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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 September 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 November 6, 2002
- --------------------- ----------------
$ 0.50 par value 122,486,736
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended
September 30, 2002
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Statements of Earnings
- Three and Six Months Ended September 30, 2002 and 2001 2
Condensed Consolidated Balance Sheets
- September 30, 2002, and March 31, 2002 3
Condensed Consolidated Statements of Cash Flows
- Six Months Ended September 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 15
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 34
Item 4: Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 35
Item 4: Submission of Matters to a Vote of Security Holders 40
Item 6: Exhibits and Reports on Form 8-K 40
SIGNATURES 41
CERTIFICATIONS
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(unaudited; in thousands, except per share amounts)
Three Months Six Months
------------ ----------
Period Ended September 30, 2002 2001 2002 2001
---- ---- ---- ----
Net revenues $319,539 $286,328 $595,012 $524,261
Cost of sales 152,807 122,551 280,678 238,625
-------- -------- -------- --------
Gross profit 166,732 163,777 314,334 285,636
-------- -------- -------- --------
Operating expenses:
Research and development 20,169 16,463 37,012 33,246
Selling and marketing 16,538 14,254 33,425 29,396
General and administrative 25,030 33,822 44,251 59,417
-------- -------- -------- --------
Total operating expenses 61,737 64,539 114,688 122,059
-------- -------- -------- --------
Earnings from operations 104,995 99,238 199,646 163,577
Other income, net 1,613 1,446 3,601 16,245
-------- -------- -------- --------
Earnings before income taxes 106,608 100,684 203,247 179,822
Provision for income taxes 38,379 36,548 73,169 65,038
-------- -------- -------- --------
Net earnings $ 68,229 $ 64,136 $130,078 $114,784
======== ======== ======== ========
Earnings per common share:
Basic $ 0.54 $ 0.51 $ 1.04 $ 0.92
======== ======== ======== ========
Diluted $ 0.54 $ 0.50 $ 1.03 $ 0.90
======== ======== ======== ========
Weighted average common shares:
Basic 125,362 125,372 125,657 125,202
======== ======== ======== ========
Diluted 126,777 127,338 126,866 126,856
======== ======== ======== ========
Cash dividends declared
per common share: $ 0.04 $ 0.04 $ 0.08 $ 0.08
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
2
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited; in thousands)
September 30, March 31,
2002 2002
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 215,294 $ 160,790
Marketable securities 467,540 456,266
Accounts receivable, net 180,580 145,491
Inventories 196,253 195,074
Deferred income tax benefit 109,655 92,642
Other current assets 9,875 11,819
---------- ----------
Total current assets 1,179,197 1,062,082
Property, plant and equipment, net 169,405 166,531
Intangible assets, net 159,765 169,315
Goodwill, net 103,196 103,196
Investment in and advances to Somerset 19,562 22,720
Other assets 77,868 92,866
---------- ----------
Total assets $1,708,993 $1,616,710
========== ==========
Liabilities and shareholders' equity
Liabilities
Current liabilities:
Trade accounts payable $ 35,459 $ 36,534
Income taxes payable 74,305 63,826
Other current liabilities 88,541 72,758
---------- ----------
Total current liabilities 198,305 173,118
Long-term obligations 21,166 23,883
Deferred income tax liability 20,396 17,470
---------- ----------
Total liabilities 239,867 214,471
---------- ----------
Shareholders' equity:
Common stock 66,413 66,100
Additional paid-in capital 360,641 349,719
Retained earnings 1,200,806 1,080,736
Accumulated other comprehensive earnings 6,486 7,920
---------- ----------
1,634,346 1,504,475
Less: treasury stock at cost 165,220 102,236
---------- ----------
Total shareholders' equity 1,469,126 1,402,239
---------- ----------
Total liabilities and shareholders' equity $1,708,993 $1,616,710
========== ==========
See Notes to Condensed Consolidated Financial Statements
3
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)
Six Months Ended September 30, 2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 130,078 $ 114,784
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Depreciation and amortization 19,648 23,459
Deferred income tax benefit (19,050) (18,297)
Equity in loss of and cash received from Somerset 3,158 1,919
Loss(earnings)from limited liability partnerships 3,334 (11,998)
Adjustments to estimated sales allowances 52,234 30,038
Other noncash items (7,250) 7,616
Changes in operating assets and liabilities:
Accounts receivable (87,234) (10,503)
Inventories 1,363 (21,214)
Trade accounts payable (1,075) 3,455
Income taxes 16,215 36,153
Other operating assets and liabilities, net 13,898 29,192
---------- ----------
Net cash provided from operating activities 125,319 184,604
---------- ----------
Cash flows from investing activities:
Proceeds from (purchase of):
Capital assets (13,109) (6,621)
Other and intangible assets (612) (3,369)
Marketable securities (385,883) (324,840)
Sale and maturity of marketable securities 384,019 126,813
---------- ----------
Net cash used in investing activities (15,585) (208,017)
---------- ----------
Cash flows from financing activities:
Payments on long-term obligations -- (2,000)
Cash dividends paid (10,066) (10,002)
Purchase of common stock (56,042) --
Proceeds from exercise of stock options 10,878 6,965
---------- ----------
Net cash used in financing activities (55,230) (5,037)
---------- ----------
Net increase (decrease) in cash and cash equivalents 54,504 (28,450)
Cash and cash equivalents - beginning of period 160,790 229,183
---------- ----------
Cash and cash equivalents - end of period $ 215,294 $ 200,733
========== ==========
Cash paid during the period for:
Interest $ -- $ 105
========== ==========
Income taxes $ 52,893 $ 47,180
========== ==========
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
condensed consolidated financial statements (interim financial
statements) have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC) 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 adjustments) necessary to present fairly our interim results
of operations, financial position and cash flows for the periods
presented.
These interim 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 were reclassified to conform to the
current year presentation. Such reclassifications had no impact on
reported net earnings, earnings per share or shareholders' equity.
The interim results of operations for the three and six months
ended September 30, 2002, are not necessarily indicative of the
results to be expected for the full fiscal year.
2. Revenue Recognition and Accounts Receivable
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 $259,487 and
$214,637 as of September 30, 2002, and March 31, 2002. Other current
liabilities include $26,839 and $21,577 at September 30, 2002, and
March 31, 2002, for certain rebates and other adjustments that are
payable to indirect customers.
We perform ongoing credit evaluations of our customers and
generally do not require collateral. Approximately 83% and 64% of the
accounts receivable balances represent amounts due from four customers
at September 30, 2002, and March 31, 2002.
5
3. Recent Accounting Pronouncements
Effective April 1, 2002, Mylan adopted Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets.
Goodwill and other indefinite lived intangible assets are no longer
amortized. Intangible assets determined to have indefinite lives were
tested for potential impairment and no impairments were indicated. The
transitional assessment of goodwill for impairment as of April 1,
2002, was completed during the quarter ended September 30, 2002, with
no indication of impairment. An independent valuation specialist
assisted in the determination of the fair values used to test for
impairment. Assuming the adoption of SFAS 142 had occurred on April 1,
2001, and goodwill and other indefinite lived assets were no longer
amortized, net earnings for the three and six months ended September
30, 2001, would have increased by $1,801 and $3,602 and earnings per
basic and diluted share would have increased by $.02 per share and
$.03 per share, respectively.
SFAS 143, Accounting for Asset Retirement Obligations,
establishes standards of accounting for obligations associated with
the retirement of tangible long-lived assets. The statement is
effective for fiscal years beginning after June 15, 2002. We are
currently evaluating the impact, if any, this statement will have on
our financial position and results of operations.
Effective April 1, 2002, Mylan adopted SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment and disposal of
long-lived assets. The impact of adoption had no material effect on
our financial position or results of operations.
SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires a liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred rather
than when a commitment to an exit plan is made. SFAS 146 is effective
for exit or disposal activities that are initiated after December 31,
2002. We believe the adoption of this statement will not have a
material effect on our financial position or results of operations.
6
4. Balance Sheet Components
Selected balance sheet components consist of the following:
September 30, March 31,
2002 2002
---- ----
Inventories:
Raw materials $ 88,638 $ 74,782
Work in process 26,696 31,056
Finished goods 80,919 89,236
-------- --------
$196,253 $195,074
======== ========
Other current liabilities:
Rebates $ 26,839 $ 21,577
Payroll and related 22,355 18,936
Royalties and product license fees 14,961 12,363
Cash dividends payable 5,010 5,067
Other 19,376 14,815
-------- --------
$ 88,541 $ 72,758
======== ========
5. Goodwill and Intangible Assets
Goodwill by operating segment as of September 30, 2002, and April
1, 2002:
Generic $ 20,100
Brand 83,096
---------
Total $ 103,196
=========
Intangible assets, excluding goodwill, consist of the following
components:
Weighted
Average Life Original Accumulated Net Book
(years) Cost Amortization Value
------- ------- ------------ -------
September 30, 2002
- ------------------
Amortized intangible assets:
Patents and technologies 19 $ 117,435 $ 33,038 $ 84,397
Product rights and related
intangibles 12 107,273 42,309 64,964
Other 20 13,875 4,723 9,152
--------- --------- ---------
$ 238,583 $ 80,070 158,513
========= =========
Unamortized intangible assets:
Trademarks 1,252
---------
$ 159,765
March 31, 2002 =========
- --------------
Amortized intangible assets:
Patents and technologies $ 119,663 $ 32,056 $ 87,607
Product rights and related
intangibles 107,907 36,950 70,957
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 an original cost of $13,368. Such assets were
fully amortized at March 31, 2002, and have no ongoing benefit to our
current operations.
Amortization expense for the current three and six month periods
was $4,714 and $9,431 and is expected to be $18,578 for the fiscal
year. Expected amortization expense for fiscal years 2004 through 2007
is $18,369, $16,904, $13,355 and $13,143, respectively.
6. Earnings per Common Share
Basic earnings per common share is computed by dividing net
earnings by the weighted average number of common shares outstanding
during the period. Diluted earnings per common share is computed by
dividing net earnings 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 1,415,000 and
1,966,000 for the three months ended September 30, 2002 and 2001, and
1,209,000 and 1,654,000 for the six months ended September 30, 2002
and 2001.
Antidilutive stock options of 344,000 and 38,000 were excluded
from the diluted earnings per common share calculation for the three
months ended September 30, 2002 and 2001, and 527,000 and 351,000 were
excluded for the six months ended September 30, 2002 and 2001.
7. Comprehensive Earnings
Comprehensive earnings consist of the following:
Three Months Six Months
------------ ------------
Period Ended September 30, 2002 2001 2002 2001
---- ----- ---- -----
Net earnings $ 68,229 $ 64,136 $ 130,078 $ 114,784
Other comprehensive (loss)
earnings, net of tax:
Net unrealized (loss) gain
on marketable securities (393) (1,035) 1,733 2,348
Reclassification for gains
included in net earnings (3,198) (67) (3,167) (201)
--------- --------- --------- ---------
(3,591) (1,102) (1,434) 2,147
--------- --------- --------- ---------
Comprehensive earnings $ 64,638 $ 63,034 $ 128,644 $ 116,931
========= ========= ========= =========
8
Accumulated other comprehensive earnings, as reflected on the
balance sheet, is comprised solely of the net unrealized gain on
marketable securities, net of deferred income taxes.
8. Common Stock
As of September 30, 2002, and March 31, 2002, there were
300,000,000 shares of common stock authorized with 132,825,870 and
132,200,528 shares issued. Treasury shares held as of September 30,
2002, and March 31, 2002, were 7,908,246 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. During the six months ended September 30, 2002, we purchased
2,092,700 shares for $62,906. Subsequent to September 30, 2002, and
through October 24, 2002, we purchased an additional 2,341,600 shares
for $73,743.
9. Stock Option Plan
In July 2002, Mylan shareholders approved the proposal to amend
and restate the Mylan Laboratories Inc. 1997 Incentive Stock Option
Plan (the Plan) to add an additional 5,000,000 shares for which
options may be granted and to authorize the grant of options to
non-employee directors. Under the Plan, as amended, up to 15,000,000
shares of the Company's common stock may be granted to officers,
employees, non-employee directors and non-employee consultants and
agents as either incentive stock options or nonqualified stock
options. As of September 30, 2002, 5,727,860 shares were available for
future grants.
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.
9
The following table presents the results of operations for each
of our operating segments:
Three Months Six Months
------------ ----------
Period Ended September 30, 2002 2001(1) 2002 2001(1)
---- ---- ---- ----
Consolidated:
Net revenues $ 319,539 $ 286,328 $ 595,012 $ 524,261
Pretax earnings 106,608 100,684 203,247 179,822
Generic:
Net revenues 274,281 252,817 509,926 462,639
Segment profit 120,747 127,851 227,070 217,256
Brand:
Net revenues 45,258 33,511 85,086 61,622
Segment profit (loss) 1,127 (5,666) 713 (16,614)
Corporate/Other:
Segment loss (15,266) (21,501) (24,536) (20,820)
(1)Includes amortization of goodwill and certain other intangible assets not
amortized in the current fiscal year due to the adoption of SFAS 142. Quarterly
amortization recorded in fiscal 2001 for these intangibles, including goodwill,
was $1,599 in Corporate/Other, $167 in Generic and $35 in Brand.
11. Related Parties
A consulting agreement dated July 2000 with a firm, which was
previously owned by a director of the Company, was terminated in its
entirety through mutual consent upon the director becoming an employee
of the Company in July 2002.
12. Contingencies
Product Litigation
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 vigorously defend our
position. AN ADVERSE OUTCOME IN ANY OF THESE PROCEEDINGS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
Paclitaxel
In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott
Laboratories Inc. (Abbott) filed suit against the Company in the
United States (US) District Court for the Western District of
Pennsylvania. Plaintiffs allege that the Company's manufacture,
10
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 treble 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.
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 $10,000, plus unspecified 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.
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 Federal 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.
11
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 Pfizer regarding nifedipine. Two of
the class actions have been dismissed in their entirety and the
remaining actions have been dismissed in part. The plaintiffs in the
remaining actions, as well as Biovail, are seeking unspecified
compensatory and treble 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 US Food and Drug
Administration (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 immediately grant 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 of 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 (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 tablet since
August 2001 and the 5mg and 10mg tablets since March 2002. BMS
appealed the preliminary injunction order to both 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.
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
12
petition was denied in January 2002. A petition for review by the US
Supreme Court was denied in October 2002.
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
treble 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 for pre-trial purposes in the US District Court for the
Southern District of New York. The New York Court has granted the
Company's motion for summary judgment 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 January 1999, four companies who claim to have purchased
lorazepam and/or clorazepate from the Company filed suit alleging 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
those two products. In July 2001, the US Court for the District of
Columbia certified a litigation class consisting of direct purchasers.
The plaintiffs seek to recover treble damages equal to three times the
13
overcharge they claim to have paid, plus injunctive relief, attorneys'
fees, costs of litigation and such other relief as the court deems
proper.
In December 2001, four third-party reimbursers filed separate
actions against the Company. These actions are pending in the US
District Court for the District of Columbia. The Company is also
defending a civil action in the State of California that was brought
under state law on behalf of independent retail pharmacies who
purchased lorazepam and/or clorazepate. The California action has not
been certified as a class action. The plaintiffs in each of these
actions seek unspecified monetary damages, equitable relief,
attorneys' fees and costs of litigation.
Average Wholesale Price litigation
The Company, along with a number of other pharmaceutical
manufacturers, has been named as a defendant in four lawsuits filed in
the state courts of California in which the plaintiffs allege the
defendants unlawfully, unfairly and fraudulently manipulated the
reported average wholesale price of various products, allegedly to
increase third party reimbursements to others for their products. None
of these four cases has been certified as a class action, although all
four cases seek class action and representative status. Plaintiffs
seek equitable relief in the form of disgorgement and restitution,
attorneys' fees and costs of litigation. While it is not possible to
determine with any degree of certainty the ultimate outcome of these
suits, we believe that we have meritorious defenses with respect to
the claims asserted against the Company, and we intend to vigorously
defend our position. AN ADVERSE OUTCOME IN ANY OF THESE SUITS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION AND RESULTS
OF OPERATIONS.
Other Litigation
The Company is involved in various other legal proceedings that
are considered normal to its business. While it is not feasible to
predict the ultimate outcome of such other proceedings, we believe
that the ultimate outcome of such other proceedings will not have a
material adverse effect on our financial position or results of
operations.
14
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
- ---------------------
Net earnings increased 6% or $4.1 million for the current quarter and 13%
or $15.3 million for the current six months, compared to the same prior year
periods. Earnings per diluted share increased 8% or $.04 per share for the
current quarter and 14% or $.13 per share for the current six months. The
increases in net earnings were primarily the result of increased net revenues
and decreased operating expenses. The increases in net revenues for the current
year were primarily attributable to new products, increased volume, relatively
stable pricing for generic products and improved marketing conditions for brand
products. Operating expenses in the current year decreased primarily due to
lower general and administrative expenses.
15
Segment Results (in thousands)
Three Months Six Months
------------ ----------
Period Ended September 30, 2002 2001(1) 2002 2001(1)
---- ------- ---- -------
Consolidated:
Net revenues $ 319,539 $ 286,328 $ 595,012 $ 524,261
Gross profit 166,732 163,777 314,334 285,636
Research and development 20,169 16,463 37,012 33,246
Selling and marketing 16,538 14,254 33,425 29,396
General and administrative 25,030 33,822 44,251 59,417
Other income, net 1,613 1,446 3,601 16,245
Pretax earnings 106,608 100,684 203,247 179,822
Generic Segment:
Net revenues 274,281 252,817 509,926 462,639
Gross profit 139,872 145,073 264,355 254,236
Research and development 10,873 7,393 20,887 16,682
Selling and marketing 2,551 3,224 5,299 6,302
General and administrative 5,701 6,605 11,099 13,996
Segment profit 120,747 127,851 227,070 217,256
Brand Segment:
Net revenues 45,258 33,511 85,086 61,622
Gross profit 26,860 18,704 49,979 31,400
Research and development 9,296 9,070 16,125 16,564
Selling and marketing 13,987 11,030 28,126 23,094
General and administrative 2,450 4,270 5,015 8,357
Segment profit (loss) 1,127 (5,666) 713 (16,614)
Corporate/Other:
Segment loss (15,266) (21,501) (24,536) (20,820)
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.
1 Includes amortization of goodwill and certain other intangible assets not
amortized in the current fiscal year due to the adoption of SFAS 142. Quarterly
amortization recorded in fiscal 2001 for these intangibles, including goodwill,
was $1,599 in Corporate/Other, $167 in Generic and $35 in Brand.
Quarter Ended September 30, 2002, compared to Quarter Ended September 30, 2001
Net Revenues and Gross Profit
Net revenues for the current quarter increased 12% or $33.2 million
compared to the prior year quarter. The Generic segment accounted for 65% or
$21.5 million of the total increase in net revenues, while the Brand segment
accounted for the remaining 35% or $11.7 million. New products launched
subsequent to September 30, 2001, primarily generics, contributed $24.7 million.
New generic products and increased net revenues on core generic products
(excluding buspirone 15mg and 30mg) more than offset the decrease in net
revenues experienced on buspirone. Excluding the impact of buspirone, Generic
net revenues for the quarter increased 24% or $50.8 million over the prior year
16
quarter. The increase in core products' net revenues was primarily the result of
relatively stable pricing, favorable product mix and increased volume. Buspirone
net revenues decreased 80%, primarily due to the loss of marketing exclusivity
and the competitive pressures resulting from new entrants into the marketplace.
Brand net revenues for the current quarter increased 35% or $11.7 million.
The increase was primarily due to improved pricing, product mix and increased
volume, in part due to the curtailment of end-of-quarter promotions in the prior
year.
Gross profit increased 2% or $3.0 million. Generic gross profit decreased
4% or $5.2 million, primarily due to decreased gross profit on buspirone sales.
The lower gross profit recognized on buspirone was partially offset by
contributions from core products. Brand gross profit increased 44% or $8.2
million, primarily due to favorable pricing, product mix and increased volume,
in part due to the curtailment of end-of-quarter promotions in the prior year.
Operating Expenses
Research and development (R&D) expenses for the current quarter increased
23% or $3.7 million compared to the same prior year quarter. The increase was
primarily related to Generic expenses due to the timing and number of studies
being conducted. We expect R&D expenses to continue to increase for both the
Generic and Brand segments throughout fiscal 2003 as activities related to
current projects progress.
Selling and marketing expenses for the current quarter were up 16% or $2.3
million over the prior year quarter. The increase was primarily related to Brand
advertising and promotional expenses, focused primarily on Digitek(R),
Phenytek(TM) and, in part, Amnesteem(TM) (isotretinoin).
General and administrative (G&A) expenses decreased 26% or $8.8 million
over the prior year quarter. The decrease was primarily related to decreased
Corporate expenses. Corporate expenses in the prior year quarter included $5.3
million related to increased retirement benefits for certain executive and
management employees. Additionally, Corporate expenses for the prior year
quarter included $1.6 million of goodwill amortization, which, due to the April
1, 2002, adoption of SFAS 142, is no longer amortized. The $1.8 million decrease
in Brand expenses was primarily related to a $1.4 million decrease in relocation
expenses. Bertek Pharmaceuticals Inc. (Bertek) completed its move to Raleigh,
North Carolina, in fiscal 2002.
Other Income, net
Other income, net of non-operating expenses, increased 31% or $.8 million
over the prior year quarter. The increase was primarily due to an increase in
interest income due to higher cash balances and a $4.6 million increase in
17
realized gains on the sale of marketable securities in the current quarter,
which was offset by a $4.6 million decrease in income from our pooled asset
funds.
The increase in the loss from our equity investment in Somerset
Pharmaceuticals, Inc. (Somerset) was primarily attributable to increased R&D
expenses. We expect to continue to recognize losses on our equity investment in
Somerset throughout fiscal 2003 as its R&D activities continue.
Six Months Ended September 30, 2002, compared to Six Months Ended September 30,
2001
Net Revenues and Gross Profit
Net revenues for the current six months increased 13% or $70.8 million
compared to the same prior year six months. The Generic segment accounted for
67% or $47.3 million of the total increase in net revenues, while the Brand
segment accounted for the remaining 33% or $23.5 million. New products launched
subsequent to September 30, 2001, primarily generics, contributed net revenues
of $32.3 million.
Generic net revenues increased principally due to increased sales of core
products, which experienced relatively stable pricing, favorable product mix and
increased volume. Excluding the impact of buspirone (15mg and 30mg), Generic net
revenues for the current six months increased 27% or $105.0 million over the
prior year six months. Buspirone net revenues for the current six months
decreased 81%, primarily due to the loss of market exclusivity and the
competitive pressures resulting from new entrants into the marketplace.
The increase in Brand net revenues was due to both favorable pricing,
product mix and increased volume, in part due to the prior year's curtailment of
end-of-quarter promotions.
Gross profit for the current six months increased 10% or $28.7 million.
Generic gross profit increased 4% or $10.1 million, representing 35% of the
total gross profit increase. Increased gross profit contributed from our core
generic products was partially offset by decreased gross profit contributed from
buspirone. Brand gross profit increased 59% or $18.6 million, primarily due to
favorable pricing and product mix and in part to the prior year's curtailment of
end-of-quarter promotions.
Operating Expenses
R&D expenses for the current six months increased 11% or $3.8 million. The
increase was primarily related to expenses incurred by the Generic segment.
Generic studies and related expenses were up $3.5 million primarily due to the
timing and number of studies being conducted. We expect our R&D expenses to
18
continue to increase, for both the Generic and Brand segments, as activities
related to current projects progress.
Selling and marketing expenses increased 14% or $4.0 million. The increase
was primarily attributable to increased brand advertising and promotional
activities, focused primarily on Digitek(R), Phenytek(TM) and, in part,
Amnesteem(TM) (isotretinoin).
G&A expenses for the current six months decreased 26% or $15.2 million. The
decrease in Corporate expenses was primarily related to a decrease in payroll
related expenses and goodwill no longer amortized in the current year. The prior
year six months included expense of $5.3 million for changes in retirement
benefits for certain executive and management employees. Other Corporate
expenses with significant decreases were legal and professional fees of $2.5
million and goodwill amortization expense of $3.2 million. Brand expenses for
the prior year six month period included relocation expenses of $2.6 million for
Bertek's move to Raleigh, North Carolina, which was completed in fiscal 2002.
Other Income, net
The 63% or $11.3 million decrease in other income, net of non-operating
expenses, for the current six months was primarily attributable to decreased
earnings on our limited partnership investments of $15.3 million, which were
partially offset by realized gains of $4.6 million on the sale of certain
marketable securities.
The Somerset loss for the current six months increased $1.3 million
compared to the prior year six months. The increase was primarily attributable
to decreased sales revenues and increased R&D expenses. We expect to continue to
recognize losses on our equity investment in Somerset throughout fiscal 2003 as
its R&D activities continue.
Liquidity and Capital Resources
- -------------------------------
Our primary source of liquidity continues to be cash flow from operating
activities, which was $125.3 million for the current six months. Working capital
as of September 30, 2002, was $980.9 million, an increase of $91.9 million from
March 31, 2002. Of our $1.7 billion of total assets at September 30, 2002, 40%
or $682.8 million was held in cash, cash equivalents and 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 operating needs. As these
instruments mature, we generally reinvest the funds in instruments with similar
characteristics.
In May 2002, the Board of Directors (Board) approved a stock purchase
program that authorized the purchase of up to 10.0 million shares of the
19
Company's outstanding common stock. Through October 24, 2002, we purchased
approximately 4.4 million shares of common stock for $136.6 million.
Capital expenditures during the six months ended September 30, 2002, were
$13.1 million. These expenditures were primarily for machinery and equipment
used in our manufacturing facilities. We expect such expenditures to continue at
current year levels.
Mylan has historically paid a quarterly cash dividend of $.04 per common
share, which, for the six months ended September 30, 2002, totaled $10.1
million. However, our Board approved an increase in the quarterly cash dividend
to $.05 per share, beginning with the dividend payable to shareholders of record
on December 31, 2002, resulting in an expected increase in annual dividends of
approximately $5.0 million.
We maintain commercial insurance to protect against and manage the risks
involved in conducting our business. The cost to obtain insurance coverage for
such risks has significantly increased due to the environment within the
commercial insurance industry. The recent renewals of our policies resulted in
increased deductibles and decreased levels of coverage. We have evaluated and
will continue to evaluate the types and levels of insurance coverage purchased.
To the extent that a loss occurs, it could have a material adverse effect on our
financial position and results of operations depending on the nature of the loss
and the level of insurance coverage maintained.
We are involved in various legal proceedings that are considered normal to
our business (see Note 12 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 financial
position and cash flow.
We are actively pursuing, and are currently 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 flow 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
September 30, 2002, no funds have been advanced under this line of credit, which
expires in March 2003. Additionally, we are continuously evaluating the
potential acquisition of products, as well as companies, as a strategic part of
our future growth. Consequently, we may utilize current cash reserves or incur
additional indebtedness to finance these acquisitions, which could impact future
liquidity.
20
Recent Accounting Pronouncements
- --------------------------------
Effective April 1, 2002, Mylan adopted Statement of Financial Accounting
Standards (SFAS) 142, Goodwill and Other Intangible Assets. Goodwill and other
indefinite lived intangible assets are no longer amortized. Intangible assets
determined to have indefinite lives were tested for potential impairment and no
impairments were indicated. The transitional assessment of goodwill for
impairment as of April 1, 2002, was completed during the quarter ended September
30, 2002, with no indication of impairment. An independent valuation specialist
assisted in the determination of the fair values used to test for impairment.
Assuming the adoption of SFAS 142 had occurred on April 1, 2001, and goodwill
and other indefinite lived assets were no longer amortized, net earnings for the
three and six months ended September 30, 2001, would have increased by $1.8
million and $3.6 million and earnings per basic and diluted share would have
increased by $.02 per share and $.03 per share, respectively.
SFAS 143, Accounting for Asset Retirement Obligations, establishes
standards of accounting for obligations associated with the retirement of
tangible long-lived assets. The statement is effective for fiscal years
beginning after June 15, 2002. We are currently evaluating the impact, if any,
this statement will have on our financial position and results of operations.
Effective April 1, 2002, Mylan adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
The impact of adoption had no material effect on our financial position or
results of operations.
SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities,
requires a liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred rather than when a commitment to an
exit plan is made. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. We believe the adoption of this statement
will not have a material effect on our financial position or results of
operations.
Critical Accounting Policies
- ----------------------------
The following discussion of critical accounting policies was condensed for
presentation in this Report on Form 10-Q 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. Our 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
21
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 that would
result in different amounts being reported and 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 or as components of other
current liabilities. Accounts receivable are presented net of such allowances
and totaled $259.5 million and $214.6 million at September 30, 2002, and March
31, 2002. Other accrued liabilities include $26.8 million and $21.6 million at
September 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.
We are 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 may
differ from those estimated.
Useful Lives and Impairment of Intangibles
As of September 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.
SFAS 142 states that a 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. The determination of fair value in accordance
with SFAS 142 generally requires the evaluation of the reporting unit's
projected sales volumes, pricing structure and anticipated cost environment,
which includes the reporting unit's product pipeline. During the quarter ended
September 30, 2002, we performed this assessment, assisted by an independent
valuation specialist, and determined there was no indication of goodwill
impairment. If the key assumptions and projections utilized in the fair value
22
determinations, primarily our ability to receive new product approvals from the
US Food and Drug Administration (FDA), do not properly reflect future activity,
future valuations could be adversely impacted. The result could cause an
impairment, which could materially affect our financial position and results of
operations.
As of September 30, 2002, and March 31, 2002, recorded intangible assets,
excluding goodwill, net of accumulated amortization, were $159.8 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. 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. If these estimates do not properly reflect future activity,
our financial position and 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 September 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.
Risk Factors
- ------------
The following risk factors could have a material adverse effect on our
business, financial position or results of operations. These risk factors may
not include all of the important factors that could affect our business or our
industry or that could cause our future financial results to differ materially
from historic or expected results or cause the market price of our common stock
to fluctuate or decline. Please refer to our other periodic reports filed with
the Securities and Exchange Commission, including our Annual Report on Form 10-K
for the fiscal year ended March 31, 2002.
23
OUR FUTURE REVENUE GROWTH AND PROFITABILITY ARE DEPENDENT UPON OUR ABILITY TO
DEVELOP AND LICENSE OR OTHERWISE ACQUIRE AND INTRODUCE NEW PRODUCTS ON A TIMELY
BASIS IN RELATION TO OUR COMPETITOR' PRODUCT INTRODUCTIONS, AND OUR FAILURE TO
DO SO SUCCESSFULLY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
Our future revenues and profitability will depend, to a significant extent,
upon our ability to successfully develop and license or otherwise acquire and
commercialize new generic and patent or statutorily protected (usually brand)
pharmaceutical products in a timely manner. Product development is inherently
risky, especially for new drugs for which safety and efficacy have not been
established and the market is not yet proven. The development process,
particularly with regard to new drugs, also requires substantial time, effort
and financial resources. We may not be successful in commercializing any of the
products that we are developing on a timely basis, if at all, which could
adversely affect our product introduction plans, financial position and results
of operations and could cause the market value of our common stock to decline.
FDA approval is required before any drug product, including generic drug
products, can be marketed. The process of obtaining FDA approval to manufacture
and market new and generic pharmaceutical products is rigorous, time-consuming,
costly and largely unpredictable. We may be unable to obtain requisite FDA
approvals on a timely basis for new generic or brand products that we may
develop, license or otherwise acquire. The timing and cost of obtaining FDA
approvals could adversely affect our product introduction plans, financial
position and results of operations and could cause the market value of our
common stock to decline.
The Abbreviated New Drug Application (ANDA) process, through which we
obtain FDA approval for our generic drugs, often results in the FDA granting
final approval to a number of ANDAs for a given product at the time a patent
claim for a corresponding brand product or other market exclusivity expires.
This often forces us to face immediate competition when we introduce a generic
product into the market. Additionally, the Waxman-Hatch Act provides for a
period of 180 days of generic marketing exclusivity for each ANDA applicant that
is first to file an ANDA containing a certification of invalidity,
non-infringement or unenforceability related to a patent listed with respect to
a reference drug product. A reference drug product refers to a drug product,
usually brand, included in the FDA Publication entitled "Approved Drug Products
with Therapeutic Equivalence Evaluations" and known in the industry as the
"Orange Book." If the patent challenge of the first such ANDA applicant is
successful, it generally results in higher market share, net revenues and gross
margin for that applicant. Even if we obtain FDA approval for our generic drug
products, if we are not the first ANDA applicant to challenge a listed patent
for such a product, we may lose significant advantages to a competitor who filed
its ANDA containing such a challenge. Such a situation could have a material
24
adverse effect on our ability to market that product profitably, our financial
position and results of operations and the market value of our common stock
could decline.
OUR APPROVED PRODUCTS MAY NOT ACHIEVE EXPECTED LEVELS OF MARKET ACCEPTANCE,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
Even if we are able to obtain regulatory approvals for our new
pharmaceutical products, generic or brand, the success of those products is
dependent upon market acceptance. Levels of market acceptance for our new
products could be impacted by several factors, including:
o the availability of alternative products from our competitors;
o the price of our products relative to that of our competitors;
o the timing of our market entry;
o the ability of our customers to market our products effectively
to the retail level; and
o the acceptance of our products by government and private formularies.
These factors are not within our control. Our new products may not achieve
expected levels of market acceptance, which could have a material adverse effect
on our profitability, financial position and results of operations and the
market value of our common stock could decline.
A RELATIVELY SMALL GROUP OF PRODUCTS MAY REPRESENT A SIGNIFICANT PORTION OF OUR
NET REVENUES OR NET EARNINGS FROM TIME TO TIME. IF THE VOLUME OR PRICING OF ANY
OF THE PRODUCTS DECLINES, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE
MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Sales of a limited number of our products often represent a significant
portion of our net revenues and net earnings. If the sales or pricing of our
largest selling products decline in the future, our business, financial position
and results of operations could be materially adversely affected and the market
value of our common stock could decline.
WE FACE VIGOROUS COMPETITION FROM OTHER PHARMACEUTICAL MANUFACTURERS THAT
THREATENS THE COMMERCIAL ACCEPTANCE AND PRICING OF OUR PRODUCTS, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Our competitors vary depending upon therapeutic and product categories. Our
primary competitors include major manufacturers of brand name and generic
25
pharmaceuticals. Our competitors may be able to develop products and processes
competitive with or superior to our own for many reasons, including that they
may have:
o proprietary processes or delivery systems;
o larger research and development and marketing staffs;
o larger production capabilities in a particular therapeutic area;
o more experience in preclinical testing and human clinical trials;
o more products; or
o more experience in developing new drugs and financial resources,
particularly with regards to brand manufacturers.
Each of these factors and others could have a material adverse effect on
our business, financial position and results of operations and could cause the
market value of our common stock to decline.
BECAUSE THE PHARMACEUTICAL INDUSTRY IS HEAVILY REGULATED, WE FACE SIGNIFICANT
COSTS AND UNCERTAINTIES ASSOCIATED WITH OUR EFFORTS TO COMPLY WITH APPLICABLE
REGULATIONS, AND SHOULD WE FAIL TO COMPLY WE COULD EXPERIENCE MATERIAL ADVERSE
EFFECTS ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND THE
MARKET VALUE OF OUR COMMON STOCK COULD DECLINE.
The pharmaceutical industry is subject to regulation by various federal and
state governmental authorities. For instance, we must comply with FDA
requirements with respect to the manufacture, labeling, sale, distribution,
marketing, advertising, promotion and development of pharmaceutical products.
Failure to comply with FDA and other governmental regulations can result in
fines, disgorgement, unanticipated compliance expenditures, recall or seizure of
products, total or partial suspension of production and/or distribution,
suspension of FDA's review of New Drug Applications (NDAs), which are filed for
products with active ingredients or combinations of such ingredients not
previously approved by the FDA, or ANDAs, enforcement actions, injunctions and
criminal prosecution. Under certain circumstances, the FDA also has the
authority to revoke previously granted drug approvals. Although we have internal
regulatory compliance programs and policies and have had a favorable compliance
history, if these programs were not to meet regulatory agency standards in the
future or if our compliance were deemed deficient in any significant way, it
could have a material adverse effect on our business, financial position and
results of operations and could cause the market value of our common stock to
decline.
In addition to the new drug approval process, the FDA also regulates the
facilities and operational procedures that we use to manufacture our products.
We must register our facilities with the FDA. All products manufactured in those
facilities must be made in a manner consistent with "current good manufacturing
practices." Failure to do so could result in an enforcement action brought by
the FDA, which periodically inspects our manufacturing facilities for
compliance. FDA approval to manufacture a drug is site-specific. If the FDA
would cause one of our manufacturing facilities to cease or limit production,
26
our business could be adversely affected. Delay and cost in obtaining FDA
approval to manufacture at a different facility also could have a material
adverse effect on our business, financial position and results of operations and
could cause the market value of our common stock to decline.
We also are subject to various other federal, state and local environmental
protection laws and regulations, including those governing the discharge of
materials into the environment. Although we have not incurred significant costs
associated with complying with such environmental provisions in the past, if
changes to such environmental provisions are made in the future that require
significant changes in our operations or if we engage in the development and
manufacturing of new products requiring new or different environmental controls,
we may be required to expend significant funds. Such changes could have a
material adverse effect on our business, financial position and results of
operations and could cause the market value of our common stock to decline.
WE EXPEND A SIGNIFICANT AMOUNT OF RESOURCES ON RESEARCH AND DEVELOPMENT EFFORTS
THAT MAY NOT LEAD TO SUCCESSFUL PRODUCT INTRODUCTIONS.FAILURE TO SUCCESSFULLY
INTRODUCE PRODUCTS INTO THE MARKET COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND THE MARKET VALUE OF
OUR COMMON STOCK COULD DECLINE.
Much of our development effort is focused on technically
difficult-to-formulate products and/or products that require advanced
manufacturing technology. Research and development efforts are conducted
primarily to enable us to manufacture and market FDA-approved pharmaceuticals in
accordance with FDA regulations. Typically, research expenses related to the
development of innovative compounds and the filing of NDAs are significantly
greater than those expenses associated with ANDAs. As we continue to develop new
products, our research expenses will likely increase. Because of the inherent
risk associated with research and development efforts in our industry,
particularly with respect to new drugs, our research and development
expenditures may not result in the successful introduction of FDA approved new
pharmaceutical products. Also, after submission, the FDA may request additional
studies be conducted, and as a result, we may be unable to reasonably determine
the total research and development costs to develop a particular product. To the
extent that we expend significant resources on research and development efforts
and are not able ultimately to introduce successful new products as a result of
those efforts, our business, financial position and results of operations may be
materially adversely affected and the market value of our common stock could
decline.
27
A SIGNIFICANT PORTION OF OUR NET REVENUES ARE DERIVED FROM SALES TO A LIMITED
NUMBER OF CUSTOMERS. ANY SIGNIFICANT REDUCTION OF BUSINESS WITH ANY OF THESE
CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND THE MARKET VALUE OF OUR COMMON STOCK
COULD DECLINE.
A significant portion of our net revenues are derived from sales to a
limited number of customers. If we were to lose the business of, or experience a
significant reduction in business with, any of these or our other major
customers, or if any of them were to experience difficulty in paying us on a
timely basis, our business, financial position and results of operations could
be materially adversely affected and the market value of our common stock could
decline.
THE USE OF LEGAL, REGULATORY AND LEGISLATIVE STRATEGIES BY COMPETITORS, BOTH
BRAND AND GENERIC, MAY INCREASE OUR COSTS ASSOCIATED WITH THE INTRODUCTION OR
MARKETING OF OUR GENERIC PRODUCTS OR COULD DELAY OR PREVENT SUCH INTRODUCTION.
THESE FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
Our competitors often pursue strategies to prevent or delay competition
from generic alternatives to brand products. These strategies include, but are
not limited to:
o seeking to establish regulatory and legal obstacles that would make
it more difficult to demonstrate bioequivalence;
o initiating legislative efforts in various states to limit the
substitution of generic versions of brand pharmaceuticals;
o filing suits for patent infringement that automatically delays FDA
approval of many generic products;
o introducing "second generation" products prior to the expiration of
market exclusivity for the reference product, which often materially
reduces the demand for the first generic product for which we seek
FDA approval;
o obtaining extensions of market exclusivity by conducting trials of
brand drugs in pediatric populations;
o persuading the FDA to withdraw the approval of brand name drugs,
for which the patents are about to expire, thus allowing the brand
name company to obtain new patented products serving as substitutes
for the products withdrawn;
o seeking to obtain new patents on drugs for which patent protection
is about to expire; and
o filing a citizen petition with the FDA, which often results in
delays of our approvals.
28
Some companies have lobbied Congress for amendments to the Waxman-Hatch
legislation that would give them additional advantages over generic competitors.
For example, although the term of a company's drug patent can be extended to
reflect a portion of the time an NDA is under regulatory review, some companies
have proposed extending the patent term by a full year for each year spent in
clinical trials, rather than the one-half year that is currently permitted. If
proposals like these become effective, our entry into the market and our ability
to generate revenues associated with these products may be delayed, which could
have a material adverse effect on our business, financial position and results
of operations and could cause the market value of our common stock to decline.
THE USE OF LEGAL, REGULATORY AND LEGISLATIVE STRATEGIES BY COMPETITORS, BOTH
BRAND AND GENERIC, MAY INCREASE OUR COSTS ASSOCIATED WITH THE INTRODUCTION OR
MARKETING OF OUR GENERIC PRODUCTS OR COULD DELAY OR PREVENT SUCH INTRODUCTION.
THESE FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
The active ingredient(s), i.e., the chemical compound(s) which produces the
desired therapeutic effect, and other materials and supplies that we use in our
pharmaceutical manufacturing operations are generally available and purchased
from many different foreign and domestic suppliers. In some cases, however, we
have listed only one supplier in our applications with the FDA. Although we
maintain safety stocks in inventory, and in some cases have received FDA
approval to use alternative suppliers should the need arise, a prolonged
interruption in the supply of a single-sourced active ingredient could cause our
financial position and results of operations to be materially adversely affected
and the market value of our common stock could decline. In addition, if any of
our suppliers interrupt the supply of products that we use or experience quality
deficiencies in products that they supply to us for a prolonged period, it could
have a material adverse effect on our business, financial position and results
of operations, and the market value of our common stock could decline.
WE USE SEVERAL MANUFACTURING FACILITIES TO MANUFACTURE OUR PRODUCTS. HOWEVER, A
SIGNIFICANT NUMBER OF OUR GENERIC PRODUCTS ARE PRODUCED AT ONE LOCATION.
PRODUCTION AT THE FACILITY COULD BE INTERRUPTED, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND
COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Although we have other facilities, a significant amount of our generic
products are produced at our largest manufacturing facility. A significant
disruption at that facility, even on a short-term basis, could impair our
ability to produce and ship products to the market on a timely basis, which
could have a material adverse effect on our business, financial position and
29
results of operations and could cause the market value of our common stock to
decline.
WE MAY EXPERIENCE DECLINES IN THE SALES AND PRICES OF OUR PRODUCTS AS THE RESULT
OF THE CONTINUING TREND TOWARD CONSOLIDATION OF CERTAIN CUSTOMER GROUPS SUCH AS
THE WHOLESALE DRUG DISTRIBUTION AND RETAIL PHARMACY INDUSTRIES AND THE EMERGENCE
OF LARGE BUYING GROUPS. ANY SUCH DECLINES COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE
THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Drug wholesalers and retail drug chains have undergone, and are continuing
to undergo, significant consolidation. This consolidation may result in these
groups gaining additional purchasing leverage and consequently increasing the
product pricing pressures facing our business. The emergence of large buying
groups representing independent retail pharmacies and the prevalence and
influence of managed care organizations and similar institutions potentially
enable those groups to attempt to extract price discounts on our products. The
result of these developments may have a material adverse effect on our business,
financial position and results of operations and could cause the market value of
our common stock to decline.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL AND OTHER PROPRIETARY PROPERTY IN
AN EFFECTIVE MANNER, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF
OUR COMMON STOCK TO DECLINE.
We own or license a number of patents in the US and in foreign countries
covering certain products. We consider the overall protection of our patents,
trademarks and license rights to be of material value and will act appropriately
to prevent these rights from being infringed. Our patents on our brand products
may not prevent other companies from developing functionally equivalent products
or from challenging the validity or enforceability of our patents. If our
patents are found to be non-infringed, invalid or not enforceable we could
experience an adverse affect on our ability to commercially promote patented
products. We could be required to enforce our patent or other intellectual
property rights through litigation, which can be protracted and involve
significant expense and an inherently uncertain outcome. Any negative outcome
could have a material adverse effect on our business, financial position and
results of operations and could cause the market value of our common stock to
decline.
30
OUR COMPETITORS MAY ALLEGE THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY,
FORCING US TO EXPEND SUBSTANTIAL RESOURCES IN RESULTING LITIGATION, THE OUTCOME
OF WHICH IS UNCERTAIN. ANY UNFAVORABLE OUTCOME OF SUCH LITIGATION COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Companies that produce brand pharmaceutical products routinely bring
litigation against ANDA applicants who seek FDA approval to manufacture and
market generic forms of their branded products. These companies allege patent
infringement or other violations of intellectual property rights as the basis
for filing suit against an ANDA applicant. Litigation often involves significant
expense, or can delay or prevent introduction of our generic products. There may
also be situations where the Company uses its business judgement and decides to
market and sell products, notwithstanding the fact that allegations of patent
infringement(s) by our competitors have not been finally resolved by the courts.
An adverse decision in a case such as this or in other similar litigation could
have a material adverse effect on our business, financial position and results
of operations and could cause the market value of our common stock to decline.
WE MAY EXPERIENCE REDUCTIONS IN THE LEVELS OF REIMBURSEMENT FOR PHARMACEUTICAL
PRODUCTS BY GOVERNMENTAL AUTHORITIES, HMOS OR OTHER THIRD-PARTY PAYERS. ANY SUCH
REDUCTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
Various governmental authorities and private health insurers and other
organizations, such as HMOs, provide reimbursement to consumers for the cost of
certain pharmaceutical products. Demand for our products depends in part on the
extent to which such reimbursement is available. Third-party payers increasingly
challenge the pricing of pharmaceutical products. This trend and other trends
toward the growth of HMOs, managed healthcare and legislative healthcare reform
create significant uncertainties regarding the future levels of reimbursement
for pharmaceutical products. Further, any reimbursement may be reduced in the
future, perhaps to the point that market demand for our products declines. Such
a decline could have a material adverse effect on our business, financial
position and results of operations and could cause the market value of our
common stock to decline.
WE ARE INVOLVED IN VARIOUS LEGAL PROCEEDINGS AND MAY EXPERIENCE UNFAVORABLE
OUTCOMES OF SUCH PROCEEDINGS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE
MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
We are involved in various legal proceedings including, but not limited to,
product liability, breach of contract and claims involving Medicaid and Medicare
31
reimbursements, some of which are described in our periodic reports and involve
claims for substantial amounts of money or for other relief. If any of these
legal proceedings were to result in an adverse outcome, the impact could have a
material adverse effect on our business, financial position and results of
operations and could cause the market value of our common stock to decline.
OUR ACQUISITION STRATEGIES INVOLVE A NUMBER OF INHERENT RISKS. THESE RISKS COULD
CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE A DECLINE IN THE MARKET VALUE OF OUR COMMON STOCK.
We continually seek to expand our product line through complementary or
strategic acquisitions of other companies, products and assets, through joint
ventures, licensing agreements or other arrangements. Acquisitions, joint
ventures and other business combinations involve various inherent risks, such as
assessing accurately the values, strengths, weaknesses, contingent and other
liabilities, regulatory compliance and potential profitability of acquisition or
other transaction candidates. Other inherent risks include the potential loss of
key personnel of an acquired business, our inability to achieve identified
financial and operating synergies anticipated to result from an acquisition or
other transaction and unanticipated changes in business and economic conditions
affecting an acquisition or other transaction. International acquisitions and
other transactions could also be affected by export controls, exchange rate
fluctuations, domestic and foreign political conditions and the deterioration in
domestic and foreign economic conditions.
We may be unable to realize synergies or other benefits expected to result
from acquisitions, joint ventures and other transactions or investments we may
undertake, or be unable to generate additional revenue to offset any
unanticipated inability to realize these expected synergies or benefits.
Realization of the anticipated benefits of acquisitions or other transactions
could take longer than expected, and implementation difficulties, market factors
and the deterioration in domestic and global economic conditions could alter the
anticipated benefits of any such transactions. These factors could cause a
material adverse effect on our business, financial position and results of
operations and could cause a decline in the market value of our common stock.
OUR FUTURE SUCCESS IS HIGHLY DEPENDENT ON OUR CONTINUED ABILITY TO ATTRACT AND
RETAIN KEY PERSONNEL. ANY FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Because our success is largely dependent on the scientific nature of our
business, it is imperative that we attract and retain qualified personnel in
order to develop new products and compete effectively. If we fail to attract and
32
retain key scientific, technical or management personnel, our business could be
affected adversely. While we have employment agreements with certain key
employees, we may not succeed in retaining all of these persons, which could
have a material adverse effect on our business, financial position and results
of operations and could cause the market value of our common stock to decline.
WE MAY MAINTAIN INVESTMENTS IN MARKETABLE DEBT AND/OR EQUITY SECURITIES, OTHER
INVESTMENTS, BOTH PUBLICLY AND PRIVATELY HELD, AND MAY MAINTAIN DEPOSIT BALANCES
AT BANKS IN EXCESS OF FEDERALLY INSURED AMOUNTS. WE MAY EXPERIENCE DECLINES IN
THE MARKET VALUE OF THESE SECURITIES, AND/OR LOSSES OF PRINCIPAL INVESTED OR AN
UNINSURED LOSS OF DEPOSITED FUNDS. SIGNIFICANT DECLINES OR LOSSES COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
To the extent that we maintain investments in marketable debt securities,
marketable equity securities, and/or investments in other securities, both
publicly and privately held, we are subject to many risks. Such risks include
market risk associated with declines in the market values of such securities,
interest rate risk and the risk of default. As a result of such risks, we could
experience a substantial loss, or may even lose all, of the basis or principal
we have invested in such securities. Any such declines or losses could have a
material adverse effect on our business, financial position and results of
operations and could cause the market value of our common stock to decline.
THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH
GAAP. ANY CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
The consolidated and condensed consolidated financial statements included
in the periodic reports we file with the Securities and Exchange Commission are
prepared in accordance with generally accepted accounting principles in the
United States of America, or GAAP. The preparation of financial statements in
accordance with GAAP involves making estimates, judgments and assumptions that
affect reported amounts of assets (including intangible assets), liabilities,
revenues, expenses and income. This includes, but is not limited to, estimates,
judgments and assumptions used in the adoption of the provisions of SFAS 142,
Goodwill and Other Intangible Assets and SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Estimates, judgments and assumptions are
inherently subject to change in the future, and any such changes could result in
corresponding changes to the amounts of assets (including goodwill and other
intangible assets), liabilities, revenues, expenses and income. Any such changes
33
could have a material adverse effect on our financial position and results of
operations and could cause the market value of our common stock to decline.
Forward-Looking Statements
- --------------------------
This 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. These statements can be identified 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
Report on Form 10-Q, as well as in other documents that we filed with the
Securities and Exchange Commission. We undertake no obligation to update any
forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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. The following table summarizes the
investments which subject the Company to market risk:
September 30, March 31,
(in thousands) 2002 2002
---- ----
Debt securities $ 440,368 $ 435,499
Equity securities 27,172 20,767
Pooled asset funds 11,224 26,144
--------- ---------
$ 478,764 $ 482,410
========= =========
34
Pooled Asset Funds
Pooled asset funds consist of investments in limited liability
partnerships. The assets of these funds are typically actively traded and are
exposed to market fluctuations. During the quarter ended September 30, 2002, we
received a distribution of $11.6 million from a certain fund in the form of
common shares of a publicly traded company. These shares are classified as
marketable equity securities.
Unlike investments in marketable debt and equity securities, the changes in
the market values of these investments are recognized as other income or loss in
the Consolidated Statements of Earnings. A 20% change in the market value of the
pooled asset funds would result in a $2.2 million change in other assets and a
corresponding change to other income or expense.
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in this Report on Form 10-Q is recorded,
processed, summarized and reported within the time period specified. Our
management, including the Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act) within ninety days
prior to the filing of this Report and has concluded that such disclosure
controls and procedures are effective.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the last
day they were evaluated by management, including our Chief Executive Officer and
Chief Financial Officer.
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS
Product Litigation
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 vigorously defend our position. AN ADVERSE OUTCOME IN ANY OF
THESE PROCEEDINGS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION
AND RESULTS OF OPERATIONS.
35
Paclitaxel
In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories
Inc. (Abbott) filed suit against the Company in the United States (US) District
Court for the Western District of Pennsylvania. Plaintiffs allege that 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 treble 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.
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 $10.0 million, plus unspecified 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.
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 Federal 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
36
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.
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 Pfizer regarding nifedipine. Two of the class actions have been
dismissed in their entirety and the remaining actions have been dismissed in
part. The plaintiffs in the remaining actions, as well as Biovail, are seeking
unspecified compensatory and treble 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 US Food and Drug Administration (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 immediately grant 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 of a bond in the amount
of $25.0 million, 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 (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 tablet since August 2001 and the 5mg and 10mg tablets
since March 2002. BMS appealed the preliminary injunction order to both 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.
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
37
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 US Supreme Court was denied in
October 2002.
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 treble 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 for pre-trial purposes in the US District
Court for the Southern District of New York. The New York Court has granted the
Company's motion for summary judgment 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 January 1999, four companies who claim to have purchased lorazepam
and/or clorazepate from the Company filed suit alleging 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 those two products. In July 2001, the US Court for
the District of Columbia certified a litigation class consisting of direct
purchasers. The plaintiffs seek to recover treble damages equal to three times
38
the overcharge they claim to have paid, plus injunctive relief, attorneys' fees,
costs of litigation and such other relief as the court deems proper.
In December 2001, four third-party reimbursers filed separate actions
against the Company. These actions are pending in the US District Court for the
District of Columbia. The Company is also defending a civil action in the State
of California that was brought under state law on behalf of independent retail
pharmacies who purchased lorazepam and/or clorazepate. The California action has
not been certified as a class action. The plaintiffs in each of these actions
seek unspecified monetary damages, equitable relief, attorneys' fees and costs
of litigation.
Average Wholesale Price Litigation
The Company, along with a number of other pharmaceutical manufacturers, has
been named as a defendant in four lawsuits filed in the state courts of
California in which the plaintiffs allege the defendants unlawfully, unfairly
and fraudulently manipulated the reported average wholesale price of various
products, allegedly to increase third party reimbursements to others for their
products. None of these four cases has been certified as a class action,
although all four cases seek class action and representative status. Plaintiffs
seek equitable relief in the form of disgorgement and restitution, attorneys'
fees and costs of litigation. While it is not possible to determine with any
degree of certainty the ultimate outcome of these suits, we believe that we have
meritorious defenses with respect to the claims asserted against the Company,
and we intend to vigorously defend our position. AN ADVERSE OUTCOME IN ANY OF
THESE SUITS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION AND
RESULTS OF OPERATIONS.
Other Litigation
The Company is involved in various other legal proceedings that are
considered normal to its business. While it is not feasible to predict the
ultimate outcome of such other proceedings, we believe that the ultimate outcome
of such other proceedings will not have a material adverse effect on our results
of operations or financial position.
39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following provides a summary of votes cast for the proposals on which
our shareholders voted at our Annual Meeting of Shareholders held on July 26,
2002.
Proposal No. 1 - Election of Eleven Directors.
Nominee For Withheld
------- --- --------
Milan Puskar 106,711,820 3,730,913
Robert J. Coury 106,852,059 3,590,674
Wendy Cameron 107,097,191 3,345,542
Leslie B. Daniels(1) 106,592,768 3,849,965
Laurence S. DeLynn 106,393,165 4,049,568
John C. Gaisford, M.D. 106,462,193 3,980,540
Douglas J. Leech 106,247,714 4,195,019
Patricia A. Sunseri 106,833,630 3,609,103
C.B. Todd 106,834,762 3,607,971
Randall L. Vanderveen, Ph.D. 107,119,522 3,323,211
Stuart A. Williams, Esq. 106,444,594 3,998,139
(1) Resigned effective September 1, 2002.
Proposal No. 2 - Approval of proposed amendment and restatement of the
Mylan Laboratories Inc. 1997 Incentive Stock Option Plan.
For Against Abstain
--- ------- -------
102,097,178 7,783,463 562,079
Proposal No. 3 - Approval of the appointment of Deloitte & Touche LLP as
independent auditors.
For Against
--- -------
104,483,610 5,485,278
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.
40
3.2 By-laws of the registrant, as amended to date, filed herewith.
10.1 Mylan Laboratories Inc. 1997 Incentive Stock Option Plan, as
amended to date, 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report on Form 10-Q for the quarterly period
ended September 30, 2002, to be signed on its behalf by the undersigned
thereunto duly authorized as of November 14, 2002.
Mylan Laboratories Inc.
(Registrant)
/s/ Robert J. Coury
------------------------------
Robert J. Coury
Vice-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)
41
Sarbanes-Oxley Section 302 Certification
I, Robert J. Coury, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mylan Laboratories
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period[s] presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Robert J. Coury
------------------------
Robert J. Coury
Chief Executive Officer,
Mylan Laboratories Inc.
Sarbanes-Oxley Section 302 Certification
I, Edward J. Borkowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mylan Laboratories
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period[s] presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Edward J. Borkowski
------------------------
Edward J. Borkowski
Chief Financial Officer,
Mylan Laboratories Inc.
Sarbanes-Oxley Section 906 Certification
Each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based
on my knowledge, this Report on Form 10-Q for the quarter ended September 30,
2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and the information contained in
such report fairly presents, in all material respects, the financial condition
and results of operations of Mylan Laboratories Inc.
Date: November 14, 2002
/s/ Robert J. Coury
-----------------------
Robert J. Coury
Chief Executive Officer
/s/ Edward J. Borkowski
-----------------------
Edward J. Borkowski
Chief Financial Officer