --- -- --- --- --- -- ---
Total 6% - 1% 7% 6% - 3% 9%
=== === == === === === == ===
Animal Health
-------------------
United States 4% 7% - 11% 7% 9% - 16%
International 6% 2% 4% 12% 5% 1% 9% 15%
--- --- -- --- --- --- -- ---
Total 5% 5% 2% 12% 6% 5% 5% 16%
=== === == === === === == ===
Total
-------------------
United States 8% 2% - 10% (1%) 4% - 3%
International 11% 1% 4% 16% 13% 1% 8% 22%
--- --- -- --- --- --- -- ---
Total 9% 2% 2% 13% 5% 3% 3% 11%
=== === == === === === == ===
32
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
Operating Expenses
------------------
Cost of goods sold, as a percentage of Net revenue, decreased to 26.8%
for the 2004 second quarter compared with 27.2% for the 2003 second
quarter due primarily to lower inventory and manufacturing losses and
the partial reversal of the reserve provided for PREMPRO returns in
the 2003 second quarter (as described in the "Certain Factors That May
Affect Future Results" section, herein) in the Pharmaceuticals
segment. The increase in gross margin was offset, in part, by a
decrease in alliance revenue (lower sales of ALTACE) and an increase
in royalty costs (higher sales of ENBREL in Europe) in the
Pharmaceuticals segment. Cost of goods sold, as a percentage of Net
revenue, increased to 27.0% for the 2004 first half compared with
26.2% for the 2003 first half 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, increased alliance revenue and
lower inventory adjustments in the Pharmaceuticals segment.
Selling, general and administrative expenses, as a percentage of Net
revenue, decreased to 33.8% for both the 2004 second quarter and first
half compared with 36.4% for the 2003 second quarter and 35.7% for the
2003 first half due primarily to lower marketing expenses in the
Pharmaceuticals segment. These decreases resulted primarily from net
revenue increasing at a higher rate than expenses (13% vs. 5% for the
2004 second quarter and 11% vs. 5% for the 2004 first half).
Research and development expenses increased 17% for the 2004 second
quarter and 27% for the 2004 first half primarily due to higher
clinical grant spending in the Pharmaceuticals segment as a result of
the initiation of several Phase 3 programs offset, in part, by lower
other research operating expenses (including lower licensing
expenses). The increase in research and development expenses for the
2004 first half also reflects the impact of the upfront payment and
charge in the 2004 first quarter of $145.5 million made in connection
with the agreement entered into between the Company and Solvay to
co-develop and co-commercialize four neuroscience compounds, most
notably, bifeprunox.
33
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
Interest Expense and Other Income
---------------------------------
Interest expense, net for the three and six months ended June 30, 2004
and 2003 consisted of the following:
Three Months Six Months
Ended June 30, Ended June 30,
--------------- -----------------
(In millions) 2004 2003 2004 2003
---------------------------- ----- ----- ------ ------
Interest expense $75.4 $72.7 $146.2 $143.8
Interest income (21.4) (18.9) (44.8) (38.4)
Less: amount capitalized for
capital projects (22.1) (27.9) (42.6) (52.5)
----- ----- ------ ------
Total interest expense, net $31.9 $25.9 $58.8 $52.9
===== ===== ====== ======
Interest expense, net increased 23% for the 2004 second quarter and
11% for the 2004 first half due primarily to lower capitalized
interest. Weighted average debt outstanding during the 2004 second
quarter and first half was $8,146.7 million and $8,425.5 million,
respectively, compared with prior year levels of $6,938.1 million and
$7,176.1 million, respectively. The impact of higher weighted average
debt outstanding on interest expense was offset by increases in
interest income. 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 decreased $256.8 million for the 2004 second quarter
and $136.6 million for the 2004 first half primarily as a result of
decreases in gains from the divestiture of certain Pharmaceuticals and
Consumer Healthcare products. The 2004 divestitures included product
rights to indiplon, DIAMOX (in Japan), and the Company's nutritionals
products in France. The 2003 divestitures included product rights in
various territories to ATIVAN, ISORDIL, DIAMOX (excluding Japan),
ZIAC, ZEBETA, AYGESTIN, ANACIN and SONATA. The sales, profits and net
assets of these divested products, individually or in the aggregate,
were not material to either business segment or the Company's
consolidated financial position or results of operations.
34
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
Income Before Taxes
-------------------
The following table sets forth worldwide income before taxes by
reportable segment together with the percentage changes from the
comparable periods in the prior year:
Income Before Taxes
---------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------- -------------------------------------
(Dollars in millions) % Increase/ % Increase/
Segment 2004 2003 (Decrease) 2004 2003 (Decrease)
--------------------- -------- -------- ----------- -------- -------- -----------
Pharmaceuticals(1) $965.9 $1,045.2 (8%) $1,838.0 $1,962.9 (6%)
Consumer Healthcare 104.6 149.0 (30%) 214.1 229.2 (7%)
Animal Health 50.3 38.2 32% 88.0 64.4 37%
Corporate(2) (57.7) (124.2) 54% (133.1) 634.3 -
-------- -------- ----------- -------- -------- -----------
Total(3) $1,063.1 $1,108.2 (4%) $2,007.0 $2,890.8 (31%)
======== ======== =========== ======== ======== ===========
(1) Pharmaceuticals for the 2004 first half included a first quarter
charge of $145.5 within Research and development expenses related
to the 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 half
results, but including Pharmaceuticals product divestiture gains
discussed in footnote 3 below, Pharmaceuticals income before
taxes increased 1%.
(2) Corporate for the 2003 first half included a first quarter gain
of $860.6 related to the sale of Amgen shares. Excluding the gain
on the sale of Amgen shares from the 2003 first half results,
Corporate expenses decreased 41%.
(3) Income before taxes included $12.9 and $153.6 for the 2004 second
quarter and first half, respectively, and $287.5 and $290.2 for
the 2003 second quarter and first half, respectively, related to
gains from the divestiture of certain Pharmaceuticals and
Consumer Healthcare products. The 2004 divestitures included
product rights to indiplon, DIAMOX (in Japan), and the Company's
nutritionals products in France. The 2003 divestitures included
product rights in various territories to ATIVAN, ISORDIL, DIAMOX
(excluding Japan), ZIAC, ZEBETA, AYGESTIN, ANACIN and SONATA.
Worldwide Pharmaceuticals income before taxes decreased 8% for the
2004 second quarter and 6% for the 2004 first half while
Pharmaceuticals net revenue increased 14% for the 2004 second quarter
and 11% for the 2004 first half. This difference between the decrease
in income before taxes and net revenue growth is primarily
attributable to higher research and development expenses related to
the upfront payment to Solvay, lower other income, net related to
product divestiture gains and lower gross profit margin rates earned
on Pharmaceuticals net revenue in the 2004 first half.
Worldwide Consumer Healthcare income before taxes decreased 30% for
the 2004 second quarter and 7% for the 2004 first half while Consumer
Healthcare net revenue increased 7% for the 2004 second quarter and 9%
for the 2004 first half. This difference between the decrease in
income before taxes and net revenue growth is primarily attributable
to lower other income, net related to product divestiture gains and
higher
35
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
selling and general expenses offset, in part, by higher gross profit
margins earned on worldwide sales of Consumer Healthcare products.
Worldwide Animal Health income before taxes for the 2004 second
quarter and first half increased 32% and 37%, respectively. The
increase in the 2004 second quarter and first half results was
primarily due to higher net revenue and increased gross profit margins
earned on worldwide sales of Animal Health products.
Corporate expenses for the 2004 second quarter were $57.7 million
compared with $124.2 million for the 2003 second quarter. In addition,
Corporate expenses for the 2004 first half were $133.1 million
compared with income before taxes of $634.3 million for the 2003 first
half. Corporate income before taxes for the 2003 first half included a
gain of $860.6 million from the sale of the Company's Amgen shares.
Excluding this gain, Corporate expenses would have decreased 41% for
the 2004 first half. 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 increased slightly to 22.2% for the 2004 second
quarter and 22.3% for the 2004 first half compared with 22.0% for both
the 2003 second quarter and first half. The 2004 second quarter and
first half rate was calculated assuming the benefit of certain
research and development tax credits. Since the law allowing such
credits expired in June 2004 and has yet to be renewed, only one-half
of the annualized benefit was included in the effective tax rate
calculation for the 2004 second quarter and first half.
Consolidated Net Income and Diluted Earnings Per Share Results
--------------------------------------------------------------
As Reported
Net income and diluted earnings per share for the 2004 second quarter
were $827.3 million and $0.62, respectively, compared with net income
and diluted earnings per share of $864.4 million and $0.65 in the
prior year, decreases of 4% and 5%, respectively. Net income and
diluted earnings per share for the 2004 first half were $1,577.0
million and $1.18, respectively, compared with net income and diluted
earnings per share of $2,142.3 million and $1.61 in the prior year,
decreases of 26% and 27%, respectively.
36
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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 following:
o 2004 first quarter upfront payment to Solvay; and
o 2003 first quarter gain 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 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 operations for
this accounting period.
Net income before certain significant items and diluted earnings per
share before certain significant items for the 2004 first half were
$1,671.6 million and $1.25, respectively, compared with $1,583.6
million and $1.19 for the 2003 first half. The increases were due
primarily to higher net revenue and lower selling, general and
administrative expenses, as a percentage of net revenue, offset, in
part, by higher costs of goods sold, as a percentage of net revenue,
higher research and development spending and lower other income, net
related to product divestiture gains.
37
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
A reconciliation of 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
--------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ---------------------
(In millions) 2004 2003 2004 2003
----------------------------------------------- ------ ------ -------- --------
As reported $827.3 $864.4 $1,577.0 $2,142.3
Gain on sale of Amgen shares(1) - - - (558.7)
Co-development / co-commercialization charge(2) - - 94.6 -
------ ------ -------- --------
As adjusted, before certain significant items $827.3 $864.4 $1,671.6 $1,583.6
====== ====== ======== ========
Diluted Earnings per Share
--------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ---------------------
2004 2003 2004 2003
----------------------------------------------- ------ ------ -------- --------
As reported $0.62 $0.65 $1.18 $1.61
Gain on sale of Amgen shares(1) - - - (0.42)
Co-development / co-commercialization charge(2) - - 0.07 -
------ ------ -------- --------
As adjusted, before certain significant items $0.62 $0.65 $1.25 $1.19
====== ====== ======== ========
(1) The 2003 first half included a first quarter 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 half included a first quarter charge of $145.5
($94.6 after-tax or $0.07 per share-diluted) within Research and
development expenses related to the upfront payment to Solvay.
Gains from product 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. Product
divestiture gains for the 2004 second quarter and first half were
$12.9 million and $153.6 million, respectively, compared with $287.5
million and $290.2 million for the 2003 second quarter and first half.
Excluding the gains from product divestitures and the certain
significant items described above, net income and diluted earnings per
share were $818.3 million and $0.61, respectively, for the 2004 second
quarter and $1,570.1 million and $1.17 for the 2004 first half as
compared with $677.4 million and $0.51, respectively, for the 2003
second quarter and $1,394.9 million and $1.05 in the 2003 first half.
38
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
Liquidity, Financial Condition and Capital Resources
----------------------------------------------------
Cash flows provided by operating activities totaling $1,204.9 million
during the 2004 first half were generated primarily by net earnings of
$1,577.0 million, offset, in part, by payments of $588.1 million for
working capital requirements and payments of $255.2 million relating
to the diet drug litigation (see Note 7 to the consolidated condensed
financial statements).
During the 2004 first half, the Company used $589.2 million of cash
for investments in property, plant and equipment and $959.5 million of
cash for purchases of marketable securities. In addition, the Company
received investment proceeds through the sales and maturities of
marketable securities of $374.6 million and the sales of assets
totaling $315.9 million. The capital expenditures made during the 2004
first half were consistent with the Company's commitment to expand
existing manufacturing and research and development facilities
worldwide, and to build new biotechnology facilities.
The Company's financing activities included repayments of debt
totaling $1,506.7 million and dividend payments of $613.3 million.
At June 30, 2004, the Company had outstanding $7,926.7 million in
total debt, which consisted of notes payable and other debt.
Maturities of the Company's obligations as of June 30, 2004 are set
forth below.
Less than Over
(In millions) Total 1 year 1-3 years 4-5 years 5 years
------------- -------- --------- --------- --------- --------
Total debt $7,926.7 $334.7 $307.1 $18.0 $7,266.9
The following represents the Company's credit ratings as of June 30,
2004 and as of August 2, 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
39
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
related to the diet drug litigation, pay dividends, maintain the
ongoing programs of capital expenditures, and repay both the principal
and interest on its outstanding obligations without the disposition of
significant strategic core assets and/or reductions in certain cash
outflows.
Certain Factors that May Affect Future Results
----------------------------------------------
Prempro / Premarin - HT Studies
In July 2002, the 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 because they believed that the results would not likely change
during the period until completion of the study in 2005 and the
increased risk of stroke seen in the treatment arm could not be
justified by what could be learned in an additional year of treatment.
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. This increased risk of stroke
was 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 an increased
risk of probable dementia and/or mild cognitive impairment in women
age 65 and older when data from both the PREMARIN and PREMPRO arm were
pooled. The study also reported a trend towards increased risk of
possible dementia in women treated with PREMARIN alone. WHIMS data
published in the Journal of American Medical Association (JAMA) in
June 2004 and in a separate report published in JAMA at the same time
indicated that HT did not improve cognitive impairment and may
adversely affect it in some women. The Company will work with the FDA
to update the labeling for its HT products to include the latest data.
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 54%,
respectively, compared with the average weekly prescriptions written
during the eight-week period preceding the 2002 termination of the
study subset.
40
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
Set forth below are individual product operating results for
Prempro/Premphase and Premarin for the three and six months ended June
30, 2004 and 2003:
Prempro/Premphase
-----------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
(In millions) 2004 2003 2004 2003
------------- ------ ------ ------ ------
Net revenue $59.7 $22.1 $117.0 $165.0
Gross profit 46.5 (8.4) 90.2 115.1
Premarin
-----------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
(In millions) 2004 2003 2004 2003
------------- ------ ------ ------ ------
Net revenue $163.0 $254.5 $371.6 $514.3
Gross profit 131.7 223.5 310.0 456.7
The Company recorded a $60.0 million reserve in the 2003 second
quarter for anticipated returns in connection with a projected shift
in prescriptions toward the approved lower dosage forms of PREMPRO.
This $60.0 million reserve was calculated by reviewing wholesalers'
inventory levels as of June 30, 2003, after deducting projected
PREMPRO sales by wholesalers using the first-in, first-out (FIFO)
method and excluding "out of date" inventory (it is the Company's
policy to accept returns of product with expiration dates of six
months or less). Due to higher than anticipated sales of the original
formulations of PREMPRO, a portion of the inventory previously
reserved was sold by wholesalers. Based on current demand forecasts,
wholesalers' inventory levels and expiration dating of the remaining
inventory held by the wholesalers, the Company reduced the reserve by
$20.0 million in the 2004 second quarter. The remaining reserve, which
approximated $40.0 million at June 30, 2004, is expected to fully
reserve the value of the remaining inventory. The Company will
continue to monitor the adequacy of this reserve.
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
41
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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
differences between the active ingredient of these products and
PREMARIN. Although the FDA has not approved any generic equivalent to
PREMARIN to date, PREMARIN will continue to be subject to competition
from existing and new competing estrogen and other products for its
approved indications and may be subject to generic competition from
either synthetic or natural conjugated estrogens products in the
future. One other company has announced that it has applied for FDA
approval of a generic version of PREMARIN derived from the same
natural source. Following a bench trial in November 2002, a federal
court found, in an order issued on October 2, 2003, that the company
which had developed the estrogens to be used in this product, Natural
Biologics, Inc., had misappropriated certain of the Company's trade
secrets relating to the manufacture of PREMARIN. The court has entered
a permanent injunction that, inter alia, bars Natural Biologics, Inc.
from using the misappropriated trade secrets and from engaging in the
research, development, production or manufacture of estrogens from
urine. Wyeth v. Natural Biologics, Inc., et al., No. 98-2469
(JNE/JGL), U.S.D.C., D. Minn. Natural Biologics, Inc. has filed an
appeal from the court's injunction. The Company cannot predict the
timing or outcome of the appeal or other efforts by any other company
to seek FDA approval for generic versions of PREMARIN.
On August 4, 2004, Eli Lilly received FDA approval for its new
antidepressant, CYMBALTA, which, like EFFEXOR XR, inhibits the uptake
of serotonin and norepinephrine in the brain. It is unclear what
effect this new drug may have on EFFEXOR XR sales. Growth in overall
usage in atidepressants in the United states appears to be slowing
for a variety of reasons. EFFEXOR continues to outperform the overall
category, but the Company cannot be certain that trend will continue.
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
42
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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.
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 planned timeframe. The current plan for the longer term
includes an additional manufacturing facility, which is being
constructed by the Company in Ireland, and increased capacity at the
Rhode Island facility, both of which are expected to be completed
during 2005.
As a result of delays in product availability of PREVNAR due to 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 was constrained in all markets through the first
half of 2004. During the first quarter of 2004, the Centers for
Disease Control and Prevention (CDC) issued interim recommendations to
defer administration of the 3rd and 4th doses for healthy children.
Due to increased product availability, the CDC revised these
recommendations in early July to recommend that Health Care Providers
defer only the 4th dose for healthy children and initiate efforts to
vaccinate those children who had the 3rd dose deferred. In March of
2004, the European Agency for the Evaluation of Medicinal Products
issued interim dosing recommendations to reduce usage. To date these
recommendations have not been revised. Capacity should be enhanced
overall in 2004 due to internal improvements and the FDA approval of a
third party filling facility in the second quarter of 2004. The
Company continues to believe 2004 production will exceed the 2003
level of 20 million doses.
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
43
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
for the year ended December 31, 2003, the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004, interim Current
Reports filed on Form 8-K, 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 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;
44
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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 the impact of changes in generally accepted accounting
principles;
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 the impact of managed care or health care cost-containment;
o governmental laws and regulations affecting our U.S. and
international businesses, including tax obligations and results
of tax audits;
o environmental liabilities;
o the accuracy of our estimates and assumptions utilized in our
critical accounting policies;
o the future impact of presently known trends, including those with
respect to product performance and competition;
o future demand for our products;
o anticipated changes 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 the potential impact of 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
45
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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 threatened or actual terrorist activity;
Interruptions of computer and communication systems including computer
viruses, that could impair the Company's ability to conduct business
and communicate internally or 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)
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; (v) tax obligations and results of tax audits; and (vi)
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
46
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2004
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 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;
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; and
The other factors identified above under "Certain Factors that May
Affect Future Results."
This list should not be considered an exhaustive statement of all
potential risks and uncertainties.
47
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 June 30, 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) $1,453.7 $(2.8) $(2.8)
Option contracts (1) 657.2 (11.8) (11.8)
Interest rate swaps 5,300.0 (49.5) (49.5)
Outstanding debt (2) 7,976.3 (7,926.7) (8,246.8)
(1) If 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 $113.9.
(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 $667.3.
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
loss if settlement were to take place on June 30, 2004; the fair value
of option contracts reflects the present value of future cash flows if
the contracts were settled on June 30, 2004; and the fair value of
outstanding debt instruments reflects a current yield valuation based
on observed market prices as of June 30, 2004.
Item 4. Controls and Procedures
-----------------------
As of June 30, 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 second quarter, there were no 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.
48
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 have
been described in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003, Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 and items filed in Current Reports on
Form 8-K in 2004.
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 June 30, 2004, payments into the REDUX and PONDIMIN national
settlement funds, individual settlement payments, legal fees and other
costs totaling $13,338.7 million were paid and applied against the
litigation accrual. At June 30, 2004, $3,261.3 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 was intended to provide 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.
On July 13, 2004 the District Court extended the stay, which had
expired on July 9, 2004, until July 21, 2004. On July 21, the parties
informed the Court that an agreement had been reached on the terms of
the proposed Seventh Amendment and that the parties had placed the
signed agreement in escrow with the Court's Special Master while the
parties finalized the exhibits to the agreement, including the
proposed Form of Notice to the class. At the parties' request, the
Court extended the stay on the processing and payment of Level I and
Level II claims until August 4, 2004. On August 5, the stay was again
extended, through August 10, 2004. If the parties file a motion for
preliminary approval of the proposed Seventh Amendment by August 10,
the stay will automatically be extended until the District Court
enters an order granting or denying that motion.
The proposed Seventh Amendment would require preliminary court
approval, notice to the class and an opportunity for class members to
opt out of the Seventh Amendment process, final agreement by the
Company following the opt out period, trial court approval and final
judicial approval. If finalized and approved, the proposed Seventh
Amendment would include the following key terms:
o The amendment would create a new Supplemental Fund, to be
administered by a Fund Administrator who will be appointed by the
District Court and who will process the Level I and Level II
matrix claims;
49
o The Company would make initial payments of up to $50.0 million to
facilitate the establishment of the Supplemental Fund. Following
approval by the federal court overseeing the settlement and any
appellate courts, the Company would make an initial payment of
$400.0 million. The timing of additional payments would be
dictated by the rate of review and payment of claims by the Fund
Administrator. The Company would ultimately deposit a total of
$1,275.0 million, net of certain credits, into the Supplemental
Fund;
o All current matrix Level I and II claimants who qualify under the
Seventh Amendment, who pass the Settlement Fund's medical review
and who otherwise satisfy the requirements of the settlement
would receive a pro rata share of the $1,275.0 million
Supplemental Fund, after deduction of certain expenses and other
amounts from the Supplemental Fund. The pro rata amount would
vary depending upon the number of claimants who pass medical
review, the nature of their claims, their age and other factors.
A Seventh Amendment participant who does not qualify for a
payment after such medical review would be paid $2,000 from the
Supplemental Fund;
;
o Participating class members who would in the future have been
eligible to file Level I and Level II matrix claims would be
eligible to receive a $2,000 payment from the settlement Trust;
such payments would be funded by the Company apart from its other
funding obligations under the national settlement;
o If the participants in the Seventh Amendment have surgery or
other more serious medical conditions on Matrix Levels III-V by
the earlier of fifteen years from the date of their last diet
drug ingestion or by December 31, 2011, 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 terms modified by the Seventh Amendment. In the event the
existing settlement Trust is unable to pay those claims, the
Company would guarantee payment; and
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. Approval of the Seventh Amendment would also
preclude any lawsuits by the Trust or the Company to recover any
amounts previously paid to class members by the Trust, as well as
terminate the Claims Integrity Program as to all claimants who do
not opt out of the Seventh Amendment.
There can be no assurance 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.
As of July 19, 2004, approximately 53,000 individuals who had filed
Intermediate or Back-End opt out forms had served lawsuits on the
Company. The claims of approximately 42% of the plaintiffs in the
Intermediate and Back-End opt out cases served on the Company are
pending in federal court, with approximately 36% pending in state
courts. The claims of approximately 22% of the Intermediate and
Back-End opt out plaintiffs have been removed from state courts to
federal court, but are still subject to a possible remand to state
court. The Company expects to challenge vigorously all
50
Intermediate and Back-End opt out claims of questionable validity or
medical eligibility and a number of cases have already been dismissed
on eligibility grounds. However, the total number of filed lawsuits
that meet the settlement's opt out criteria will not be known for some
time. As a result, the Company cannot predict the ultimate number of
purported Intermediate or Back-End opt outs that will satisfy the
settlement's opt out requirements, but that number could be
substantial. As to those opt outs who are found eligible to pursue a
lawsuit, the Company also intends to vigorously defend these cases.
On July 27, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the Intermediate opt
out cases of Istnick v. Wyeth, et al., No. 021200268, and Clepper v.
Wyeth, et al., No. 021202456, returned a verdict finding that
plaintiff Istnick had not been damaged by her use of PONDIMIN and that
plaintiff Clepper had been damaged in the amount of $48,000 by the use
of PONDIMIN. The Istnick case was thereupon dismissed and the parties
resolved the Clepper case. On July, 30, 2004, a Philadelphia jury in
the Pennsylvania Court of Common Pleas, First Judicial District,
hearing the Intermediate opt out case of Cannon v. Wyeth, et al., No.
021201534, returned a defense verdict finding that plaintiff Cannon
had not proven that she had valvular heart disease. The
Istnick/Clepper and the Cannon cases were tried under a reverse
bifurcation procedure, in which the parties first try the issue of the
plaintiff's alleged injury and damages, and only proceed to a trial of
the Company's liability for the jury's award if any damages are found.
Because the Istnick/Clepper and Cannon cases were resolved by the
damage phase, the cases did not proceed to the liability phase. On
August 6, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the combined Back-End
opt out cases of Davis v. Wyeth, et al., No. 021101477, Sidwell v.
Wyeth, et al., No. 021101431, Roberts v. Wyeth, et al., No. 021102564,
May v. Wyeth, et al., No. 021103564, and Rogowski v. Wyeth, et al.,
No. 021201594 returned a verdict in favor of the plaintiffs, awarding
plaintiff Davis $1,000 in damages and the remaining plaintiffs $750
each in damages.
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.
On May 17, 2004, the trial court entered judgment on behalf of the
plaintiffs for the full amount of the jury's verdict, as well as $4.2
million in pre-judgment interest and $188,737 in guardian ad litem
fees. On July 26, 2004, the trial court denied in their entirety the
Company's motions for a new trial or for judgment notwithstanding the
verdict, including the Company's request for application of Texas's
statutory cap on punitive damage awards. The Company intends to file
an appeal from the judgment entered by the trial court and 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. In connection with its 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.
51
As of July 16, 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 75 of these cases appear
to be eligible to pursue a PPH lawsuit under the terms of the national
settlement. In approximately 50 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 45 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, four
additional putative class action lawsuits have been filed. Three of
the new class actions have been filed in West Virginia. The putative
class representative in Michael, et al. v. Wyeth Pharmaceuticals,
Inc., et al., No. 2:04-0435 (U.S.D.C., S.D. W.Va.), seeks to represent
a class of all women in the United States who ingested prescription
hormone therapy (HT) medication prior to July 9, 2002 and allegedly
suffered personal injury as a result. Compensatory and punitive
damages are sought. The putative class representative in Green, et al.
v. Wyeth, Inc., et al., No. 3:04-0700 (U.S.D.C., S.D. W.Va.), seeks to
represent a class of all residents of Arizona, California, Georgia,
Illinois, Indiana, Ohio, Oregon, Pennsylvania, Texas and West Virginia
who used HT and allegedly suffered personal injuries, as well as all
residents of other states who were prescribed the product by a
physician licensed and practicing in one of the 10 specified states or
who were injured by the product in one of those states. Compensatory
damages, medical monitoring costs and punitive damages are sought. The
putative class representatives in Barker, et al. v. Wyeth, et al., No.
04-C-1932 (U.S.D.C., S.D. W.Va.) are seeking to represent a class of
West Virginia women who used HT and allegedly suffered personal
injuries, as well as all residents of other states who were prescribed
HT by a physician licensed and practicing in West Virginia or who
received patient information about HT that had been provided by one or
more of the defendants to West Virginia physicians. Compensatory
damages, medical monitoring costs and punitive damages are sought. The
fourth new class action, Vitanza, et al. v. Wyeth, Inc., et al., No.
ATL-L-2093-04 (N.J. Super. Ct., Atlantic Cty.), seeks certification of
a class of New Jersey residents who have used PREMPRO and are not
suffering from breast cancer or coronary heart disease, but are
allegedly at increased risk for such diseases. Medical monitoring is
the sole form of relief sought. The Company is currently defending
approximately 1,870 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 3,136 women allegedly injured by
PREMPRO or PREMARIN.
52
On July 9, 2002, interim findings from the Women's Health Initiative
(WHI) study evaluating HT were released. The estrogen plus progestin
arm of the study (in which the Company's PREMPRO product was used as
the study drug) was stopped early because of findings of slightly
increased risks of breast cancer, stroke and coronary heart disease
among the women taking the drug compared to those in the placebo
group. The arm of the study relating to the Company's PREMARIN
conjugated estrogens product continued through March 2004 when the
National Institutes of Health (NIH) announced preliminary findings
from the estrogen-only arm of the WHI study and that it had decided to
stop the study because they believed that the results would not likely
change during the period until completion of the study in 2005 and the
increased risk of stroke seen in the treatment arm could not be
justified by what could be learned in an additional year of treatment.
NIH concluded that estrogen alone did 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. This increased risk of stroke
was similar to the increase seen in the HT subset of the WHI study.
Data from the Women's Health Initiative Memory Study (WHIMS) showed an
increased risk of probable dementia and/or mild cognitive impairment
in women age 65 and older when data from both the PREMARIN and PREMPRO
arm were pooled. The study also reported a trend towards increased
risk of possible dementia in women treated with PREMARIN alone. WHIMS
data published in the Journal of American Medical Association (JAMA)
in June 2004 and in a separate report published in JAMA at the same
time indicated that HT did not improve cognitive impairment and may
adversely affect it in some women. The Company will work with the FDA
to update the labeling for its HT products to include the latest data.
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 741 lawsuits (on behalf
of a total of approximately 1,234 plaintiffs). Seventeen PPA cases
involving the Company are currently scheduled for trial during 2004.
In the litigation alleging that the administration of one or more
vaccines containing 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, the Company has been served with 367 lawsuits in
various state and federal courts involving 942 vaccine recipients. Of
those 942 vaccine recipients, 479 have also filed petitions for
compensation in the United States Court of Federal Claims under the
provisions of the federal Vaccine Compensation Act (the Vaccine
Court). Of these 479 Vaccine Court petitioners, 42 have withdrawn from
Vaccine Court (32 of whom are currently proceeding with lawsuits
against the Company), and 407 of those currently proceeding in Vaccine
Court have had their petitions in that Court pending for over 240
days. Absent a Vaccine Court judgment, Vaccine Court petitioners are
first eligible to withdraw from Vaccine Court 240 days after they file
their petitions. Currently there are over 4,000 petitions pending as
part of an Omnibus Autism Proceeding in Vaccine Court, but it is
unknown how many of those petitioners received one or more vaccines
manufactured and distributed by the Company.
53
Broadview Pharmacy, a retail pharmacy located in Toronto, Canada, has
filed an application for leave to file a private application for
remedial relief with Canada's Competition Tribunal against Wyeth
Canada under Section 75 of Canada's Competition Act. The application
alleges that Wyeth Canada has refused to supply the pharmacy with
Wyeth Canada's prescription pharmaceutical products. Pursuant to
Canada's Competition Act, Broadview Pharmacy, if ultimately successful
in obtaining leave and proceeding with an application, may obtain an
order requiring Wyeth Canada to deal with Broadview on Wyeth Canada's
ordinary and customary terms, but would not be entitled to monetary
damages.
The Company has been named as a defendant in an action brought by
Compass Marketing, Inc. alleging that Schering-Plough Corporation and
Wyeth Consumer Healthcare violated federal and state antitrust laws
and state common laws by allegedly engaging in certain collusive
practices regarding commission rates and credit terms. Compass
Marketing, Inc. v. Schering-Plough Corp., et al., No. 1:04-CV-1663,
U.S.D.C., D. Md. Compass Marketing is a former Wyeth Consumer
Healthcare broker that provided brokerage services for a small segment
of the over-the-counter drug business. The complaint seeks treble
damages under the federal antitrust laws, as well as punitive and
exemplary damages on the state common law claims. The Company has
answered the complaint denying the allegations and asserted a
counterclaim for breach of contract. The complaint stems from the same
allegations that Compass Marketing, Inc. made to the Antitrust
Division of the Department of Justice.
The Company has been named as a defendant, along with other
pharmaceutical manufacturers, in seven civil actions in Minneapolis,
Minnesota federal District Court alleging that the defendant companies
violated federal antitrust statutes and certain state antitrust,
consumer protection and unfair trade practice laws by unlawfully
agreeing to engage in conduct to prevent U.S. consumers from
purchasing defendants' prescription drugs from Canada. Iverson, et al.
v. Pfizer, Inc., et al., No. 0:04-CV-02724, U.S.D.C., D. Minn.;
Schafer, et al. v. Pfizer, Inc., et al., No. 0:04-CV-2763, U.S.D.C.,
D. Minn.; Noonan, et al. v. Pfizer, Inc., et al., No. 0:04-CV-2898,
U.S.D.C., D. Minn.; Koch, et al. v. Pfizer, Inc., et al., No.
0:04-CV-2899, U.S.D.C., D. Minn.; United Senior Action of Indiana, et
al. v. Pfizer, Inc. et al., No. 0:04-CV-2931, U.S.D.C., D. Minn.;
Mills, et al. v. Pfizer, Inc., et al., No. 0:04-CV-3143, U.S.D.C., D.
Minn.; Central Laborers Welfare Fund, et al. v. Pfizer, Inc., et al.,
No. 0:04-CV-3198, U.S.D.C., D. Minn. These actions are purported
class actions filed on behalf of indirect purchasers of the
pharmaceutical companies' products. These plaintiffs claim that, as a
result of the alleged unlawful agreement, the purported class members
have paid higher prices for the defendants' pharmaceutical products
than in the absence of the alleged agreement. The complaints seek
various forms of relief, including damages, treble damages,
restitution, disgorgement, injunctive relief and attorneys' fees.
The Company, along with 43 other pharmaceutical manufacturers, has
been named as a defendant in a suit filed by the City of New York.
City of New York v. Abbott Laboratories, Inc., et al. U.S.D.C.,
S.D.N.Y. No. 04-CV-06054. The complaint, which has not yet been served
on Wyeth, alleges that all the defendants caused plaintiff to overpay
for prescription drugs by inflating their Average Wholesale Prices
(AWP), which determine the initial Medicaid price for the drugs, and
by deliberately miscalculating
54
their Best Price (BP) and Average Manufacturer's Price (AMP), which
are used to calculate Medicaid rebates. Plaintiff seeks compensatory
and punitive damages, as well as an accounting for all New York City
drug purchases from 1992 to date. Plaintiff's counsel is also
prosecuting similar suits on behalf of Suffolk, Rockland and
Westchester counties in New York state, in which cases the Company is
already named as a defendant.
The Company has received notifications from Teva Pharmaceuticals USA
(Teva), Sandoz, Inc. and Sun Pharmaceutical Advanced Research Centre
Limited 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 (Altana) is the owner of these patents. In
May 2004, Altana and the Company filed a lawsuit against Teva in the
U.S. District Court for the District of New Jersey, Docket No.
2:04-CV-02355, alleging infringement of the patent expiring in 2010.
The Company intends, and is informed that Altana intends, to pursue
the causes of action under this litigation vigorously.
Boston Scientific brought a patent infringement lawsuit against
Cordis, seeking to enforce a patent on stent coatings against Cordis'
CYPHER sirolimus drug-eluting stent, Boston Scientific Scimed v.
Cordis, Docket No. 03-283, U.S.D.C., D. Del. In an earlier filed
action, Cordis sued Boston Scientific seeking to enforce Cordis' stent
architecture patent. In the respective actions, both Boston Scientific
and Cordis sought a preliminary injunction against the other. On
November 21, 2003, the District Court denied both motions for
preliminary injunction. Cordis appealed the denial of the injunction
against Boston Scientific to the U.S. Court of Appeals for the Federal
Circuit. In May 2004, the appellate court affirmed the District
Courts' denial of the preliminary injunction. The case is scheduled
for trial in 2005. Although the Company is not a party to this
litigation, if Cordis were to be enjoined from selling the CYPHER
stent, the Company could lose licensing income. Cordis has advised the
Company that it intends to vigorously defend this litigation.
The Company is cooperating in responding to the subpoena served on the
Company on January 21, 2004 from the U.S. Office of Personnel
Management, Office of the Inspector General, requesting certain
documents related to EFFEXOR. The subpoena requests documents related
principally to educating or consulting with physicians, as well as
marketing or promotion of EFFEXOR to physicians or pharmacists from
January 1, 1997 to September 30, 2003. Other manufacturers of
psychopharmacologic products have also received subpoenas.
The Company has settled the Notice of Violation served by the Office
of Federal Contract Compliance Programs alleging disparities in pay
between men and women in certain job classifications and inadequate
systems to check for such disparities. Under the Settlement Agreement,
the Company has agreed to perform a self-audited review of
compensation of all female exempt employees at the Company's offices
in Collegeville, Pennsylvania.
55
Under the Settlement Agreement, no compensation adjustments for any
time period in the past are necessary.
In the litigation involving allegations that the Company violated
federal and state antitrust laws through the use of alleged exclusive
contracts and "disguised exclusive contracts" with managed care
organizations and pharmacy benefit managers concerning PREMARIN,
United States District Judge Sandra S. Beckwith has granted the
indirect-purchasers' motion for class certification. Ferrell, et al.
v. Wyeth-Ayerst Labs., Inc., Civ. A. No. C-1-01-634, U.S.D.C., S.D.
Oh. Additionally, the court granted in part the Company's motion for
partial dismissal of certain state antitrust actions by dismissing
plaintiffs' claims brought under the antitrust laws of New Jersey and
Louisiana, but otherwise denied the motion with respect to the other
state laws that were the subject of the motion. In addition to the
Ferrell action, the following two actions are also presently pending
in the Ohio Federal District Court: a direct-purchaser class action,
J.B.D.L. Corp., et al. v. Wyeth-Ayerst Labs., Inc., et al., Civ. A.
No. C-1-01-704, U.S.D.C., S.D. Oh., and an action brought on behalf of
CVS Meridian, Inc. and Rite Aid Corporation, who opted out of the
federal direct-purchaser class action and filed a separate action
based on their status as direct-purchasers and/or assignees of the
claims of certain direct-purchasing wholesalers. CVS Meridian, Inc.,
et al. v. Wyeth, Civil A. No. C-1-03-781, U.S.D.C., S.D. Oh. Moreover,
California Superior Court Judge Richard A. Kramer granted an
indirect-purchaser's motion for class certification. Blevins v.
Wyeth-Ayerst Labs., Inc., et al., Case No. 324380, Cal. Super. Ct.,
San Francisco Cty. In addition to the Blevins action, there is one
putative indirect-purchaser class action pending in California state
court. Sullivan v. Wyeth-Ayerst Labs., Inc., et al., Case No.
GIC796997, Cal. Super. Ct., San Diego Cty.
The Company has been sued by Aventis in a breach of contract case in
the Commercial Court of Nanterre, France arising out of an October 12,
2000 Agreement between the parties relating to the development of
hormone therapy drugs utilizing Aventis's trimegestone (TMG)
progestin. The agreement granted Wyeth a worldwide exclusive license
of Aventis's patents and know-how relating to TMG and Wyeth agreed to
develop, manufacture and sell two different hormone therapy products:
a product combining Wyeth's PREMARIN product with TMG, and a product
combining 17 beta estradiol and TMG, referred to as "Totelle". The
Company terminated the agreement in December 2003, and Aventis claims
that the termination was improper. The complaint seeks monetary
damages in the amount of $579.0 million. It also seeks certain
injunctive relief to ensure continued marketing of Totelle, including
compelling continued manufacture of the product and the compulsory
licensing of Totelle trademarks.
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.
56
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The matters described under item 4(c) below were submitted to a
vote of security holders, through the solicitation of proxies
pursuant to Section 14 under the Securities Exchange Act of 1934,
as amended, at the Annual Meeting of Stockholders held on April
22, 2004 (the Annual Meeting).
(b) Not applicable.
(c) The following describes the matters voted upon at the Annual
Meeting and sets forth the number of votes cast for, against or
withheld and the number of abstentions as to each such matter
(except as provided below, there were no broker non-votes):
(i) Election of directors:
Nominee For Withheld
------- --- --------
Clifford L. Alexander, Jr. 1,099,309,328 38,804,456
Frank A. Bennack, Jr. 1,106,564,113 31,549,671
Richard L. Carrion 1,098,211,449 39,902,335
Robert Essner 1,105,159,077 32,954,707
John D. Feerick 1,100,646,251 37,467,533
Robert Langer, Sc.D. 1,113,491,173 24,622,611
John P. Mascotte 1,104,602,248 33,511,536
Mary Lake Polan,M.D.,Ph.D.,M.P.H. 1,113,539,051 24,574,733
Ivan G. Seidenberg 1,106,041,894 32,071,890
Walter V. Shipley 1,098,722,083 39,391,701
John R. Torell III 1,107,893,885 30,219,899
(ii) Ratification of the appointment of PricewaterhouseCoopers
LLP as principal independent public accountants for 2004:
For Against Abstain
--- ------- -------
1,113,685,204 17,589,352 6,839,228
(iii)Adoption of Stockholder Proposal regarding access to and
affordability of prescription drugs:
For Against Abstain
--- ------- -------
52,145,576 838,182,193 87,144,326
There were 160,641,689 broker non-votes with reference to
this item.
(iv) Adoption of Stockholder Proposal on animal testing:
For Against Abstain
--- ------- -------
21,968,950 846,615,459 108,887,686
There were 160,641,689 broker non-votes with reference to
this item.
57
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
(10.1) Executive Retirement Plan, as amended to date.
(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.
(99.1) Description of Amendment No. 1 to Amended and
Restated Promotion Agreement, effective July 8,
2003, by and among the Company, Immunex Corporation
and Amgen Inc. (filed as Exhibit 10.94 to Amgen's
Annual Report on Form 10-K (File No 1-2477) for the
fiscal year ended December 31, 2003) is
incorporated herein by reference.
(99.2) Description of Amendment No. 2 to Amended and
Restated Promotion Agreement, effective April 20,
2004, by and among the Company, Immunex Corporation
and Amgen Inc. (filed as Exhibit 10.93 to Amgen's
Amended Registration Statement on Form S-4/A (File
No 333-114820) filed on June 29, 2004) is
incorporated herein by reference.
58
(b) Reports on Form 8-K
-------------------
The following Current Reports on Form 8-K were filed or furnished
by the Company:
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).
o May 26, 2004 relating to furnishing information on Wyeth's
diet drug litigation (Items 5 and 7 disclosure).
o July 21, 2004 relating to furnishing Wyeth's earnings
results for the 2004 second quarter (Item 12 disclosure).
o July 22, 2004 relating to furnishing information on Wyeth's
diet drug litigation (Items 5 and 7 disclosure).
59
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: August 9, 2004
60
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
(10.1) Executive Retirement Plan, as amended to date.
(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