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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-9114
MYLAN LABORATORIES INC.
(Exact Name of registrant as specified in its charter)
Pennsylvania 25-1211621
(State of incorporation) (I.R.S. Employer Identification No.)
130 Seventh Street
1030 Century Building
Pittsburgh, Pennsylvania 15222
(Address of principal executive offices)
(Zip Code)
(412) 232-0100
(Registrant's telephone number, including area code)
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 twelve 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
Outstanding at
Class of Common Stock August 1, 2002
- --------------------- --------------
$.50 par value 125,312,716
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended
June 30, 2002
INDEX
Page
Number
--------
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Statements of Earnings
- Three Months Ended June 30, 2002 and 2001 2
Condensed Consolidated Balance Sheets
- June 30, 2002, and March 31, 2002 3
Condensed Consolidated Statements of Cash Flows
- Three Months Ended June 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition 16
ITEM 3: Quantitative and Qualitative Disclosures About
Market Risk 23
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 24
ITEM 6: Exhibits and Reports on Form 8-K 29
SIGNATURES 30
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
For the Three Months Ended June 30, 2002 and 2001
(unaudited; in thousands, except per share amounts)
2002 2001
---- ----
Net revenues $275,473 $237,933
Cost of sales 127,871 116,074
-------- --------
Gross profit 147,602 121,859
Operating expenses:
Research and development 16,843 16,783
Selling and marketing 16,887 15,142
General and administrative 19,221 25,595
-------- --------
Total operating expenses 52,951 57,520
-------- --------
Earnings from operations 94,651 64,339
Other income, net 1,988 14,799
-------- --------
Earnings before income taxes 96,639 79,138
Provision for income taxes 34,790 28,490
-------- --------
Net earnings $ 61,849 $ 50,648
======== ========
Earnings per common share:
Basic $ 0.49 $ 0.41
======== ========
Diluted $ 0.49 $ 0.40
======== ========
Weighted average common shares:
Basic 125,952 125,031
======== ========
Diluted 126,955 126,374
======== ========
Cash dividends declared per common share: $ 0.04 $ 0.04
======== ========
See Notes to Condensed Consolidated Financial Statements
2
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited; in thousands)
June 30, March 31,
2002 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 84,979 $ 160,790
Marketable securities 509,515 456,266
Accounts receivable, net 175,309 145,491
Inventories 207,634 195,074
Deferred income tax benefit 98,305 92,642
Other current assets 10,279 11,819
---------- ----------
Total current assets 1,086,021 1,062,082
Property, plant and equipment, net 166,771 166,531
Intangible assets, net 164,479 169,315
Goodwill, net 103,196 103,196
Investment in and advances to Somerset 21,328 22,720
Other assets 93,712 92,866
---------- ----------
Total assets $1,635,507 $1,616,710
========== ==========
Liabilities and shareholders' equity
Liabilities
Current liabilities:
Trade accounts payable $ 43,201 $ 36,534
Income taxes payable 48,820 63,826
Other current liabilities 77,959 72,758
---------- ----------
Total current liabilities 169,980 173,118
Long-term obligations 19,735 23,883
Deferred income tax liability 21,197 17,470
---------- ----------
Total liabilities 210,912 214,471
---------- ----------
Shareholders' equity:
Common stock 66,252 66,100
Additional paid-in capital 353,859 349,719
Retained earnings 1,137,574 1,080,736
Accumulated other comprehensive earnings 10,077 7,920
---------- ----------
1,567,762 1,504,475
Less: treasury stock at cost 143,167 102,236
---------- ----------
Total shareholders' equity 1,424,595 1,402,239
---------- ----------
Total liabilities and shareholders' equity $1,635,507 $1,616,710
========== ==========
See Notes to Condensed Consolidated Financial Statements
3
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 2002 and 2001
(unaudited; in thousands)
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 61,849 $ 50,648
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Depreciation and amortization 10,180 11,070
Deferred income tax benefit (3,098) (11,509)
Equity in loss of Somerset 1,338 642
Cash received from Somerset 54 74
Earnings from limited liability partnerships (1,286) (11,982)
Adjustments to estimated accounts receivable credits 7,954 33,438
Litigation settlement (4,014) -
Other noncash items 164 2,352
Changes in operating assets and liabilities:
Accounts receivable (37,772) (22,518)
Inventories (12,823) (10,546)
Trade accounts payable 6,667 3,016
Income taxes (15,006) 7,418
Other operating assets and liabilities, net 7,455 5,545
---------- ----------
Net cash provided from operating activities 21,662 57,648
---------- ----------
Cash flows from investing activities:
Proceeds from (purchase of):
Capital assets (5,762) (3,195)
Sale of capital assets 59 461
Other and intangible assets (125) 181
Marketable securities (213,303) (141,914)
Sale and maturity of marketable securities 163,404 43,637
---------- ----------
Net cash used in investing activities (55,727) (100,830)
---------- ----------
Cash flows from financing activities:
Cash dividends paid (5,055) (4,997)
Purchase of common stock (40,853) -
Proceeds from exercise of stock options 4,162 2,815
---------- ----------
Net cash used in financing activities (41,746) (2,182)
---------- ----------
Net decrease in cash and cash equivalents (75,811) (45,364)
Cash and cash equivalents - beginning of period 160,790 229,183
---------- ----------
Cash and cash equivalents - end of period $ 84,979 $ 183,819
========== ==========
Cash paid during the period for:
Income taxes $ 52,893 $ 32,578
========== ==========
See Notes to Condensed Consolidated Financial Statements
4
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited; in thousands, except share and per share amounts)
1. General
In the opinion of management, the accompanying unaudited
interim consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q; therefore, as
permitted under these rules, certain footnotes or other financial
information required by generally accepted accounting principles and
included in audited financial statements have been condensed or
omitted. The accompanying financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly our consolidated results of operations, financial position and
cash flows for the periods presented.
These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2002.
Certain prior year amounts have been reclassified to conform
to the current year presentation. Such reclassifications had no impact
on reported net earnings, earnings per share or shareholders' equity.
The consolidated results of operations for the three months
ended June 30, 2002, are not necessarily indicative of the results to
be expected for the full fiscal year.
2. Revenue Recognition
We recognize revenue for product sales upon shipment when
title and risk of loss transfer to our customers and when provisions
for estimates, including discounts, rebates, price adjustments,
returns, chargebacks and other promotional adjustments are reasonably
determinable. Accounts receivable are presented net of allowances
relating to these provisions. Such allowances were $222,591 and
$214,637 as of June 30, 2002, and March 31, 2002. Other current
liabilities include $25,986 and $21,577 at June 30, 2002, and March
31, 2002, for certain rebates and other adjustments that are paid to
indirect customers.
3. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. See Note 6 for a discussion of the
SFAS 142 implementation process.
5
The FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which establishes standards of accounting for obligations
associated with the retirement of tangible long-lived assets. This
statement is effective for the Company on April 1, 2003. We are
currently evaluating the impact, if any, this statement will have on
our financial position and results of operations.
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, was issued by the FASB in August 2001 and addresses
financial accounting and reporting for the impairment and disposal of
long-lived assets. SFAS 144 became effective for the Company as of
April 1, 2002, and had no material effect on our financial position or
results of operations.
4. Marketable Securities
The amortized cost and market values of marketable
securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
June 30, 2002
-------------
Debt securities $ 485,411 $ 3,143 $ 119 $ 488,435
Equity securities 8,615 13,877 1,412 21,080
--------- ------- ----- ---------
$ 494,026 $ 17,020 $ 1,531 $ 509,515
========= ======== ======= =========
March 31, 2002
--------------
Debt securities $ 435,592 $ 567 $ 660 $ 435,499
Equity securities 8,535 13,219 987 20,767
--------- -------- ------- ---------
$ 444,127 $ 13,786 $ 1,647 $ 456,266
========= ======== ======= =========
Maturities of debt securities at market value as of June 30,
2002, are as follows:
Mature within one year $ 466,385
Mature in one to five years 4,872
Mature in five years and later 17,178
---------
$ 488,435
=========
6
5. Balance Sheet Components
Selected balance sheet components consist of the following:
June 30, March 31,
2002 2002
---- ----
Inventories:
Raw materials $ 74,709 $ 74,782
Work in process 34,325 31,056
Finished goods 98,600 89,236
-------- --------
$207,634 $195,074
======== ========
Other current liabilities:
Accrued rebates $ 25,986 $ 21,577
Payroll and payroll related 20,737 18,936
Royalties and product license fees 14,116 12,363
Cash dividends payable 5,024 5,067
Litigation settlement - 4,014
Other 12,096 10,801
-------- --------
$ 77,959 $ 72,758
======== ========
6. Intangible Assets
Intangible assets consist of the following components:
Weighted
Average
Original Accumulated Net Book Life
Cost Amortization Value (years)
--- ------------ ----- -------
June 30, 2002
- -------------
Intangible assets subject to amortization:
Patents and technologies $117,435 $31,495 $ 85,940 19
Maxzide(R) intangible 69,666 19,986 49,680 15
License fees and agreements 37,607 19,327 18,280 6
Other 13,875 4,548 9,327 20
-------- ------- --------
$238,583 $75,356 163,227
======== =======
Intangible assets not subject to amortization:
Trademarks 1,252
--------
$164,479
========
March 31, 2002
- --------------
Intangible assets subject to amortization:
Patents and technologies $119,663 $32,056 $ 87,607
Maxzide(R) intangibles 69,666 18,567 51,099
License fees and agreements 38,241 18,383 19,858
Other 24,380 14,881 9,499
-------- ------- --------
251,950 83,887 168,063
Trademarks 1,800 548 1,252
-------- ------- --------
$253,750 $84,435 $169,315
======== ======= ========
7
As of June 30, 2002, we removed from the balance sheet
certain intangible assets with original costs of $13,368. Such assets
were fully amortized at March 31, 2002, and have no ongoing benefit to
our current operations.
An assembled workforce does not meet the criteria for a
separately identifiable intangible asset under the guidance of SFAS
141; accordingly, we reclassed an assembled workforce, with an
original cost of $5,210 and a carrying value of $2,899 as of April 1,
2002, to goodwill.
Unaudited pro forma consolidated net earnings information,
assuming the adoption of SFAS 141 and SFAS 142 had occurred on April
1, 2001, is as follows:
Three Months Ended
June 30, 2001
-------------
Net earnings as reported $ 50,648
Add back amortization recorded for:
Goodwill 1,599
Workforce 35
Trademarks 167
--------
1,801
--------
Net earnings as adjusted $ 52,449
========
Basic earnings per common share:
As reported $ 0.41
========
As adjusted $ 0.42
========
Diluted earnings per common share:
As reported $ 0.40
========
As adjusted $ 0.42
========
We are currently in the process of implementing SFAS 142. We
have reviewed and determined that all non-goodwill intangible assets
have definite lives, except certain trademarks. These trademarks were
tested for impairment and determined not to be impaired. SFAS 142 also
requires us, by September 30, 2002, to identify our reporting units,
allocate to each of those units the appropriate share of goodwill,
intangible assets, other assets and liabilities and determine the fair
value of each identified unit. Until this process is complete, we are
unable to determine any further impact SFAS 142 will have on our
financial position and results of operations.
8
7. Earnings per Common Share
Basic earnings per common share is computed by dividing net
earnings available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted
earnings per common share is computed by dividing net earnings
available to common shareholders by the weighted average number of
common shares outstanding during the period adjusted for the dilutive
effect of stock options outstanding. The effect of dilutive stock
options on the weighted average number of common shares outstanding
was 1,003,000 and 1,343,000 for the three months ended June 30, 2002
and 2001.
Antidilutive stock options of 709,000 and 663,000 were
excluded from the diluted earnings per common share calculation for
the three months ended June 30, 2002 and 2001.
8. Comprehensive Earnings
Comprehensive earnings consist of the following:
Three Months Ended
June 30,
--------
2002 2001
---- ----
Net earnings $61,849 $50,648
Other comprehensive earnings, net of tax:
Net unrealized holding gains on securities 2,126 3,383
Reclassification for losses/(gains)
included in net earnings 31 (134)
------- -------
Other comprehensive earnings, net of tax 2,157 3,249
------- -------
Comprehensive earnings $64,006 $53,897
======= =======
Accumulated other comprehensive earnings, as reflected on
the balance sheet, is comprised solely of the net unrealized gains on
marketable securities, net of deferred income taxes.
9. Common Stock
As of June 30, 2002, and March 31, 2002, there were
300,000,000 shares of common stock authorized with 132,503,289 and
132,200,528 shares issued. Treasury stock held as of June 30, 2002,
and March 31, 2002, was 7,210,646 and 5,813,033.
In May 2002, the Board of Directors approved a stock
purchase program to purchase up to 10,000,000 shares of our
outstanding common stock. This program may be administered through
open market or privately negotiated transactions.
9
During the three months ended June 30, 2002, we purchased 1,395,100
shares for $40,853.
10. Segment Reporting
Segment net revenues represent revenues from unrelated third
parties. For the Generic and Brand Segments, segment profit (loss)
represents segment gross profit less direct research and development,
selling and marketing and general and administrative expenses.
Corporate/Other includes legal costs, administrative expenses and
other income and expense.
The following table presents the results of operations for
each of our business segments:
Three Months Ended
June 30,
--------
2002 2001 (1)
---- ----
Consolidated:
Net revenues $275,473 $237,933
Pretax earnings 96,639 79,138
Generic:
Net revenues $235,645 $209,822
Segment profit 106,323 89,405
Brand:
Net revenues $ 39,828 $ 28,111
Segment loss (414) (10,948)
Corporate/Other, net:
Segment (loss) profit $ (9,270) $ 681
(1)Effective April 1, 2002, the Company adopted SFAS 142, Goodwill and
Other Intangible Assets, and consequently, goodwill and certain other
intangible assets were not amortized in the current quarter. For the
quarter ended June 30, 2001, Corporate/Other Segment includes $1,599
of goodwill amortization, and the Generic and Brand Segments include
amortization expense of $167 and $35 relating to certain indefinite
lived intangible assets.
11. Contingencies
The Company is involved in various legal proceedings that
are considered normal to its business. While it is not feasible to
predict the ultimate outcome of such proceedings, it is the opinion of
management that the ultimate outcome of such proceedings, except those
discussed below, will not have a material adverse effect on our
financial position or results of operations.
10
While it is not possible to determine with any degree of
certainty the ultimate outcome of the following legal proceedings, we
believe that we have meritorious defenses with respect to the claims
asserted against the Company, and we intend to defend vigorously our
position. An adverse outcome in any one of these proceedings could
have a material adverse effect on our financial position and results
of operations.
Product Litigation
Paclitaxel
In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott
Laboratories Inc. (Abbott) filed suit against the Company in the US
District Court for the Western District of Pennsylvania. Plaintiffs
allege the Company's manufacture, use and sale of its paclitaxel
product infringes certain patents owned by NAPRO and allegedly
licensed to Abbott. Plaintiffs seek unspecified damages plus interest,
a finding of willful infringement which could result in trebel
damages, injunctive relief, attorneys' fees, costs of litigation, and
such equitable and other relief as the court deems just and proper.
The Company began selling its paclitaxel product in July 2001.
Abbott's ANDA was approved in May 2002.
Verapamil ER
In July 2001, Biovail Laboratories Inc. (Biovail) filed a
demand for arbitration against the Company with the American
Arbitration Association. In response to such demand, the Company filed
its answer and counterclaims. The dispute relates to a supply
agreement under which the Company supplied extended-release verapamil
to Biovail. The Company terminated the agreement in March 2001.
Biovail's allegations include breach of contract, breach of implied
covenant of good faith and fair dealing and unfair competition.
Biovail is seeking damages plus interest, to be determined at trial
but in an amount of not less than $20,000, punitive damages,
attorneys' fees and costs of litigation and such other relief as the
panel may deem just and proper. The Company's allegations as set forth
in its counterclaims include breach of obligations of good faith and
fair dealing, fraud and unjust enrichment. The arbitration hearing is
scheduled to be held in September 2002.
Zagam(R)
The Company filed suit against Aventis Pharmaceuticals,
Inc., successor in interest to Rhone-Poulenc Rorer Pharmaceuticals,
Inc.; Rhone-Poulenc Rorer Pharmaceuticals, LTD.; Rorer Pharmaceutical
Products, Inc.; Rhone-Poulenc Rorer, S.A., and their affiliates in the
US District Court for the Western District of Pennsylvania in May
2001. The complaint sets forth claims of breach of contract,
11
rescission, breach of implied covenant of good faith and fair dealing
and unjust enrichment. The defendants' answer includes a counterclaim,
which alleges nonpayment of royalties and failure to mitigate. The
defendants are seeking royalties allegedly owed by the Company,
attorneys' fees and costs of litigation and such other relief as may
be demonstrated at trial.
Nifedipine
In February 2001, Biovail filed suit against the Company and
Pfizer Inc. (Pfizer) in the US District Court for the Eastern District
of Virginia alleging antitrust violations with respect to agreements
entered into between the Company and Pfizer regarding nifedipine. The
Company filed a motion to transfer the case to the US District Court
for the Northern District of West Virginia, which was granted. The
Company's motion to dismiss Biovail's complaint was denied, and the
Company's motion to dismiss certain claims by other plaintiffs was
granted in part and denied in part. The Company has been named as a
defendant in five other putative class action suits alleging antitrust
claims based on the settlement entered into by the Company with Bayer
AG, Bayer Corporation and Pfizer regarding nifedipine. Collectively,
plaintiffs are seeking unspecified compensatory and trebel damages,
attorneys' fees, costs of litigation, restitution, disgorgement and
declaratory and injunctive relief.
Buspirone
The Company filed an ANDA seeking approval to market
buspirone, a generic equivalent to Bristol-Myers Squibb's (BMS)
BuSpar(R). The Company filed the appropriate certifications relating
to the patents for this product that were then listed in the FDA
publication entitled Approved Drug Products with Therapeutic
Equivalence Evaluations, popularly known as the "Orange Book." In
November 2000, a new patent claiming the administration of a
metabolite of buspirone (which BMS claims also covers the
administration of buspirone itself) was issued to BMS. The subsequent
listing of this patent in the Orange Book prevented the FDA from
granting final approval for the Company's buspirone ANDA. In November
2000, the Company filed suit against the FDA and BMS in the US
District Court for the District of Columbia. The complaint asked the
court to order the FDA to grant immediately final approval of the
Company's ANDA for the 15mg buspirone product and require BMS to
request withdrawal of the patent from the Orange Book. Upon the
Company's posting a bond in the amount of $25,000, the court entered
an order granting the Company's motion for a preliminary injunction.
Following a brief stay by the US Court of Appeals for the Federal
Circuit, the FDA granted approval of the Company's ANDA with respect
to the 15mg strength. Upon receiving FDA approval, the Company began
marketing and selling the 15mg tablet in March 2001. The Company has
also been selling the 30mg buspirone tablet since August 2001. BMS
appealed the preliminary injunction order
12
to both the US Court of Appeals for the Federal Circuit and the US
Court of Appeals for the District of Columbia Circuit. The District of
Columbia Court of Appeals denied BMS' application and stayed the
Company's motion to dismiss pending the decision of the Federal
Circuit Court of Appeals. The Federal Circuit heard oral arguments in
July 2001.
In October 2001, the Federal Circuit overturned the lower
court ruling and held that the Company did not have a cognizable claim
against BMS under the Declaratory Judgment Act to challenge the
listing of BMS' patent, which the Federal Circuit viewed as an
improper effort to enforce the Federal Food, Drug and Cosmetic Act.
The Federal Circuit did not address the lower court's determination
that the BMS patent does not claim buspirone or a method of
administration of the drug. The Company filed a petition with the
Federal Circuit asking that the court reconsider its holding. The
petition was denied in January 2002. A petition for review by the
United States Supreme Court is pending.
In January 2002, the Company filed a motion in the US
District Court for the District of Columbia seeking a preliminary
injunction which, if granted, would require that the FDA refuse to
list the BMS patent should BMS submit it for re-listing in the Orange
Book. The District of Columbia Court has entered an order staying
further proceedings in this case pending appeal of the order entered
in the US District Court for the Southern District of New York
granting the Company's motion for summary judgment of
non-infringement.
The Company is involved in three other suits related to
buspirone. In November 2000, the Company filed suit against BMS in the
US District Court for the Northern District of West Virginia. The suit
seeks a declaratory judgment of non-infringement and/or invalidity of
the BMS patent listed in November 2000. In January 2001, BMS sued the
Company for patent infringement in the US District Court for the
District of Vermont and also in the US District Court for the Southern
District of New York. In each of these cases, BMS asserts that the
Company infringes BMS' patent and seeks to rescind approval of the
Company's ANDA. BMS seeks to recover damages equal to lost profits
plus interest, a finding of willful infringement which could result in
trebel damages, injunctive relief, attorneys' fees, costs of
litigation and such other relief as the court deems just and proper.
The Company subsequently filed motions to dismiss the
Vermont case and dismiss and transfer the New York case to the US
District Court for the Northern District of West Virginia. The
Judicial Panel on Multi-District Litigation ordered these cases, along
with another patent case and numerous antitrust suits filed against
BMS, be consolidated in the US District Court for the Southern
District of New York. The New York Court has granted the Company's
motion for summary judgement that the BMS patent is not infringed or,
alternatively, is
13
invalid. BMS has appealed this decision to the Court of Appeals for
the Federal Circuit. The New York Court also denied the BMS motion to
dismiss the Company's antitrust counterclaims.
Lorazepam and Clorazepate
In December 1998, the Federal Trade Commission (FTC) filed
suit in US District Court for the District of Columbia against the
Company. The FTC's complaint alleged that the Company engaged in
restraint of trade, monopolization, attempted monopolization and
conspiracy to monopolize arising out of certain agreements involving
the supply of raw materials used to manufacture two products,
lorazepam and clorazepate.
In July 2000, the Company reached a tentative agreement to
settle the actions brought by the FTC, the States Attorneys General
and suits brought by or on behalf of third party reimbursers. The
Company agreed to pay up to $147,000, including attorneys' fees. This
tentative settlement became final in February 2002 and has been fully
funded to date. Included in this settlement were three companies
indemnified by the Company - Cambrex Corporation, Profarmaco S.r.I.
and Gyma Laboratories, Inc.
Lawsuits not included in this settlement principally involve
alleged direct purchasers, such as wholesalers and distributors. In
July 2001, the United States Court for the District of Columbia
certified a litigation class consisting of these direct purchasers.
The Company filed a petition with the United States Court of Appeals
for the District of Columbia Circuit seeking appellate review of the
district court's order. The appellate court denied the Company's
appeal of the lower court's class certification order. In addition,
four third party reimbursers opted-out of the class action settlement
and, in November 2001, filed separate non-class actions against the
Company. These actions are pending in the United States District Court
for the District of Columbia. The Company has filed motions to dismiss
those claims. The Company also is defending a civil action, which was
filed in January 1999 and remains pending in the Superior Court of the
State of California, County of San Francisco, brought on behalf of
independent retail pharmacies in the State of California. The
plaintiffs in each of these actions seek unspecified monetary damages,
equitable relief, attorneys' fees and court costs. This case has not
been certified as a class action.
Other Litigation
The Company was served in July 2002 with a putative class
action suit filed in the Superior Court of the State of California,
County of Alameda. The representative plaintiff claims to represent
the general public. The plaintiffs allege that the defendants,
primarily pharmaceutical manufacturers, have engaged
14
in improper price reporting practices. Plaintiffs seek injunctive and
equitable relief in the form of disgorgement and restitution,
compensatory damages, special and incidental damages, punitive
damages, attorneys' fees, costs of litigation and such other relief as
the court may deem just and proper.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion addresses material changes in the Company's
results of operations and financial condition for the periods presented. This
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements, the related Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Results of Operations and Financial
Condition included in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2002, and the unaudited interim condensed consolidated financial
statements and related notes included in Item 1 of this Report on Form 10-Q.
Results of Operations
- ----------------------
Quarter Ended June 30, 2002, compared to Quarter Ended June 30, 2001
Effective April 1, 2002, the Company adopted SFAS 142, Goodwill and
Other Intangible Assets, and consequently, goodwill and certain other intangible
assets were not amortized in the quarter ended June 30, 2002. However, the
following discussions regarding the financial results for the quarter ended June
30, 2001, include amortization of $1.8 million ($1.6 million in Corporate/Other
and $.2 million in Generic) for these same assets. Excluding this amortization,
net earnings and earnings per diluted share for the quarter ended June 30, 2001,
would have been $52.4 million or $.42 per share.
Financial Highlights
- - Net revenues increased 16% or $37.6 million to $275.5 million from $237.9
million.
- - Gross profit increased 21% or $25.7 million to $147.6 million from $121.9
million.
- - Gross margin increased to 54% from 51%.
- - Operating income increased 47% or $30.4 million to $94.7 million from $64.3
million.
- - Net earnings increased 22% or $11.2 million to $61.8 million from
$50.6 million.
- - Earnings per diluted share increased 23% to $.49 per share from
$.40 per share.
16
Segment Results (dollars in thousands)
Quarter Ended
June 30,
--------
2002 2001 Change
---- ---- ------
Consolidated:
Net revenues $275,473 $237,933 16%
Gross profit 147,602 121,859 21%
Research and development 16,843 16,783 0%
Selling and marketing 16,887 15,142 12%
General and administrative 19,221 25,595 -25%
Other income, net 1,988 14,799 -87%
Pretax earnings 96,639 79,138 22%
Generic Segment:
Net revenues 235,645 209,822 12%
Gross profit 124,483 109,163 14%
Research and development 10,014 9,289 8%
Selling and marketing 2,748 3,078 -11%
General and administrative 5,398 7,391 -27%
Segment profit 106,323 89,405 19%
Brand Segment:
Net revenues 39,828 28,111 42%
Gross profit 23,119 12,696 82%
Research and development 6,829 7,494 -9%
Selling and marketing 14,139 12,064 17%
General and administrative 2,565 4,087 -37%
Segment loss (414) (10,948) -96%
Corporate/Other Segment:
Segment (loss) profit (9,270) 681
*Segment net revenues represent revenues from unrelated third parties. For the
Generic and Brand Segments, segment profit (loss) represents segment gross
profit less direct research and development, selling and marketing and general
and administrative expenses. Corporate/Other includes legal costs,
administrative expenses and other income and expense.
Net Revenues and Gross Profit
Consolidated net revenues for the current quarter were $275.5 million
compared to $237.9 million for the prior year quarter, representing a $37.6
million or 16% increase despite the significant decrease in buspirone net
revenues. The increase in net revenues was primarily attributable to volume
growth, relatively stable pricing for generic products and the launch of new
products, as well as improved marketing conditions for the brand products.
Generic Segment net revenues for the current quarter increased 12% or
$25.8 million to $235.6 million from $209.8 million for the prior year quarter.
The growth in net revenues was driven by increased sales volume, relatively
stable pricing, excluding
17
the competitive pressures experienced on buspirone, and sales associated with
the launch of new products subsequent to June 30, 2001. Generic volume shipped,
excluding unit dose, increased 0.254 billion doses or 10% from 2.530 billion
doses in the prior year quarter to 2.784 billion doses. New product launches
subsequent to June 30, 2001, contributed $17.0 million in net revenues during
the current quarter.
Brand Segment net revenues for the current quarter increased 42% or
$11.7 million to $39.8 million from $28.1 million for the prior year quarter.
The increase in net revenues was primarily due to increased sales volume,
primarily phenytoin, and improved marketing conditions resulting from the
curtailment of end-of-quarter promotions in the prior year.
Consolidated gross profit for the current quarter was $147.6 million,
or 54% of net revenues, compared to $121.9 million, or 51% of net revenues, for
the prior year quarter, an increase in gross profit of 21% or $25.7 million. The
increase in gross profit and gross margin was primarily attributable to volume
growth, relatively stable pricing for generic products and the launch of new
products, as well as improved marketing conditions for the brand products.
Operating Expenses
Research and development (R&D) expenses remained relatively unchanged
for the current quarter at $16.8 million, or 6% of net revenues, compared to
$16.8 million, or 7% of net revenues, for the prior year quarter. We expect R&D
expenses to increase throughout fiscal year 2003 as activities related to our
current projects, including nebivolol, progress.
We are actively pursuing, and are involved in, joint development
projects in an effort to broaden our scope of capabilities to market both
generic and brand products. Many of these arrangements provide for payments by
us upon the attainment of specified milestones. While these arrangements help to
reduce our financial risk for unsuccessful projects, fulfillment of specified
milestones or the occurrence of other obligations may result in fluctuations in
R&D expenses.
Selling and marketing expenses increased $1.8 million or 12% to $16.9
million, or 6% of net revenues, from $15.1 million, or 6% of net revenues, for
the prior year quarter. The increase in selling and marketing expenses was
attributable to increased advertising and promotional expenses in the Brand
Segment of $1.9 million. The Brand Segment's advertising and promotional
expenses have been primarily related to Phenytek(TM) and clozapine, in addition
to the anticipated launch of Amnesteem(TM) (isotretinoin).
General and administrative expenses for the current quarter were $19.2
million, or 7% of net revenues, down 25% or $6.4 million from $25.6 million, or
11% of net revenues, for the prior year quarter. This decrease in general and
administrative
18
expenses is primarily a result of decreased amortization expense of $1.8
million, decreased legal and professional fees of $1.3 million and a $1.1
million decrease in relocation expense.
Other Income, Net
Other income, net of non-operating expenses, was $2.0 million for the
current quarter, compared to $14.8 million for the prior year quarter, a
decrease of 86% or $12.8 million. This decrease is primarily related to
decreases in both limited liability partnership income of $10.7 million and
interest income of $1.5 million. Additionally, the equity in the loss of
Somerset Pharmaceuticals, Inc. (Somerset) increased to $1.3 million, compared to
a loss of $.6 million for the prior year quarter. The increase in Somerset's
loss for the quarter is the result of decreased net revenues and higher R&D
spending. As R&D activities continue at Somerset, we anticipate our earnings to
be adversely affected throughout fiscal 2003.
Liquidity and Capital Resources
- -------------------------------
Cash provided from operations continues to be the primary source of
funds to operate and expand our business. This is reflected in cash flows from
operations, which were $21.7 million for the current quarter and $57.6 million
for the prior year quarter. The decrease in cash provided by operations is
primarily a result of the timing of tax payments and receivable collections. Our
business relies on new product approvals to generate significant future cash
flows. An inability to introduce new products to the marketplace could cause a
decline in operating cash flows.
During the quarter ended June 30, 2002, our working capital increased
$27.0 million to $916.0 million from $889.0 million at March 31, 2002. Of our
$1.6 billion of total assets at June 30, 2002, 36% or $594.5 million was held in
cash, cash equivalents or marketable securities. Investments in marketable
securities consist primarily of high-quality government and commercial paper
that generally mature within one year. These investments are highly liquid and
are available for our operating needs. As these instruments mature, we generally
reinvest these funds in instruments with similar characteristics.
In May 2002, the Board of Directors approved a stock purchase program
that authorized the purchase of up to 10.0 million shares of the Company's
outstanding common stock. The purchase of common stock under this program could
materially affect our cash, cash equivalents and marketable securities. During
the quarter ended June 30, 2002, we purchased approximately 1.4 million shares
of common stock for $40.9 million.
Payments for state and federal income taxes increased to $52.9 million
during the current quarter compared to $32.6 million for the prior year quarter.
19
Capital expenditures during the quarter ended June 30, 2002, were $5.8
million compared to $3.2 million during the prior year quarter. These
expenditures in the current and prior quarters were primarily made to acquire
machinery and equipment for our production facilities. We anticipate our capital
expenditures, primarily to expand manufacturing capacity, to approximate amounts
expended in previous years.
We continue to pay quarterly cash dividends of $.04 per common share.
Dividend payments totaled $5.1 million during the current quarter and $5.0
million during the prior year quarter. During the quarter ended June 30, 2002,
we received $4.2 million from the exercise of stock options compared to $2.8
million in the prior year quarter.
We are involved in various legal proceedings (see Note 11 to Condensed
Consolidated Financial Statements). While it is not feasible to predict the
outcome of such proceedings, an adverse outcome in any of these proceedings
could materially affect our cash flows.
We are actively pursuing, and are involved in, joint development
projects in an effort to broaden our scope of capabilities to market both
generic and brand products. Many of these arrangements provide for payments by
us upon the attainment of specified milestones. While these arrangements help to
reduce our financial risk for unsuccessful projects, fulfillment of specified
milestones or the occurrence of other obligations may result in fluctuations in
cash provided from operating activities.
To provide additional operating leverage, if necessary, we maintain a
revolving line of credit of up to $50.0 million with a commercial bank. As of
June 30, 2002, no funds have been advanced under this line of credit.
Additionally, we believe that the acquisition of new products, as well as other
companies, will play a strategic role in our growth. Consequently, we may incur
additional indebtedness to finance these acquisitions which would impact future
liquidity.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
See Note 6 to Condensed Consolidated Financial Statements for a discussion of
the SFAS 142 implementation process.
The FASB issued SFAS 143, Accounting for Asset Retirement Obligations,
which establishes standards of accounting for obligations associated with the
retirement of tangible long-lived assets. This statement is effective for the
Company on April 1, 2003. We are currently evaluating the impact, if any, this
statement will have on our financial position and results of operations.
20
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued by the FASB in August 2001. This statement addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. SFAS 144 became effective for the Company as of April 1, 2002, and had
no material effect on our financial position or results of operations.
Critical Accounting Policies
- ----------------------------
The following discussion of critical accounting policies has been
condensed for presentation in this Report and should be read in conjunction with
Management's Discussion and Analysis of Results of Operations and Financial
Condition included in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2002. The Company's critical accounting policies are the determination
of revenue provisions, useful lives and impairment of intangibles and the impact
of existing legal matters. These critical accounting policies affect each of the
operating segments. The application of these accounting policies involves the
exercise of judgment and the use of assumptions as to future uncertainties and,
as a result, actual results could differ materially from these estimates. We are
currently not aware of any reasonably likely event or circumstance which would
result in different amounts being reported that would have a material impact on
our consolidated financial statements.
Revenue Provisions
Revenue is recognized for product sales upon shipment when title and
risk of loss have transferred to the customer and when provisions for estimates,
including discounts, rebates, price adjustments, returns, chargebacks and other
promotional adjustments are reasonably determinable. These provisions are
recognized as reductions to gross revenues, with the corresponding allowances
recognized as reductions to accounts receivable and as components to other
current liabilities. Accounts receivable are presented net of such allowances
totaling $222.6 million and $214.6 million at June 30, 2002, and March 31, 2002.
Other accrued liabilities include $26.0 million and $21.6 million at June 30,
2002, and March 31, 2002, for certain rebates and other adjustments that are
paid to indirect customers. The provision for chargebacks is the most
significant and complex estimate used in the recognition of revenue. The Company
is a party to arrangements with other parties establishing prices for products
for which they independently select a wholesaler from which to purchase. Such
parties are referred to as indirect customers. A chargeback represents the
difference between our invoice price to the wholesaler and the indirect
customer's contract price. The provision for estimated chargebacks is calculated
primarily using historical chargeback experience and estimated wholesaler
inventory levels. We continually monitor our assumptions giving consideration to
wholesaler buying patterns and current pricing trends and make necessary
adjustments when we believe that the actual chargeback credits will differ from
those estimated.
21
Useful Lives and Impairment of Intangibles
As of June 30, 2002, and March 31, 2002, recorded goodwill, net of
accumulated amortization, was $103.2 million. In addition to an annual
impairment review, goodwill is reviewed for impairment when events or other
changes in circumstances may indicate that the carrying amount of the goodwill
may not be recoverable.
Historically, impairment has been determined when the undiscounted
future cash flows, based on estimated sales volumes, pricing and the anticipated
cost environment, are less than the carrying value of the goodwill. However,
with the adoption of SFAS 142, potential impairment will be identified when the
fair value, determined at least annually, of a reporting unit is less than the
carrying value of its net assets. For the initial impairment test required by
SFAS 142, we have engaged valuation specialists to assist us in determining the
fair value of our reporting units. Until these evaluations are complete, we are
unable to determine the impact SFAS 142 will have on our financial position and
results of operations.
As of June 30, 2002, and March 31, 2002, recorded intangible assets,
excluding goodwill, net of accumulated amortization, were $164.5 million and
$169.3 million. These intangible assets consist of both purchased and acquired
product rights, as well as internally developed patents and technologies.
Intangible assets are reviewed for impairment when certain events or other
changes in circumstances may indicate that the carrying amount of the asset or
asset group may not be recoverable. Certain product rights associated with the
Brand Segment were reviewed for impairment in fiscal 2002. Impairment is
determined when the undiscounted future cash flows, based on estimated sales
volume, anticipated pricing and estimated product costs, are less than the
carrying value of the intangible asset. The carrying values of the product
rights reviewed were not impaired. If these projections do not properly reflect
future activity, results of operations could be negatively impacted.
Legal Matters
The Company is involved in various legal proceedings, some of which
involve claims for substantial amounts. An accrual for a loss contingency
relating to any of these legal proceedings is made if it is probable that a
liability was incurred at the date of the financial statements and the amount of
loss can be reasonably estimated. After review, it was determined, at June 30,
2002, and March 31, 2002, that for each of the various legal proceedings in
which we are involved, the conditions mentioned above were not met. However, if
any of these legal proceedings would result in an adverse outcome for the
Company, the impact could have a material adverse effect on our financial
position and results of operations.
22
Forward-Looking Statements
- --------------------------
This Quarterly Report on Form 10-Q may contain "forward-looking
statements." Such forward-looking statements may include, without limitation,
statements about our market opportunities, strategies, competition and expected
activities and expenditures. You can identify these statements by the use of
words such as "may," "will," "could," "should," "would," "project," "believe,"
"anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend,"
"continue" and variations of these words or comparable words. We believe that it
is important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control and that may cause our actual results to differ materially from the
expectations expressed or implied by these forward-looking statements. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those discussed as
a result of various factors, including, but not limited to, those factors
described in this Quarterly Report on Form 10-Q in the "Notes to Condensed
Consolidated Financial Statements" under the heading "Contingencies," in the
section titled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" under the headings "Results of Operations" and
"Liquidity and Capital Resources," in the section titled "Legal Proceedings" and
elsewhere in this Quarterly Report on Form 10-Q, as well as in our other
documents filed with the Securities and Exchange Commission. We do not undertake
to update any forward-looking statements contained in this Quarterly Report on
Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk primarily from changes in the
market values of investments in marketable debt and equity securities, including
marketable securities owned indirectly through certain pooled asset funds that
are classified as other assets on our balance sheet. Additional investments are
made in overnight deposits, money market funds and marketable securities with
maturities of less than three months. These instruments are classified as cash
equivalents for financial reporting purposes and have minimal or no interest
rate risk due to their short-term nature. The majority of our investments are
managed by professional portfolio managers. We also invest in nonpublic
securities that are classified as other assets on our balance sheet and we do
not consider these investments to be sensitive to market risk. The following
table summarizes the investments which subject the Company to market risk: (in
thousands)
June 30, March 31,
2002 2002
---- ----
Marketable debt securities $488,435 $435,499
Marketable equity securities 21,080 20,767
Certain pooled asset funds 27,430 26,144
-------- --------
$536,945 $482,410
======== ========
23
The primary objectives of our marketable debt securities investment
portfolio are liquidity and safety of principal. Investments are made to achieve
the highest rate of return while retaining principal. The investment policy
limits investments to certain types of instruments issued by institutions and
government agencies with investment grade credit ratings. Of the $488.4 million
invested in marketable debt securities at June 30, 2002, $466.4 million will
mature within one year. This short duration to maturity creates minimal exposure
to fluctuations in market values for these investments. A significant change in
current interest rates could affect the market value of the remaining $22.0
million of marketable debt securities that mature after one year. A 5% change in
the market value of the marketable debt securities that mature after one year
would result in a $1.1 million change in our balance of marketable debt
securities.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are
considered normal to its business. While it is not feasible to predict the
ultimate outcome of such proceedings, it is the opinion of management that the
ultimate outcome of such proceedings, except those discussed below, will not
have a material adverse effect on our financial position or results of
operations.
While it is not possible to determine with any degree of certainty the
ultimate outcome of the following legal proceedings, we believe that we have
meritorious defenses with respect to the claims asserted against the Company,
and we intend to defend vigorously our position. An adverse outcome in any one
of these proceedings could have a material adverse effect on our financial
position and results of operations.
Product litigation
Paclitaxel
In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott
Laboratories Inc. (Abbott) filed suit against the Company in the US District
Court for the Western District of Pennsylvania. Plaintiffs allege the Company's
manufacture, use and sale of its paclitaxel product infringes certain patents
owned by NAPRO and allegedly licensed to Abbott. Plaintiffs seek unspecified
damages plus interest, a finding of willful infringement which could result in
trebel damages, injunctive relief, attorneys' fees, costs of litigation, and
such equitable and other relief as the court deems just and
24
proper. The Company began selling its paclitaxel product in July 2001. Abbott's
ANDA was approved in May 2002.
Verapamil ER
In July 2001, Biovail Laboratories Inc. (Biovail) filed a demand for
arbitration against the Company with the American Arbitration Association. In
response to such demand, the Company filed its answer and counterclaims. The
dispute relates to a supply agreement under which the Company supplied
extended-release verapamil to Biovail. The Company terminated the agreement in
March 2001. Biovail's allegations include breach of contract, breach of implied
covenant of good faith and fair dealing and unfair competition. Biovail is
seeking damages plus interest, to be determined at trial but in an amount of not
less than $20.0 million, punitive damages, attorneys' fees and costs of
litigation and such other relief as the panel may deem just and proper. The
Company's allegations as set forth in its counterclaims include breach of
obligations of good faith and fair dealing, fraud and unjust enrichment. The
arbitration hearing is scheduled to be held in September 2002.
Zagam(R)
The Company filed suit against Aventis Pharmaceuticals, Inc.,
successor in interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.;
Rhone-Poulenc Rorer Pharmaceuticals, LTD.; Rorer Pharmaceutical Products, Inc.;
Rhone-Poulenc Rorer, S.A., and their affiliates in the US District Court for the
Western District of Pennsylvania in May 2001. The complaint sets forth claims of
breach of contract, rescission, breach of implied covenant of good faith and
fair dealing and unjust enrichment. The defendants' answer includes a
counterclaim, which alleges nonpayment of royalties and failure to mitigate. The
defendants are seeking royalties allegedly owed by the Company, attorneys' fees
and costs of litigation and such other relief as may be demonstrated at trial.
Nifedipine
In February 2001, Biovail filed suit against the Company and Pfizer
Inc. (Pfizer) in the US District Court for the Eastern District of Virginia
alleging antitrust violations with respect to agreements entered into between
the Company and Pfizer regarding nifedipine. The Company filed a motion to
transfer the case to the US District Court for the Northern District of West
Virginia, which was granted. The Company's motion to dismiss Biovail's complaint
was denied, and the Company's motion to dismiss certain claims by other
plaintiffs was granted in part and denied in part. The Company has been named as
a defendant in five other putative class action suits alleging antitrust claims
based on the settlement entered into by the Company with Bayer AG, Bayer
Corporation and Pfizer regarding nifedipine. Collectively, plaintiffs
25
are seeking unspecified compensatory and trebel damages, attorneys' fees, costs
of litigation, restitution, disgorgement and declaratory and injunctive relief.
Buspirone
The Company filed an ANDA seeking approval to market buspirone, a
generic equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company filed
the appropriate certifications relating to the patents for this product that
were then listed in the FDA publication entitled Approved Drug Products with
Therapeutic Equivalence Evaluations, popularly known as the "Orange Book." In
November 2000, a new patent claiming the administration of a metabolite of
buspirone (which BMS claims also covers the administration of buspirone itself)
was issued to BMS. The subsequent listing of this patent in the Orange Book
prevented the FDA from granting final approval for the Company's buspirone ANDA.
In November 2000, the Company filed suit against the FDA and BMS in the US
District Court for the District of Columbia. The complaint asked the court to
order the FDA to grant immediately final approval of the Company's ANDA for the
15mg buspirone product and require BMS to request withdrawal of the patent from
the Orange Book. Upon the Company's posting a bond in the amount of $25.0
million, thecourt entered an order granting the Company's motion for a
preliminary injunction. Following a brief stay by the US Court of Appeals for
the Federal Circuit, the FDA granted approval of the Company's ANDA with respect
to the 15mg strength. Upon receiving FDA approval, the Company began marketing
and selling the 15mg tablet in March 2001. The Company has also been selling the
30mg buspirone tablet since August 2001. BMS appealed the preliminary injunction
order to both the US Court of Appeals for the Federal Circuit and the US Court
of Appeals for the District of Columbia Circuit. The District of Columbia Court
of Appeals denied BMS' application and stayed the Company's motion to dismiss
pending the decision of the Federal Circuit Court of Appeals. The Federal
Circuit heard oral arguments in July 2001.
In October 2001, the Federal Circuit overturned the lower court ruling
and held that the Company did not have a cognizable claim against BMS under the
Declaratory Judgment Act to challenge the listing of BMS' patent, which the
Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug
and Cosmetic Act. The Federal Circuit did not address the lower court's
determination that the BMS patent does not claim buspirone or a method of
administration of the drug. The Company filed a petition with the Federal
Circuit asking that the court reconsider its holding. The petition was denied in
January 2002. A petition for review by the United States Supreme Court is
pending.
In January 2002, the Company filed a motion in the US District Court
for the District of Columbia seeking a preliminary injunction which, if granted,
would require that the FDA refuse to list the BMS patent should BMS submit it
for re-listing in the Orange Book. The District of Columbia Court has entered an
order staying further proceedings in this case pending appeal of the order
entered in the US District Court
26
for the Southern District of New York granting the Company's motion for summary
judgment of non-infringement.
The Company is involved in three other suits related to buspirone. In
November 2000, the Company filed suit against BMS in the US District Court for
the Northern District of West Virginia. The suit seeks a declaratory judgment of
non-infringement and/or invalidity of the BMS patent listed in November 2000. In
January 2001, BMS sued the Company for patent infringement in the US District
Court for the District of Vermont and also in the US District Court for the
Southern District of New York. In each of these cases, BMS asserts that the
Company infringes BMS' patent and seeks to rescind approval of the Company's
ANDA. BMS seeks to recover damages equal to lost profits plus interest, a
finding of willful infringement which could result in trebel damages, injunctive
relief, attorneys' fees, costs of litigation and such other relief as the court
deems just and proper.
The Company subsequently filed motions to dismiss the Vermont case and
dismiss and transfer the New York case to the US District Court for the Northern
District of West Virginia. The Judicial Panel on Multi-District Litigation
ordered these cases, along with another patent case and numerous antitrust suits
filed against BMS, be consolidated in the US District Court for the Southern
District of New York. The New York Court has granted the Company's motion for
summary judgement that the BMS patent is not infringed or, alternatively, is
invalid. BMS has appealed this decision to the Court of Appeals for the Federal
Circuit. The New York Court also denied the BMS motion to dismiss the Company's
antitrust counterclaims.
Lorazepam and Clorazepate
In December 1998, the Federal Trade Commission (FTC) filed suit in US
District Court for the District of Columbia against the Company. The FTC's
complaint alleged that the Company engaged in restraint of trade,
monopolization, attempted monopolization and conspiracy to monopolize arising
out of certain agreements involving the supply of raw materials used to
manufacture two products, lorazepam and clorazepate.
In July 2000, the Company reached a tentative agreement to settle the
actions brought by the FTC, the States Attorneys General and suits brought by or
on behalf of third party reimbursers. The Company agreed to pay up to $147.0
million, including attorneys' fees. This tentative settlement became final in
February 2002 and has been fully funded to date. Included in this settlement
were three companies indemnified by the Company - Cambrex Corporation,
Profarmaco S.r.I. and Gyma Laboratories, Inc.
Lawsuits not included in this settlement principally involve alleged
direct purchasers, such as wholesalers and distributors. In July 2001, the
United States Court for the District of Columbia certified a litigation class
consisting of these direct
27
purchasers. The Company filed a petition with the United States Court of Appeals
for the District of Columbia Circuit seeking appellate review of the district
court's order. The appellate court denied the Company's appeal of the lower
court's class certification order. In addition, four third party reimbursers
opted-out of the class action settlement and, in November 2001, filed separate
non-class actions against the Company. These actions are pending in the United
States District Court for the District of Columbia. The Company has filed
motions to dismiss those claims.
The Company also is defending a civil action, which was filed in January
1999 and remains pending in the Superior Court of the State of California,
County of San Francisco, brought on behalf of independent retail pharmacies in
the State of California. The plaintiffs in each of these actions seek
unspecified monetary damages, equitable relief, attorneys' fees and court costs.
This case has not been certified as a class action.
Other Litigation
The Company was served in July 2002 with a putative class action suit
filed in the Superior Court of the State of California, County of Alameda. The
representative plaintiff claims to represent the general public. The plaintiffs
allege that the defendants, primarily pharmaceutical manufacturers, have engaged
in improper price reporting practices. Plaintiffs seek injunctive and equitable
relief in the form of disgorgement and restitution, compensatory damages,
special and incidental damages, punitive damages, attorneys' fees, costs of
litigation and such other relief as the court may deem just and proper.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Amended and Restated Articles of Incorporation of
the registrant, filed as Exhibit 4.2 to the Form
S-8 on December 23, 1997, (registration number
333-43081) and incorporated herein by reference.
3.2 By-laws of the registrant, as amended to date,
filed as Exhibit 3.2 to the Form 10-K for the
fiscal year ended March 31, 2001, and incorporated
herein by reference.
10.1 Executive Employment Agreement with Robert J.
Coury, dated July 22, 2002, filed herewith.
10.2 Executive Employment Agreement with Louis J.
DeBone, dated July 22, 2002, filed herewith.
10.3 Executive Employment Agreement with John P.
O'Donnell, dated July 22, 2002, filed herewith.
b. Reports on Form 8-K
On July 22, 2002, we filed a Report on Form 8-K announcing
changes in senior management.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report filed on Form 10-Q for the quarterly
period ended June 30, 2002, to be signed on its behalf by the undersigned
thereunto duly authorized as of August 6, 2002.
Mylan Laboratories Inc.
(Registrant)
/s/ Milan Puskar
----------------------------
Milan Puskar
Chairman of the Board and
Chief Executive Officer
(Principal executive officer)
/s/ Edward J. Borkowski
----------------------------
Edward J. Borkowski
Chief Financial Officer
(Principal financial officer)
/s/ Gary E. Sphar
-----------------------------
Gary E. Sphar
Vice President, Corporate Controller
(Principal accounting officer)
30
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Milan Puskar, Chairman of the Board and Chief Executive Officer of
Mylan Laboratories Inc. (the "Company"), do hereby certify as of
August 6, 2002, in accordance with 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The foregoing Quarterly Report on Form 10-Q fully complies
with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and,
(2) The information contained in the foregoing Quarterly Report
on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the
Company.
/s/ Milan Puskar
----------------------------
Milan Puskar
Chairman of the Board and
Chief Executive Officer
31
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Edward J. Borkowski, Chief Financial Officer of Mylan Laboratories
Inc. (the "Company"), do hereby certify as of August 6, 2002, in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The foregoing Quarterly Report on Form 10-Q fully complies
with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and,
(2) The information contained in the foregoing Quarterly Report
on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the
Company.
/s/ Edward J. Borkowski
----------------------------
Edward J. Borkowski
Chief Financial Officer
32