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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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 February 5, 2003
- ---------------------- ----------------
$ 0.50 par value 183,792,386
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended
December 31, 2002
INDEX
-------
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Statements of Earnings
- Three and Nine Months Ended December 31, 2002 and 2001 2
Condensed Consolidated Balance Sheets
- December 31, 2002, and March 31, 2002 3
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended December 31, 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 17
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 38
Item 4: Controls and Procedures 39
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 39
Item 6: Exhibits and Reports on Form 8-K 43
SIGNATURES 44
CERTIFICATIONS
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(unaudited; in thousands, except per share amounts)
Three Months Nine Months
Period Ended December 31, 2002 2001 2002 2001
------------------------ ------------------------
Net Renues $320,494 $297,191 $915,506 $821,452
Cost of sales 150,918 119,819 431,596 358,444
--------- --------- --------- ---------
Gross profit 169,576 177,372 483,910 463,008
--------- --------- --------- ---------
Operating expenses:
Research & development 22,941 13,441 59,953 46,687
Selling & marketing 15,173 15,279 48,598 44,675
General & administrative 28,769 28,705 73,020 88,122
--------- --------- --------- ---------
Total operating expenses 66,883 57,425 181,571 179,484
--------- --------- --------- ---------
Earnings from operations 102,693 119,947 302,339 283,524
Other income, net 3,734 3,165 7,335 19,410
--------- --------- --------- ---------
Earnings before income taxes 106,427 123,112 309,674 302,934
Provision for income taxes 37,995 44,936 111,164 109,974
--------- --------- --------- ---------
Net earnings $ 68,432 $ 78,176 $198,510 $192,960
========= ========= ========= =========
Earnings per common share:
Basic $ 0.37 $ 0.41 $ 1.06 $ 1.03
========= ========= ========= =========
Diluted $ 0.37 $ 0.41 $ 1.05 $ 1.01
========= ========= ========= =========
Weighted average common shares:
Basic 184,348 188,388 187,107 187,998
========= ========= ========= =========
Diluted 186,594 191,836 189,064 190,801
========= ========= ========= =========
Cash dividend declared
per common share $ 0.03 $ 0.03 $ 0.09 $ 0.08
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
2
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited; in thousands)
December 31, March 31,
2002 2002
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 253,462 $160,790
Marketable securities 454,500 456,266
Accounts receivable, net 183,821 150,054
Inventories 214,574 195,074
Deferred income tax benefit 106,199 92,642
Other current assets 12,718 11,819
------------ ------------
Total current assets 1,225,274 1,066,645
Property, plant and equipment, net 173,385 166,531
Intangible assets, net 155,050 169,315
Goodwill, net 103,196 103,196
Investment in and advances to Somerset 18,248 22,720
Other assets 79,275 92,866
------------ ------------
Total assets $ 1,754,428 $ 1,621,273
============ ============
Liabilities and shareholders' equity
Liabilities:
Current liabilities:
Trade accounts payable $ 54,918 $ 36,534
Income taxes payable 98,507 63,826
Other current liabilities 109,310 77,321
------------ ------------
Total current liabilities 262,735 177,681
Long-term obligations 20,858 23,883
Deferred income tax liability 18,331 17,470
------------ ------------
Total liabilities 301,924 219,034
------------ ------------
Shareholders' equity
Common stock 99,826 99,150
Additional paid-in capital 340,584 316,669
Retained earnings 1,262,951 1,080,736
Accumulated other comprehensive earnings 6,952 7,920
------------ ------------
1,710,313 1,504,475
Less: treasury stock at cost 257,809 102,236
------------ ------------
Total shareholders' equity 1,452,504 1,402,239
------------ ------------
Total liabilities and shareholders' equity $ 1,754,428 $ 1,621,273
============ ============
See Notes to Condensed Consolidated Financial Statements
3
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)
Nine Months Ended December 31, 2002 2001
---- ----
Cash flows from operating activities:
Net earnings $198,510 $192,960
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Depreciation and amortization 30,130 35,599
Realized gain on sale of marketable securities (5,246) (324)
Deferred income tax benefit (14,439) (20,930)
Equity in loss of and cash received from Somerset 3,770 2,978
Loss(earnings)from limited liability partnerships 2,955 (14,723)
Adjustments to estimated sales allowances 55,608 70,180
Other noncash items 1,904 6,190
Changes in operating assets and liabilities:
Accounts receivable (82,210) 5,795
Inventories (21,264) (34,102)
Trade accounts payable 18,384 (10,620)
Income taxes 45,118 55,153
Other operating assets and liabilities, net 20,784 17,049
----------- -----------
Net cash provided from operating activities 254,004 305,205
----------- -----------
Cash flows from investing activities:
Capital expenditures (22,154) (13,980)
Proceeds from the sale of fixed assets 22 4,137
Purchase of marketable securities (604,284) (621,922)
Sale and maturity of marketable securities 621,482 251,563
Other items, net (1,892) 4,882
----------- -----------
Net cash used in investing activities (6,826) (375,320)
----------- -----------
Cash flows from financing activities:
Payments on long-term obligations - (3,227)
Cash dividends paid (15,073) (15,021)
Purchase of common stock (155,573) -
Proceeds from exercise of stock options 16,140 12,603
----------- -----------
Net cash used in financing activities (154,506) (5,645)
----------- -----------
Net increase (decrease) in cash and cash equivalents 92,672 (75,760)
Cash and cash equivalents - beginning of period 160,790 229,183
----------- -----------
Cash and cash equivalents - end of period $253,462 $153,423
=========== ===========
Additional disclosures:
Cash paid for interest $ - $ 150
=========== ===========
Cash paid for income taxes $ 80,486 $ 72,036
=========== ===========
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) of Mylan
Laboratories Inc. and Subsidiaries ("Mylan" or "the Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America and 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 included in audited financial statements have been condensed or
omitted. The accompanying interim financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the 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 the Company's
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 nine months ended
December 31, 2002, and the interim cash flows for the nine months ended
December 31, 2002, are not necessarily indicative of the results to be
expected for the full fiscal year or any other future period.
On January 27, 2003, the Company effected a three-for-two split of its
common stock. Pursuant to the split, all shareholders of record as of
January 17, 2003 received one additional share of common stock for every
two shares held on that date. Fractional share amounts resulting from the
split were paid to shareholders in cash. All share and per share amounts
contained in the interim financial statements, and in these notes, were
adjusted for all periods to reflect the stock split.
5
2. Revenue Recognition and Accounts Receivable
Revenue is recognized 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 $258,606 and $210,074 as of December 31, 2002, and
March 31, 2002, respectively. Other current liabilities include $33,216 and
$26,140 at December 31, 2002, and March 31, 2002, respectively, for certain
rebates and other adjustments that are payable to indirect customers.
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 nine months ended December 31, 2001, would have increased by
$1,801 and $5,403 and earnings per basic and diluted share would have
increased by $.01 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. The Company is currently evaluating the
impact, if any, that the adoption of this statement will have on its
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 the adoption of this statement had no material effect
on the Company's financial position or results of operations.
6
SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, requires that 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. The
Company does not believe that the adoption of this statement will have a
material effect on its financial position or results of operations.
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS 148, Accounting for Stock-Based Compensation-Transition and
Disclosure an amendment of FASB Statement No. 123, which amends SFAS 123,
Accounting for Stock-Based Compensation. SFAS 148 provides alternatives for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
existing disclosure requirements for all companies with stock-based
compensation plans and establishes disclosure requirements for interim
periods. In accordance with SFAS 123, Mylan will continue to account for
its stock option plan using the intrinsic-value-based method as defined in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, but will adopt the disclosure provisions of SFAS 148 in its
Annual Report on Form 10-K for the year ended March 31, 2003. The Company
does not believe that the adoption of this statement will have a material
effect on its financial position or results of operations.
The FASB also issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. This interpretation requires disclosure of
guarantees and indemnification agreements made by a company and requires
the recognition of a liability for the fair value of guarantees or
indemnifications initiated after December 31, 2002. The Company is
currently assessing the impact that this interpretation will have on its
financial statements.
7
4. Balance Sheet Components
Selected balance sheet components consist of the following:
December 31, March 31,
2002 2002
---- ----
Inventories:
Raw materials $100,825 $ 74,782
Work in process 31,954 31,056
Finished goods 81,795 89,236
-------- --------
$214,574 $195,074
======== ========
Other current liabilities:
Rebates $ 33,216 $ 26,140
Payroll and related 28,579 18,936
Royalties and product license fees 18,161 12,363
Cash dividends payable 6,289 5,067
Other 23,065 14,815
-------- --------
$109,310 $ 77,321
======== ========
5. 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 2,246,000 and 3,448,000 for the three months
ended December 31, 2002 and 2001, respectively, and 1,957,000 and 2,803,000
for the nine months ended December 31, 2002 and 2001, respectively.
Antidilutive stock options of 254,000 and 90,000 were excluded from
the diluted earnings per common share calculation for the three months
ended December 31, 2002 and 2001, respectively, and 611,000 and 381,000
were excluded for the nine months ended December 31, 2002 and 2001,
respectively.
8
6. Goodwill and Intangible Assets
Goodwill by operating segment as of December 31, 2002, and April 1,
2002 is as follows:
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
--------- ---- ------------- -----
December 31, 2002
- -----------------
Amortized intangible assets:
Patents and technologies 19 $117,435 $34,582 $ 82,853
Product rights and licenses 12 107,273 45,305 61,968
Other 20 13,875 4,898 8,977
-------- ------- --------
$238,583 $84,785 153,798
======== =======
Intangible assets no longer subject to amortization:
Trademarks 1,252
--------
$155,050
========
March 31, 2002
- --------------
Amortized intangible assets:
Patents and technologies $119,663 $32,056 $ 87,607
Product rights and licenses 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
======== ======= ========
As of June 30, 2002, the Company 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
current operations.
Amortization expense for the three and nine month periods ended
December 31, 2002 and 2001 was $4,714 and $14,145, respectively, and is
expected to be $18,578 for the fiscal year. Expected amortization expense
for fiscal years 2004 through 2008 is $18,369, $16,904, $13,355, $13,143
and $13,066, respectively.
9
7. Comprehensive Earnings
Comprehensive earnings consist of the following:
Three Months Nine Months
------------ -----------
Period Ended December 31, 2002 2001 2002 2001
---- ---- ---- ----
Net earnings $ 68,432 $ 78,176 $198,510 $192,960
Other comprehensive earnings
(loss) net of tax:
Net unrealized gain
on marketable securities 710 1,540 2,442 3,887
Reclassification for gains
included in net earnings (244) (10) (3,410) (210)
--------- -------- -------- --------
466 1,530 (968) 3,677
--------- -------- -------- --------
Comprehensive earnings $ 68,898 $ 79,706 $197,542 $196,637
========= ======== ======== ========
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 December 31, 2002 and March 31, 2002, there were 300,000,000
shares of common stock authorized with 199,652,748 and 198,300,792 shares
issued, respectively. Treasury shares held as of December 31, 2002 and
March 31, 2002 were 16,234,761 and 8,719,549, respectively.
In May 2002, the Board of Directors approved a stock purchase program
to purchase shares of the Company's outstanding common stock. During the
nine months ended December 31, 2002, the Company purchased 7,500,000 shares
for approximately $155.5 million. At December 31, 2002, 7,500,000
additional shares are available for purchase under the stock purchase
program. Subsequent to December 31, 2002, and through February 5, 2003,
2,544,300 additional shares were purchased.
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 7,500,000 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 22,500,000 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 December 31, 2002, 8,164,705 shares were
available for future grants.
10
10. Segment Reporting
Segment net revenues represent revenues from unrelated third parties.
For the Generic and Brand Segments, segment profit (loss) represents
segment gross profit less direct research and development, selling and
marketing and general and administrative expenses. Corporate/Other includes
legal costs, administrative expenses and other income and expense.
The following table presents the results of operations for each of the
Company's operating segments:
Three Months Nine Months
-------------- --------------
Period Ended December 31, 2002 2001 (1) 2002 2001 (1)
---- ---- ---- ----
Consolidated:
Net revenues $320,494 $297,191 $915,506 $821,452
Pretax earnings 106,427 123,112 309,674 302,934
Generic:
Net revenues 253,888 261,334 763,814 723,973
Segment profit 112,649 139,229 339,719 356,485
Brand:
Net revenues 66,606 35,857 151,692 97,479
Segment profit (loss) 10,742 106 11,455 (16,509)
Corporate/Other:
Segment loss (16,964) (16,223) (41,500) (37,042)
(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.
11
12. Contingencies
Legal Proceedings
While it is not possible to determine with any degree of certainty the
ultimate outcome of the following legal proceedings, the Company believes
that it has meritorious defenses with respect to the claims asserted
against it and intends to vigorously defend its position. AN ADVERSE
OUTCOME IN ANY OF THESE PROCEEDINGS COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S 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, 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
12
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. 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
13
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 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
14
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.
On January 7, 2003, the Company announced that it had reached an
agreement in principle with BMS, which would resolve all disputes between
the companies related to buspirone and paclitaxel, BMS' Buspar(R) and
Taxol(R), respectively, when finalized. As part of the agreement in
principle, the Company would receive a one-time payment of approximately
$35.0 million, and non-exclusive, paid-up, royalty free, irrevocable
licenses under any applicable BMS patents to manufacture, market and sell
buspirone and paclitaxel.
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,
conspiracy to monopolize, and price-fixing arising out of certain
agreements and proposed 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 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,
15
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.
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, the Company believes that the
ultimate outcome of such other proceedings will not have a material adverse
effect on its financial position or results of operations.
16
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 the Company's 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.
On January 27, 2003, the Company effected a three-for-two split of its
common stock. Pursuant to the split, all shareholders of record as of
January 17, 2003 received one additional share of common stock for every
two shares held on that date. All share and per share amounts were adjusted
for all periods to reflect the stock split.
Results of Operations
Mylan's third quarter was highlighted by record net revenues of $320.5
million, an increase of 8% or $23.3 million compared to the third quarter
of the prior year. The Brand Segment also reported record net revenues of
$66.6 million, an increase of 86% over the same prior year period. For the
nine months ended December 31, 2002, revenues increased 11% or $94.1
million to $915.5 million from $821.5 million for the nine months ended
December 31, 2001. This increase was realized despite the loss of
exclusivity on buspirone, from which prior year net revenues benefited
significantly.
For the quarter, primarily as a result of the loss of exclusivity on
buspirone, net earnings decreased 12% or $9.7 million to $68.4 million, and
earnings per diluted share decreased 10% to $.37 per share from $.41 per
share in the same period last year. For the nine months ended December 31,
2002, net earnings increased 3% or $5.6 million to $198.5 million, and
earnings per diluted share increased 4% or $.04 per share to $1.05 per
share. The following table illustrates the financial results for the
consolidated company and by operating segment.
17
Segment Results (in thousands)
Three Months Nine Months
------------ -----------
Period Ended December 31, 2002 2001(1) 2002 2001(1)
---- ------ ---- -------
Consolidated:
Net revenues $320,494 $297,191 $915,506 $821,452
Gross profit 169,576 177,372 483,910 463,008
Research and development 22,941 13,441 59,953 46,687
Selling and marketing 15,173 15,279 48,598 44,675
General and administrative 28,769 28,705 73,020 88,122
Other income, net 3,734 3,165 7,335 19,410
Pretax earnings 106,427 123,112 309,674 302,934
Generic Segment:
Net revenues 253,888 261,334 763,814 723,973
Gross profit 131,724 155,878 396,079 410,114
Research and development 11,073 8,090 31,960 24,772
Selling and marketing 2,779 3,197 8,078 9,499
General and administrative 5,223 5,362 16,322 19,358
Segment profit 112,649 139,229 339,719 356,485
Brand Segment:
Net revenues 66,606 35,857 151,692 97,479
Gross profit 37,852 21,494 87,831 52,894
Research and development 11,868 5,351 27,993 21,915
Selling and marketing 12,394 12,082 40,520 35,176
General and administrative 2,848 3,955 7,863 12,312
Segment profit (loss) 10,742 106 11,455 (16,509)
Corporate/Other:
Segment loss (16,964) (16,223) (41,500) (37,042)
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 December 31, 2002, compared to Quarter Ended December 31, 2001
Net Revenues and Gross Profit
Net revenues for the current quarter increased 8% or $23.3 million to
$320.5 million, compared to $297.2 million in the prior year quarter. The
increase was largely driven by the Brand Segment, which recorded record net
revenues of $66.6 million, an increase of 86% or $30.7 million over the prior
year quarter. The Generic Segment recorded net revenues of $253.9 million, a
decrease of 3% or $7.4 million from the same quarter in the prior year. The
decrease in net revenues is primarily the result of the loss of exclusivity on
buspirone in February 2002. Following the entrance into the market of other
generic competition, both price and volume erosion are considered normal in the
generic pharmaceuticals industry.
18
Excluding revenue from buspirone, Generic net revenues for the quarter
ended December 31, 2002 increased by $40.4 million or 19% over the same prior
year quarter. Of this increase, $38.0 million was driven by new products
launched subsequent to December 31, 2001, with the remainder of the increase
attributable to volume increases on existing products. In total, Generic volume
shipped, excluding unit dose, was approximately 2.8 billion doses in the current
quarter, compared to 2.7 billion in the same prior year period.
Brand Segment net revenues increased 86% or $30.7 million for the current
quarter to $66.6 million from $35.9 million in the same prior year period.
During the quarter, Bertek Pharmaceuticals Inc. ("Bertek"), a wholly-owned
subsidiary, launched Amnesteem(TM) which accounted for approximately half of the
increase in net revenues. Amnesteem (isotretinoin soft-gelatin capsules), for
which Bertek acquired marketing rights as part of a three-way licensing
agreement, is prescribed for the treatment of severe recalcitrant nodular acne.
Following its launch, Amnesteem captured a market share of 31%. However, it is
expected that other generic competition will enter the market in the fourth
quarter of fiscal 2003, which could negatively impact the revenue and earnings
from Amnesteem.
In addition to the growth in net revenues from sales of Amnesteem, Brand
net revenues increased as a result of growth experienced by several major
products in the existing product portfolio including Digitek(R), Phenytoin and
Acticin(R).
The Company's gross profit decreased 4% or $7.8 million to $169.6 million
from $177.4 million. Generic gross profit decreased 15% or $24.2 million to
$131.7 million from $155.9 million, and gross margin decreased to 52% from 60%.
These decreases were primarily due to decreased gross profit on buspirone sales,
partially offset by favorable contributions from core products. Brand gross
profit increased 76% or $16.4 million to $37.9 million from $21.5 million,
primarily due to increased volume, as well as favorable product mix. Brand gross
margin decreased to 57% from 60%, primarily due to royalties paid under the
supply and distribution agreement for sales of Amnesteem.
Operating Expenses
Research and development (R&D) expenses for the current quarter increased
71% or $9.5 million to $22.9 million from $13.4 million. The increase was
primarily related to the timing and number of studies being conducted, mainly in
the Brand Segment, and primarily for nebivolol, a beta-blocker for which Bertek
has obtained the exclusive US and Canadian rights. The Company expects R&D
expenses to continue to increase for both the Generic and Brand Segments
throughout the remainder of fiscal 2003 as activities related to current
projects progress.
19
Selling and marketing expenses for the current quarter have remained
consistent at $15.2 million. A slight increase in selling and marketing expenses
in the Brand Segment resulted from the launch of Amnesteem, and the promotion of
existing products. This increase was offset by a decrease in Generic selling and
marketing expense.
General and administrative ("G&A") expenses for the quarter have also
remained consistent at $28.8 million. Lower G&A expenses in the Generic and
Brand Segments were offset by increased Corporate expenses. The increase in
Corporate expenses was driven by higher payroll and legal expenses, partially
offset by less amortization as a result of the adoption of SFAS 142 on April 1,
2002.
Other Income, net
Other income, net of non-operating expenses, increased 18% or $0.6 million
over the prior year quarter. The increase was primarily due to an increase in
interest income as a result of higher cash balances, which was partially offset
by a net $1.9 million decrease in income from investments which are accounted
for under the equity method.
Provision for Income Taxes
The effective tax rate for the quarter ended December 31, 2002 was 35.7%
compared to 36.5% in the prior year quarter. The decrease in the effective tax
rate was the result of the favorable tax impact related to the adoption of SFAS
142.
Nine months Ended December 31, 2002, compared to Nine months Ended December 31,
2001
Net Revenues and Gross Profit
Net revenues for the current nine months increased 11% or $94.1 million to
$915.5 million compared to $821.5 million during the same prior year period. The
Brand Segment accounted for 58% or $54.2 million of the total increase in net
revenues, while the Generic Segment accounted for the remaining 42%, or $39.8
million.
The increase in Generic net revenues of $39.8 million was realized despite
the loss of exclusivity on buspirone in February 2002. Excluding sales of
buspirone, Generic net revenues increased $145.4 million or 24% to $747.1
million from $601.7 million. New products launched subsequent to December 31,
2001 accounted for $62.2 million or approximately 43% of this increase. The
remaining increase was due to both increased volume and favorable product mix
from the Company's existing portfolio. Overall, Generic volume shipped,
excluding unit dose, was 8.5 billion and 7.7 billion for the nine months ended
December 31, 2002 and December 31, 2001, respectively.
20
The Brand Segment reported net revenues of $151.7 million, an increase of
56% or $54.2 million over the same prior year period. This increase was the
result of growth in its core products, primarily Digitek(R), Phenytoin and
Acticin(R), as well as the launch of Amnesteem.
The Company's gross profit for the current nine months increased 5% or
$20.9 million to $483.9 million from $463.0 million. Brand gross profit
increased 66% or $34.9 million to $87.8 million from $52.9 million. Brand
Segment gross margins increased to 58% from 54% on the strength of the increase
in net revenues. Generic gross profit decreased 3% or $14.0 million to $396.1
million from $410.1 million, and gross margin decreased to 52% from 57%,
primarily due to the loss of exclusivity on buspirone.
Operating Expenses
R&D expenses for the current nine months increased 28% or $13.3 million to
$60.0 million from $46.7 million in the same prior year period. The increase was
primarily the result of the timing and number of clinical studies being
performed in both the Generic and Brand Segments.
Selling and marketing expenses increased 9% or $3.9 million to $48.6
million from $44.7 million. Selling and marketing expense for the Brand Segment
increased by $5.3 million, while Generic selling and marketing expenses
decreased by $1.4 million. The increase in Brand Segment selling and marketing
expense is the result of increased promotions on existing products, such as
Digitek and Phenytek(R), as well as costs associated with the launch of
Amnesteem.
G&A expenses for the current nine months decreased 17% or $15.1 million to
$73.0 million from $88.1 million. The decrease in G&A expenses was primarily the
result of less amortization due to the adoption of SFAS 142. Additionally, the
nine months ended December 31, 2001, included a one-time charge related to
deferred compensation for certain executives and costs associated with Bertek's
move to Raleigh, North Carolina.
Other Income, net
The $12.1 million decrease in other income, net of non-operating expenses,
for the current nine months was primarily attributable to decreased earnings
from equity investees of $17.7 million, which were partially offset by realized
gains of $5.2 million on the sale of certain marketable securities.
21
Provision for Income Taxes
The effective tax rate for the nine months ended December 31, 2002 was
35.9% compared to 36.3% in the prior year. The decrease in the effective tax
rate is the result of the favorable tax impact related to the adoption of SFAS
142.
Liquidity and Capital Resources
The Company's primary source of liquidity continues to be cash flow from
operating activities, which was $254.0 million for the nine months ended
December 31, 2002. Working capital as of December 31, 2002, was $962.5 million,
an increase of $73.5 million from March 31, 2002.
Cash used in investing activities for the nine months ended December 31,
2002, was $6.8 million. Of the Company's $1.8 billion of total assets at
December 31, 2002, 40% or $708.0 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, the funds are generally reinvested in instruments
with similar characteristics. Capital expenditures during the nine months ended
December 31, 2002, were $22.2 million. These expenditures were primarily for
machinery and equipment used in the Company's manufacturing facilities. The
Company expects such expenditures to continue at the current year levels. In the
fourth quarter of fiscal 2003, the Company received $4.4 million in the form of
marketable securities as a distribution from an investment held in a pooled
asset account.
Cash used in financing activities was $154.5 million for the nine months
ended December 31, 2002, consisting primarily of cash paid to purchase the
Company's common stock. In May 2002, the Board of Directors (Board) approved a
stock purchase program that authorized the purchase of up to 15.0 million shares
of the Company's outstanding common stock. Through December 31, 2002, the
Company had purchased 7.5 million shares for $155.5 million. There are an
additional 7,500,000 shares at December 31, 2002 that may be purchased under the
stock purchase program. Through February 5, 2003, an additional 2.5 million
shares were purchased for $67.2 million.
Mylan had historically paid a quarterly cash dividend of 2.67 cents per
common share. However, the Board approved an increase in the quarterly cash
dividend to 3.33 cents per share beginning with the dividend declared for the
third quarter of fiscal 2003, which resulted in total dividends of $16.3 million
for the nine months then ended. It is expected that this increase in the
quarterly cash dividend will result in an increase in annual dividends of
approximately $5.0 million.
22
The Company maintains commercial insurance to protect against and manage
the risks involved in conducting its 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 changes in the levels of coverage. The
Company has 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 the Company's financial position and results of
operations depending on the nature of the loss and the level of insurance
coverage maintained. In response to the rising cost of commercial insurance,
during the current quarter, Mylan insured a portion of its product liability
risk through a wholly-owned insurance subsidiary. The coverage provides for
losses up to $10 million per occurrence.
The Company is involved in various legal proceedings that are considered
normal to its 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 the Company's financial position and results of operations.
On January 7, 2003 Mylan announced that it had reached an agreement in
principle with Bristol-Myers Squibb ("BMS"), which would result in a one-time
payment of $35 million from BMS.
The Company is actively pursuing, and is currently involved in, joint
development projects related to marketing both generic and brand products. Many
of these arrangements provide for payments by the Company upon the attainment of
specified milestones. While these arrangements help to reduce the financial risk
for unsuccessful projects, fulfillment of specified milestones or the occurrence
of other obligations may result in fluctuations in cash flows from operating
activities.
To provide additional operating leverage, if necessary, the Company
maintains a revolving line of credit of up to $50.0 million with a commercial
bank. As of December 31, 2002, no funds have been advanced under this line of
credit, which expires in March 2003. Additionally, the Company is continuously
evaluating the potential acquisition of products, as well as companies, as a
strategic part of its future growth. Consequently, the Company may utilize
current cash reserves or incur additional indebtedness to finance any such
acquisitions, which could impact future liquidity.
Recent Accounting Pronouncements
Effective April 1, 2002, Mylan adopted 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
23
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 nine months ended December 31, 2001, would have
increased by $1.8 million and $5.4 million, and earnings per basic and diluted
share would have increased by $.01 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. The Company is currently evaluating the impact,
if any, that the adoption of this statement will have on its 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 the adoption of this statement had no material effect on the
Company's 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. The Company believes that the adoption of
this statement will not have a material effect on its financial position or
results of operations.
In December 2002, the FASB issued SFAS 148, Accounting for Stock- Based
Compensation--Transition and Disclosure an amendment of FASB Statement No. 123,
which amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternatives for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements for all companies with stock-based compensation plans.
In accordance with SFAS 123, Mylan will continue to account for its stock option
plan using the intrinsic-value-based method as defined in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but will adopt
the disclosure provisions of SFAS 148 in its Annual Report on Form 10-K for the
year ended March 31, 2003. The Company does not believe that the adoption of
this statement will have a material effect on its financial position or results
of operations.
24
The FASB also issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. This interpretation requires disclosure of guarantees
and indemnification agreements made by a company and requires the recognition of
a liability for the fair value of guarantees or indemnifications initiated after
December 31, 2002. The Company is currently assessing the impact that this
interpretation will have on the financial statements.
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 the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2002. Mylan's critical accounting policies include the
determination of revenue provisions, useful lives and impairment of intangibles
and the impact of existing legal matters. These critical accounting policies
affect each of the operating segments. The application of these accounting
policies involves the exercise of judgment and the use of assumptions as to
future uncertainties and, as a result, actual results could differ materially
from these estimates. The Company is 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 its condensed 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,
which totaled $258.6 million and $210.1 million at December 31, 2002, and March
31, 2002, respectively. Other accrued liabilities include $33.2 million and
$26.1 million at December 31, 2002, and March 31, 2002, respectively, for
certain rebates and other adjustments that are paid to indirect customers. The
provision for chargebacks is the most significant and complex estimate used in
the recognition of revenue. The Company is a party to arrangements with other
parties establishing prices for products for which they independently select a
wholesaler from which to purchase. Such parties are referred to as indirect
customers. A chargeback represents the difference between the Company's 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. The Company
continually monitors
25
its assumptions, giving consideration to wholesaler buying patterns and current
pricing trends and makes necessary adjustments when it is determined that the
actual chargeback credits may differ from those estimated. Chargebacks accounted
for $152.9 million and $120.9 million of the total allowance at December 31,
2002 and March 31, 2002, respectively.
Useful Lives and Impairment of Intangibles
As of December 31, 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, the Company 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 determinations, primarily the Company's 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 the Company's
financial position and results of operations. No events occurred during the
quarter ended December 31, 2002 which the Company believes would indicate the
need to test again for impairment.
As of December 31, 2002, and March 31, 2002, recorded intangible assets,
excluding goodwill, net of accumulated amortization, were $155.1 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,
the Company's financial position and results of operations could be negatively
impacted.
26
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 December 31, 2002, and
March 31, 2002, that for each of the various legal proceedings in which the
Company is 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 its 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.
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 COMPETITORS' 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.
27
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
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 DELCINE.
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.
28
Some of 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 volume 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
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.
29
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,
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.
30
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.
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.
31
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 delay 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.
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.
WE DEPEND ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS FOR THE RAW MATERIALS,
PARTICULARLY THE CHEMICAL COMPOUND(S) COMPRISING THE ACTIVE INGREDIENT, THAT WE
USE TO MANUFACTURE OUR PRODUCTS AND COULD EXPERIENCE A PROLONGED INTERRUPTION IN
THE SUPPLY OF SUCH MATERIALS, WHICH 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.
32
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
results of operations and could cause the market value of our common stock to
decline.
WE MAY EXPERIENCE DECLINES IN THE SALES VOLUME 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
33
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.
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 judgment 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.
The risk involved in doing so can be substantial because the remedies available
to the owner of a patent for infringement include, among other things, damages
measured by the profits lost by the patent owner and not by the profits earned
by the infringer. In the case of a willful infringement, the definition of which
is unclear, such damages may be trebled. Moreover, because of the discount
pricing typically involved with bioequivalent products, patented brand products
generally realize a substantially higher profit margin than bioequivalent
products. An adverse decision in a case such as this or in other similar
litigation could have a
34
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
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
35
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
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.
36
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 accounting principles generally accepted 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
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
37
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
The Company is subject to market risk primarily from changes in the market
values of investments in marketable debt and equity securities, including
marketable securities owned indirectly through certain pooled asset funds that
are classified as other assets on the 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 the Company's
investments are managed by professional portfolio managers. The following table
summarizes the investments which subject the Company to market risk:
December 31, March 31,
(in thousands) 2002 2002
---- ----
Debt securities $422,400 $435,499
Equity securities 32,100 20,767
Pooled asset funds 11,603 26,144
-------- --------
$466,103 $482,410
======== ========
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.
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, based on the market value at December 31, 2002, would result
in a $2.3 million change in other assets and a corresponding change to other
income or expense. However, subsequent to December 31, 2002, approximately 40%
of the balance in the pooled asset funds has been received by the Company in the
form of a distribution. It is anticipated that the remaining pooled asset funds
will be liquidated during fiscal 2004.
38
ITEM 4. CONTROLS AND PROCEDURES
The Company's 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.
The Company's 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 on Form 10-Q and has
concluded that such disclosure controls and procedures are effective.
There were no significant changes in the Company's 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
Legal Proceedings
While it is not possible to determine with any degree of certainty the
ultimate outcome of the following legal proceedings, the Company believes that
it has meritorious defenses with respect to the claims asserted against it and
intends to vigorously defend its position. AN ADVERSE OUTCOME IN ANY OF THESE
PROCEEDINGS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S 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, 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.
39
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 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.
40
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
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.
41
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.
On January 7, 2003, Mylan announced that it had reached an agreement in
principle with BMS, which would resolve all disputes between the companies
related to buspirone and paclitaxel, BMS's Buspar(R) and Taxol(R), respectively,
when finalized. As part of the agreement in principle, Mylan would receive a
one-time payment of $35 million, and non-exclusive, paid-up, royalty free,
irrevocable licenses under any applicable BMS patents to manufacture, market and
sell buspirone and paclitaxel.
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, conspiracy to
monopolize and price-fixing arising out of certain agreements and proposed
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 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
42
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.
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, the Company believes that the ultimate outcome of
such other proceedings will not have a material adverse effect on its results of
operations or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Amended and Restated Articles of Incorporation of the registrant,
filed as Exhibit 4.2 to the Form S-8 on December 23, 1997,
(registration number 333-43081) and incorporated herein by
reference.
3.2 By-laws of the registrant, as amended to date, filed as Exhibit
3.2 to the Form 10-Q for the quarterly period ended September 30,
2002, and incorporated herein by reference.
b. Reports on Form 8-K
On January 15, 2003, the Company filed a Report on Form 8-K announcing
a three-for-two stock split.
43
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 December 31, 2002, to be signed on its behalf by the undersigned thereunto
duly authorized as of February 12, 2003.
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)
44
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;
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: February 12, 2003
/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;
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: February 12, 2003
/s/ Edward J. Borkowski
----------------------
Edward J. Borkowski
Chief Financial Officer,
Mylan Laboratories Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
----------------------------------------------
In connection with the Quarterly Report of Mylan Laboratories Inc. (the
"Company") on Form 10-Q for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: February 12, 2003
/s/ Robert J. Coury
------------------------------
Robert J. Coury
Chief Executive Officer
/s/ Edward J. Borkowski
------------------------------
Edward J. Borkowski
Chief Financial Officer