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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 1-09623
IVAX CORPORATION
INCORPORATED UNDER THE LAWS OF THE I.R.S. EMPLOYER IDENTIFICATION NUMBER
STATE OF FLORIDA 16-1003559
4400 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33137
305-575-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange
on which registered
COMMON STOCK, PAR VALUE $.10 AMERICAN STOCK EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of February 28, 2002, there were 196,043,818 shares of Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates
of the registrant on February 28, 2002, was approximately $2.7 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Part III is incorporated by reference to
portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Registrant's 2001 year end.
IVAX CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 24
Item 3. Legal Proceedings....................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders..................................... 28
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................... 29
Item 6. Selected Financial Data................................................................. 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 43
Item 8. Financial Statements and Supplementary Data............................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 44
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 44
Item 11. Executive Compensation.................................................................. 45
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 45
Item 13. Certain Relationships and Related Transactions.......................................... 45
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.......................... 45
PART I
ITEM 1. BUSINESS
BUSINESS
OVERVIEW
We are a multinational company engaged in the research, development,
manufacture and marketing of pharmaceutical products. We were incorporated in
Florida in 1993, as successor to a Delaware corporation formed in 1985.
We manufacture and/or market several brand name pharmaceutical products
and a wide variety of brand equivalent and over-the-counter pharmaceutical
products, primarily in the United States and the United Kingdom. We also have
subsidiaries located throughout the world, some of which are among the leading
pharmaceutical companies in their markets. We maintain manufacturing operations
in Argentina, Chile, China, the Czech Republic, Germany, Ireland, Italy, Mexico,
the United Kingdom, Uruguay and Venezuela. We also have marketing and sales
operations in Finland, France, Hong Kong, Kazakhstan, Latvia, Peru, Poland,
Russia, the Slovak Republic, Sweden, Switzerland, Taiwan and Ukraine and market
our products through distributors or joint ventures in other foreign markets.
GROWTH STRATEGIES
We expect our future growth to come from:
o discovering and developing and/or acquiring new products;
o leveraging proprietary technology and development strengths in the
respiratory and oncology areas;
o pursuing complementary, accretive or strategic acquisitions; and
o strategically expanding sales and distribution of our proprietary and
branded products as well as our brand equivalent pharmaceutical
products.
DISCOVERY AND DEVELOPMENT AND/OR ACQUISITION OF NEW PRODUCTS
We expect that new products that we discover, develop and/or acquire
will provide a cornerstone for our future growth. In October 1999, we
dramatically increased the size and scope of our new product development
capability through our acquisition of the Institute for Drug Research (now
called IVAX Drug Research Institute), which had approximately 250 employees
engaged in drug research and development. We currently have over 700 people
involved in our drug research and development programs. In 2001, we spent $88.0
million for company-sponsored research and development activities compared to
$65.3 million in 2000 and $53.4 million in 1999.
Among the proprietary compounds in development that have either entered
or are about to enter clinical trials in the near future are:
o the Paxoral(TM)oral form of paclitaxel;
o a compound for the treatment of multiple sclerosis;
o a compound for the treatment of inflammation disorders;
o a compound for the treatment of epilepsy;
o a compound for the treatment of brain cancer;
o one or more of the soft steroids that we are developing for asthma,
allergic rhinitis, dermatology and gastrointestinal indications both in
humans and companion animals;
o a compound for the treatment of benign prostatic hypertrophy; and
o a brain targeted estrogen for the treatment of post menopausal
syndrome, Alzheimer's disease and sexual disorders.
Other new compounds in earlier stages of development are being designed
to treat cystic fibrosis and neurological disorders such as Parkinson's disease.
We believe that our research programs at the Ivax Drug Research
Institute and the development groups in the U.K. and the U.S. will allow us to
develop proprietary and novel compounds and delivery systems.
LEVERAGE PROPRIETARY TECHNOLOGY AND DEVELOPMENT STRENGTHS
We intend to continue to leverage our proprietary technology and
development strengths to develop a portfolio of proprietary pharmaceutical
products in the areas of respiratory diseases and oncology. Primary among these
strengths are:
o our patented inhalation technology and our expertise in
developing and commercializing respiratory products; and
o our experience in the development and commercialization of oncology
drugs.
Our technology and capabilities in these areas have also allowed us to
pursue new business opportunities in the form of strategic collaborations with
pharmaceutical partners desiring to license our technologies and utilize our
expertise. In the respiratory area, we were the first company to obtain
approvals of our own CFC-free formulations of these drugs.
In the oncology field, we were the first company after Bristol-Myers
Squibb to complete original clinical trials accepted by the United States Food
and Drug Administration, known as the FDA, as establishing the safety and
efficacy of paclitaxel. The product is currently being marketed, under the
trademarks Paxene(R) and Onxol(TM), by our subsidiaries in the United States,
Eastern Europe and the European Union. Through these activities, we have
developed a considerable body of clinical data, technology and know-how that is
proprietary to us.
PURSUE COMPLEMENTARY, ACCRETIVE OR STRATEGIC ACQUISITIONS
Acquisitions have in the past helped to build our company, and we
expect to use well-timed, carefully selected acquisitions to continue to drive
our growth. We intend to pursue primarily acquisitions that will complement our
existing businesses and provide new product and market opportunities, as well as
leverage our existing assets. In assessing strategic opportunities, we will
consider whether the acquisition:
o is accretive to earnings;
o allows us to leverage our expertise in our areas of therapeutic focus
by adding new products or product development capabilities;
o offers geographic expansion opportunities into key strategic markets;
and
o allows us to penetrate further our existing markets, thereby enabling
us to take advantage of economies of scale.
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In addition to business acquisitions, we will continue to actively
pursue strategic product acquisitions and other collaborative arrangements.
Integral to these initiatives is our ability to leverage our existing
infrastructure by adding sales from acquired products while minimizing
incremental costs.
STRATEGICALLY EXPAND SALES AND DISTRIBUTION OF OUR PRODUCTS
We intend to continue to expand strategically the sales and
distribution of our products. We currently have research, manufacturing,
distribution and/or marketing operations in more than 20 countries throughout
the world, and our products are distributed in approximately 70 countries. We
are developing sales capabilities in various European countries to market
respiratory products. We have begun marketing proprietary products through our
subsidiaries in the United States and in Eastern Europe.
We recently completed acquisitions of pharmaceutical companies in
Chile, Mexico and Venezuela, which complement our operations in Argentina, Peru
and Uruguay and continue the expansion of our Latin American operations. Our
future plans include the acquisition of additional manufacturing and
distribution capabilities in Europe and Latin America.
In Asia, we believe that we can complement the operations of our
subsidiaries IVAX Asia Limited and IVAX Pharmaceutical (Beijing) Co. Ltd., and
our Kunming Baker Norton joint venture company, by establishing additional joint
ventures and selectively establishing distribution channels for our major
products.
At the same time, we are attempting to integrate operations and seeking
to identify and exploit the cross-marketing and distribution opportunities that
exist among our various subsidiaries. For example, our Czech Republic subsidiary
is a large producer of bulk cyclosporin, a drug used to prevent rejection in
organ transplant recipients. Cyclosporin is also one of the ingredients used in
our Paxoral(TM) product.
PHARMACEUTICAL BUSINESS
CURRENT PROPRIETARY AND BRANDED PRODUCTS
We market a number of proprietary and brand name products treating a
variety of conditions through our subsidiaries throughout the world. These
products are marketed by our direct sales forces to physicians, pharmacies,
hospitals, managed health care organizations and government agencies. These
products are sold primarily to wholesalers, retail pharmacies, distributors,
hospitals and physicians.
ONCOLOGY
We have a strong foundation in the oncology field based on our
proprietary anti-cancer drug.
PAXENE(R)/ONXOL(TM). The active substance in the injectable drug
paclitaxel is an unpatented compound which, in clinical trials sponsored by the
National Cancer Institute, exhibited promising results in the treatment of
ovarian and breast cancer and AIDS-related Kaposi's Sarcoma. Bristol-Myers
Squibb currently markets an injectable product containing paclitaxel under the
brand name Taxol(R) for the treatment of ovarian and breast cancer and
AIDS-related Kaposi's Sarcoma. Our current formulation of injectable paclitaxel
is marketed under a license from NaPro BioTherapeutics and is marketed in Europe
as Paxene(R) and in the United States as Onxol(TM). Sales of our paclitaxel
products were approximately 17% of consolidated revenues for our year ended
December 31, 2001.
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We submitted a New Drug Application, or NDA, for Paxene(R) for the
treatment of AIDS-related Kaposi's Sarcoma in March 1997. In December 1997, the
FDA determined Paxene(R) to be safe and effective for that purpose, but
concluded that Paxene(R) could not be finally approved for this indication until
August 4, 2004. The delay in final approval is due to a seven-year market
exclusivity period under the Orphan Drug Act granted to Taxol(R), which was
approved for AIDS-related Kaposi's Sarcoma earlier in 1997. The Orphan Drug
exclusivity of Taxol(R) does not apply to NDAs or Abbreviated New Drug
Applications, known as ANDAs, for the use of paclitaxel to treat indications
other than AIDS-related Kaposi's Sarcoma and does not apply in any market other
than the United States.
We filed an application for regulatory approval of Paxene(R) to treat
AIDS-related Kaposi's Sarcoma in the European Union in 1997, and the European
Committee for Proprietary Medical Products approved this application in July
1999. In April 2000, Paxene(R) was approved for the same indication in Canada by
the Health Protection Branch.
We filed our own ANDA for paclitaxel injection with the FDA in December
1997. In August 1998 we purchased Immunex Corporation's ANDA for paclitaxel
injection, which was the first ANDA filed with the FDA for paclitaxel injection.
This ANDA was approved on September 15, 2000 and we are marketing paclitaxel
injection in the United States under the name Onxol(TM). We are marketing
Onxol(TM) in the United States through our direct sales force to health care
supply chain management companies, hospitals, oncologists and distributors of
oncological drugs. We believe that these relationships can be used in the future
to facilitate our commercialization of Paxoral(TM) and other oncology products.
Our subsidiary IVAX-CR received an exemption from registration to
market Paxene(R) for Kaposi's Sarcoma in the Czech Republic in January 1999 and
the standard Marketing Authorization was granted in March 2000. The full range
of indications was approved in the Czech Republic in March 2000. Paxene(R) was
also approved for breast and ovarian cancers in Belarus in January 1999 and
Kazakhstan in March 2001. In February 2000 our product was approved in Poland
for breast and ovarian cancers and is being marketed in Poland under the name
Paxenor. We have also applied for approval to market Paxene(R) in other
countries, including Hungary, Latvia, Lithuania, Romania, Russia, the Slovak
Republic and Ukraine.
RESPIRATORY
We have substantial expertise in the development, manufacture and
marketing of respiratory drugs, primarily for asthma, in metered-dose inhaler
formulations. Our subsidiary IVAX UK Limited in the United Kingdom is the third
largest respiratory company in that market. At the core of our respiratory
franchise are advanced delivery systems, which include a patented metered-dose
inhaler called Easi-Breathe(R) and a patented dry powder inhaler, as well as
conventional metered-dose inhalers.
EASI-BREATHE(R). We hold patents on Easi-Breathe(R), our
breath-activated metered-dose inhaler, which is designed to overcome the
difficulty many persons experience with conventional metered-dose inhalers in
attempting to coordinate their inhalation with the emission of the medication.
Easi-Breathe(R) emits the medication automatically in one step upon inhalation,
minimizing coordination problems and better ensuring that the medication is
delivered to the lungs. We market our Easi-Breathe(R) breath-activated inhaler
through our subsidiary IVAX UK in Ireland and the United Kingdom and through our
subsidiary IVAX-CR in the Czech and Slovak Republics.
We have pioneered the development of aerosol products that do not
contain CFCs, chemicals believed to be harmful to the environment which are
being phased out on a global basis. In November 1997, we received the world's
first approval for a CFC-free beclomethasone, and in April 2000, March 2001 and
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May 2001, we received approval in the United Kingdom, Germany and Ireland,
respectively, for a CFC-free albuterol. Both beclomethasone and albuterol are
widely-prescribed anti-asthmatic drugs.
In October 2001, we acquired the United States rights to the intranasal
steroid brand products, Nasarel(R) and Nasalide(R), for the treatment of
allergic rhinitis, from Elan Corporation. We also acquired from the Roche Group
in March 2002 the same intranasal steroid products, which are marketed under a
number of trademarks in Belgium, Canada, the Czech Republic, France, Ireland,
the Netherlands, Norway and the United Kingdom.
NEW PROPRIETARY AND BRANDED PRODUCTS UNDER DEVELOPMENT
We are committed to the cost-effective development of proprietary
pharmaceuticals directed primarily towards indications having relatively large
patient populations or for which limited or inadequate treatments are available.
We seek to accelerate product development and commercialization by in-licensing
compounds, especially after clinical testing has begun, and by developing new
dosage forms of existing products or new therapeutic indications for existing
products. We intend to emphasize the development of drug products in the
oncology and respiratory fields and have a variety of proprietary
pharmaceuticals in varying stages of development.
ONCOLOGY
PAXORAL(TM). Presently, paclitaxel, which is one of the leading
anti-cancer drugs in the world, is marketed only in injectable form. We are
developing an oral formulation of paclitaxel that we believe may provide
significant advantages over the injectable dosage form in terms of patient
convenience and reduced side effects. We believe that our patented new system
will allow patients to obtain effective doses of paclitaxel through oral
administration and that this patented system can be applied to other
chemotherapeutic agents that are not currently orally available. In 2001, we
completed Phase II clinical trials with patients with advanced lung cancer and
the results showed substantial anti-cancer activity.
TP-38. In pre-clinical trials of our EGF receptor-targeted brain cancer
therapy, our lead compound, TP-38, was found to be highly specific and toxic to
brain cancer cells. This compound is currently in a Phase I/II clinical trial
under the supervision of Duke University and the University of California at San
Francisco.
RESPIRATORY
INHALATION PRODUCTS. We are continuing to develop the Easi-Breathe(R)
inhaler for use with various compounds. In light of international agreements
calling for the eventual phase-out of CFC, we are developing CFC-free inhalation
aerosol products. We received regulatory approval to market CFC-free
beclomethasone in Ireland and France in 1997 in our standard metered-dose
inhaler and our Easi-Breathe(R) inhaler, the first such approvals for any
company anywhere in the world. We received regulatory approval to market
CFC-free beclomethasone in our standard metered-dose inhaler in Belgium, Italy,
Finland and Portugal in 1999 and in Japan, Germany and Spain in 2000. We
received approval in December 2001 through the mutual recognition procedure to
market CFC-free beclomethasone in our Easi-Breathe(R) inhaler in Belgium,
Luxembourg, Spain and Portugal. In 1998, we also applied for approval to market
an albuterol CFC-free formulation in various European countries, and in April
2000, this product was approved for marketing in the United Kingdom. This
approval was used as the basis for obtaining approvals in other European
countries in October 2001, including Belgium, Denmark, Germany, Holland,
Luxembourg, Norway and Spain under the mutual recognition procedure. We have
also developed a multi-dose dry powder inhaler which uses no propellant and is
believed to have superior dosing accuracy than competing models. In 1998, we
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completed clinical trials in the United Kingdom for budesonide in our multi-dose
dry powder inhaler. We received regulatory approval in 2001 to market formoterol
in our multi-dose dry powder inhaler in Denmark. In 1999, we submitted Marketing
Authorization Applications in the United Kingdom for approval to market a
multi-dose dry powder inhaler for use with albuterol and budesonide. In the
United States, Phase III clinical trials to support U.S. marketing approval of
CFC-free albuterol are in progress and Phase III clinical trials for CFC-free
beclomethasone are scheduled for 2002.
In developing CFC-free formulations for metered-dose inhalers, we and
many of our competitors have obtained or licensed patents on formulations
containing alternative propellants. There are many existing patents covering the
use of hydrofluoroalkane with pharmaceuticals, and successful product
development by us may require that we incur substantial expense in seeking to
develop formulations that do not infringe competitors' patents, or that we
license or invalidate such patents. We successfully invalidated certain relevant
United Kingdom and European patents in the United Kingdom during 1997, 1998 and
1999.
CENTRAL NERVOUS SYSTEM
TALAMPANEL. In February 2001, we acquired the rights to develop and
market the AMPA receptor antagonist, talampanel, from Eli Lilly & Co. Talampanel
was initially discovered at the IVAX Drug Research Institute in Budapest,
Hungary. In Phase II studies conducted by Eli Lilly, talampanel was shown to
reduce the incidence of seizures in patients with epilepsy, and we have
commenced additional Phase II clinical trials in epilepsy patients, involving 25
centers in the United States and Europe. We are also conducting Phase II
clinical trials using this compound with patients with Parkinson's Disease, and
planning additional studies to treat multiple sclerosis and other neurological
diseases.
SOFT DRUGS
ASTHMA AND INFLAMMATORY DISEASES. In December 1999, we acquired Soft
Drugs, Inc., a private company with a significant patent portfolio. This
acquisition entered us into a new field of technology and provides us with
several new chemical entities to add to our pipeline of proprietary new drugs.
These chemical entities include a corticosteroid that is rapidly converted to an
inactive form after absorption, that reduces the likelihood of side effects
normally associated with these drugs. Initial applications will be to treat
asthma (as an inhaled product) and inflammatory diseases of the large intestine
(in a special oral form). One of our soft steroid compounds, BNP-166 has
successfully completed Phase Ia and Ib clinical trials for safety for oral
administration. We are preparing to begin Phase II clinical trials for
inflammatory bowel diseases, such as regional ileitis (Crohn's disease) and
ulcerative colitis. After successfully completing regulatory inhalation
toxicology, we are starting Phase I clinical studies with BNP-166 towards the
development of the compound to treat asthma and allergic rhinitis.
DERMATOLOGY. In October 2001, we acquired the worldwide rights for the
dermatological use of loteprednol etabonate, a new soft corticosteroid to treat
dermatological conditions. We plan to start Phase II clinical trials to
demonstrate further safety and efficacy.
BRAND EQUIVALENT PHARMACEUTICAL PRODUCTS
Another important part of our pharmaceutical business is the broad line
of brand equivalent pharmaceutical products, both prescription and
over-the-counter, that are marketed by our various subsidiaries as brand
equivalent substitutes or under a brand name. Brand equivalent drugs are
therapeutically equivalent to their brand name counterparts, but are generally
sold at lower prices and as alternatives to the brand name products. In order to
remain successful in the brand equivalent pharmaceutical business, we are
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working to develop new formulations and to obtain marketing authorizations which
will enable us to be the first or among the first to launch brand equivalent
pharmaceutical products on the market.
In the United States, our subsidiary, IVAX Pharmaceuticals, Inc. (which
changed its name from Zenith Goldline Pharmaceuticals, Inc. in February 2001),
manufactures and markets approximately 58 brand equivalent prescription drugs in
capsule or tablet forms in an aggregate of approximately 126 dosage strengths.
We also distribute in the United States approximately 212 additional brand
equivalent prescription and over-the-counter drugs and vitamin supplements, in
various dosage forms, dosage strengths and package sizes. Our domestic brand
equivalent drug distribution network encompasses most trade classes of the
pharmaceutical market, including wholesalers, retail drug chains, retail
pharmacies, mail order companies, managed care organizations, hospital groups,
nursing home providers and government agencies.
In the United Kingdom, we are a leading provider of brand equivalent
pharmaceutical products. We market approximately 112 brand equivalent
prescription and over-the-counter drugs, about half of which we manufacture, in
various dosage forms and dosage strengths, constituting an aggregate of
approximately 278 products. Such products are marketed to wholesalers, retail
pharmacies, hospitals, physicians and government agencies. In addition, we
manufacture and market various "blow-fill-seal" pharmaceutical products, such as
solutions for injection or irrigation, and unit-dose vials for nebulization to
treat respiratory disorders.
Brand equivalent products (but not including branded generic products)
represented 57%, 52% and 61% of our revenues for the years ended December 31,
2001, 2000 and 1999, respectively.
NEW BRAND EQUIVALENT PRODUCTS UNDER DEVELOPMENT
We are seeking to supplement our portfolio of brand equivalent products
by emphasizing the development of specialty brand equivalent pharmaceutical
products, defined as those products which, because of one or more special
characteristics, are likely to encounter less competition. Specialty brand
equivalent products include those:
o which are difficult to formulate or manufacture;
o which involve regulatory obstacles or potential patent challenges; or
o for which limited raw material suppliers exist.
By emphasizing the development of specialty brand equivalent
pharmaceutical products, we seek to introduce brand equivalent products that our
competitors cannot easily develop, which is advantageous because the products
are subject to less competition and less pricing pressure. In addition, in
evaluating which brand equivalent pharmaceutical product development projects to
undertake, we consider whether the new product, once developed, will complement
our other products in the same therapeutic family, or will otherwise assist in
making our product line more complete. Developing specialty brand equivalent
pharmaceutical products generally involves more time and resources than
developing common brand equivalent pharmaceutical products.
During 2001 we received final FDA approval of 10 ANDAs for 8 molecules,
tentative FDA approval of 1 ANDA for 1 molecule, approval of 5 abridged
Marketing Authorization Applications or AMAA's (the European equivalent of an
ANDA) for two molecules in the United Kingdom, and approval of 31 AMAA's for 6
molecules in the other European Union (EU) countries.
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As of January 1, 2002, we had ANDAs or its foreign equivalent pending
as follows:
NUMBER PENDING COUNTRY
35 (31 molecules) United States
39 (16 molecules) United Kingdom
26 (7 molecules) Other EU Countries
4 (4 molecules) Canada
ACQUISITIONS
A significant component of the expansion of our pharmaceutical business
has been the acquisition of strategic and complementary businesses. Some of our
recent acquisitions are described below.
LABORATORIO CHILE S.A. Through two tender offers, the first of which
commenced on May 31, 2001, we acquired 99.9% of the outstanding shares of
Laboratorio Chile S.A. Laboratorio Chile was, at the time of purchase, the
largest Chilean pharmaceutical company in revenue terms and also through its
Argentine and Peruvian subsidiaries among the major pharmaceutical companies in
Argentina and Peru. Laboratorio Chile manufactures, markets and sells a broad
line of more than 900 branded and brand equivalent products in Chile, Argentina
and Peru. Its main products are to treat respiratory and infectious diseases,
but it also has strong franchises with cardiovascular, neurological and
gynecological products.
INDIANA PROTEIN TECHNOLOGIES, INC. On April 2, 2001, we acquired the
remaining 70% of Indiana Protein Technologies, Inc. that we did not already own.
We acquired 30% of Indian Protein Technologies in 1999. Indiana Protein
Technologies specializes in using recombinant technology to develop
peptide-based pharmaceutical products. Indiana Protein Technologies had been
working with us to develop a number of brand equivalent pharmaceutical products
pursuant to a development agreement.
LABORATORIOS FUSTERY, S.A. DE C.V. In February 2001, we acquired
Laboratorios Fustery, S.A. de C.V., which is based in Mexico City, Mexico. We
subsequently changed its name to IVAX Pharmaceuticals Mexico, S.A. de C.V. IVAX
Pharmaceuticals Mexico manufactures, markets and distributes a broad range of
prescription pharmaceutical products and is a leading manufacturer of
antibiotics and injectable products in Mexico. IVAX Pharmaceuticals Mexico's
therapeutic areas of primary emphasis are antibiotics, anti-inflammatories,
analgesics, cardiovascular and gastrointestinal products. IVAX Pharmaceuticals
Mexico employs over 200 medical representatives who promote IVAX Pharmaceuticals
Mexico's products.
While we have generally not experienced any material issues related to
the integration of acquired businesses, the results of operations at our
Mexican subsidiary have been negatively impacted by difficulties in combining
the operations and management following the acquisition. We have recently hired
new management at our Mexican subsidiary to address these issues.
WAKEFIELD PHARMACEUTICALS, INC. In September 2000, we acquired
Wakefield Pharmaceuticals, Inc., which was merged into IVAX Laboratories, Inc.
on October 17, 2001.
LABORATORIOS ELMOR, S.A. In June 2000, we acquired Laboratorios Elmor,
S.A., which is based in Caracas, Venezuela. Elmor manufactures, markets and
distributes a broad range of pharmaceutical products in Venezuela. Elmor is the
largest Venezuelan pharmaceutical company in terms of units sold, and one of the
fastest growing pharmaceutical companies in Venezuela.
INSTITUTE FOR DRUG RESEARCH. In October 1999, we acquired the Institute
for Drug Research, which is based in Budapest, Hungary. We subsequently changed
its name to IVAX Drug Research Institute, Ltd. The IVAX Drug Research Institute
employs approximately 250 scientists and support staff and engages in original
drug discovery and provides contract research services to other pharmaceutical
companies. It was originally founded in 1950 as a government-owned
pharmaceutical research and development center for the Hungarian pharmaceutical
industry. Through our acquisition of the IVAX Drug Research Institute, we
obtained a research capability that includes drug discovery, screening,
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synthesis and pre-clinical development. Additionally, the IVAX Drug Research
Institute has a depository of more than 1,500 microorganisms to produce
chemicals of medicinal value through fermentation. As part of the acquisition of
the Institute for Drug Research, we also acquired rights to several important
compounds, including a patented drug for the treatment of benign prostatic
hypertrophy which is currently undergoing Phase II clinical trials. The IVAX
Drug Research Institute also has a number of other new drug candidates that are
in preclinical development, including compounds to prevent metastasis, several
peptide analogs with dual anti-thrombin activity and others to treat
disseminated intravascular coagulation (DIC) and sepsis.
GALENA, A.S. In 1994, we acquired a 60% interest in Galena, a.s., one
of the oldest pharmaceutical companies based in the Czech Republic. We changed
its name to IVAX-CR a.s. on April 30, 2001. Through open market purchases made
in 1995, 1996, 1999 and 2000, and public tender offers made in 1999 and 2000, we
increased our ownership interest in IVAX-CR to 98%. IVAX-CR develops,
manufactures and markets a variety of human pharmaceutical and veterinary
products, as well as syrup for a herbal based cola and an energy sport beverage,
and active ingredients and herbal extracts used in the manufacture of
pharmaceuticals, including cyclosporin and ergot alkaloids. All such products
are manufactured in the Czech Republic. IVAX-CR sells its products primarily in
Central and Eastern European countries, including Russia.
COLLABORATIVE AGREEMENTS
We also seek to enter into collaborative alliances which allow us to
exploit our drug discovery and development capabilities or provide us with
valuable intellectual property and technologies. One of these collaborative
alliances is described below.
CENTER FOR BLOOD RESEARCH. In December 2000, we entered into a license
and collaborative agreement with the Center for Blood Research, Inc., an
affiliate of the Harvard Medical School. Pursuant to this agreement we will be
collaborating with the Center to develop products to treat cystic fibrosis using
technology licensed from the Center.
LICENSING
We have obtained licenses to technology and compounds for development
into new pharmaceutical products from various inventors, universities and the
United States government. For example, we are working with compounds licensed
from The National Institutes of Health to develop a potential new treatment for
brain cancer. We also grant licenses to other pharmaceutical companies relating
to technologies or compounds under development and, in some cases, finished
products. We will continue to seek new licenses from third parties, including
pharmaceutical companies.
OTHER BUSINESS
DIAGNOSTICS
In March 2001, our diagnostics group merged with b2bstores.com forming
IVAX Diagnostics, Inc., a publicly traded company which is listed on the
American Stock Exchange under the symbol IVD. We own approximately 70% of the
equity of IVAX Diagnostics, Inc.
IVAX Diagnostics, Inc. develops, manufactures and markets diagnostic
test kits or assays that are used to aid in the detection of disease markers
primarily in the area of autoimmune and infectious diseases. These tests which
are designed to aid in the identification of the causes of illness and disease,
assist physicians in selecting appropriate patient treatment. Most of IVAX
Diagnostics' tests are based on Enzyme Linked ImmunoSorbent Assay (ELISA)
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technology, a clinical technology used worldwide. In addition to an extensive
line of diagnostic kits, IVAX Diagnostics also designs and manufactures
laboratory instruments that perform the tests and provide fast and accurate
results, while reducing labor costs. These products are marketed to clinical
reference laboratories, hospital laboratories, research institutions and other
commercial entities in the United States and in Italy through their direct sales
force and through independent distributors in various other foreign markets.
PATENTS AND PROPRIETARY RIGHTS
We believe that patents and other proprietary rights are important to
our business. Our policy is to file patent applications to protect our products,
technologies, inventions and improvements that we consider important to the
development of our business. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position.
We hold approximately 683 United States and foreign patents and have
filed several hundred United States and foreign patent applications. In
addition, we have exclusively licensed several additional United States and
foreign patents and patent applications. Our success depends, in part, on our
ability to obtain United States and foreign patent protection for our products,
to preserve our trade secrets and proprietary rights and to operate without
infringing on the proprietary rights of third parties or having third parties
circumvent our rights. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the pharmaceutical industry has traditionally placed considerable
importance on obtaining patent and trade secret protection for significant new
technologies, products and processes.
GOVERNMENT REGULATION
Our pharmaceutical and diagnostic operations are subject to extensive
regulation by governmental authorities in the United States and other countries
with respect to the testing, approval, manufacture, labeling, marketing and sale
of pharmaceutical and diagnostic products. We devote significant time, effort
and expense to addressing the extensive government regulations applicable to our
business. In general, the trend is towards more stringent regulation.
In the United States, the FDA requires extensive testing of new
pharmaceutical products to demonstrate that such products are both safe and
effective in treating the indications for which approval is sought. Testing in
humans may not be commenced until after an Investigational New Drug exemption is
granted by the FDA. An NDA must be submitted to the FDA for new drugs that have
not been previously approved by the FDA and for new combinations of, and new
indications and new delivery methods for, previously approved drugs. Three
phases of clinical trials must be successfully completed before an NDA is
approved. Phase I clinical trials involve the administration of the drug to a
small number of healthy subjects to determine safety, tolerance, absorption and
metabolism characteristics. Phase II clinical trials involve the administration
of the drug to a limited number of patients for a specific disease to determine
dose response, efficacy and safety. Phase III clinical trials involve the study
of the drug to gain confirmatory evidence of efficacy and safety from a wide
base of investigators and patients. In the case of a drug that has been
previously approved by the FDA, an abbreviated approval process is available.
For such drugs an ANDA may be submitted to the FDA for approval. For an ANDA to
be approved, among other requirements, the drug must be shown to be
bioequivalent to the previously approved drug. The NDA and ANDA approval
processes generally take a number of years and involve the expenditure of
substantial resources. Even so, the time and resources devoted to seeking
regulatory approval for new products will not necessarily result in product
approvals or earnings.
The owner of an approved drug is required to list with the FDA all
patents which cover the approved drug and its approved uses. A company filing an
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ANDA and seeking approval to market a product before expiration of all listed
patents must certify that such patents are invalid or will not be infringed by
the manufacture, use or sale of the applicant's product, and must notify the
patent owner and the owner of the approved drug of its filing. If the approved
drug owner sues the ANDA filer for patent infringement within 45 days after it
receives such notice, then the FDA will not grant final approval of the ANDA
until the earlier of 30 months from the date the approved drug owner receives
such notice or the date when a court determines that the applicable patents are
either invalid or would not be infringed by the applicant's product. As a
result, brand equivalent drug manufacturers, including us, are often involved in
lengthy, expensive patent litigation against brand name drug companies that have
considerably greater resources and that are typically inclined to actively
pursue patent litigation in an effort to protect their franchises.
On an ongoing basis, the FDA reviews the safety and efficacy of
marketed pharmaceutical products and products considered medical devices and
monitors, labeling, advertising and other matters related to the promotion of
such products. The FDA may cause a recall or withdraw product approvals if
regulatory standards are not maintained or if safety or efficacy concerns arise
with respect to such products. The FDA also regulates the facilities and
procedures used to manufacture pharmaceutical and diagnostic products in the
United States or for sale in the United States. Such facilities must be
registered with the FDA and all products made in such facilities must be
manufactured in accordance with "good manufacturing practices" established by
the FDA. Compliance with good manufacturing practices guidelines requires the
dedication of substantial resources and requires significant costs. The FDA
periodically inspects our manufacturing facilities and procedures to assure
compliance. The FDA approval to manufacture a drug is site-specific. In the
event an approved manufacturing facility for a particular drug becomes
inoperable, obtaining the required FDA approval to manufacture such drug at a
different manufacturing site could result in production delays, which could
adversely affect our business and results of operations.
The evolving and complex nature of regulatory requirements, the broad
authority and discretion of the FDA and the severely high level of regulatory
oversight result in a continuing possibility that we may be adversely affected
by regulatory actions despite our efforts to maintain compliance with regulatory
requirements.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. No assurance can be
given that clinical studies conducted outside of any country will be accepted by
such country, and the approval of any pharmaceutical or diagnostic product in
one country does not assure that such product will be approved in another
country.
The federal and state governments in the United States, as well as many
foreign governments, including the United Kingdom, from time to time explore
ways to reduce medical care costs through health care reform. These efforts have
resulted in, among other things, government policies that encourage the use of
brand equivalent drugs rather than brand name drugs to reduce drug reimbursement
costs. Virtually every state in the United States has a brand equivalent
substitution law which permits the dispensing pharmacist to substitute a brand
equivalent drug for the prescribed brand name product. The debate to reform the
United States' health care system is expected to be protracted and intense. Due
to uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, we cannot predict what impact any reform proposal
ultimately adopted may have on the pharmaceutical or diagnostic industries or on
our business or operating results.
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COMPETITION
The pharmaceutical market is highly competitive and includes many
established companies. Some of our major competitors are:
o Astra Zeneca
o Boehringer Ingelheim
o Bristol-Myers Squibb
o Geneva Pharmaceuticals
o Glaxo Welcome
o Eli Lilly
o Mylan Pharmaceuticals
o Novartis Pharmaceuticals
o Schering-Plough
o Teva 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 significantly greater financial resources;
o larger research and development and marketing staffs;
o larger production facilities; or
o extensive experience in preclinical testing and human clinical trials.
The pharmaceutical market is undergoing, and is expected to continue to
undergo, rapid and significant technological change, and we expect competition
to intensify as technological advances are made. We intend to compete in this
marketplace by developing or licensing pharmaceutical products that are either
patented or proprietary and which are primarily for indications having
relatively large patient populations or for which limited or inadequate
treatments are available, and, with respect to brand equivalent pharmaceuticals,
by developing therapeutic equivalents to previously patented products which we
expect to have less intensive competition. Developments by others could make our
pharmaceutical products or technologies obsolete or uncompetitive.
In addition to product development, other competitive factors in the
pharmaceutical industry include product quality, price, customer service, and
reputation. Price is a key competitive factor in the brand equivalent
pharmaceutical business. To compete effectively on the basis of price and remain
profitable, a brand equivalent drug manufacturer must manufacture its products
in a cost-effective manner.
Revenues and gross profit derived from brand equivalent pharmaceutical
products tend to follow a pattern based on regulatory and competitive factors
unique to the brand equivalent pharmaceutical industry. As patents for
brand-name products and related exclusivity periods mandated by regulatory
authorities expire, the first brand equivalent manufacturer to apply for
regulatory approval for generic equivalents of such products may be entitled to
a 180-day period of marketing exclusivity under the Hatch-Waxman Act. During
this exclusivity period, the FDA cannot approve any other generic equivalent. If
we are not the first brand equivalent applicant, our brand equivalent product
will be kept off the market for an additional 180 days after the first brand
equivalent commercial launch of the product. The first brand equivalent product
on the market is usually able to achieve relatively high revenues and gross
profit. As other brand equivalent manufacturers receive regulatory approvals and
enter the market, prices typically decline. Accordingly, the level of revenues
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and gross profit attributable to brand equivalent products developed and
manufactured by us is dependent, in part, on:
o our ability to maintain a pipeline of products in development;
o our ability to develop and rapidly introduce new products;
o the timing of regulatory approval of such products;
o the number and timing of regulatory approvals of competing products;
and
o our ability to manufacture such products efficiently.
Because of the regulatory and competitive factors discussed above, our
revenues and results of operations historically have fluctuated from period to
period. We expect this fluctuation to continue as long as a significant part of
our revenues are generated from sales of brand equivalent pharmaceuticals.
In addition to competition from other brand equivalent drug
manufacturers, we face competition from brand-name companies as they
increasingly sell their products into the brand equivalent market directly by
establishing, acquiring or forming licensing or business arrangements with brand
equivalent pharmaceutical companies. No regulatory approvals are required for a
brand-name manufacturer to sell directly or through a third party to the brand
equivalent market, nor do such manufacturers face any other significant barriers
to entry into such market.
In addition, many large drug companies are increasingly pursuing
strategies to prevent or delay the introduction of brand equivalent competition.
These strategies include:
o seeking to establish regulatory obstacles to demonstrate that there is
no significant difference in the rate and extent to which the active
ingredient in the brand equivalent product becomes available at the
site of drug action as compared to the brand name counterpart;
o instituting legal actions that automatically delay approval of
brand equivalent products the approval of which requires
certifications that the brand name drug's patents are invalid or
would not be infringed by the brand equivalent;
o obtaining approvals of patented drugs for a rare disease or condition
and, as a result, obtaining seven years of exclusivity for that
indication;
o obtaining extensions of patent exclusivity by conducting additional
trials of brand name drugs using children; and
o persuading the FDA to withdraw the approvals of brand name drugs
the patents for which are about to expire so that the brand name
company can substitute a new patented product.
Additionally, in the United States, some companies have lobbied
Congress for amendments to the Hatch-Waxman legislation which could give them
additional advantages over brand equivalent competitors such as us. For example,
although the life of a drug company's drug patent is extended for a period equal
to the time that it takes the FDA to approve the drug, some companies have
proposed eliminating the five-year maximum on the period of those patent
extensions and extending the patent life by a full year for each year spent in
clinical trials, rather than the one-half year that is currently allowed. If
proposals like these become effective, our entry into the U.S. market and our
ability to generate revenues associated with these products will be delayed.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity in the United States for indications of new or currently marketed
drugs, if certain agreed upon pediatric studies are completed by the applicant.
Brand-name companies are utilizing this provision to increase their period of
market exclusivity and are increasingly pursuing other strategies to prevent or
delay the introduction of brand equivalent competition. These strategies
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include, among other things, initiating legislative efforts in various states to
limit the substitution of brand equivalent versions of certain types of branded
pharmaceuticals, seeking to establish regulatory obstacles to the demonstration
of the bioequivalence of brand equivalent drugs to their brand-name
counterparts, and instituting legal actions based on process or other patents
that allegedly are infringed by the brand equivalent products.
A significant amount of our United States brand equivalent
pharmaceutical sales are made to a relatively small number of drug wholesalers
and retail drug chains, which represent an essential part of the distribution
chain of brand equivalent pharmaceutical products in the United States. Drug
wholesalers and retail drug chains have undergone, and are continuing to
undergo, significant consolidation, which has resulted in our customers gaining
more purchasing leverage and consequently increasing the pricing pressures
facing our United States brand equivalent pharmaceutical business. Further
consolidation among our customers may result in even greater pricing pressures
and correspondingly reduce the gross margins of this business.
Other competitive factors affecting our business include the emergence
of large buying groups representing independent retail pharmacies and the
prevalence and influence of managed care organizations and similar institutions,
which are able to seek price discounts on pharmaceutical products. As the
influence of these entities continues to grow, we may continue to face increased
pricing pressure on the products we market.
BACKLOG ORDERS
As of February 21, 2002, the dollar amount of backlog orders for IVAX
Pharmaceuticals was $13.2 million compared to $20.6 million as of February 21,
2001, and for IVAX UK Limited was $0.9 million compared to $0.8 million. We
expect to fill all of our backlog orders during our current fiscal year.
RAW MATERIALS
Raw materials needed for our business are generally readily available
from multiple sources. Certain raw materials and components used in the
manufacture of our products are, however, available from limited sources, and in
some cases, including paclitaxel, a single source. A problem with the
availability of such raw materials could cause production or other delays, and,
in the case of products for which only one raw material supplier exists, could
result in a material loss of sales, with consequent adverse effects on our
business. In addition, because raw material sources for pharmaceutical products
must generally be approved by regulatory authorities, changes in raw material
suppliers may result in production delays, higher raw material costs and loss of
sales and customers. We obtain a significant portion of our raw materials from
foreign suppliers, and our arrangements with such suppliers are subject to FDA,
customs and other government clearances, duties and regulation by the countries
of origin. See "Risk Factors - FUTURE INABILITY TO OBTAIN RAW MATERIALS OR
PRODUCTS COULD SERIOUSLY AFFECT OUR OPERATIONS."
RETURNS
Based on industry practice, brand equivalent manufacturers, including
us, have liberal return policies and have been willing to give customers
post-sale inventory allowances. Under these arrangements, the manufacturers give
customers credits on the manufacturer's brand equivalent products which the
customers hold in inventory after decreases in the market prices of the brand
equivalent products. Like our competitors, we also give credits for charge-backs
to wholesale customers that have contracts with us for their sales to hospitals,
group purchasing organizations, pharmacies or other retail customers. These
credits increased significantly during 2001 primarily due to reduced prices on
certain brand equivalent pharmaceutical products and an increase in sales
volume. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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SEASONALITY
While certain of our individual products may have a degree of
seasonality, there are no significant seasonal aspects to our business, except
that sales of pharmaceutical products indicated for colds and flu symptoms are
higher during the fourth quarter as customers supplement inventories in
anticipation of the cold and flu season. In addition, revenues that are
contingent upon licensees achieving certain sales targets during the year tend
to be higher in the second half of the year.
ENVIRONMENT
We believe that our operations comply in all material respects with
applicable laws and regulations concerning the environment. While it is
impossible to accurately predict the future costs associated with environmental
compliance and potential remediation activities, compliance with environmental
laws is not expected to require significant capital expenditures and has not
had, and is not presently expected to have, a material adverse effect on our
earnings or competitive position.
EMPLOYEES
As of February 28, 2002, we had approximately 8,175 employees
worldwide.
RISK FACTORS
You should carefully consider the following risks regarding our
company. These and other risks could materially and adversely affect our
business, operating results or financial condition. You should also refer to the
other information contained or incorporated by reference in this report.
RISKS RELATING TO OUR COMPANY
OUR RESEARCH AND DEVELOPMENT EXPENDITURES WILL NEGATIVELY IMPACT OUR
EARNINGS IN THE SHORT TERM.
We spent approximately $88.0 million during 2001 and $65.3 million
during 2000 on our research and development efforts. This amount represents a
significant increase in the amounts we allocated to research and development in
prior periods. We may in the future increase the amounts we expend for research
and development. As a result, our research and development expenditures may have
an adverse impact on our earnings in the short term. Further, we cannot be sure
that our research and development expenditures will, in the long term, result in
the discovery or development of products which prove to be commercially
successful.
OUR ACQUISITIONS MAY REDUCE OUR EARNINGS, BE DIFFICULT FOR US TO COMBINE INTO
OUR OPERATIONS OR REQUIRE US TO OBTAIN ADDITIONAL FINANCING.
We search for and evaluate acquisitions which will provide new product
and market opportunities, benefit from and maximize our existing assets and add
critical mass. Acquisitions may expose us to additional risks and may have a
material adverse effect on our results of operations. Any acquisitions we make
may:
o fail to accomplish our strategic objectives;
o not be successfully combined with our operations;
o not perform as expected; and
o expose us to cross border risks.
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In addition, based on current acquisition prices in the pharmaceutical
industry, our acquisitions could initially reduce our per share earnings and add
significant amortization expense of intangible assets charges. Our acquisition
strategy may require us to obtain additional debt or equity financing, resulting
in additional leverage, or increased debt obligations as compared to equity, and
dilution of ownership. We may not be able to finance acquisitions on terms
satisfactory to us.
WE DEPEND ON OUR DEVELOPMENT, MANUFACTURE AND MARKETING OF NEW PRODUCTS FOR OUR
FUTURE SUCCESS.
Our future success is largely dependent upon our ability to develop,
manufacture and market commercially successful new pharmaceutical products and
brand-equivalent versions of pharmaceutical products that are no longer subject
to patents. Generally, the commercial marketing of pharmaceutical products
depends upon:
o continually developing and testing products;
o proving that new products are safe and effective in clinical trials;
o proving that there is no significant difference in the rate and
extent to which the active ingredient in the brand-equivalent
product becomes available at the site of drug action as compared
to the brand name version; and
o receiving requisite regulatory approval for all new products.
Delays in the development, manufacture and marketing of new products
will impact our results of operations. Each of the steps in the development,
manufacture and marketing of our products, as well as the process taken as a
whole, involves significant periods of time and expense. We cannot be sure that:
o any of our products presently under development, if and when fully
developed and tested, will perform as we expect;
o we will obtain necessary regulatory approvals in a timely manner, if
at all; or
o we can successfully and profitably produce and market any
of our products.
FUTURE INABILITY TO OBTAIN RAW MATERIALS OR PRODUCTS COULD SERIOUSLY AFFECT OUR
OPERATIONS.
Some materials used in our manufactured products, and some products
sold by us, are currently available only from one or a limited number of
domestic or foreign suppliers. Among others, this includes products that have
historically accounted for a significant portion of our revenues, including
paclitaxel. In the event an existing supplier becomes unavailable or loses its
regulatory status as an approved source, we will attempt to locate a qualified
alternative; however, we may be unable to obtain the required components or
products on a timely basis or at commercially reasonable prices. In addition,
from time to time, certain of our outside suppliers, including our sole source
supplier for paclitaxel, have experienced regulatory or supply-related
difficulties that have adversely impacted their ability to deliver products to
us, causing supply delays or interruptions of supply. To the extent such
difficulties cannot be resolved within a reasonable time, and at a reasonable
cost, or we are required to qualify a new supplier, our revenues, profit margins
and market share for the affected product could decrease, as well as delay our
development and sales and marketing efforts.
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Our arrangements with foreign suppliers are subject to certain
additional risks, including the availability of government clearances, export
duties, political instability, currency fluctuations and restrictions on the
transfer of funds. Arrangements with international raw material suppliers are
subject to, among other things, FDA regulation, various import duties and
required government clearances. Acts of governments outside the United States
may affect the price or availability of raw materials needed for the development
or manufacture of our products. In addition, recent changes in patent laws in
jurisdictions outside the United States may make it increasingly difficult to
obtain raw materials for research and development prior to the expirations of
the applicable United States or foreign patents.
REDUCTIONS IN THE SALES VOLUME OR MARGINS OF OUR PACLITAXEL PRODUCT COULD IMPACT
OUR REVENUES AND MARGINS.
Sales of our paclitaxel product represented a significant component of
our net revenues during 2001. In addition, an important component of our 2002
revenue and gross margin estimates depends on our sales of paclitaxel. Two
competitors received FDA approval for the sale of their paclitaxel products and
others may receive similar approvals. Competitive pressures during 2001 have
resulted in lower prices and reduced revenues for our paclitaxel product. Our
competitors and any future competitors may continue to lower the price of such
products and could gain market share. We also rely on third parties to
manufacture our paclitaxel products. In the future these parties may not produce
for us a continuing and reliable supply of paclitaxel or the cost of such supply
may significantly increase. The reduction of the market price of paclitaxel, our
loss of market share or our inability to obtain a supply of raw materials and/or
a cost-effective supply of paclitaxel may result in (i) delays in the production
of paclitaxel or the shipment of paclitaxel to our customers which could result
in reprocurement penalties, and (ii) a continued decrease of net sales and gross
margin from our paclitaxel product.
WE DEPEND ON OUR PATENTS AND PROPRIETARY RIGHTS AND CANNOT BE CERTAIN OF THEIR
CONFIDENTIALITY AND PROTECTION.
Our success with our proprietary products depends, in large part, on
our ability to protect our current and future technologies and products and to
defend our intellectual property rights. If we fail to adequately protect our
intellectual property, competitors may manufacture and market products similar
to ours. We have numerous patents covering our technologies. We have filed, and
expect to continue to file, patent applications seeking to protect newly
developed technologies and products in various countries, including the United
States. The United States Patent and Trademark Office does not publish patent
applications or make information about pending applications available to the
public until it issues the patent. Since publication of discoveries in the
scientific or patent literature tends to follow actual discovery by several
months, we cannot be certain that we were the first to file patent applications
on our discoveries. We cannot be sure that we will receive patents for any of
our patent applications or that any existing or future patents that we receive
or license will provide competitive advantages for our products. We also cannot
be sure that competitors will not challenge, invalidate or void the application
of any existing or future patents that we receive or license. In addition,
patent rights may not prevent our competitors from developing, using or selling
products that are similar or functionally equivalent to our products.
We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation. We use confidentiality agreements with
licensees, suppliers, employees and consultants to protect our trade secrets,
unpatented proprietary know-how and continuing technological innovation. We
cannot assure you that these parties will not breach their agreements with us.
We also cannot be certain that we will have adequate remedies for any breach.
Disputes may arise concerning the ownership of intellectual property or the
applicability of confidentiality agreements. Furthermore, we cannot be sure that
our trade secrets and proprietary technology will not otherwise become known or
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that our competitors will not independently develop our trade secrets and
proprietary technology. We also cannot be sure, if we do not receive patents for
products arising from research, that we will be able to maintain the
confidentiality of information relating to our products.
THIRD PARTIES MAY CLAIM THAT WE INFRINGE THEIR PROPRIETARY RIGHTS AND MAY
PREVENT US FROM MANUFACTURING AND SELLING SOME OF OUR PRODUCTS.
The manufacture, use and sale of new products that are the subject of
conflicting patent rights have been the subject of substantial litigation in the
pharmaceutical industry. These lawsuits relate to the validity and infringement
of patents or proprietary rights of third parties. We may have to defend against
charges that we violated patents or proprietary rights of third parties. This is
especially true for the sale of the brand-equivalent version of products on
which the patent covering the branded product is expiring, an area where
infringement litigation is prevalent. Our defense against charges that we
infringed third party patents or proprietary rights could require us to incur
substantial expense and to divert significant effort of our technical and
management personnel. If we infringe on the rights of others, we could lose our
right to develop or make some products or could be required to pay monetary
damages or royalties to license proprietary rights from third parties.
Although the parties to patent and intellectual property disputes in
the pharmaceutical industry have often settled their disputes through licensing
or similar arrangements, the costs associated with these arrangements may be
substantial and could include ongoing royalties. Furthermore, we cannot be
certain that the necessary licenses would be available to us on terms we believe
to be acceptable. As a result, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling a number of our products.
A NUMBER OF INTERNAL AND EXTERNAL FACTORS HAVE CAUSED AND MAY CONTINUE TO CAUSE
THE MARKET PRICE OF OUR STOCK TO BE VOLATILE.
The market prices for securities of companies engaged in pharmaceutical
development, including us, have been volatile. Many factors, including many over
which we have no control, may have a significant impact on the market price of
our common stock, including without limitation:
o our or our competitors' announcement of technological innovations or
new commercial products;
o changes in governmental regulation;
o our or our competitors' receipt of regulatory approvals;
o our or our competitors' developments relating to patents or proprietary
rights;
o publicity regarding actual or potential medical results for products
that we or our competitors have under development; and
o period-to-period changes in financial results.
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POLITICAL AND ECONOMIC INSTABILITY AND FOREIGN CURRENCY FLUCTUATIONS MAY
ADVERSELY AFFECT THE REVENUES GENERATED BY OUR FOREIGN OPERATIONS.
Our foreign operations may be affected by the following factors, among others:
o political instability in some countries in which we currently do
business or may do business in the future through acquisitions or
otherwise;
o uncertainty as to the enforceability of, and government control over,
commercial rights;
o expropriation by foreign governmental entities;
o limitations on the repatriation of investment income, capital and other
assets;
o currency exchange fluctuations and currency restrictions; and
o other adverse regulatory or legislative developments.
We sell products in many countries that are susceptible to significant
foreign currency risk. We sell many of these products in United States dollars,
which eliminates our direct currency risk but increases our credit risk if the
local currency devalues significantly and it becomes more difficult for
customers to purchase the United States dollars required to pay us. We sell a
growing number of products, particularly in Latin America, for local currency,
which results in a direct currency risk to us if the local currency devalues
significantly. Additional foreign acquisitions may increase our foreign currency
risk and the other risks identified above.
In June 2000, we acquired Laboratorios Elmor S.A., a pharmaceutical
company based in Venezuela. In the third quarter of 2001, we acquired 99.9% of
Laboratorio Chile S.A., a Chilean pharmaceutical company with operations in
Chile, Argentina and Peru. Although Argentina and Venezuela are not classified
as having highly inflationary economies, each of these economies has recently
experienced high inflation rates and devaluation of their respective currencies.
Recent developments in Argentina's economic and political arenas suggest an
increased risk of further currency devaluation and continued economic
deterioration, which may adversely impact our Argentine operations and our
consolidated earnings. Approximately 18.4% of our net revenues for 2001 were
attributable to our Latin American operations.
INCREASED INDEBTEDNESS MAY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
On February 28, 2002, we had approximately $930.9 million of
consolidated indebtedness. We may incur additional indebtedness in the future.
Our level of indebtedness will have several important effects on our future
operations, including, without limitation:
o we will be required to use a portion of our cash flow from operations
for the payment of any principal or interest due on our outstanding
indebtedness;
o our outstanding indebtedness and leverage will increase the impact
of negative changes in general economic and industry conditions,
as well as competitive pressures; and
o the level of our outstanding debt may affect our ability to obtain
additional financing for working capital, capital expenditures or
general corporate purposes.
General economic conditions, industry cycles and financial, business
and other factors affecting our operations, many of which are beyond our
control, may affect our future performance. As a result, these and other factors
may affect our ability to make principal and interest payments on our
indebtedness. We anticipate that approximately $131.5 million of cash flow from
operations will be required next year to discharge our annual obligations on our
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currently outstanding indebtedness. Our business might not continue to generate
cash flow at or above current levels. If we cannot generate sufficient cash flow
from operations in the future to service our debt, we may, among other things:
o seek additional financing in the debt or equity markets;
o refinance or restructure all or a portion of our indebtedness;
o sell selected assets; or
o reduce or delay planned capital expenditures.
These measures might not be sufficient to enable us to service our
debt. In addition, any financing, refinancing or sale of assets might not be
available on economically favorable terms.
COMPLIANCE WITH GOVERNMENTAL REGULATION IS CRITICAL TO OUR BUSINESS.
Our pharmaceutical and diagnostic operations are subject to extensive
regulation by governmental authorities in the United States and other countries
with respect to the testing, approval, manufacture, labeling, marketing and sale
of pharmaceutical and diagnostic products. Our inability or delay in receiving,
or the loss of any regulatory approval could have a material adverse effect on
our results of operations. The evolving and complex nature of regulatory
requirements, the broad authority and discretion of the FDA and the severely
high level of regulatory oversight result in a continuing possibility that we
may be adversely affected by regulatory actions despite our efforts to maintain
compliance with regulatory requirements. The FDA may cause a recall or withdraw
product approvals if regulatory standards are not maintained. The FDA approval
to manufacture a drug is site-specific. In the event an approved manufacturing
facility for a particular drug becomes inoperable, obtaining the required FDA
approval to manufacture such drug at a different manufacturing site could result
in production delays, which could adversely affect our business and results of
operations.
THE CONCENTRATION OF OWNERSHIP AMONG OUR EXECUTIVE OFFICERS AND DIRECTORS MAY
PERMIT THOSE PERSONS TO INFLUENCE CORPORATE MATTERS AND POLICIES.
As of March 14, 2002, our executive officers, directors and one
additional shareholder had or shared voting control over approximately 28% of
our issued and outstanding common stock. As a result, these persons may have the
ability to significantly influence the election of the members of our board of
directors and other corporate decisions.
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WE HAVE ENACTED A SHAREHOLDER RIGHTS PLAN AND CHARTER PROVISIONS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS.
We have in place a shareholder rights plan under which we issued common
stock purchase rights. As a result of the plan, each share of our common stock
carries with it one common stock purchase right. Each common stock purchase
right entitles the registered holder to purchase from us .9375 of a share of our
common stock at a price of $12.00 per .9375 of a share, subject to adjustment.
The common stock purchase rights are intended to cause substantial dilution to a
person or group who attempts to acquire us on terms that our board of directors
has not approved. The existence of the common stock purchase rights could make
it more difficult for a third party to acquire a majority of our common stock.
Other provisions of our articles of incorporation and bylaws may also have the
effect of discouraging, delaying or preventing a merger, tender offer or proxy
contest, which could have an adverse effect on the market price of our common
stock.
RISKS RELATING TO OUR INDUSTRY
LEGISLATIVE PROPOSALS, REIMBURSEMENT POLICIES OF THIRD PARTIES, COST CONTAINMENT
MEASURES AND HEALTH CARE REFORM COULD AFFECT THE MARKETING, PRICING AND DEMAND
FOR OUR PRODUCTS.
Various legislative proposals, including proposals relating to
prescription drug benefits, could materially impact the pricing and sale of our
products. Further, reimbursement policies of third parties may affect the
marketing of our products. Our ability to market our products will depend in
21
part on reimbursement levels for the cost of the products and related treatment
established by health care providers, including government authorities, private
health insurers and other organizations, such as health maintenance
organizations, or HMOs, and managed care organizations, or MCOs. Insurance
companies, HMOs, MCOs, Medicaid and Medicare administrators and others are
increasingly challenging the pricing of pharmaceutical products and reviewing
their reimbursement practices. In addition, the following factors could
significantly influence the purchase of pharmaceutical products, which would
result in lower prices and a reduced demand for our products:
o the trend toward managed health care in the United States;
o the growth of organizations such as HMOs and MCOs;
o legislative proposals to reform health care and government insurance
programs; and
o price controls and non-reimbursement of new and highly priced medicines
for which the economic therapeutic rationales are not established.
THESE COST CONTAINMENT MEASURES AND HEALTH CARE REFORM PROPOSALS COULD AFFECT
OUR ABILITY TO SELL OUR PRODUCTS.
The reimbursement status of a newly approved pharmaceutical product may
be uncertain. Reimbursement policies may not include some of our products. Even
if reimbursement policies of third parties grant reimbursement status for a
product, we cannot be sure that these reimbursement policies will remain in
effect. Limits on reimbursement could reduce the demand for our products. The
unavailability or inadequacy of third party reimbursement for our products would
reduce or possibly eliminate demand for our products. We are unable to predict
whether governmental authorities will enact additional legislation or regulation
which will affect third party coverage and reimbursement that reduces demand for
our products.
22
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report on Form 10-K and the documents that are incorporated
by reference into this Form 10-K contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements concern expectations, beliefs,
projections, future plans and strategies, anticipated events or trends and
similar expressions concerning matters that are not historical facts.
Specifically, this Form 10-K and the documents incorporated into this Form 10-K
by reference contain forward-looking statements, including among others, the
following:
o our intention to generate growth through the introductions of new
proprietary drugs, the expanded sale and distribution of our
current products, the acquisition of new businesses and products
and strategic collaborations;
o the ability of our research programs to develop improved forms of
drugs, novel compounds and new delivery systems, including the
development of improved formulations of paclitaxel and
complementary products;
o our ability to establish additional joint ventures and distribution
channels in Asia;
o our ability to integrate operations and exploit opportunities among
our subsidiaries;
o our capacity to become a worldwide leader in the asthma
market;
o our ability to capitalize on current relationships in the oncology
market to market new brand equivalent biotech drugs and our
commercialization of Paxoral(TM)and other oncology products;
o our capability to identify, acquire and successfully integrate new
acquisitions of companies and products;
o the ability of our new patented oral administration system to provide
patients effective doses of paclitaxel with more convenience and
reduced side effects and the applicability of this system to other
chemotherapeutic agents;
o our ability to develop Easi-Breathe(R)for use with various compounds;
o our ability to further develop CFC-free inhalation aerosol product;
o our ability to develop a corticosteroid with minimal side effects to
treat asthma and inflammatory diseases of the large intestine;
o our ability to develop new formulations and obtain marketing
authorizations which will enable us to be the first, or among the
first, to launch brand equivalent products;
o our ability to establish and maintain the bioequivalency and efficacy
of our brand equivalent products;
o our ability to develop and market products to treat cystic
fibrosis, brain cancer, benign prostatic hypertrophy, post
menopausal syndrome, Alzheimer's disease and sexual disorders;
o our ability to further develop and market talampanel or other
compounds for the treatment of epilepsy, Parkinson's Disease,
multiple sclerosis or other neurological diseases;
o our ability to develop and market BNP-166 for inflammatory bowel
diseases, asthma and allergic rhinitis;
o our ability to develop and market loteprednol etabonate for the
treatment of dermatological conditions;
o our ability to develop or license proprietary products for indications
having large patient populations, or for which limited or inadequate
treatments exist;
23
o our capacity to accelerate product development and commercialization
by in-licensing products and by developing new dosage forms or new
therapeutic indications for existing products;
o anticipated trends in the pharmaceutical industry and the effect of
technological advances on competition;
o our estimates regarding the capacity of our facilities; and
o our intention to fund 2002 capital expenditures and research and
development from existing cash and internally generated funds.
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish to
caution readers that certain important factors may have affected and could in
the future affect our actual results and could cause actual results to differ
significantly from those expressed in any forward-looking statement. The most
important factors that could prevent us from achieving our goals, and cause the
assumptions underlying forward-looking statements and the actual results to
differ materially from those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
o difficulties in product development;
o difficulties in complying with governmental regulations;
o difficulties in obtaining raw materials;
o difficulties in manufacturing products;
o efficacy or safety concerns with respect to marketed products, whether
or not scientifically justified, leading to recalls, withdrawals or
declining sales;
o our ability to identify potential acquisitions and to successfully
acquire and integrate such operations or products;
o the ability of the company to obtain approval from the FDA to market
new pharmaceutical products;
o the acceptance of new products by the medical community as effective as
alternative forms of treatment for indicated conditions;
o the outcome of any pending or future litigation; and
o the impact of new regulations or court decisions regarding the
protection of patents and the exclusivity period for the marketing
of branded drugs.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Specific financial information with respect to our foreign and domestic
operations is provided in Note 12, Business Segment Information, in the Notes to
Consolidated Financial Statements.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Miami, Florida. We maintain
offices, warehouses, research and development facilities and/or distribution
centers in Argentina, Chile, China, the Czech Republic, Finland, Germany, Hong
Kong, Hungary, India, Ireland, Italy, Kazakhstan, Mexico, Latvia, Peru, Poland,
Russia, the Slovak Republic, Sweden, Switzerland, Taiwan, Ukraine, Uruguay,
Venezuela and various parts of the United States and the United Kingdom, most of
which are held pursuant to leases. None of these leases are material to us.
We operate pharmaceutical manufacturing facilities in Buenos Aires,
Argentina; Opava, Czech Republic; Runcorn, England; Miami, Florida; Falkenhagen,
Germany; Budapest, Hungary; Waterford, Ireland; Mexico City and Monterey,
Mexico; Northvale, New Jersey; Cidra, Puerto Rico; St. Croix, US Virgin Islands;
Montevideo, Uruguay; and Guacara, Venezuela. We own our Miami, Budapest, Buenos
24
Aires, Cidra, Guacara, Mexico City, Monterey, Montevideo, Opava and Falkenhagen
manufacturing facilities, and lease our remaining manufacturing facilities. In
connection with the sale of the specialty chemicals business, we retained
ownership of our manufacturing facilities in Rock Hill, South Carolina and
Marion, Ohio which we are seeking to sell.
We believe our facilities are in satisfactory condition and are
suitable for their intended use. We plan to spend between $80 million and $90
million in 2002 to improve and expand our pharmaceutical and other related
facilities. A portion of our pharmaceutical manufacturing capacity and our
research and development activities, as well as our corporate headquarters and
other critical business functions are located in areas subject to hurricane
casualty risk. Although we have certain limited protection afforded by
insurance, our business and our earnings could be materially adversely affected
in the event of a major windstorm.
ITEM 3. LEGAL PROCEEDINGS
In late April 1995, IVAX Pharmaceuticals NV (which was formerly named
Zenith Laboratories, Inc.), one of our wholly-owned subsidiaries ("Zenith"),
received approvals from the FDA to manufacture and market the antibiotic
cefaclor in capsule and oral suspension formulations. Cefaclor is the brand
equivalent of Ceclor(R), a product of Eli Lilly and Company ("Lilly"). On April
27, 1995, Lilly filed a lawsuit against Zenith and others styled ELI LILLY AND
COMPANY V. AMERICAN CYANAMID COMPANY, BIOCRAFT LABORATORIES, INC., ZENITH
LABORATORIES, INC. AND BIOCHIMICA OPOS S.P.A. in the United States District
Court for the Southern District of Indiana, Indianapolis Division. In general,
the lawsuit alleged that Biochimica Opos S.p.A. ("Opos"), Zenith's cefaclor raw
material supplier, manufactured cefaclor raw material in a manner which
infringed two process patents owned by Lilly, and that Zenith and the other
defendants knowingly and willfully infringed and induced Opos to infringe the
patents by importing the raw material into the United States. The lawsuit sought
to enjoin Zenith and the other defendants from infringing or inducing the
infringement of the patents and from making, using or selling any product
incorporating the raw material provided by Opos, and sought an unspecified
amount of monetary damages and the destruction of all cefaclor raw material
manufactured by Opos and imported into the United States. In August 1995, the
Court denied Lilly's motion for preliminary injunction which sought to prevent
Zenith from selling cefaclor until the merits of Lilly's allegations could be
determined at trial. On May 10, 1996, the United States Court of Appeals for the
Federal Circuit affirmed the district court's denial of Lilly's motion for
preliminary injunction. On February 28, 1997, Lilly filed an amended complaint
alleging the infringement of an additional patent. Lilly subsequently filed a
second amended complaint but did not revise its allegations regarding Zenith.
Zenith asserted a counterclaim, alleging antitrust violations. On December 21,
2001, this matter was settled and each party dismissed their claims accordingly.
On December 21, 1998, an action purporting to be a class action, styled
LOUISIANA WHOLESALE DRUG CO. VS. ABBOTT LABORATORIES, GENEVA PHARMACEUTICALS,
INC. AND ZENITH GOLDLINE PHARMACEUTICALS, INC., was filed against IVAX
Pharmaceuticals and others in the United States District Court for the Southern
District of Florida, alleging a violation of Section 1 of the Sherman Antitrust
Act. Plaintiffs purport to represent a class consisting of customers who
purchased a certain proprietary drug directly from Abbott Laboratories during
the period beginning on October 29, 1998. Plaintiffs allege that, by settling
patent-related litigation against Abbott in exchange for quarterly payments, the
defendants engaged in an unlawful restraint of trade. The complaint seeks
unspecified treble damages and injunctive relief. Eighteen additional class
action lawsuits containing allegations similar to those in the LOUISIANA
WHOLESALE case were filed in various jurisdictions between July 1999 and
February 2001, the majority of which have been consolidated with the LOUISIANA
WHOLESALE case. On December 13, 2000 plaintiffs' motion for summary judgement on
the issue of whether the settlement agreement constituted a PER SE violation of
Section 1 of the Sherman Antitrust Act in the LOUISIANA WHOLESALE case was
granted. IVAX Pharmaceuticals has sought leave to appeal to the United States
25
Court of Appeals for the Eleventh Circuit. On March 13, 2000 the Federal Trade
Commission ("FTC") announced that it had issued complaints against, and
negotiated consent decrees with, Abbott Laboratories and Geneva Pharmaceuticals
arising out of an investigation of the same subject matter that is involved in
these lawsuits. The FTC took no action against IVAX Pharmaceuticals. Settlement
has been reached with those plaintiffs representing approximately one third of
the direct purchaser class.
IVAX Pharmaceuticals has been named in a number of individual and class
action lawsuits in both state and federal courts involving the diet drug
combination of fenfluramine and phentermine, commonly known as "fen-phen."
Generally, these lawsuits seek damages for personal injury, wrongful death and
loss of consortium, as well as punitive damages, under a variety of liability
theories including strict products liability, breach of warranty and negligence.
IVAX Pharmaceuticals did not manufacture either fenfluramine or phentermine, but
did distribute the brand equivalent version of phentermine manufactured by Eon
Labs Manufacturing, Inc. ("Eon") and Camall Company. Although IVAX
Pharmaceuticals had a very small market share, to date, IVAX Pharmaceuticals has
been named in approximately 5,027 cases and has been dismissed from
approximately 4,757 of these cases, with additional dismissals pending. IVAX
Pharmaceuticals intends to vigorously defend all of the lawsuits, and while
management believes that its defense will succeed, as with any litigation, there
can be no assurance of this. Currently Eon is paying for approximately 50% of
IVAX Pharmaceuticals' costs in defending these suits and is fully indemnifying
IVAX Pharmaceuticals against any damages IVAX Pharmaceuticals may suffer as a
result of cases involving product manufactured by Eon. In the event Eon
discontinues providing this defense and indemnity, IVAX Pharmaceuticals has its
own product liability insurance. While IVAX Pharmaceuticals' insurance carriers
have issued reservations of rights, IVAX Pharmaceuticals believes that it has
adequate coverage. Although it is impossible to predict with certainty the
outcome of litigation, in the opinion of management, this litigation will not
have a material adverse impact on our financial condition or results of
operation.
On March 7, 2000, individuals purporting to be our shareholders filed a
class action complaint styled GOLDFISHER V. IVAX CORPORATION, ET AL. against us
and certain of our current and former officers and directors in the Circuit
Court of the 11th Judicial Circuit in and for Dade County, Florida. The
plaintiff seeks to act as the representative of a class consisting of all
purchasers of our common stock between December 19, 1997 and the date of class
certification. The complaint generally alleges that our adoption of a
shareholder rights plan containing a provision that would limit the ability of
certain members who might be added to the Board of Directors following a change
of control to approve a decision to redeem the rights, which is commonly known
as a "dead hand" provision, is a violation of the Florida Business Corporation
Act and our articles of incorporation and by-laws. Plaintiffs seek an injunction
invalidating this provision, as well as damages in an unspecified amount which,
in the opinion of management, would not be material. On February 8, 2001, a
motion for summary judgment was granted in our favor, and on January 4, 2002,
Plaintiff's motion for Attorneys' Fees was denied.
PACLITAXEL RELATED LITIGATION
On March 26, 1998, Bristol Myers Squibb Company ("BMS") filed a
complaint in the United States District Court for the District of New Jersey
styled BRISTOL MYERS SQUIBB COMPANY V. ZENITH GOLDLINE PHARMACEUTICALS, INC., ET
AL. alleging patent infringement of two of its patents relating to Taxol(R).
IVAX Pharmaceuticals filed variouS counterclaims based on antitrust and unfair
competition. On March 3, 2000, the court granted IVAX Pharmaceuticals' motion
for summary judgment of invalidity. On April 17, 2000, BMS filed an appeal. On
April 20, 2001, the appellate court affirmed the district court's grant of
summary judgment of invalidity with respect to all but two of the asserted
claims of Bristol's `803 and `537 patents. The appellate court remanded the case
to the district court for further proceedings on these two claims. On January
16, 2002, this matter was settled in its entirety with both parties dismissing
their remaining claims with prejudice.
26
On August 11, 2000, American BioScience, Inc. ("ABI") filed a complaint
in the United States District Court for the Central District of California
styled AMERICAN BIOSCIENCE, INC. V. BRISTOL MYERS SQUIBB COMPANY for a temporary
restraining order and preliminary injunction compelling BMS to list in the FDA's
Orange Book ABI's `331 patent, which purportedly covers BMS's Taxol(R) product.
The listing of the patent in the FDA's Orange Book would have the effect of
blocking brand equivalent competition. A hearing was held on September 6, 2000
and the Court denied ABI's request for preliminary injunction, declined to
approve the settlement between ABI and BMS and dismissed ABI's complaint and
ordered that BMS de-list the `331 patent. ABI appealed and sought a stay of the
Order from the Ninth Circuit Court of Appeals, which was denied on September 13,
2000. The appeal remains pending.
On September 7, 2000, ABI filed a lawsuit for patent infringement
styled AMERICAN BIOSCIENCE, INC. V. BAKER NORTON PHARMACEUTICALS, INC., ZENITH
GOLDLINE PHARMACEUTICALS, INC., AND IVAX CORPORATION in the United States
District Court for Central District of California alleging infringement of its
`331 patent, which purports to cover paclitaxel, and seeking damages in an
unspecified amount. On January 10, 2002, Zenith's motion for summary judgment
was granted and the court held the patent was invalid. ABI filed a motion for
reconsideration which was denied on March 2, 2002.
On September 20, 2000, ABI filed a complaint in the United States
District Court for the District of Columbia styled AMERICAN BIOSCIENCE, INC. V.
DONNA E. SHALALA, ET AL., which sought by temporary restraining order and
preliminary injunction a rescission of Baker Norton Pharmaceuticals' final
marketing approval by the FDA for its brand equivalent paclitaxel product. Both
BMS and Baker Norton Pharmaceuticals intervened in the action. On October 3,
2000, the Court denied ABI's request for relief. ABI filed an appeal and on
March 30, 2001, the appellate court vacated the district court's decision and
remanded the case based on the lack of administrative record from the FDA. FDA
filed an administrative record and ABI then renewed its motion for a temporary
restraining order and preliminary injunction. On April 19, 2001, the district
court again denied ABI's motion and ABI appealed. On November 6, 2001, the
appellate court ordered the district court to vacate FDA's approval of the
Company's ANDA and remanded the matter to the agency. On January 25, 2002, the
FDA vacated the company's approval for paclitaxel and reinstated it the same day
based on the delisting by BMS of the `331 patent in the FDA's Orange Book.
We intend to vigorously defend each of the foregoing lawsuits, but
their respective outcomes cannot be predicted. Any of such lawsuits, if
determined adversely to us, could have a material adverse effect on our
financial position and results of operations. Our ultimate liability with
respect to any of the foregoing proceedings is not presently determinable.
We are involved in various other legal proceedings arising in the
ordinary course of business, some of which involve substantial amounts. In order
to obtain brand equivalent approvals prior to the expiration of patents on
branded products, and to benefit from the exclusivity allowed to ANDA applicants
that successfully challenge these patents, we frequently become involved in
patent infringement litigation brought by branded pharmaceutical companies (see
"Governmental Regulation"). Although these lawsuits involve products that are
not yet marketed and therefore pose little or no risk of liability for damages,
the legal fees and costs incurred in defending such litigation can be
substantial. While it is not feasible to predict or determine the outcome or the
total cost of these proceedings, in the opinion of management, based on a review
with legal counsel, any losses resulting from such legal proceedings will not
have a material adverse impact on our financial position or results of
operations.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are of the names, ages, officer's positions held and
business experience during the past five years of our executive officers as of
March 26, 2002. Officers serve at the discretion of the Board of Directors.
There is no family relationship between any of the executive officers, and there
is no arrangement or understanding between any executive officer and any other
person pursuant to which the executive officer was selected.
THOMAS BEIER
Thomas Beier, age 56, has served as our Senior Vice President - Finance
and Chief Financial Officer since October 1997. From December 1996 to October
1997, he served as our Vice President - Finance. Prior to joining us, he served
as Executive Vice President and Chief Financial Officer of Intercontinental Bank
from 1989 until August 1996.
RAFICK HENEIN, PH.D.
Rafick Henein, age 61, has served as one of our Senior Vice Presidents
and as the President and Chief Executive Officer of IVAX Pharmaceuticals, Inc.,
our principal United States-based brand equivalent pharmaceutical subsidiary,
since July 1997. He held various positions in the Novopharm Limited organization
(pharmaceuticals) since 1988, rising to the position of President and Chief
Executive Officer of Novopharm International in 1996.
NEIL FLANZRAICH Director since 1997
Neil Flanzraich, age 58, has served as our Vice Chairman and President
since May 1998. He was a shareholder and served as Chairman of the Life Sciences
Legal Practices Group of Heller Ehrman White & McAuliffe from 1995 to 1998. From
1981 to 1994, he served in various capacities at Syntex Corporation
(pharmaceuticals), most recently as its Senior Vice President, General Counsel
and a member of the Corporate Executive Committee. From 1994 to 1995, after
Syntex Corporation was acquired by Roche Holding Ltd., he served as Senior Vice
President and General Counsel of Syntex (U.S.A.) Inc., a Roche subsidiary. He
was Chairman of the Board of Directors of North American Vaccine, Inc. (vaccine
research and development) from 1991 to 2000. He is a director of Whitman
Education Group, Inc. (proprietary education), IVAX Diagnostics, Inc.
(laboratory instruments) and Continucare Corporation (integrated health care).
PHILLIP FROST, M.D. Director since 1987
Phillip Frost, age 65, has served as our Chairman of the Board of
Directors and Chief Executive Officer since 1987. He served as our President
from July 1991 until January 1995. He was the Chairman of the Department of
Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami Beach, Florida
from 1972 to 1990. Dr. Frost was Chairman of the Board of Directors of Key
Pharmaceuticals, Inc. from 1972 to 1986, Vice Chairman of the Board of Directors
of North American Vaccine, Inc. (vaccine research and development) from 1989 to
2000, and Vice Chairman of the Board of Directors of Continucare Corporation
(integrated health care) from 1996 to 2002. He is Chairman of the Board of
Directors of Whitman Education Group, Inc. (proprietary education) and of IVAX
Diagnostics, Inc. (laboratory instruments). He is a director of Ladenburg
28
Thalman (investment banking and brokerage company), of Northrop Grumman Corp.
(aerospace) and of the Center for Blood Research, Inc. (research company). He is
Chairman of the Board of Trustees of the University of Miami and a member of the
Board of Governors of the American Stock Exchange.
JANE HSIAO, PH.D. Director since 1995
Jane Hsiao, age 54 has served as our Vice Chairman-Technical Affairs
since February 1995, as our Chief Technical Officer since July 1996, and as
Chairman, Chief Executive Officer and President of DVM Pharmaceuticals, Inc.,
our veterinary products subsidiary, since March 1998. From 1992 until February
1995, she served as our Chief Regulatory Officer and Assistant to the Chairman,
and as Vice President-Quality Assurance and Compliance of IVAX Research, Inc.,
our principal proprietary pharmaceutical subsidiary. From 1987 to 1992, Dr.
Hsiao was Vice President-Quality Assurance, Quality Control and Regulatory
Affairs of IVAX Research, Inc. She is a director of IVAX Diagnostics, Inc.
(laboratory instruments).
ISAAC KAYE Director since 1990
Isaac Kaye, age 72, has served as our Deputy Chief Executive Officer
since 1990 and as Chairman and Chief Executive Officer of IVAX UK, our principal
United Kingdom pharmaceutical subsidiary, since 1990.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is listed on the American Stock Exchange and is traded
under the symbol IVX. As of the close of business on February 28, 2002, there
were approximately 3,470 holders of record of our common stock. The following
table sets forth the high and low sales price of a share of our common stock for
each quarter in 2000 and 2001 as reported by the American Stock Exchange and
restated to give effect to the 3 for 2 stock split paid on February 22, 2000 and
the 5 for 4 stock split paid on May 18, 2001:
2001 HIGH LOW
---- ---- ---
First Quarter $31.08 $21.19
Second Quarter 39.60 21.46
Third Quarter 41.87 17.00
Fourth Quarter 23.85 17.00
2000
----
First Quarter $22.90 $13.60
Second Quarter 35.40 19.90
Third Quarter 42.30 19.40
Fourth Quarter 38.58 26.72
We did not pay cash dividends on our common stock during 2000 or 2001
and we do not intend to pay any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data as of
and for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 that has
been
29
derived from, and is qualified by reference to, our audited financial
statements. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes thereto
included elsewhere in this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2001(1) 2000(2) 1999 1998 1997
------------- ----------- --------- --------- -------
(in thousands, except per share data)
OPERATING DATA
Net revenues $ 1,215,377 $ 793,405 $ 656,482 $ 625,727 $ 594,286
Gross profit 631,789 383,502 278,515 219,736 114,304
Selling 143,629 92,032 71,131 71,152 100,220
General & administrative 110,477 84,900 85,092 88,434 116,185
Research and development 88,015 65,331 53,403 47,886 53,409
Amortization 19,412 9,042 3,121 3,673 3,760
Restructuring & asset write-downs 2,367 (4,535) (612) 12,222 38,088
Merger expenses - - - - 2,343
------------- ----------- --------- --------- ---------
Operating income (loss) 267,889 136,732 66,380 (3,631) (199,701)
Interest income 21,249 13,986 6,142 11,972 5,738
Interest expense (41,791) (14,624) (5,556) (6,857) (14,685)
Other income 38,335 17,497 19,513 32,777 53,366
Income taxes 49,883 13,214 14,850 10,047 60,166
Minority interest 344 (608) (2,085) 403 (4,086)
------------- ----------- --------- --------- ---------
Income (loss) from continuing operations 236,143 139,769 69,544 24,617 (219,534)
Income (loss) from discontinued operations - - 585 48,904 (8,701)
Net income (loss) 243,263 131,044 70,722 71,594 (233,254)
Basic earnings (loss) per common share:
Continuing operations 1.18 0.71 0.35 0.11 (0.96)
Discontinued operations - - - 0.22 (0.04)
Net earnings (loss) 1.22 0.67 0.35 0.32 (1.02)
Diluted earnings (loss) per common share:
Continuing operations 1.15 0.68 0.34 0.11 (0.96)
Discontinued operations - - - 0.22 (0.04)
Net earnings (loss) 1.19 0.64 0.34 0.32 (1.02)
Weighted average number of common shares outstanding:
Basic 199,099 196,276 201,885 223,342 227,804
Diluted 204,639 204,058 205,501 223,621 227,804
Cash dividends per common share $ - $ - $ - $ - $ -
BALANCE SHEET DATA
Working capital (3) $ 597,578 $ 438,490 $ 124,373 $ 269,511 $ 238,918
Total assets 2,105,449 1,068,186 634,514 778,015 790,736
Total long-term debt, net of current portion 913,486 253,755 93,473 77,776 94,193
Shareholders' equity 718,354 484,120 292,371 453,208 435,039
OTHER INFORMATION
Ratio of Earnings to Fixed Charges 7.6 11.1 15.3 5.9 (9.7)
(1) Includes post-acquisition results of companies acquired, primarily Lab
Chile, Netpharma and Fustery, which were acquired on July 5, 2001, March
13, 2001, and February 9, 2001, respectively, all of which were accounted
for under the purchase method of accounting.
(2) Includes the post-acquisition results of IVAX Laboratories (formerly known
as Wakefield) and Elmor, which were acquired on September 7, 2000, and June
19, 2000, both of which were accounted for under the purchase method of
accounting.
(3) Excludes net assets of discontinued operations.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the 2001 Consolidated Financial Statements and the related Notes to
Consolidated Financial Statements included elsewhere in this report. Certain
prior period amounts presented herein have been reclassified to conform to the
current period's presentation.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Net income for the year ended December 31, 2001, was $243.3 million, or
$1.19 per diluted share, compared to $131.0 million, or $.64 per diluted share,
for the prior year. Income from continuing operations was $236.1 million, or
$1.15 per diluted share, for the year ended December 31, 2001, compared to
$139.8 million, or $.68 per diluted share, for the prior year. Net income for
the year ended December 31, 2001, was positively impacted by $7.1 million, or
$.04 per diluted share, of net extraordinary gains relating to the early
extinguishment of debt, and net income for the year ended December 31, 2000, was
negatively impacted by $(2.3) million, or $(.01) per diluted share, of net
extraordinary losses relating to the early extinguishment of debt (See Note 7,
Debt, in the Notes to Consolidated Financial Statements).
NET REVENUES AND GROSS PROFIT
Net revenues for the year ended December 31, 2001, totaled $1.2
billion, an increase of $422.0 million, or 53%, from the $793.4 million reported
in the prior year. This increase was comprised of increases of $253.8 million in
net revenues from North American subsidiaries, $160.7 million in net revenues
from Latin American subsidiaries, and $39.5 million in net revenues from
European subsidiaries, offset by a decrease of $32.0 million from other
operations.
North American subsidiaries net revenues totaled $595.0 million for the
year ended December 31, 2001, compared to $341.2 million in 2000. The 74%
increase in net revenues was primarily attributable to increased sales volume,
in part due to new product releases, including paclitaxel, and higher sales
prices for certain products, partially offset by higher sales returns and
allowances. North American subsidiaries recorded provisions for sales returns
and allowances that reduced gross sales by $370 million in 2001 and $182.8
million in 2000. The increase of $187.2 million, or 102%, was primarily due to
reduced prices on certain brand equivalent pharmaceutical products and an
increase in sales volume. During the third and fourth quarters of 2001, we
offered extended payment terms to certain customers and extended the terms of
sale on certain immediately preceding quarter sales. In addition, during the
second quarter we offered extended payment terms to certain customers related to
the launch of a product to a new class of customers, which receivables were
subsequently collected.
European subsidiaries generated net revenues of $419.1 million for the
year ended December 31, 2001, compared to $379.6 million in 2000. The 10%
increase was primarily due to higher sales volume and prices of respiratory
products, partially offset by reduced product development fees and the effect of
unfavorable exchange rates. European subsidiaries recorded provisions for sales
returns and allowances that reduced gross sales by $34.7 million in 2001 and
$27.5 million in 2000.
Latin American subsidiaries generated net revenues of $224.1 million
for the year ended December 2001, compared to $63.4 million in 2000. The 253%
increase was primarily due to the sales volume of Laboratorio Chile S.A. ("Lab
Chile") which was acquired on July 5, 2001, Laboratorios Fustery, S.A. de C.V.
("Fustery") which was acquired on February 9, 2001, and Laboratorios Elmor, S.A.
("Elmor") which was acquired on June 19, 2000. Revenues from these subsidiaries
are included in results of operations from the dates they were acquired. Latin
American subsidiaries recorded provisions for sales returns and allowances that
reduced gross sales by $25.7 million in 2001 and $5.1 million in 2000.
31
Gross profit for the year ended December 31, 2001, increased $248.3
million, or 65%, to $631.8 million (52% of net revenues) from $383.5 million
(48% of net revenues) for the year ended December 31, 2000. The increase in
gross profit percentage was primarily due to the launch of paclitaxel in North
America and higher margin sales from the operations of Lab Chile, Fustery and
Elmor, partially offset by increased sales returns and allowances. Our
paclitaxel product accounted for approximately 17% of our net revenues during
2001. The entry of two competitors for brand equivalent paclitaxel resulted in
price and volume pressures during the latter part of 2001. We are continuing to
experience increased competition for paclitaxel as well as our brand equivalent
albuterol products and the resulting pricing and volume pressures have
negatively impacted and may continue to negatively impact our revenues and gross
profits. Our future net revenues and gross profits will depend upon:
o our ability to maintain our pricing and volume levels and obtain a
consistent supply of raw materials for paclitaxel;
o our ability to maintain a pipeline of products in development;
o our ability to develop and rapidly introduce new products;
o the timing of regulatory approval of such products;
o the number and timing of regulatory approval of competing products;
o our ability to manufacture such products efficiently; and
o our ability to replace or renew license fees, royalties and development
service fees as the related agreements expire or are terminated.
Because of the regulatory and competitive factors discussed under "Risk
Factors," our net revenues and results of operations historically have
fluctuated from period to period. Other factors discussed under "Safe Harbor
Statement under the Private Securities Litigation Reform Act of 1995," including
the impact of governmental regulations and efficacy or safety concerns with
respect to our marketed products, may also adversely impact our results.
OPERATING EXPENSES
Selling expenses increased $51.6 million, or 56%, to $143.6 million
(12% of net revenues) in 2001 from $92.0 million (12% of net revenues) in 2000.
The increase was due to higher expenses from the operations of Lab Chile,
Fustery, Elmor, and IVAX Laboratories, Inc. ("Laboratories", formerly Wakefield
Pharmaceuticals, Inc.), and increased sales force and promotional expenses at
the European subsidiaries.
General and administrative expenses totaled $110.5 million (9% of net
revenues) in 2001, an increase of $25.6 million, or 30%, from $84.9 million (11%
of net revenues) in 2000. The increase is due to increased professional fees at
corporate headquarters and additional general and administrative expenses from
the operations of Lab Chile, Fustery, Elmor and Laboratories.
Research and development expenses totaled $88.0 million (7% of net
revenues) in 2001 compared to $65.3 million (8% of net revenues) in 2000, an
increase of $22.7 million, or 35%. The increase in research and development
expenses was due primarily to increased biostudies. Our future level of research
and development expenditures will depend on, among other things, the outcome of
clinical testing of products under development, delays or changes in government
required testing and approval procedures, technological and competitive
developments, strategic marketing decisions and liquidity.
Amortization expense for 2001 increased $10.4 million, from $9.0
million to $19.4 million, due primarily to the amortization of goodwill arising
from the acquisitions of Elmor and Fustery. Amortization of goodwill will cease
January 1, 2002, pursuant to Statement of Financial Accounting Standards
("SFAS") No. 142.
32
During 2001, we recorded restructuring costs of $2.4 million related
primarily to integration of the operations of Lab Chile's and our Argentine
businesses.
OTHER INCOME (EXPENSE)
Interest income increased $7.3 million and interest expense increased
$27.2 million compared to 2000. The increases were due primarily to additional
cash on hand and indebtedness from the issuance of $725 million of 4.5%
Convertible Senior Subordinated Notes in May 2001.
Other income, net increased $20.8 million for 2001 compared to 2000.
The increase is due primarily to $3.8 million of investment gains and a $6.6
million increase in royalty and milestone payments from ALZA Corporation
("ALZA"), partially offset by foreign currency losses at various European
subsidiaries. Additionally, we recorded a gain of $21.7 million on derivative
contracts due to the devaluation of the Argentine peso partially offset by a
$19.0 million loss on bank debt and other liabilities denominated in currencies
foreign to the Argentine operations. We also recorded a gain on the partial sale
of IVAX Diagnostics, Inc. of $10.3 million in connection with IVAX Diagnostics,
Inc.'s March 2001 merger with b2bstores.com, Inc.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Net income for the year ended December 31, 2000, was $131.0 million, or
$.64 per diluted share, compared to $70.7 million, or $.34 per diluted share,
for the prior year. Income from continuing operations was $139.8 million, or
$.68 per diluted share, for the year ended December 31, 2000, compared to $69.5
million, or $.34 per diluted share, for the prior year. During 2000, we recorded
a cumulative change in accounting principle charge in the amount of $6.5
million, or $.03 per diluted share, as a result of SAB No. 101, related to
up-front receipts previously recognized in income during 1998 and 1999. Net
income for the year ended December 31, 2000, was negatively impacted by a $2.3
million, or $.01 per diluted share, extraordinary loss, and net income for 1999
was positively impacted by $.6 million, or less than $.01 per diluted share, of
net extraordinary gain relating to the early extinguishment of debt (See Note 7,
Debt, in the Notes to Consolidated Financial Statements).
NET REVENUES AND GROSS PROFIT
Net revenues for the year ended December 31, 2000, totaled $793.4
million, an increase of $136.9 million, or 21%, from the $656.5 million reported
in the prior year. This increase was comprised of increases of $66.6 million in
net revenues from North American subsidiaries, $57.0 million in net revenues
from European subsidiaries and $30.5 million in net revenues from Latin American
subsidiaries, offset by a decrease of $17.2 million from other operations.
North American subsidiaries net revenues totaled $341.2 million for the
year ended December 31, 2000, compared to $274.6 million in 1999. The 24%
increase was primarily attributable to increased sales volume partially offset
by higher sales returns and allowances and lower sales prices of certain brand
equivalent pharmaceutical products. North American subsidiaries recorded
provisions for sales returns and allowances that reduced gross sales by $182.8
million in 2000 and $90.8 million in 1999. The increase of $92 million, or 101%,
was primarily due to reduced prices on certain brand equivalent pharmaceuticals
and an increase in sales volume.
European subsidiaries generated net revenues of $379.6 million for the
year ended December 31, 2000, compared to $322.6 million for 1999. The 18%
increase was primarily due to increased product development fees and higher
sales volumes of respiratory products partially offset by unfavorable effects of
currency exchange rates and lower prices for certain brand equivalent products.
33
European subsidiaries recorded provisions for sales returns and allowances that
reduced gross sales by $27.5 million in 2000 and $26.2 million in 1999.
Gross profit for the year ended December 31, 2000, increased $105.0
million, or 38%, to $383.5 million (48% of net revenues) from $278.5 million
(42% of net revenues) for the year ended December 31, 1999. The increase in the
gross profit percentage was primarily attributable to increased other revenue,
higher margin sales from the acquisitions of Elmor and Laboratories and product
mix.
OPERATING EXPENSES
Selling expenses increased $20.9 million, or 29%, to $92.0 million in
2000 (12% of net revenues) from $71.1 million (11% of net revenues) in 1999. The
increase was due to higher expense from the operations of Elmor and
Laboratories, an increased sales force at our North American subsidiaries and an
increased sales force and promotional expenses at our European subsidiaries.
General and administrative expenses totaled $84.9 million (11% of net
revenues) in 2000, a decrease of $.2 million, or .2%, from $85.1 million (13% of
net revenues) in 1999. The decrease was comprised of a decrease in legal
expenses, favorable resolution of certain litigation at our North American
subsidiaries and lower costs at our Far East subsidiaries, partially offset by
$2.0 million in additional general and administrative expenses from the
operations of Elmor and Laboratories.
Research and development expenses totaled $65.3 million (8% of net
revenues) in 2000 compared to $53.4 million (8% of net revenues) in 1999, an
increase of $11.9 million, or 22%. The increase in research and development
expenses was due to increased personnel at our North American and European
subsidiaries and biostudies associated with the development of brand equivalent
pharmaceuticals at our North American and European subsidiaries.
We reversed restructuring costs of $4.5 million in 2000 and $.6 million
in 1999. In the second quarter of 2000, as a result of a change in strategy to
keep the Northvale, New Jersey pharmaceutical facility operating as back-up
capacity in the event of hurricane damage at the Puerto Rico facility, the
related restructuring reserves were reversed. Also, during 2000, we were
released from certain non-cancelable operating leases associated with our United
Kingdom restructuring and the reserves previously established for certain
severance payments were determined to be unnecessary, resulting in $1.4 million
of the reversal of restructuring reserves. The credit recorded in 1999 was
primarily due to the reversal of a previously recorded reserve for a note
receivable and 15% interest in a partnership received as consideration for the
1998 sale of a Ft. Lauderdale, Florida facility. Due to the uncertainty of
collectibility, these assets were fully reserved in 1998. In 1999 the note was
collected in full, the partnership interest was sold and the reserve against the
assets was reversed.
OTHER INCOME (EXPENSE)
Interest income increased $7.8 million in 2000 compared to 1999 due to
higher levels of cash on hand primarily from the proceeds from the debt offering
discussed below.
Interest expense increased $9.1 million primarily due to the issuance
of $250 million of 5.5% Convertible Senior Subordinated Notes partially offset
by the conversion of our 6.5% Convertible Subordinated Notes to common stock and
cash in 2000 and the payoff of the related-party Frost Nevada Limited
Partnership ("FNLP") note during 2000. Prior to the payoff, $2.1 million of the
warrant issued to FNLP in 1999 had been amortized to interest expense. In
addition, in connection with the payoff of the FNLP note, the remaining value of
the warrant issued was recorded as an extraordinary loss on extinguishment of
debt in the amount of $2.3 million.
34
Other income, net, totaled $17.5 million in 2000, compared to $19.5
million in 1999, a decrease of $2.0 million, or 10%. Royalty and milestone
payments from the 1997 sale of rights to Elmiron(R) and certain other urology
products in the United States and Canada to ALZA amounted to $7.2 million in
2000 and $13.0 million in 1999, and are included in other income as additional
gain on the sale of product rights.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective July 1, 2001, we adopted SFAS No. 141, Business Combinations,
which addresses the financial accounting and reporting for business
combinations. It supersedes APB Opinion No. 16, Business Combinations, and SFAS
No. 38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises.
All business combinations under the scope of this statement must be accounted
for using the purchase method of accounting. This statement applies to all
business combinations initiated after June 30, 2001. The adoption of SFAS No.
141 did not have a material impact on our financial condition or results of
operations. On January 1, 2002, we will reverse the $4.2 million of negative
goodwill recorded in the balance sheet as of December 31, 2001, through a
cumulative effect of a change in accounting principle, thereby increasing net
income by this amount for the 2002 first quarter and year.
SFAS No. 142, Goodwill and Other Intangible Assets, addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses accounting for
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) at acquisition. It also
addresses accounting for goodwill and other intangible assets after they have
been initially recognized in the financial statements. Intangible assets that
have indefinite lives and goodwill will no longer be amortized, but rather must
be tested at least annually for impairment using fair values. Intangible assets
that have finite useful lives will be amortized over their useful lives. The
statement is effective in fiscal years beginning after December 15, 2001, except
that goodwill and intangible assets acquired after June 30, 2001, are subject
immediately to the non-amortization and amortization provisions of this
statement. Accordingly, no goodwill amortization was recorded related to the
July 5, 2001, acquisition of Lab Chile. In addition, amortization of goodwill
acquired prior to June 30, 2001, will cease. This will increase net income by
approximately $2.0 million per quarter, or $8.0 million per year. Management is
currently evaluating the extent of impairment, if any, of intangible assets with
indefinite lives and goodwill, that may need to be recorded, but the effect
won't be known until the provisions of SFAS No. 142 are applied.
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal operation of a long-lived asset, except for certain obligations
of lessees. It requires that the fair value of an asset retirement obligation be
recognized as a liability in the period in which it is incurred if a reasonable
estimate can be made, and that the associated retirement costs be capitalized as
part of the carrying amount of the long-lived asset. It is effective for fiscal
years beginning after June 15, 2002. We believe that the impact of adoption of
this statement will not be material.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
certain provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. It also
amends ARB No. 51, Consolidated Financial Statements. It establishes a single
35
accounting model for the accounting for a segment of a business accounted for as
a discontinued operation that was not addressed by SFAS No. 121 and resolves
other implementation issues related to SFAS No. 121. It is effective for fiscal
periods beginning after December 15, 2001. We believe that the impact of
adoption of this statement will not be material.
EITF Issue No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products, is effective for
periods beginning after December 15, 2001. It states that consideration paid by
a vendor to a reseller should be classified as a reduction of revenue in the
income statement unless an identifiable benefit is or will be received from the
reseller that is sufficiently separable from the purchase of the vendor's
products and the vendor can reasonably estimate the fair value of the benefit.
Restatement of prior periods is required. We believe that the impact of adoption
will not be material.
EITF Issue No. 01-09, Accounting for Consideration Given to a Customer
or a Reseller of a Vendor's Products, reconciles EITF Issue No. 00-14, Issue No.
3 of EITF Issue No. 00-22 and EITF Issue No. 00-25. It is effective for periods
beginning after December 15, 2001. Restatement of prior period amounts is
required. We believe the impact of adoption will not be material.
Effective January 1, 2001, IVAX adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated as hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income ("OCI") and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair value of cash flow
hedges are recognized in earnings. Certain forecasted transactions are exposed
to foreign currency risk. The principal currency hedged was the Irish punt
against the British pound. Forward options used to hedge a portion of forecasted
international expenses for up to one year in the future are designated as cash
flow hedging instruments. The adoption of SFAS No. 133 resulted in a pre-tax
increase to OCI of $1.8 million. The increase to OCI was mostly attributable to
gains on cash flow hedges. The net derivative gains included in OCI as of
January 1, 2001, were reclassified into earnings during the twelve months ended
December 31, 2001.
During the first quarter of 2001, we adopted EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock, which addresses the classification and
accounting treatment of equity derivative contracts (such as our put options),
as equity instruments (either temporary or permanent) or assets and liabilities.
As a result, put options were reclassified from temporary equity to permanent
equity. As of December 31, 2001, we had outstanding five freestanding put
options for 1.2 million shares of our common stock that were issued in
connection with the share repurchase program. The put options have strike prices
ranging from $19.00 to $31.80 and expire from January 2002 through April 2002.
During January and February 2002, we rolled forward three put options for 0.8
million shares that bore strike prices ranging from $31.50 to $31.80. No
additional premiums were collected. These put options have strike prices ranging
from $31.90 to $32.28 and expire between April and May 2002. In addition, we
elected the net share settlement method to settle one put option for 0.2 million
shares bearing a strike price of $31.00 that expired on March 1, 2002. We issued
0.2 million shares of our common stock in settlement of this obligation on March
5, 2002. See "Liquidity and Capital Resources" below for a discussion of our
obligations under these put options.
36
During the first quarter of 2001, we adopted Issue No. 3 of EITF Issue
No. 00-22, Accounting for Points and Certain Other Time or Volume Based Sales
Incentive Offers and Offers for Free Products or Services to be Delivered in the
Future. Final consensus was reached on the recognition, measurement and income
statement classification of cash rebates or refunds that are time and volume
based. Final consensus has not been reached on four other items under
consideration. EITF Issue No. 00-22 requires that cash rebates or refunds
redeemable if the customer completes a specified cumulative level of revenue
transactions or remains a customer for a specified time period should be
recognized as a reduction of revenue based on a systematic and rational
allocation of the cost of honoring the rebate or refund earned and claimed to
each of the underlying revenue transactions that result in progress toward
earning the rebate or refund. The effective date of adoption is fiscal quarters
ending after February 15, 2001. The impact of adoption was not significant.
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, was adopted for up-front licensing fees and milestone payments
during the fourth quarter of 2000 resulting in a cumulative change in accounting
principle charge of $6.5 million, net of tax benefit, or $.03 per share,
recorded retroactively in the first quarter of 2000. The offsetting impact was
recorded in deferred revenue that will be recognized in income through 2011. We
amortized $.9 million of this deferred revenue into income during 2001 and $1.7
million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, working capital was $597.6 million compared to
$438.5 million at December 31, 2000. Cash and cash equivalents were $178.3
million at December 31, 2001, compared to $174.8 million at December 31, 2000.
Marketable securities were $154.8 million at December 31, 2001, compared to
$76.7 million at December 31, 2000.
Net cash provided by operations during 2001 was $199.0 million compared
to $80.7 million in 2000, and $62.7 million in 1999. The increase in cash
provided by operating activities during 2001 was due to the $112.2 million
increase in net income and increases in accounts payable, accrued expenses and
other current liabilities partially offset by increases in other current assets.
The increase in cash provided by operating activities during 2000 was due to the
$60.3 million increase in net income offset by larger accounts receivable and
inventory balances at December 31, 2000.
Net cash of $705.3 million was used for investing activities during
2001 compared to $136.3 million in 2000 and $37.5 million in 1999. The increase
in cash used by investing activities in 2001 compared to 2000 was due primarily
to the increase in cash used to acquire patents, trademarks, licenses and other
intangible assets and businesses. We invested $378.2 million and received $305.0
million from sales of marketable securities during 2001 and invested $82.7
million and received $6.0 million from sales of marketable securities during
2000.
Cash utilized for capital expenditures was $73.5 million in 2001
compared to $50 million in 2000 and $42.7 million in 1999. The increases in 2001
and 2000 were due to increased investments in information systems at our North
American subsidiaries.
On March 14, 2001, our wholly-owned subsidiary, IVAX Diagnostics, Inc.,
was merged with b2bstores.com which provided cash of $22.3 million at the IVAX
Diagnostics level. These proceeds are reflected in proceeds from sales of assets
in the accompanying 2001 cash flow statement.
On February 6, 2001, we acquired a license to the patent rights to
develop and market talampanel for $10 million.
37
On February 9, 2001, we paid $57.2 million in cash, net of cash
acquired, and issued common stock to indirectly acquire Fustery, a Mexican
pharmaceutical company. During the second quarter of 2001, in accordance with
the stock purchase agreement, we made an additional payment of $16.3 million in
lieu of additional shares, representing contingent consideration based on the
market value of our common stock. During the fourth quarter of 2001, we received
$1.4 million from Fustery, representing a reduction of the purchase price and
goodwill for this acquisition.
On February 26, 2001, we acquired the assets of a research organization
located in the United States for $4.7 million in cash, net of cash acquired, and
the issuance of common stock.
On March 13, 2001, we acquired Netpharma, a Swedish pharmaceutical
company, through the issuance of common stock and received cash of $1.0 million
in excess of cash paid.
On April 3, 2001, we acquired the remaining 70% of Indiana Protein
Technologies, Inc. ("Indiana Protein") that we did not already own. Indiana
Protein was previously accounted for as an investment under the equity method of
accounting. This additional interest was acquired for $4.1 million in cash, net
of cash acquired, of which $2.5 million is subject to an earnout period of 5
years.
During the third quarter of 2001, we acquired 99.9% of the outstanding
shares and American Depositary Shares ("ADS") of Lab Chile, a Chilean
pharmaceutical company, in two tender offers for cash. The total purchase price,
including acquisition costs of $6.2 million, was $387.6 million, net of cash
acquired. During 2001, we purchased ADS' of Lab Chile for a total of $15.2
million, which were subsequently sold at a profit of $3.6 million prior to
commencement of the tender offer for Lab Chile in the same period.
On October 8, 2001, we acquired the worldwide rights for the
dermatological use of loteprednol etabonate, a new "soft" corticosteroid to
treat dermatological conditions, for $.5 million in cash.
On October 16, 2001, we acquired the currently marketed intranasal
steroid brand products, Nasarel and Nasalide, for the treatment of allergic
rhinitis, from Elan Corporation, plc for $121.0 million in cash.
During 2001, we received $1.7 million, representing the reduction of
the purchase price of Elmor that was acquired in 2000.
On June 19, 2000, and August 2, 2000, we acquired, through the
acquisition of three holding companies, Elmor, a company located in Caracas,
Venezuela. Elmor manufactures, markets and distributes pharmaceutical products
in Venezuela. In June 2000, we paid $1.7 million in cash, net of cash acquired,
and issued common stock, for two of the holding companies. In August 2000, we
acquired certain other assets utilized in the business of Elmor by the purchase
of the third holding company for additional cash of $3.9 million.
On September 7, 2000, we acquired IVAX Laboratories, an U.S.
pharmaceutical company located in Georgia, through the issuance of common stock
and received $5.1 million of cash in excess of cash paid. We incurred $0.1
million of other costs.
During 2000, we acquired 0.2 million additional shares of IVAX-CR a.s.
(formerly Galena) through open market transactions and 0.1 million shares
through a tender offer for $10.9 million. During 1999, we paid $5.0 million for
additional shares of IVAX-CR a.s. primarily under a tender offer for all
outstanding shares.
38
On October 12, 1999, we acquired 100% ownership of the Institute for
Drug Research, Ltd., ("IDR") a pharmaceutical research and development company
in Budapest, Hungary, for $3.4 million plus assumption of $3.5 million in loans.
Net cash of $492.9 million was provided by financing activities in 2001
compared to $195.8 million provided by financing activities in 2000 and $189.0
million used in financing activities in 1999. The increase in 2001 was due to
the issuance in 2001 of $725 million of 4.5% Convertible Senior Subordinated
Notes, partially offset by increased repurchases of our common stock and
payments on long-term debt and loans payable. The increase in 2000 was due to
the issuance of $250 million of 5.5% Convertible Senior Subordinated Notes in
2000.
During October 2001, we repaid $15 million of long-term debt assumed in
the acquisition of Lab Chile.
During May 2001, we issued $725.0 million of our 4.5% Convertible
Senior Subordinated Notes due 2008 and received net proceeds of approximately
$705.7 million. The 4.5% Notes are convertible at any time prior to maturity,
unless previously redeemed, into 24.96875 shares of our common stock per $1,000
of principal amount of the 4.5% Notes. This ratio results in a conversion price
of approximately $40.05 per share. The 4.5% Notes are redeemable by us on or
after May 29, 2004. During the third quarter of 2001, we repurchased $65 million
face value of the 4.5% Notes at a total cost of $52 million.
During May 2000, we issued $250.0 million of our 5.5% Convertible
Senior Subordinated Notes due 2007 and received net proceeds of approximately
$243.8 million. The 5.5% Notes are convertible at any time prior to maturity,
unless previously redeemed, into 33.6475 shares of our common stock per $1,000
of principal amount of the 5.5% Notes. This ratio results in a conversion price
of approximately $29.72 per share. The 5.5% Notes are redeemable by us on or
after May 29, 2003.
On November 18, 1999, we issued a $50 million promissory note to FNLP,
an entity controlled by our Chairman and CEO. The note was due January 17,
2001, and bore interest at 10% payable quarterly. Proceeds from the note were
used to purchase our common stock under our share repurchase program (See Note
11, Shareholders' Equity, in the Notes to Consolidated Financial Statements).
In conjunction with the loan, FNLP was issued a warrant to purchase .9 million
shares of our common stock at an exercise price equal to the price paid for the
repurchased shares, $9.60 per share. On June 30, 2000, the loan was repaid
resulting in the write-off of the remaining $2.3 million of debt issue costs as
an extraordinary item. During the first six months of 2000, we amortized to
interest expense $2.1 million of the value of the warrant issued to FNLP during
1999.
Between August 2000 and March 2002, our Board of Directors increased
its authorization of share repurchases under the share repurchase program by
22.5 million shares. As of March 8, 2002, we had repurchased 9.7 million shares
under this authorization.
During 2001, in connection with our share repurchase program, we
received $4.7 million in premiums on the issuance of eight freestanding put
options for 1.9 million shares of our common stock, of which one put option for
0.2 million shares expired unexercised prior to December 31, 2001. We also
received $0.2 million upon renewal/rollforward of three put options for 0.9
million shares into two put options for 0.9 million shares. Five put options for
1.6 million shares were exercised by the holders at strike prices ranging from
$27.68 to $31.50 during 2001. We elected the physical settlement method upon
exercise of one put option for 0.3 million shares and paid $7.8 million in
exchange for the underlying shares. We elected the net share settlement method
39
upon exercise of the remaining four put options for 1.4 million shares and
issued 0.3 million shares of our common stock in settlement of the obligation.
In the event the put options are exercised, we may elect to settle by one of
three methods: physical settlement by payment in exchange for our shares, net
cash settlement or net share settlement. The maximum repurchase obligation for
the five put options outstanding at December 31, 2001, under the physical
settlement method is $34.7 million. At December 31, 2001, the market price of
IVAX' common stock was $20.14 per share, which was lower than the strike prices
for four outstanding put options for 1.0 million shares with a maximum
repurchase obligation under the physical settlement method of $29.9 million.
Under the net settlement method the repurchase obligation would be $10.8 million
(See Note 11, Shareholders' Equity, in the Notes to Consolidated Financial
Statements).
During 2000, we received $11.3 million and during 1999 we received $2.1
million in premiums on the issuance of freestanding put options. These amounts
were credited to "Capital in excess of par value" in the accompanying
consolidated balance sheets.
We plan to spend substantial amounts of capital in 2002 to continue the
research and development of pharmaceutical products. Although research and
development expenditures are expected to be between $80 million and $90 million
during 2002, actual expenditures will depend on, among other things, the outcome
of clinical testing or products under development, delays or changes in
government required testing and approval procedures, technological and
competitive developments, strategic marketing decisions and liquidity. In
addition, we plan to spend between $80 million and $90 million in 2002 to
improve and expand our pharmaceutical and other related facilities.
Our principal sources of short-term liquidity are existing cash and
internally generated funds, which we believe will be sufficient to meet our
operating needs and anticipated capital expenditures over the short term. For
the long term, we intend to utilize principally internally generated funds,
which are anticipated to be derived primarily from the sale of existing
pharmaceutical products and pharmaceutical products currently under development.
There can be no assurance that we will successfully complete products under
development, that we will be able to obtain regulatory approval for any such
products, or that any approved product will be produced in commercial
quantities, at reasonable costs, and be successfully marketed. We may consider
issuing debt or equity securities in the future to fund potential acquisitions
and growth.
We filed a shelf registration statement on Form S-4, which was declared
effective in March 2001, registering up to a total of 18.8 million shares of
common stock that can be issued in connection with the acquisition of
businesses, assets or securities. In conjunction with the availability under our
previous S-4 registration statement, as of the date of this report, we had the
ability to issue up to 40.3 million shares of our common stock under our shelf
registration statements in connection with the acquisition of businesses, assets
or securities.
We filed a universal shelf registration statement on Form S-3, which
was declared effective in March 2001, registering the sale of up to $400.0
million of any combination of debt securities or common stock. During 2001, we
issued an aggregate of 0.3 million shares in connection with the net settlement
of the put options discussed above. As of the date of this report, we had the
ability to issue any combination of debt securities or common stock in an
aggregate amount of $392.4 million.
INCOME TAXES
Our effective tax rate was 17% for 2001, 9% for 2000, and 17% for 1999,
which was lower in each of these years than the U.S. statutory income tax rate,
principally due to net operating loss and tax credit carryforwards and tax
incentives in certain jurisdictions where our manufacturing facilities are
located. During 2001, we recognized a $49.9 million tax provision. The domestic
current provision was favorably impacted by $29.6 million from utilization of
40
previously reserved net operating loss and tax credit carryforwards and the
non-taxable gain on the partial sale of IVAX Diagnostics, Inc. Payment of the
current tax provision for the year ended December 31, 2001, will be reduced by
$8.0 million for our domestic operations and $2.6 million for our foreign
operations, representing the incremental impact of compensation expense
deductions associated with non-qualified stock option exercises during the
current year. In addition, during 2001 we recorded $7.4 million of tax effect
of prior years' stock option exercises. These amounts were credited to "Capital
in excess of par value" in the accompanying balance sheet. We recognized $20
million in 2001 and $45 million in 2000 of U.S. taxable income on the
intercompany assignment of a contract. For financial reporting purposes these
transactions were eliminated in consolidation. We recognized a $13.2 million
tax provision during 2000 of which $17.5 million related to foreign operations.
We recognized a $14.9 million tax provision for 1999 of which $18.3 million
related to foreign operations and included a valuation allowance of $4.1
million recorded in the second quarter against the UK deferred tax asset.
The valuation allowance previously recorded against the domestic net
deferred tax asset was reversed in the amount of $11.2 million in 2001, $31.1
million in 2000, and $11.4 million in 1999, due to our expectation of increased
domestic taxable income in the coming year.
Our future effective tax rate will depend on the mix between foreign
and domestic taxable income or losses, the statutory tax rates of the related
tax jurisdictions, and the timing of the release, if any, of the domestic
valuation allowance. The mix between our foreign and domestic taxable income may
be significantly affected by the jurisdiction in which new products are
developed and manufactured.
At December 31, 2001, domestic net deferred tax assets totaled $97.6
million and foreign net deferred tax assets, in countries with positive net
deferred tax assets, totaled $7.9 million. Realization of the net deferred tax
assets is dependent upon generating sufficient future domestic and foreign
taxable income. Although realization is not assured, we believe it is more
likely than not that the net deferred tax assets will be realized. Our estimates
of future taxable income are subject to revision due to, among other things,
regulatory and competitive factors affecting the pharmaceutical industries in
the markets in which we operate.
We have historically received a United States tax credit under Section
936 of the Internal Revenue Code for certain income generated by our Puerto Rico
and Virgin Islands operations. These credits were approximately $6.3 million for
2001, $1.6 million for 2000 and $2.4 million for 1999 and completely offset the
entire United States tax liability of such operations. The Section 936 tax
credit will be phased out over four years beginning in 2002.
`
RISK OF PRODUCT LIABILITY CLAIMS
Testing, manufacturing and marketing pharmaceutical products subjects
us to the risk of product liability claims. We are a defendant in a number of
product liability cases, none of which we believe will have a material adverse
effect on our business, results of operations or financial condition. We believe
that we maintain an adequate amount of product liability insurance, but there
can be no assurance that our insurance will cover all existing and future claims
or that we will be able to maintain existing coverage or obtain additional
coverage at reasonable rates. There can be no assurance that claims arising
under any pending or future product liability cases, whether or not covered by
insurance, will not have a material adverse effect on our business, results of
operations or financial condition (See Note 13, Commitments and Contingencies,
in the Notes to Consolidated Financial Statements).
41
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements include the accounts of IVAX
Corporation and all majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these financial
statements, management has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to
materiality. We do not believe there is a great likelihood that materially
different amounts would be reported related to the accounting policies described
below. However, application of these accounting policies involves the exercise
of judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ materially from these estimates.
Revenue Recognition, Sales Returns and Allowances - Revenues and the
related cost of sales are recognized at the time product is shipped. Our
pharmaceutical revenues are affected by the level of provisions for estimated
returns, inventory credits, discounts, promotional allowances, volume rebates
and chargebacks, as well as other sales allowances established by us. The custom
in the pharmaceutical industry is generally to grant customers the right to
return purchased goods. In the brand equivalent pharmaceutical industry, this
custom has resulted in a practice of suppliers issuing inventory credits (also
known as shelf-stock adjustments) to customers based on the customers' existing
inventory following decreases in the market price of the related brand
equivalent pharmaceutical product. The determination to grant a credit to a
customer following a price decrease is generally at our discretion, and
generally not pursuant to contractual agreements with customers. These credits
allow customers with established inventories to compete with those buying
product at the current market price, and allow us to maintain shelf space,
market share and customer loyalty.
Provisions for estimated returns, inventory credits and chargebacks, as
well as other sales allowances, are established by us concurrently with the
recognition of revenue. The provisions are established in accordance with
generally accepted accounting principles based upon consideration of a variety
of factors, including actual return and inventory credit experience for products
during the past several years by product type, the number and timing of
regulatory approvals for the product by our competitors (both historical and
projected), the market for the product, expected sell-through levels by our
wholesaler customers to customers with contractual pricing arrangements with us,
estimated customer inventory levels by product and projected economic
conditions. Actual product returns and inventory credits incurred are, however,
dependent upon future events, including price competition and the level of
customer inventories at the time of any price decreases. We continually monitor
the factors that influence the pricing of our products and customer inventory
levels and make adjustments to these provisions when we believe that actual
product returns, inventory credits and other allowances may differ from
established reserves.
Royalty and license fee income are recognized when obligations
associated with earning the royalty or licensing fee have been satisfied and are
included in "Net revenues" in the accompanying consolidated statements of
operations. Through 1999, our accounting policy was to immediately recognize as
revenue up-front and milestone cash payments that are nonrefundable or where the
probability of refund is remote. As a result of SAB No. 101, we revised our
accounting policy to defer up-front payments, whether or not they are
refundable, and recognize them in income over the license period. Where we
expend resources to achieve milestones, we recognize the milestone payments in
income currently. The total amortization of up-front payments and current
recognition of milestones is limited to nonrefundable provisions of the
contract.
42
Gain on Sale of Product Rights - Royalty and milestone payments from
the 1997 sale of rights to Elmiron(R) and certain other urology products in the
United States and Canada to ALZA amounted to $13.8 million in 2001, $7.2 million
in 2000, and $13.0 million in 1999, and are included in other income as
additional gain on the sale of product rights. We may receive additional
royalties and milestone payments from ALZA based on sales of the products during
the next few years. A portion of the up-front and milestone payments received
and included in other income in prior years, $36.7 million as of December 31,
2001, is refundable through December 31, 2003, and then ratably decreases
through 2009, if the patent rights are found to be invalid and a brand
equivalent of Elmiron(R) is introduced by another company. We believe the
probability of occurrence of these events is remote.
Impairment of Long-Lived Assets - We continually evaluate whether
events and circumstances have occurred that indicate that the remaining
estimated useful life of long-lived assets may require revision or that the
remaining net book value may not be recoverable. When factors indicate that an
asset may be impaired, we use various methods to estimate the asset's future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss is recognized based on
the excess of the carrying amount over the estimated fair value of the asset.
Any impairment amount is charged to operations.
Sale of Subsidiary Stock - During 2001, IVAX elected income statement
recognition as its accounting policy for sales of subsidiary stock and recorded
a gain of $10.3 million, related to merger of IVAX Diagnostics, Inc., with
b2bstores.com, which is included in "Other income, net" in the consolidated
statements of operations.
Legal Costs - Legal charges are recorded for the costs anticipated to
be incurred in connection with litigation and claims against us when we can
reasonably estimate these costs. We intend to vigorously defend each of the
lawsuits described in Note 13, Commitments and Contingencies, in the Notes to
Consolidated Financial Statements, but their respective outcomes cannot be
predicted. Any of such lawsuits, if determined adversely to us, could have a
material adverse effect on our financial position and results of operations. Our
ultimate liability with respect to any of the foregoing proceedings is not
presently determinable.
We are involved in various other legal proceedings arising in the
ordinary course of business, some of which involve substantial amounts. In order
to obtain brand equivalent approvals prior to the expiration of patents on
branded products, and to benefit from the exclusivity allowed to Abbreviated New
Drug Application applicants that successfully challenge these patents, we
frequently become involved in patent infringement litigation brought by branded
pharmaceutical companies. Although these lawsuits involve products that are not
yet marketed and therefore pose little or no risk of liability for damages, the
legal fees and costs incurred in defending such litigation can be substantial.
While it is not feasible to predict or determine the outcome or the total cost
of these proceedings, in our opinion, based on a review with legal counsel, any
losses resulting from such legal proceedings will not have a material adverse
impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We, in the normal
course of doing business, are exposed to the risks associated with foreign
currency exchange rates and changes in interest rates.
Foreign Currency Exchange Rate Risk - We have subsidiaries in more than 20
countries worldwide. In 2001, sales outside the United States accounted for
approximately 54% of worldwide sales. Virtually all of these sales were
43
denominated in currencies of the local country. As such, our reported profits
and cash flows are exposed to changing exchange rates. If the United States
dollar weakens relative to the foreign currency, the earnings generated in the
foreign currency will, in effect, increase when converted into United States
dollars and vice versa. Although we do not speculate in the foreign exchange
market, we do from time to time manage exposures that arise in the normal course
of business related to fluctuations in foreign currency exchange rates by
entering into offsetting positions through the use of foreign exchange forward
contracts. As a result of exchange rate differences, net revenues decreased by
$19.8 million in 2001 compared to 2000 and decreased by $22.6 million in 2000
compared to 1999. The effects of inflation on consolidated net revenues and
operating income were not significant. Certain firmly committed transactions are
hedged with foreign exchange forward contracts. As exchange rates change, gains
and losses on the exposed transactions are partially offset by gains and losses
related to the hedging contracts. Both the exposed transactions and the hedging
contracts are translated at current spot rates, with gains and losses included
in earnings. Our derivative activities, which primarily consist of foreign
exchange forward contracts, are initiated primarily to hedge forecasted cash
flows that are exposed to foreign currency risk.
The foreign exchange forward contracts generally require us to exchange
local currencies for foreign currencies based on pre-established exchange rates
at the contracts' maturity dates. If the counterparties to the exchange
contracts do not fulfill their obligations to deliver the contracted currencies,
we could be at risk for currency related fluctuations. We enter into these
contracts with counterparties that we believe to be creditworthy and do not
enter into any leveraged derivative transactions. As of December 31, 2001, we
had $68.7 million in foreign exchange forward contracts outstanding, of which
$55 million related to U.S. dollar debt of $48 million of our Argentine based
subsidiary, Armstrong.
Subsequent to December 31, 2001, the Argentine peso and Venezuelan bolivar
devalued in relation to the United States dollar. The operating results in these
currencies will decrease when converted into United States dollars. During
January 2002, we repaid $48 million of United States dollar denominated bank
loans of the Argentine operations assumed in the acquisition of Lab Chile
resulting in a pretax loss of approximately $2.8 million.
Interest Rate Risk - Our only material debt obligations relate to the 4.5%
and 5.5% Convertible Notes, which bear fixed rates of interest, and $48 million
of bank debt assumed in the acquisition of Lab Chile which was repaid in January
2002. We believe that our exposure to market risk relating to interest rate risk
is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Financial Statements and supplementary data are on pages F-1
through F-37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required by item 10 is
incorporated by reference to our Proxy Statement for our 2002 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of our 2001 year end. The information concerning
44
executive officers required by item 10 is contained in the discussion entitled
"Executive Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by item 11 is incorporated by reference to our
Proxy Statement for our 2002 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
our 2001 year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by item 12 is incorporated by reference to our
Proxy Statement for our 2002 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
our 2001 year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by item 13 is incorporated by reference to our
Proxy Statement for our 2002 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
our 2001 year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Item 8. "Financial Statements and Supplementary Data" for Financial
Statements included with this Annual Report on Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed as a part of this
report:
Schedule II Valuation and Qualifying Accounts for the three
years ended December 31, 2001
All other schedules have been omitted because the required information
is not applicable or the information is included in the consolidated financial
statements or the notes thereto.
The independent auditors' report with respect to Schedule II is also
filed as part of this report.
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- -----------------
3.1 Articles of Incorporation. Incorporated by reference to our
Form 8-B dated July 28, 1993.
45
3.2 Amended and Restated Bylaws. Incorporated by reference to our
Form 10-Q for the quarter ended
September 30, 1997.
3.3 Articles of Amendment to Articles of Incorporation of Incorporated by reference to our
IVAX Corporation. Form 10-Q for the quarter ended
March 31, 2001.
4.1 Indenture dated May 12, 2000, between IVAX Corporation Incorporated by reference to our
and U.S. Bank Trust National Association, as Trustee, Form S-3 dated August 7, 2000.
with respect to IVAX Corporation's 5 1/2% Convertible
Subordinated Notes due May 15, 2007.
4.2 Form of 5 1/2% Convertible Subordinated Notes due May 15, Incorporated by reference to our
2007 in Global Form. Form S-3 dated August 7, 2000.
4.3 Rights Agreement, dated December 29, 1997, between IVAX Incorporated by reference to our
Corporation and ChaseMellon Shareholder Services, L.L.C., Form 8-K dated December 19, 1997.
with respect to the IVAX Corporation Shareholder Rights
Plan.
4.4 Indenture, dated as of May 4, 2001, between IVAX Incorporated by reference to our
Corporation and U.S. Bank Trust National Association, as Form S-3 dated July 31, 2001.
Trustee, with respect to the $725,000,000 4 1/2%
Convertible Senior Subordinated Notes due 2008.
.
4.5 Form of 4 1/2% Convertible Senior Subordinated Notes due Incorporated by reference to our
2008. Form S-3 dated July 31, 2001.
10.1 IVAX Corporation 1985 Stock Option Plan. Incorporated by reference to our
Form 10-K for the year ended
December 31, 1997.
10.2 IVAX Corporation 1994 Stock Option Plan. Incorporated by reference to our
Form 10-K for the year ended
December 31, 1997.
10.3 Form of Indemnification Agreement for Directors. Incorporated by reference to our
Form 8-B dated July 28, 1993.
10.4 Form of Indemnification Agreement for Officers. Incorporated by reference to our
Form 8-B dated July 28, 1993.
46
10.5 Agreement Containing Consent Order, dated December 6, Incorporated by reference to our
1994, between IVAX Corporation and the United States Form 10-K for the year ended
Federal Trade Commission. December 31, 1994.
10.6 Employment Agreement, dated November 28, 1997, between Incorporated by reference to our
IVAX Corporation and Phillip Frost, M.D. Form 10-K for the year ended
December 31, 1997.
10.7 Employment Agreement, dated November 28, 1997, between Incorporated by reference to our
IVAX Corporation and Isaac Kaye. Form 10-K for the year ended
December 31, 1997.
10.8 Employment Agreement, dated January 19, 1998, between Incorporated by reference to our
IVAX Corporation and Jane Hsiao, Ph.D. Form 10-K for the year ended
December 31, 1997.
10.9 Employment Agreement, dated July 28, 1997, between IVAX Incorporated by reference to our
Corporation and Rafick G. Henein, Ph.D. Form 10-Q for the quarter ended June
30, 1997.
10.10 Employment Agreement, dated as of May 26, 1998, between Incorporated by reference to our
IVAX Corporation and Neil Flanzraich. Form 10-Q for the quarter ended
September 30, 1998.
10.11 Form of Employment Agreement (Change in Control) between Incorporated by reference to our
IVAX Corporation and certain of its executive officers. Form 10-K for the year ended
December 31, 1998.
10.12 Stock Purchase Agreement, dated May 30, 1997, between Incorporated by reference to our
IVAX Corporation and B. Braun of America Inc. Form 8-K dated June 24, 1997.
10.13 Purchase Agreement, dated June 16, 1998, by and between Incorporated by reference to our
IVAX Corporation and Carson, Inc. Form 10-Q for the quarter ended June
30, 1998.
10.14 Credit Agreement, dated as of July 14, 1998, among IVAX Incorporated by reference to our
Corporation, Carson, Inc. and Carson Products Company. Form 10-Q for the quarter ended June
30, 1998.
10.15 Product Collaboration and Development Services Agreement Incorporated by reference to our
dated November 18, 1999, among IVAX Corporation, Norton Form 10-K for the year ended
Healthcare Limited, Baker Norton International GmbH December 31, 1999.
and Bristol-Myers Squibb Company.
(Confidential Treatment Granted)
47
10.16 IVAX Corporation 1999 Employee Stock Purchase Plan. Incorporated by reference to our
Form 10-K for the year ended
December 31, 1999.
10.17 Stock Purchase Agreement dated June 19, 2000 between IVAX Incorporated by reference to our
Corporation and Alpha Centura Holdings, N.V. Form 10-Q for the quarter ended June
30, 2000.
10.18 Stock Purchase Agreement dated June 19, 2000 between IVAX Incorporated by reference to our
Corporation and Mountainrise Trading Limited. Form 10-Q for the quarter ended June
30, 2000.
10.19(a) Agreement and Plan of Merger dated August 3, 2000 among Incorporated by reference to our
IVAX Corporation, Wakefield Pharmaceuticals, Inc., the Form 10-Q for the quarter ended
Principal Stockholders of Wakefield Pharmaceuticals, Inc. September 30, 2000.
and WPI Merger Corporation.
10.19(b) Amendment to Agreement and Plan of Merger dated August Incorporated by reference to our
14, 2000 among IVAX Corporation, Wakefield Form 10-Q for the quarter ended
Pharmaceuticals, Inc., the Principal Stockholders of September 30, 2000.
Wakefield Pharmaceuticals, Inc. and WPI Merger
Corporation.
10.20 Stock Purchase Agreement between Morcob, CVA and IVAX Incorporated by reference to our
Corporation. Form 8-K dated February 23, 2001.
10.21 IVAX Corporation 1997 Stock Option Plan. Incorporated by reference to our
Form S-8 dated December 22, 1997.
10.22 Non-Negotiable Promissory Note dated November 18, 1999 Incorporated by reference to our
between IVAX Corporation as Maker and Frost-Nevada Form 10-K for the year ended
Limited Partnership as Payee. December 31, 2000.
10.23 Warrant to Purchase Shares of Common Stock of IVAX Incorporated by reference to our
Corporation dated November 18, 1999 between IVAX Form 10-K for the year ended
Corporation and Frost-Nevada Limited Partnership. December 31, 2000.
10.24 Registration Rights Agreement dated May 12, 2000 by and Incorporated by reference to our
between IVAX Corporation, UBS Warburg LLC and ING Baring Form S-3 for the year ended August
L.L.C. 7, 2000.
10.25 Form of Registration Rights Agreement between the Company Incorporated by reference to our
and UBS AG. Form S-3 dated April 10, 2001.
10.26(a) Equity Option Confirmation by UBS AG, London Branch and Incorporated by reference to our
the Company dated December 7, 2000. Amendment No. 1 to Form S-3 dated
May 7, 2001.
48
10.26(b) Equity Option Confirmation by UBS AG, London Branch and Incorporated by reference to our
the Company dated December 7, 2000. Amendment No. 1 to Form S-3 dated
May 7, 2001.
10.26(c) Equity Option Confirmation by UBS AG, London Branch and Incorporated by reference to our
the Company dated December 26, 2000. Amendment No. 1 to Form S-3 dated
May 7, 2001.
10.26(d) Equity Option Confirmation by UBS AG, London Branch and Incorporated by reference to our
the Company dated December 26, 2000. Amendment No. 1 to Form S-3 dated
May 7, 2001.
10.26(e) Equity Option Confirmation by UBS AG, London Branch and Incorporated by reference to our
the Company dated December 26, 2000. Amendment No. 1 to Form S-3 dated
May 7, 2001.
10.26(f) Equity Option Confirmation by UBS AG, London Branch and Incorporated by reference to our
the Company dated March 7, 2001. Amendment No. 1 to Form S-3 dated
May 7, 2001.
10.27 Merger Agreement dated as of November 21, 2000, by and Incorporated by reference to IVAX
among IVAX Corporation, a Florida corporation, IVAX Diagnostics, Inc. f/k/a
Diagnostics, Inc., a Florida corporation and wholly-owned B2BSTORES.COM, INC. Form 14A, SEC
subsidiary of IVAX, and B2BSTORES.COM, INC., a Delaware File Number 001-14798 filed as of
corporation. January 30, 2001.
10.28 Registration Rights Agreement, dated May 4, 2001, between Incorporated by reference to our Form S-3
IVAX Corporation and UBS Warburg LLC, as the Initial Dated July 31, 2001.
Purchaser, with respect to the $725,000,000 4 1/2%
Convertible Senior Subordinated Notes due 2008.
10.29 Agreement to Tender dated as of May 18, 2001, among IVAX Incorporated by reference to our
Corporation, Comercial e Inversiones Portfolio Limitada Form 8-K dated May 18, 2001.
and Inversiones Portfolio S.A.
10.30 Equity Option Confirmation Agreement, dated August 6, Incorporated by reference to our
2001. Form 8-K dated November 29, 2001.
10.31 Termination Agreement dated March 20, 1998 by and among Filed herewith.
NaPro BioTherapeutics, Inc., IVAX Corporation, Baker
Norton Pharmaceuticals, Inc. and D & N Holding Company
(Confidential Treatment Requested).
21 Subsidiaries of IVAX Corporation. Filed herewith.
49
23 Consent of Arthur Andersen LLP. Filed herewith.
99.1 Letter Containing Certain Representations Regarding Filed herewith.
Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K.
On October 26, 2001, we filed a report on Form 8-K/A amending a Form
8-K filed on July 20, 2001 and the Form 8-K/A we filed on August 1, 2001
relating to our acquisition of Laboratorio Chile S.A. This amendment was filed
to amend the consent included as Exhibit 21.1 in the Form 8-K/A filed August 1,
2001.
On November 15, 2001, we filed a report on Form 8-K reporting our
issuance of 153,385 shares of our common stock pursuant to our Registration
Statement on Form S-3, Registration No. 333-51372, in settlement of certain put
option obligations.
On November 29, 2001, we filed a report on Form 8-K reporting our
issuance of 98,953 shares of our common stock pursuant to our Registration
Statement on Form S-3, Registration No. 333-51372, in settlement of certain put
option obligations.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IVAX CORPORATION
Dated: March 26, 2002 By: /s/ Phillip Frost, M.D.
--------------------------------
Phillip Frost, M.D.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
NAME CAPACITY DATE
- ---- -------- ----
/s/ Phillip Frost, M.D. Chairman of the Board and March 26, 2002
- ------------------------------------ Chief Executive Officer
Phillip Frost, M.D. (Principal Executive Officer)
/s/ Thomas E. Beier Chief Financial Officer March 26, 2002
- ------------------------------------ (Principal Financial Officer)
Thomas E. Beier
/s/ Thomas E. McClary Vice President - Accounting March 26, 2002
- ------------------------------------ (Principal Accounting Officer)
Thomas E. McClary
/s/ Mark Andrews Director March 26, 2002
- ---------------------------
Mark Andrews
/s/ Ernst Biekert, Ph.D. Director March 26, 2002
- ------------------------------------
Ernst Biekert, Ph.D.
/s/ Charles M. Fernandez Director March 26, 2002
- ---------------------------
Charles M. Fernandez
/s/ Jack Fishman, Ph.D. Director March 26, 2002
- ------------------------------------
Jack Fishman, Ph.D.
/s/ Neil Flanzraich Director, President and Vice Chairman March 26, 2002
- ------------------------------------
Neil Flanzraich
/s/ Jane Hsiao, Ph.D. Director and Vice Chairman- March 26, 2002
- ------------------------------------ Technical Affairs
Jane Hsiao, Ph.D.
/s/ Isaac Kaye Director and Deputy Chief March 26, 2002
- ------------------------------------ Executive Officer
Isaac Kaye
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF IVAX CORPORATION:
We have audited the accompanying consolidated balance sheets of IVAX Corporation
(a Florida corporation) and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IVAX Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 2 to the financial statements, effective January 1, 2000,
IVAX Corporation changed its method of accounting for up-front licensing fees to
comply with Securities and Exchange Commission Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements.
As explained in Note 2 to the financial statements, effective January 1, 2001,
IVAX Corporation changed its method of accounting for derivative instruments to
comply with Statement of Financial Accounting Standard No. 133, Accounting For
Derivative Instruments and Hedging Activities.
As explained in Note 2 to the financial statements, effective January 1, 2001,
IVAX Corporation changed its method of accounting for equity derivative
contracts to comply with Emerging Issues Task Force No. 00-19, Accounting For
Derivative Financial Instruments Indexed To, and Potentially Settled In, a
Company's Own Stock.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 12, 2002 (except with respect to
the matters discussed in Note 16, as to
which the date is March 15, 2002).
F-1
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
---------------------------------
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 178,264 $ 174,794
Marketable securities 154,842 76,734
Accounts receivable, net of allowances for doubtful
accounts of $21,670 in 2001 and $19,703 in 2000 247,670 155,685
Inventories 253,471 178,910
Other current assets 164,692 72,991
----------- -----------
Total current assets 998,939 659,114
Property, plant and equipment, net 356,304 250,852
Intangible assets, net 689,556 117,171
Other assets 60,650 41,049
----------- -----------
Total assets $ 2,105,449 $ 1,068,186
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 97,465 $ 49,951
Current portion of long-term debt 52,199 934
Loans payable 13,249 1,877
Accrued income taxes payable 41,861 11,854
Accrued expenses and other current liabilities 196,587 156,008
----------- -----------
Total current liabilities 401,361 220,624
Long-term debt, net of current portion 913,486 253,755
Other long-term liabilities 57,536 23,472
Minority interest 14,712 1,712
Put options -- 84,503
Commitments and contingencies - see Note 13
Shareholders' equity:
Common stock, $.10 par value, authorized 437,500 shares,
issued and outstanding 196,523 shares in 2001 and 198,546 in 2000 19,652 19,855
Capital in excess of par value 328,095 315,039
Put options 34,650 --
Retained earnings 446,469 203,206
Accumulated other comprehensive loss (110,512) (53,980)
----------- -----------
Total shareholders' equity 718,354 484,120
----------- -----------
Total liabilities and shareholders' equity $ 2,105,449 $ 1,068,186
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net revenues $ 1,215,377 $ 793,405 $ 656,482
Cost of sales 583,588 409,903 377,967
----------- ----------- -----------
Gross profit 631,789 383,502 278,515
----------- ----------- -----------
Operating expenses:
Selling 143,629 92,032 71,131
General and administrative 110,477 84,900 85,092
Research and development 88,015 65,331 53,403
Amortization of intangible assets 19,412 9,042 3,121
Restructuring costs (reversal of accrual) 2,367 (4,535) (612)
----------- ----------- -----------
Total operating expenses 363,900 246,770 212,135
----------- ----------- -----------
Income from operations 267,889 136,732 66,380
Other income (expense):
Interest income 21,249 13,986 6,142
Interest expense (41,791) (14,624) (5,556)
Other income, net 38,335 17,497 19,513
----------- ----------- -----------
Total other income 17,793 16,859 20,099
----------- ----------- -----------
Income from continuing operations before income taxes
and minority interest 285,682 153,591 86,479
Provision for income taxes 49,883 13,214 14,850
----------- ----------- -----------
Income from continuing operations before minority interest 235,799 140,377 71,629
Minority interest 344 (608) (2,085)
----------- ----------- -----------
Income from continuing operations 236,143 139,769 69,544
Discontinued operations, net of taxes -- -- 585
----------- ----------- -----------
Income before extraordinary item and cumulative effect of
a change in accounting principle 236,143 139,769 70,129
Extraordinary item:
Gains (losses) on extinguishment of debt, net of tax 7,120 (2,254) 593
Cumulative effect of a change in accounting principle, net of
tax benefit of $2,773 -- (6,471) --
----------- ----------- -----------
Net income $ 243,263 $ 131,044 $ 70,722
=========== =========== ===========
(Continued)
F-3
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Continuation)
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
----------- ----------- -----------
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ 1.18 $ 0.71 $ 0.35
Extraordinary item 0.04 (0.01) --
Cumulative effect of a change in accounting principle -- (0.03) --
----------- ----------- -----------
Net income $ 1.22 $ 0.67 $ 0.35
=========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations $ 1.15 $ 0.68 $ 0.34
Extraordinary item 0.04 (0.01) --
Cumulative effect of a change in accounting principle -- (0.03) --
----------- ----------- -----------
Net income $ 1.19 $ 0.64 $ 0.34
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 199,099 196,276 201,885
=========== =========== ===========
Diluted 204,639 204,058 205,501
=========== =========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-4
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Common Stock Compre-
--------------------- Capital in hensive
Number of Excess of Put Retained Income
Shares Amount Par Value Options Earnings (loss) Total
-------- --------- ---------- ------- --------- ----------- ---------
BALANCE, January 1, 1999 114,835 $ 11,484 $ 453,293 $ -- $ (700) $ (10,869) $ 453,208
Comprehensive income:
Net income -- -- -- -- 70,722 -- 70,722
Translation adjustment -- -- -- -- -- (16,077) (16,077)
Unrealized net gain on
available-for-sale equity
securities, net of tax -- -- -- -- -- 86 86
---------
Comprehensive income 54,731
Exercise of stock options 1,263 126 12,098 -- -- -- 12,224
Repurchase and retirement of
common stock (14,851) (1,485) (219,913) -- -- -- (221,398)
Shares issued in acquisitions 243 24 4,976 -- -- -- 5,000
Premium received on put options -- -- 2,079 -- -- -- 2,079
Put options issued - temporary
equity -- -- (20,188) -- -- -- (20,188)
Warrants issued -- -- 4,875 -- -- -- 4,875
Pre-acquisition earnings of
acquired company -- -- -- -- 1,667 -- 1,667
Value of stock options issued
to non-employees -- -- 173 -- -- -- 173
Effect of 3-for-2 stock split 50,745 5,075 (5,075) -- -- -- --
--------- --------- --------- ------- --------- --------- ---------
BALANCE, December 31, 1999 152,235 15,224 232,318 -- 71,689 (26,860) 292,371
Comprehensive income:
Net income -- -- -- -- 131,044 -- 131,044
Translation adjustment -- -- -- -- -- (27,125) (27,125)
Unrealized net gain on
available-for-sale equity
securities, net of tax -- -- -- -- -- 5 5
---------
Comprehensive income 103,924
Exercise of stock options 3,586 358 34,726 -- -- -- 35,084
Tax effect of option exercises -- -- 25,469 -- -- -- 25,469
Employee stock purchases 24 2 515 -- -- -- 517
Repurchase and retirement of
common stock (1,473) (147) (51,450) -- -- -- (51,597)
Convertible debt conversion 2,050 205 43,808 -- -- -- 44,013
Shares issued in acquisitions 2,415 242 86,680 -- -- -- 86,922
Premium received on put options -- -- 11,259 -- -- -- 11,259
Put options issued - temporary
equity -- -- (64,315) -- -- -- (64,315)
Pre-acquisition earnings of
acquired company -- -- -- -- 473 -- 473
Effect of 5-for-4 stock split 39,709 3,971 (3,971) -- -- -- --
--------- --------- --------- ------- --------- --------- ---------
BALANCE, December 31, 2000 198,546 19,855 315,039 -- 203,206 (53,980) 484,120
(Continued)
F-5
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Continuation)
Accumulated
Common Stock Compre-
---------------------- Capital in hensive
Number of Excess of Put Retained Income
Shares Amount Par Value Options Earnings (loss) Total
-------- --------- ---------- ------- --------- ----------- ---------
BALANCE, December 31, 2000 198,546 19,855 315,039 -- 203,206 (53,980) 484,120
Comprehensive income:
Net income -- -- -- -- 243,263 -- 243,263
Translation adjustment -- -- -- -- -- (57,613) (57,613)
Unrealized net gain on
available-for-sale equity
securities and derivatives,
net of tax -- -- -- -- -- 1,081 1,081
---------
Comprehensive income 186,731
Exercise of stock options 1,531 153 13,870 -- -- -- 14,023
Tax benefit of option exercises -- -- 18,001 -- -- -- 18,001
Employee stock purchases 38 4 823 -- -- -- 827
Repurchase and retirement of
common stock (6,779) (678) (146,634) (7,785) -- -- (155,097)
Shares issued in acquisitions 2,873 287 79,963 -- -- -- 80,250
Reclassification of put options
from temporary equity -- -- -- 84,503 -- -- 84,503
Put options issued - net of
premium received -- -- (74,202) 79,025 -- -- 4,823
Expired put options -- -- 80,608 (80,608) -- -- --
Shares issued to settle put options 314 31 40,454 (40,485) -- -- --
Value of stock options issued to
non-employees -- -- 173 -- -- -- 173
------- --------- --------- --------- --------- --------- ---------
BALANCE, December 31, 2001 196,523 $ 19,652 $ 328,095 $ 34,650 $ 446,469 $(110,512) $ 718,354
======= ========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-6
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 243,263 $ 131,044 $ 70,722
Adjustments to reconcile net income to net cash
flows from operating activities:
Restructuring accrual (reversal) 343 (4,535) (612)
Depreciation and amortization 52,158 32,948 29,108
Deferred tax benefit (43,645) (29,084) (4,910)
Tax effect of stock option exercises 18,001 25,469 --
Provision for doubtful accounts 1,143 (132) 4,147
Provision for inventory obsolescence 25,397 12,801 16,696
Minority interest in earnings (344) 608 2,085
Equity in earnings of unconsolidated affiliates (1,070) (849) (446)
Gain on sale of marketable securities (3,807) -- --
Gain on sale of product rights (13,792) (7,175) (13,033)
(Gains) losses on sale of assets, net (12,328) (310) 338
(Gains) losses on extinguishment of debt (7,120) 2,254 (593)
Cumulative effect of a change in accounting principle -- 6,471 --
Income from discontinued operations -- -- (585)
Changes in operating assets and liabilities:
Accounts receivable (37,643) (45,111) (9,195)
Inventories (45,920) (44,254) (33,327)
Other current assets (34,680) 1,143 6,785
Other assets 3,059 (5,306) 1,266
Accounts payable, accrued expenses and other
current liabilities 58,365 6,941 (3,038)
Other long-term liabilities (2,343) (2,242) (3,310)
Net operating activities of discontinued operations -- -- 585
--------- --------- ---------
Net cash flows from operating activities 199,037 80,681 62,683
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of product rights 13,792 7,175 13,033
Capital expenditures (73,484) (49,955) (42,685)
Proceeds from sales of assets 41,668 1,350 932
Acquisitions of patents, trademarks, licenses and other
intangibles (133,864) (1,537) (903)
Acquisitions of businesses, net of cash acquired (465,820) (11,497) (8,345)
Investment in affiliates (14,385) (5,137) 465
Purchases of marketable securities (378,176) (82,734) --
Proceeds from sales of marketable securities 304,955 6,000 --
--------- --------- ---------
Net cash flows from investing activities (705,314) (136,335) (37,503)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt and loans payable 723,818 254,048 53,059
Payments on long-term debt and loans payable (95,533) (53,495) (34,956)
Exercise of stock options and employee stock purchases 14,850 35,601 12,224
Repurchase of common stock, net of put option premium (150,274) (40,338) (219,319)
--------- --------- ---------
Net cash flows from financing activities 492,861 195,816 (188,992)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 16,658 (6,776) (3,373)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,470 133,386 (167,185)
Cash and cash equivalents at the beginning of the year 174,794 41,408 208,593
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 178,264 $ 174,794 $ 41,408
========= ========= =========
(Continued)
F-7
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continuation)
Year Ended December 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Supplemental disclosures:
Interest paid, net of capitalized interest $ 12,563 $ 10,311 $ 4,572
========= ========= =========
Income tax payments $ 50,890 $ 20,355 $ 3,913
========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
Information with respect to acquisitions which were
accounted for under the purchase method of
accounting is summarized as follows:
Fair value of assets acquired $ 238,862 $ 24,712 $ 12,308
Liabilities assumed (180,834) (10,154) (3,941)
--------- --------- ---------
58,028 14,558 8,367
Reduction of minority interest -- 9,832 7,046
--------- --------- ---------
Net assets acquired 58,028 24,390 15,413
--------- --------- ---------
Purchase price:
Cash, net of cash acquired 459,788 11,359 8,345
Acquisition costs 6,365 138 --
Fair market value of stock and options issued 79,750 86,922 5,000
--------- --------- ---------
Total 545,903 98,419 13,345
--------- --------- ---------
Goodwill $ 487,875 $ 74,029 $ (2,068)
========= ========= =========
See Note 7, Debt, for information with respect to non-cash conversion of
6.5% Convertible Subordinated Notes in 2000.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-8
IVAX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) ORGANIZATION:
IVAX Corporation is a multinational company engaged in the research,
development, manufacture and marketing of pharmaceutical products. These
products are sold primarily to customers within the United States, the United
Kingdom and Latin America. All references to "IVAX" mean IVAX Corporation and
its subsidiaries unless otherwise required by the context.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of IVAX Corporation and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Investments in affiliates representing 20% to 50% ownership
interests are recorded under the equity method of accounting. Investments in
affiliates representing less than 20% ownership interests are recorded at cost.
The minority interest held by third parties in majority owned subsidiaries is
separately stated. Certain amounts presented in the accompanying consolidated
financial statements for prior periods have been reclassified to conform to the
current period's presentation. Included in the consolidated financial statements
are the financial results of IVAX International, B.V., a wholly-owned subsidiary
of IVAX.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. IVAX' actual results in
subsequent periods may differ from the estimates and assumptions used in the
preparation of the accompanying consolidated financial statements. Significant
estimates include amounts for accounts receivable exposures, deferred tax asset
allowances, inventory reserves, environmental reserves, litigation,
restructuring costs and sales returns and allowances, including chargebacks,
rebates, returns and shelf-stock adjustments, and the useful lives of intangible
assets. Management periodically evaluates estimates used in the preparation of
the financial statements and makes changes on a prospective basis when
adjustments are necessary.
CASH AND CASH EQUIVALENTS - IVAX considers all investments with a
maturity of three months or less as of the date of purchase to be cash
equivalents.
MARKETABLE SECURITIES - Short-term investments in marketable debt
securities generally mature between three months and three years from date of
purchase or are auction rate securities with final maturities longer than three
years, but with interest rate auctions occurring every 28 or 35 days. These
short-term marketable securities consist primarily of taxable municipal bonds,
corporate bonds, government agency securities and commercial paper. It is IVAX'
intent to maintain a liquid portfolio to take advantage of investment
opportunities; therefore most securities are deemed short-term, are classified
as available for sale securities and are recorded at market value using the
specific identification method. Unrealized gains and losses, net of tax, are
reflected in "Accumulated other comprehensive loss" in the accompanying
consolidated balance sheets. Realized gains and losses are included in "Other
income" in the accompanying consolidated statement of operations using the
specific identification method.
F-9
At December 31, 2001 and 2000, IVAX held marketable securities which it
classified as short-term, available for sale. Based on quoted market prices, the
securities are stated at fair value of $154,842 and $76,734, respectively. Net
unrealized gains/(losses) of $796 and $0 at December 31, 2001 and 2000,
respectively, are included in "Accumulated other comprehensive loss" in the
accompanying consolidated balance sheets.
LONG-TERM INVESTMENTS - IVAX has investments in three marketable
securities that it deems long-term, available for sale, which are marked to
market value using the specific identification method and two investments in
limited investment partnerships. Investments in limited investment partnerships
representing greater than 5% ownership interests are adjusted to market value;
otherwise, they are carried at cost. These investments are included in "Other
assets" in the accompanying consolidated balance sheets. Unrealized gains and
losses, net of tax, are reflected in "Accumulated other comprehensive loss" in
the accompanying consolidated balance sheets. Realized gains and losses are
included in "Other income" in the accompanying consolidated statement of
operations using the specific identification method.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market. Components of inventory cost include materials, labor and
manufacturing overhead. In evaluating whether inventory is stated at the lower
of cost or market, management considers such factors as the amount of inventory
on hand, estimated time required to sell such inventory, remaining shelf life of
the inventory and current market price of the inventory. Reserves are provided
as appropriate.
Inventories consist of the following:
December 31,
------------------------
2001 2000
-------- --------
Raw materials $110,443 $ 72,991
Work-in-process 34,820 27,683
Finished goods 108,208 78,236
-------- --------
Total inventories $253,471 $178,910
======== ========
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation and amortization and consist of
the following:
December 31,
------------------------
2001 2000
-------- --------
Land $ 22,535 $ 14,116
Buildings and improvements 188,590 160,942
Machinery and equipment 221,243 167,203
Furniture and computer equipment 63,822 50,644
Construction in process 25,025 7,093
-------- --------
Total cost 521,215 399,998
Less: Accumulated depreciation and amortization 164,911 149,146
-------- --------
Property, plant and equipment, net $356,304 $250,852
======== ========
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows: buildings and improvements (10
- - 40 years), machinery and equipment (3 - 20 years) and furniture and computer
equipment (2 - 10 years). Leasehold improvements are amortized on a
straight-line basis over the shorter of the term of the lease or their estimated
useful lives. Costs of major additions and improvements are capitalized and
expenditures for maintenance and repairs that do not extend the life of the
assets are expensed. Upon sale or disposition of property, plant and equipment,
the cost and related accumulated depreciation or amortization are eliminated
from the accounts and any resulting gain or loss is credited or charged to
operations. Depreciation expense was $31,547, $23,510 and $25,560 during 2001,
2000 and 1999, respectively.
F-10
CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS - Costs associated with
software developed or obtained for internal use are capitalized when (1) the
preliminary project stage is completed and (2) management has authorized further
funding for the project, it is probable that the project will be completed and
the software will be used for the intended purpose. Costs capitalized include
(1) external direct costs of materials and services consumed (2) payroll and
payroll-related costs for employees directly associated with or who devote time
to the project and (3) interest costs incurred while developing the software.
Upgrades and enhancements that add functionality are capitalized. Costs of
training, maintenance, data conversion and nonspecific upgrades and enhancements
are expensed.
CAPITALIZATION OF INTEREST - During 2001 and 2000, IVAX capitalized
$940 and $148 of interest costs on certain software development projects.
INTANGIBLE ASSETS - Intangible assets are carried at cost less
accumulated amortization and consist of the following:
December 31,
------------------------
2001 2000
-------- --------
Goodwill $506,737 $ 84,450
Patents and related licenses 77,076 55,398
Trademarks 135,206 2,483
Licenses and other intangibles 22,768 6,714
-------- --------
Total cost 741,787 149,045
Less: Accumulated amortization 52,231 31,874
-------- --------
Intangible assets, net $689,556 $117,171
======== ========
Effective July 1, 2001, IVAX adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, relating to the amortization of goodwill. Goodwill of companies acquired
prior to June 30, 2001, was amortized through December 31, 2001. Amortization of
goodwill of companies acquired after June 30, 2001, is no longer allowed.
Effective January 1, 2002, all goodwill amortization ceases and goodwill must be
evaluated for impairment annually.
During 2001, patents, trademarks, licenses and other intangibles were
amortized using the straight-line method over their respective estimated lives
(ranging from 3 - 20 years). As of December 31, 2001, the weighted average life
of patents, trademarks, licenses and other intangibles was 16.4 years. Effective
January 1, 2002, patents, trademarks, licenses and other intangible assets with
finite lives will be amortized, while those with indefinite lives ($22,148 as of
December 31, 2001) will not be amortized, but tested annually for impairment.
Amortization expense was $20,611, $9,439 and $3,548 during 2001, 2000 and 1999,
respectively.
During 2001, IVAX acquired a license to the patent rights to develop
and market talampanel for $10,000 and the worldwide rights to loteprednol for
$500. Also during 2001, IVAX acquired the Nasarel/Nasalide patents and tradename
from Elan Corporation for $121,037. The fair values of the Nasarel assets
acquired comprised $106,037 in tradename, $3,600 patent, $11,400 for customer
contracts with lives of 20 years, 4.6 years and 10 years, respectively. In
addition, IVAX issued 17 shares of its common stock valued at $500 and paid cash
of $793 to acquire a patent in 2001.
F-11
IMPAIRMENT OF LONG-LIVED ASSETS - IVAX continually evaluates whether
events and circumstances have occurred that indicate that the remaining
estimated useful life of long-lived assets may require revision or that the
remaining net book value may not be recoverable. When factors indicate that an
asset may be impaired, IVAX uses various methods to estimate the asset's future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss is recognized based on
the excess of the carrying amount over the estimated fair value of the asset.
Any impairment amount is charged to operations.
FOREIGN CURRENCIES - IVAX' operations include subsidiaries which are
located outside of the United States. Assets and liabilities as stated in local
currencies are translated at the rate of exchange prevailing at the balance
sheet date. The gains or losses that result from this process are shown in
"Accumulated other comprehensive income (loss)" in the accompanying consolidated
balance sheets. Amounts in the statements of operations are translated at the
average rates for the period. Foreign currency translation gains and losses
arising from cash transactions are credited to or charged against current
earnings. Elmor is located in Venezuela, which was considered a
hyperinflationary economic environment through June 30, 2001. Its local currency
financial statements were remeasured into the U.S. dollar by translating
monetary assets and liabilities at the current exchange rate, non-monetary
assets and expenses related to non-monetary assets at the historical rates, and
revenues and expenses at the average exchange rate in effect during the year.
The resulting translation adjustment was included in the results of operations.
FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, accounts receivable, loans payable and accounts payable approximate
fair value due to the short maturity of the instruments and reserves for
potential losses, as applicable. The disclosed fair value of marketable
securities, other assets and long-term debt is estimated using quoted market
prices, whenever available, or an appropriate valuation method (See Note 6,
Investments In and Advances to Unconsolidated Affiliates, and Note 7, Debt).
IVAX does not speculate in the foreign exchange market. IVAX may,
however, from time to time, manage exposures that arise in the normal course of
business related to fluctuations in foreign currency rates by entering into
foreign exchange forward contracts. IVAX enters into these contracts with
counterparties that it believes to be creditworthy and does not enter into any
leveraged derivative transactions. Gains and losses on these contracts are
included in the consolidated statements of operations as they arise. Costs
associated with entering into these contracts are amortized over the contracts'
lives, which typically are less than one year. IVAX held foreign exchange
forward contracts with notional principal amounts of $68,681 at December 31,
2001, which mature in January 2002 through July 2002, and $27,621 at December
31, 2000, which matured in January 2001 through December 2001.
Prior to its acquisition by IVAX, Lab Chile engaged in a partial hedge
of its then $63,000 U.S. dollar denominated loans against a possible devaluation
of the Argentine peso, by entering into forward contracts in early 2001, to
purchase $55,000 U.S. dollars at contract prices ranging from 1.0405 pesos to
1.0412 pesos with expiration dates in January 2002. If the contracts expired
unexercised, a fee of $2,247 would be paid. Due to the lack of liquidity in the
currency forwards market in Argentina on July 5, 2001, (the date IVAX acquired
Lab Chile), the most reliable indicator of fair value was the amortized amount
of the original contract fee. Accordingly, these contracts were recorded as an
asset and a liability at the original contract fee amount and the asset was
amortized over the life of the contracts. Due to the devaluation of the
Argentine peso and the Argentine government halting foreign exchange
transactions from mid-December 2001 through approximately January 11, 2002, the
contracts were valued at December 31, 2001, at the negotiated amounts at which
the contracts were settled during January 2002
F-12
resulting in a pretax gain of $21,655 being recorded at December 31, 2001, which
is recorded in other income.
In addition, IVAX has short-term intercompany balances that are
denominated in foreign currencies. A portion of these balances are hedged, from
time to time, using foreign exchange forward contracts, and gains and losses on
these contracts are included in the consolidated statements of operations as
they arise. For the years ended December 31, 2001, 2000 and 1999, IVAX recorded
net foreign exchange transaction losses of $9,856, $2,297 and $2,934,
respectively, which are included in "Other income, net" in the accompanying
consolidated statements of operations. Approximately $19,014 of the currency
losses during 2001 related to bank and other liabilities denominated in
currencies foreign to the Argentine operations. Due to the devaluation of the
Argentine peso and the lack of foreign exchange transactions from mid-December
2001 through approximately January 11, 2002, IVAX translated the Argentine
December 31, 2001, balance sheets and the Argentine foreign currency liabilities
using an exchange rate of 1.6 pesos, which is the rate closest to the weighted
average rate at which the forward contracts were settled, within the range of
rates obtained when foreign exchange transactions were allowed to resume by the
Argentine government in January 2002.
CONCENTRATION OF CREDIT RISK - IVAX sells a significant amount of
United States brand equivalent pharmaceutical products to a relatively small
number of drug wholesalers and retail drug chains, which represents an essential
part of the distribution chain of pharmaceutical products in the United States.
IVAX monitors the creditworthiness of its customers and reviews outstanding
receivable balances for collectibility on a regular basis and records allowances
for bad debts as necessary.
IVAX follows an investment policy that limits investments in individual
issuers, generally, to the lesser of $10,000 or 10% of program size, that meet
certain minimum credit rating and size requirements.
REVENUE RECOGNITION - Revenues and the related cost of sales are
recognized at the time product is shipped. Net revenues are comprised of gross
revenues less provisions for expected customer returns, inventory credits,
discounts, promotional allowances, volume rebates, chargebacks and other
allowances. These sales provisions totaled $433,653, $215,433 and $121,286 in
the years ended December 31, 2001, 2000 and 1999, respectively. The reserve
balances related to these provisions included in "Accounts receivable, net of
allowances for doubtful accounts" and "Accrued expenses and other current
liabilities" in the accompanying consolidated balance sheets totaled $115,752
and $88,955, respectively, at December 31, 2001 and $51,080 and $63,448,
respectively, at December 31, 2000.
The custom in the pharmaceutical industry is generally to grant
customers the right to return purchased goods. In the brand equivalent
pharmaceutical industry, this custom has resulted in a practice of suppliers
issuing inventory credits (also known as shelf-stock adjustments) to customers
based on the customers' existing inventory following decreases in the market
price of the related brand equivalent pharmaceutical product. The determination
to grant a credit to a customer following a price decrease is generally at the
discretion of IVAX, and generally not pursuant to contractual agreements with
customers. These credits allow customers with established inventories to compete
with those buying products at the current market price, and allow IVAX to
maintain shelf space, market share and customer loyalty.
Provisions for estimated returns, inventory credits and chargebacks, as
well as other sales allowances, are established by IVAX concurrently with the
recognition of revenue. The provisions are established in accordance with
accounting principles generally accepted in the United States based upon
consideration of a variety of factors, including actual return and inventory
credit experience for products during the past several years by product type,
the number and timing of regulatory approvals for the product by competitors of
IVAX (both historical and projected), the market for the product, expected
sell-through levels by IVAX' wholesaler customers to customers with contractual
pricing arrangements with
F-13
IVAX, estimated customer inventory levels by product and projected economic
conditions. Actual product returns and inventory credits incurred are, however,
dependent upon future events, including price competition and the level of
customer inventories at the time of any price declines. IVAX continually
monitors the factors that influence the pricing of its products and customer
inventory levels and makes adjustments to these provisions when management
believes that actual product returns, inventory credits and other allowances may
differ from established reserves.
Royalty and license fee income are recognized when obligations
associated with earning the royalty or licensing fee have been satisfied and are
included in "Net revenues" in the accompanying consolidated statements of
operations. Net revenues in 2001, 2000 and 1999 included $879, $1,820 and
$1,214, respectively, of royalties under license agreements. Through 1999, IVAX'
accounting policy was to immediately recognize as revenue such cash payments
that are nonrefundable or where the probability of refund is remote. As a result
of SEC Staff Accounting Bulletin ("SAB") No. 101, IVAX revised its accounting
policy to defer up-front payments, whether or not they are refundable, and
recognizes them in income over the license period. Where IVAX expends resources
to achieve milestones, IVAX recognizes the milestone payments in income
currently. The total amortization of up-front payments and current recognition
of milestones is limited to nonrefundable provisions of the contract. Other
revenues in 2001 and 2000 included $879 and $1,725, respectively, of
amortization of revenue deferred in accordance with SAB No. 101.
Shipping and handling fees billed to customers are recognized in net
revenues. Shipping and handling costs are included in cost of sales.
LEGAL COSTS - Legal charges are recorded for the costs anticipated to
be incurred in connection with litigation and claims against IVAX when
management can reasonably estimate these costs.
RESEARCH AND DEVELOPMENT COSTS - Research and developments costs
related to future products are expensed currently.
SALE OF SUBSIDIARY STOCK - IVAX elected income statement recognition as
its accounting policy for sales of subsidiary stock. Accordingly, gains and
losses on sales are recorded in "Other income" in the consolidated statement of
operations.
INCOME TAXES - The provision for income taxes is based on the
consolidated United States entities' and individual foreign companies' estimated
tax rates for the applicable year. Deferred taxes are determined utilizing the
asset and liability method based on the estimated future tax effects of
differences between the financial accounting and tax bases of assets and
liabilities under the applicable tax laws. Deferred income tax provisions and
benefits are based on the changes in the deferred tax asset or tax liability
from period to period (See Note 9, Income Taxes).
EARNINGS PER COMMON SHARE - A reconciliation of the denominator of the
basic and diluted earnings per share computation is as follows:
Year Ended December 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Basic weighted average number of shares outstanding 199,099 196,276 201,885
Effect of dilutive securities - stock options and warrants 5,540 7,782 3,616
------- ------- -------
Diluted weighted average number of shares outstanding 204,639 204,058 205,501
======= ======= =======
Not included in the calculation of diluted earnings per
share because their impact is antidilutive:
Stock options outstanding 2,784 206 3,974
Convertible debt 24,891 8,412 2,579
Put options -- 3,050 2,813
F-14
ACCUMULATED OTHER COMPREHENSIVE LOSS - Other comprehensive loss ("OCL")
refers to revenues, expenses, gains and losses that under accounting principles
generally accepted in the United States are excluded from net income as these
amounts are recorded directly as an adjustment to shareholders' equity.
Accumulated other comprehensive loss is comprised of the cumulative effects of
foreign currency translation and unrealized gains on available for sale equity
securities.
STOCK-BASED COMPENSATION PLANS - As permissible under SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, IVAX accounts for all stock-based
compensation arrangements using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, as interpreted by Financial Accounting Standards Board Interpretation
No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, and
discloses pro forma net earnings and earnings per share amounts as if the fair
value method had been adopted. Accordingly, no compensation cost is recognized
for stock option awards granted to employees at or above fair market value. Pro
forma net earnings and earnings per share amounts are presented in Note 11,
Shareholders' Equity.
CHANGES IN ACCOUNTING PRINCIPLE - SAB No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, was adopted for up-front licensing fees during the fourth
quarter of 2000, resulting in a cumulative change in accounting principle charge
of $6,471, or $.03 per share, net of tax benefit of $2,773, recorded as of the
beginning of the first quarter of 2000. The offsetting impact was recorded in
deferred revenue that will be recognized in income through 2011. IVAX amortized
$879 and $1,725 of this deferred revenue to income during 2001 and 2000,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS - Effective July 1, 2001, IVAX
adopted SFAS No. 141, BUSINESS Combinations, which addresses the financial
accounting and reporting for business combinations. It supersedes APB Opinion
No. 16, BUSINESS COMBINATIONS, and SFAS No. 38, ACCOUNTING FOR PRE-ACQUISITION
CONTINGENCIES OF PURCHASED ENTERPRISES. All business combinations under the
scope of this statement must be accounted for using the purchase method of
accounting. This statement applies to all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 141 did not have a material impact on
IVAX' financial condition or results of operations. On January 1, 2002, IVAX
will reverse the $4,200 of negative goodwill recorded in the balance sheet as of
December 31, 2001, through a cumulative effect of a change in accounting
principle; thereby increasing net income by this amount for the 2002 first
quarter and year.
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, INTANGIBLE ASSETS. It addresses accounting for
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) at acquisition. It also
addresses accounting for goodwill and other intangible assets after they have
been initially recognized in the financial statements. Intangible assets that
have indefinite lives and goodwill will no longer be amortized, but rather must
be tested at least annually for impairment using fair values. Intangible assets
that have finite useful lives will be amortized over their estimated useful
lives. The statement is effective in fiscal years beginning after December 15,
2001; except that goodwill and intangible assets acquired after June 30, 2001,
are subject immediately to the non-amortization and amortization provisions of
this statement. Accordingly, no goodwill amortization was recorded related to
the July 5, 2001, acquisition of Lab Chile. In addition, amortization of
goodwill acquired prior to June 30, 2001, will cease effective January 1, 2002.
This will increase net income by approximately $2,000 per quarter, or $8,000 per
year. Management is currently evaluating the extent of impairment, if any, of
intangible assets with indefinite lives and goodwill, that may need to be
recorded, but the effect won't be known until the provisions of SFAS 142 are
applied.
F-15
SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal operation of a long-lived asset, except for certain obligations
of lessees. It requires that the fair value of an asset retirement obligation be
recognized as a liability in the period in which it is incurred if a reasonable
estimate can be made and that the associated retirement costs be capitalized as
part of the carrying amount of the long-lived asset. It is effective for fiscal
years beginning after June 15, 2002. Management believes that the impact of
adoption of this statement will not be significant.
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and
certain provisions of APB Opinion No. 30, REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. It also
amends ARB No. 51, CONSOLIDATED FINANCIAL STATEMENTS. It establishes a single
accounting model for the accounting for a segment of a business accounted for as
a discontinued operation that was not addressed by SFAS No. 121 and resolves
other implementation issues related to SFAS No. 121. It is effective for fiscal
periods beginning after December 15, 2001. Management believes that the impact
of adoption of this statement will not be significant.
EITF Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERIZATION OF
CONSIDERATION PAID TO A RESELLER OF THE VENDOR'S PRODUCTS, is effective for
periods beginning after December 15, 2001. It states that consideration paid by
a vendor to a reseller should be classified as a reduction of revenues in the
income statement unless an identifiable benefit is or will be received from the
reseller that is sufficiently separable from the purchase of the vendor's
products and the vendor can reasonably estimate the fair value of the benefit.
Restatement of prior period amounts is required. Management believes that the
impact of adoption will not be significant.
EITF Issue No. 01-09, ACCOUNTING FOR CONSIDERATION GIVEN TO A CUSTOMER
OR A RESELLER OF VENDOR'S PRODUCTS, reconciles EITF Issue No. 00-14, Issue No.3
of EITF Issue No. 00-22 and EITF Issue No. 00-25. It is effective for periods
beginning after December 15, 2001. Reclassification of prior period amounts is
required. Management believes the impact of adoption will not be significant.
Effective January 1, 2001, IVAX adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income ("OCI") and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair value of cash flow
hedges are recognized in earnings. Certain forecasted transactions are exposed
to foreign currency risk. The principal currency hedged was the Irish punt
against the British pound. Forward options used to hedge a portion of forecasted
international expenses for up to one year in the future are designated as cash
flow hedging instruments. The adoption of SFAS No. 133 resulted in a pre-tax
increase to OCI of $1.8 million. The increase to OCI is mostly attributable to
gains on cash flow hedges. The net derivative gains included in OCI as of
January 1, 2001, were reclassified into earnings during the twelve months ended
December 31, 2001.
F-16
During the first quarter of 2001, IVAX adopted EITF Issue No. 00-19,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY
SETTLED IN, A COMPANY'S OWN STOCK, which addresses the classification and
accounting treatment of equity derivative contracts (such as IVAX' put options)
as equity instruments (either temporary or permanent) or assets and liabilities.
As a result, put options were reclassified from temporary equity to permanent
equity. As of December 31, 2001, IVAX had outstanding five freestanding put
options for 1,200 shares of IVAX' common stock that were issued in connection
with the share repurchase program. The put options bore strike prices ranging
from $19.00 to $31.80 and expire from January 2002 through April 2002.
During the first quarter of 2001, IVAX adopted Issue No.3 of EITF Issue
No. 00-22, ACCOUNTING FOR POINTS AND CERTAIN OTHER TIME OR VOLUME BASED SALES
INCENTIVE OFFERS AND OFFERS FOR FREE PRODUCTS OR SERVICES TO BE DELIVERED IN THE
FUTURE. Final consensus was reached on the recognition, measurement and income
statement classification of cash rebates or refunds that are time and volume
based. Final consensus has not been reached on four other items under
consideration. EITF Issue No. 00-22 requires that cash rebates or refunds
redeemable if the customer completes a specified cumulative level of revenue
transactions or remains a customer for a specified time period should be
recognized as a reduction of revenue based on a systematic and rational
allocation of the cost of honoring the rebate or refund earned and claimed to
each of the underlying revenue transactions that result in progress toward
earning the rebate or refund. The effective date of adoption is fiscal quarters
ending after February 15, 2001. The impact of adoption was not significant.
(3) MERGERS AND ACQUISITIONS:
Acquisitions accounted for under Accounting Principles Board Opinion No. 16,
BUSINESS COMBINATIONS:
On February 9, 2001, IVAX indirectly acquired Laboratorios Fustery,
S.A. de C.V. ("Fustery"), a Mexican pharmaceutical company, by purchasing the
outstanding securities of Fustery's parent, Maancirkel Holding B.V.
("Maancirkel"), a corporation organized under the laws of The Netherlands, from
Morcob CVA, an entity organized under the laws of Belgium pursuant to a stock
purchase agreement entered into among the parties on October 11, 2000. During
the first quarter of 2001, IVAX acquired Maancirkel for 1,656 shares of IVAX'
common stock, valued at $60,979, and $57,210 in cash, net of cash acquired. In
addition, IVAX paid $94 of other costs. During the second quarter of 2001, in
accordance with the stock purchase agreement, IVAX made an additional cash
payment of $16,309 in lieu of additional shares, representing contingent
consideration based on the market value of IVAX' common stock. During the fourth
quarter of 2001, IVAX received $1,376 in cash from Fustery, representing a
reduction of the purchase price and goodwill. The fair value of net assets
acquired was $27,081 resulting in goodwill of $89,826 being recorded. The
purchase price is subject to change based on resolution of the working capital
and debt covenant adjustments as specified in the purchase agreement. The
operating results of Fustery are included in the consolidated financial
statements subsequent to the February 9, 2001, acquisition date.
On February 26, 2001, IVAX acquired the assets of a research
organization located in the United States for 609 shares of IVAX' common stock,
valued at $18,000, $4,650 in cash, net of cash acquired, and other costs of $51.
The fair value of net assets acquired was $7,085 resulting in goodwill of
$15,616 being recorded. The operating results of this company are included in
the consolidated financial statements subsequent to the February 26, 2001,
acquisition date.
On March 13, 2001, IVAX acquired Netpharma Scandinavia AB
("Netpharma"), a Swedish pharmaceutical company, for 624 shares of IVAX' common
stock, valued at $18,365, other costs of $20 and received cash of $1,036 in
excess of cash paid. During the fourth quarter of 2001, 35 shares valued at
F-17
$1,285 were returned to IVAX based on violation of covenants, representing a
reduction of purchase price and goodwill. In addition, additional shares of
IVAX' common stock, valued at $2,052, will be issued contingent on achievement
of earnout targets for each of the next two years. If the earnout targets are
achieved, the number of additional shares issued will be based on the exchange
rate in effect on the payment dates and the average price of IVAX' common stock
just prior to April 30, 2002 and 2003. The fair value of net assets acquired was
$274, resulting in goodwill of $15,790 being recorded. The operating results of
Netpharma are included in the consolidated financial statements subsequent to
the March 13, 2001, acquisition date.
On April 3, 2001, IVAX acquired the remaining 70% of Indiana Protein
Technologies, Inc. ("Indiana Protein") that it did not already own. Indiana
Protein was previously accounted for as an investment under the equity method of
accounting. This additional interest was acquired for $4,122 in cash, net of
cash acquired, and other costs of $10, of which $2,500 is subject to an earnout
period of 5 years. The fair value of net assets acquired was $37 resulting in
goodwill of $4,095 being recorded. The operating results of Indiana Protein are
included in the consolidated financial statements subsequent to the April 3,
2001, acquisition date.
Acquisition accounted for under SFAS No. 141:
During the third quarter of 2001, IVAX acquired 99.9% of the
outstanding shares and American Depositary Shares ("ADS") of Laboratorio Chile
S.A. ("Lab Chile"), a Chilean pharmaceutical company, in two tender offers for
cash. On July 5, 2001, IVAX acquired the shares and ADS' tendered in the first
offer. IVAX commenced a second tender offer on July 31, 2001, that expired
August 29, 2001, for the remaining outstanding shares of Lab Chile. The total
purchase price, including acquisition costs of $6,190 less cash acquired of
$13,377, was $387,635. The fair values of assets acquired and liabilities
assumed on July 5, 2001 were:
Current assets, excluding cash acquired $ 74,050
Property, plant & equipment 39,588
Intangible assets 27,371
Other assets 2,851
----------
Total assets 143,860
----------
Current liabilities 52,499
Long-term debt 66,077
Other liabilities 1,733
----------
Total liabilities 120,309
----------
Net assets acquired $ 23,551
==========
Intangible assets included $571 of patents and $5,400 of other
intangible assets that are subject to amortization with weighted average lives
of 10.0 years and 12.8 years, respectively. Intangible assets also included
$21,400 of trademarks that are not subject to amortization as management has
determined they have indefinite lives. The fair value of net assets acquired was
$23,551, resulting in goodwill of $364,084. IVAX acquired Lab Chile to further
its objective of expanding into growing markets. Certain of the factors
contributing to the purchase price that resulted in goodwill were Lab Chile's
100 year history and name recognition, being the largest Chilean pharmaceutical
company in revenue terms and among the major pharmaceutical companies in
Argentina and Peru. The entire balance of goodwill is not deductible for tax
purposes. The operating results of Lab Chile are included in the consolidated
financial statements subsequent to the July 5, 2001, acquisition date.
F-18
Pro forma information for the above acquisitions as if the purchases
occurred on January 1 of each year are presented below.
Period Ended December 31, Twelve Months
----------------------------
(Unaudited)
----------------------------
(In thousands) 2001 2000
---------- ----------
Revenues $1,330,098 $1,101,115
Income from continuing operations 247,988 173,428
Net income 255,108 164,703
Diluted weighted average shares 205,006 206,914
Diluted net income per share $ 1.24 $ 0.80
These unaudited pro forma results of operations are not necessarily
indicative of results that might have been achieved if the acquisitions had
actually occurred on January 1 of the periods presented.
In connection with the translation of foreign subsidiaries' financial
statements to U.S. dollars, IVAX recognized a translation loss related to
goodwill of $65,568 in 2001, of which $64,377 relates to the devaluation of the
Argentine peso after year-end and is included in the translation adjustment in
OCI.
During 2001, IVAX-CR a.s. (formerly known as Galena, a.s.), IVAX'
majority-owned subsidiary in the Czech Republic, acquired 1 share of its own
stock for $41. During 2000, IVAX, through its Netherlands subsidiary IVAX
International B.V., purchased 238 additional shares of IVAX-CR a.s. The total
cost of the shares acquired through open market transactions during 2000 was
$8,190. The net book value underlying the shares purchased was $5,362 resulting
in goodwill of $2,828 being recorded in the accompanying consolidated balance
sheet at December 31, 2000. On September 1, 2000, Galena commenced a tender
offer for the 9.26% of the outstanding shares which it did not own. The tender
offer was for a period of 60 days. During the second half of 2000, IVAX-CR a.s.
acquired 78 shares of its own stock at a cost of $2,753 through the tender
offer. The book value of shares repurchased was $4,470 resulting in negative
goodwill of $1,717 being recorded in the accompanying balance sheet as of
December 31, 2000. During 1999, IVAX paid $4,978 for additional shares of
IVAX-CR a.s. which resulted in negative goodwill of $2,068. Prior to these
purchases, IVAX owned 74% of the outstanding shares of IVAX-CR-a.s. At December
31, 2001, IVAX owned 98.2% of the outstanding shares of IVAX-CR a.s.
On June 19, 2000 and August 2, 2000, IVAX acquired, through the
acquisition of three holding companies, Elmor, a company located in Caracas,
Venezuela for $63,911. Elmor manufactures, markets, and distributes
pharmaceutical products in Venezuela. On June 19, 2000, IVAX issued 1,981 shares
of IVAX common stock (valued at $55,000) and paid $1,663 in cash, net of cash
acquired, for two of the holding companies. On August 1, 2000, IVAX acquired
certain other assets utilized in the business of Elmor by the purchase of the
third holding company for additional cash of $3,875 and other costs of $35.
During 2001, IVAX received $1,673 in cash, representing a reduction in purchase
price and goodwill. The fair value of net assets acquired was $13,614, resulting
in goodwill of $45,286 which is included in "Intangible assets - net" in the
accompanying consolidated balance sheet at December 31, 2000. The goodwill will
be amortized over 20 years. The operating results of Elmor are included in the
consolidated financial statements subsequent to the June 19, 2000, acquisition
date.
On September 7, 2000, IVAX acquired IVAX Laboratories, Inc.
("Laboratories", formerly Wakefield Pharmaceuticals, Inc.), a U.S.
pharmaceutical company located in Georgia, in exchange for 1,038 shares of IVAX
common stock (valued at $28,273), $3,649 representing the fair value of stock
options granted, $102 of other costs and received $5,120 of cash in excess of
cash paid. During 2001, IVAX paid
F-19
an additional $137 of acquisition costs. The fair value of net assets acquired
was $944 resulting in goodwill of $26,096 which is included in "Intangible
assets - net" in the accompanying consolidated balance sheet at December 31,
2000. The goodwill will be amortized over 25 years. The operating results of
Laboratories are included in the consolidated financial statements subsequent to
the September 7, 2000, acquisition date.
Proforma information for the 2000 acquisitions as if the purchases
occurred on January 1 of each year are presented below.
Period Ended December 31, Twelve Months
------------------------
(In thousands) 2000 1999
-------- --------
Revenues $818,547 $704,115
Net income 129,262 75,482
Diluted weighted average shares 205,700 208,689
Diluted earnings per share $ 0.63 $ 0.36
(4) PARTIAL SALE OF IVAX DIAGNOSTICS, INC.:
On March 14, 2001, IVAX' wholly-owned subsidiary, IVAX Diagnostics,
Inc., was merged with b2bstores.com, a non-operating company with approximately
$22,285 of cash, resulting in IVAX owning approximately 70% of the newly merged
public company. IVAX received 20,000 shares of b2bstores.com common stock in
exchange for all of the outstanding shares of IVAX Diagnostics, Inc. and
b2bstores.com's name was changed to IVAX Diagnostics, Inc. For accounting
purposes, this transaction is treated as a partial sale of IVAX Diagnostics,
Inc. in exchange for cash of b2bstores.com. IVAX elected income statement
recognition as its accounting policy for sales of subsidiary stock and recorded
a gain of $10,278, which is included in "Other income, net" in the consolidated
statements of operations. Deferred taxes have not been recorded related to the
gain as it represents an outside basis difference and IVAX expects it can
recover its investment in IVAX Diagnostics, Inc. tax-free. Also recorded was
$1,041 of nondeductible compensation expense from outstanding options under the
IVAX Diagnostics, Inc. 1999 Stock Option Plan converting to a fair value plan as
a result of the merger. IVAX Diagnostics, Inc. is engaged in the development,
manufacture and marketing of diagnostic test kits, reagents and instruments.
(5) SALE OF PRODUCT RIGHTS:
Royalty and milestone payments from the 1997 sale of rights to
Elmiron(R) and certain other urology products in the United States and Canada to
ALZA Corporation amounted to $13,792, $7,175 and $13,033 in 2001, 2000 and 1999,
respectively, and are included in other income as additional gain on the sale of
product rights. Royalties and milestone payments receivable from ALZA included
in "Other current assets" in the accompanying consolidated balance sheets
totaled $11,070 and $5,524 at December 31, 2001 and 2000, respectively. IVAX may
receive additional royalties and milestone payments from ALZA based on sales of
the products during the next few years. A portion of the up-front and milestone
payments received and included in other income in prior years, $36,663 as of
December 31, 2001, is refundable through December 31, 2003, and then ratably
decreases through 2009, if IVAX' patent rights are found to be invalid and a
brand equivalent of Elmiron(R) is introduced by another company. IVAX believes
the probability of occurrence of these events is remote.
F-20
(6) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
IVAX has ownership interests of 50% or less in various unconsolidated
affiliates. At December 31, 2001 and 2000, IVAX' non-marketable investments in
these affiliates totaled $10,338 and $10,293, respectively, and are included in
"Other assets" in the accompanying consolidated balance sheets. Undistributed
earnings of these affiliates, as well as IVAX' equity in their earnings, were
not significant in any of the periods presented in the accompanying consolidated
financial statements.
(7) DEBT:
Long-term debt consists of the following:
December 31,
------------------------
2001 2000
-------- --------
4.5% Convertible Senior Subordinated Notes due 2008. Interest
payable semi-annually. Convertible at the option of the holders into
16,479 shares of common stock at December 31, 2001 at a
conversion rate of $40.05 per share. 5.0% effective interest rate $660,000 $ --
5.5% Convertible Senior Subordinated Notes due 2007. Interest
payable semi-annually. Convertible at the option of the holders into
8,412 shares of common stock at December 31, 2001 at a
conversion rate of $29.72 per share. 5.9% effective interest rate 250,000 250,000
International subsidiaries' debt 55,268 4,248
Other 417 441
-------- --------
Total long-term debt 965,685 254,689
Less: Current portion of long-term debt 52,199 934
-------- --------
Long-term debt, net of current portion $913,486 $253,755
======== ========
During 1999, IVAX repurchased a total of $31,405 of its 6.5%
Convertible Subordinated Notes due November 2001. An extraordinary gain of $593
was recorded related to the debt repurchase during the year ended December 31,
1999. On February 9, 2000, IVAX called the remaining $43,661 face value of its
6.5% Convertible Subordinated Notes for redemption. During February 2000, IVAX
converted $43,388 face value of the 6.5% Notes into 2,561 shares of IVAX common
stock. In addition, IVAX charged $190 of unamortized debt issue cost and
credited $815 of interest forfeited on the conversion to "Capital in excess of
par value". On March 10, 2000, IVAX redeemed $273 face value of the 6.5% Notes,
plus accrued interest, for cash.
During May 2000, IVAX consummated a private offering of $250,000 of its
5.5% Convertible Senior Subordinated Notes due 2007 pursuant to Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act"), and received net
proceeds of approximately $243,750. The 5.5% Notes were registered during the
fourth quarter of 2000. The 5.5% Notes are convertible at any time prior to
maturity, unless previously redeemed, into 33.6 shares of IVAX' common stock per
$1,000 of principal amount of the 5.5% Notes. This ratio results in a conversion
price of approximately $29.72 per share. The 5.5% Notes are redeemable by IVAX
on or after May 29, 2003. At December 31, 2001, the unamortized debt issue costs
related to the 5.5% Notes was $4,869, which is being amortized on a straight
line basis to interest expense over the life of the 5.5% Notes.
During May 2001, IVAX sold $725,000 of its 4.5% Convertible Senior
Subordinated Notes due 2008 to UBS Warburg LLC (the "Initial Purchaser"). The
Initial Purchaser then sold the 4.5% Notes to Qualified Institutional Buyers
pursuant to Rule 144A of the Securities Act to institutional "accredited
investors" (as defined in Rule 501 under the Securities Act) in compliance with
Regulation D under the Securities Act and to non-U.S. persons outside the United
States in compliance with Regulation S. IVAX received net proceeds of
approximately $705,742. The 4.5% Notes were initially issued in transactions
F-21
exempt from registration under the Securities Act; however, as of November 2001,
IVAX has registered the resale of the 4.5% Notes by certain noteholders. The
4.5% Notes are convertible at any time prior to maturity, unless previously
redeemed, into 24.96875 shares of IVAX' common stock per $1,000 of principal
amount of the 4.5% Notes. This ratio results in a conversion price of
approximately $40.05 per share. The 4.5% Notes are redeemable by IVAX on or
after May 29, 2004. At December 31, 2001, the unamortized debt issue costs
related to the 4.5% Notes was $15,888, which is being amortized on a straight
line basis to interest expense over the life of the 4.5% Notes.
During 2001, IVAX repurchased $65,000 face value of the 4.5%
Convertible Senior Subordinated Notes due 2008 at a total cost of $52,070, and
expensed $1,628 of related debt issuance costs. This resulted in an
extraordinary gain on extinguishment of debt of $7,120, net of income taxes of
$4,182.
As of December 31, 2001, the outstanding current portion of long-term
debt included $48,000 of U.S. denominated bank debt assumed in the acquisition
of Lab Chile. These loans mature between March 2002 and September 2002 and bear
interest rates of U.S. dollar Libor plus 0.9% to Libor plus 1.0%.
Certain of IVAX' international subsidiaries maintain relationships with
foreign banks providing short-term lines of credit in the aggregate amount of
approximately $28,000 and $17,000 at December 31, 2001 and 2000, respectively.
Short-term borrowings totaled $13,249 and $1,877 at December 31, 2001 and 2000,
respectively, and are included as "Loans payable" in the accompanying
consolidated balance sheets.
The estimated fair values of long-term notes and debt are as follows:
December 31,
------------------------
2001 2000
-------- --------
4.5% Convertible Senior Subordinated Notes due 2008 $549,912 $ --
5.5% Convertible Subordinated Notes due 2007 250,250 311,450
Other 55,685 4,689
-------- --------
Total $855,847 $316,139
======== ========
Fair value of the 4.5% and 5.5% Convertible Subordinated Notes is based
on available quoted market prices. Management believes that the carrying amounts
of other debt approximate the fair value.
The stated future maturities of all long-term debt for the next five
years and thereafter are approximately $52,199, $941, $174, $31, $34 and
$912,306, respectively.
(8) RESTRUCTURING COSTS AND ASSET WRITE-DOWNS:
In 1999, IVAX substantially ceased manufacturing at its Northvale, New
Jersey manufacturing facility. Production from these facilities has been
transferred to other IVAX manufacturing facilities. During 2000, as a result of
a change in strategy to keep the Northvale, New Jersey pharmaceutical facility
operating as back-up capacity in the event of hurricane damage at the Puerto
Rico facility, the related restructuring reserves were reversed. Also, during
2000, IVAX was released from certain non-cancelable operating leases associated
with its United Kingdom restructuring and the reserves previously established
for certain severance payments were determined to be unnecessary resulting in
$1,324 of the reversal of restructuring reserves. The credit recorded in 1999
was primarily due to the reversal of a previously recorded reserve for a note
receivable and 15% interest in a partnership received as consideration for the
1998 sale of a Ft. Lauderdale, Florida facility. Due to the uncertainty of
collectibility, these assets were fully reserved in 1998. In 1999, the note was
collected in full, the partnership interest was sold and the
F-22
reserve against the assets was reversed. During 2000 and 1999, IVAX reversed
restructuring costs of $4,535 and $612, respectively.
During 2001, IVAX incurred $2,024 of restructuring costs, primarily
severance, related to the integration of IVAX' Argentine operations with the
Argentine operations of Lab Chile, which were expensed when paid. In addition,
IVAX recorded $887 of reserves for restructuring the operations of Lab Chile
which are included in non-cash activity in 2001 in the table below.
The components of the restructuring costs, spending and other activity,
as well as the remaining restructuring reserve balances at December 31, 2001,
2000 and 1999 are shown in the table below. These restructuring costs are shown
as "Restructuring accruals (reversals)" in the accompanying consolidated
statements of operations. The restructuring reserve balances are included in
"Accrued expenses and other current liabilities" in the accompanying
consolidated balance sheets.
Annual
Employee Total Asset Restructuring
Termination Plant Restructuring Write- Accrual
Benefits Closures Reserves Downs (Reversal)
------------ -------- ------------- ------ -------------
Balance at January 1, 1999 $ 5,774 $ 8,260 $ 14,034
Reversal of restructuring costs and
asset write-downs charged in
prior years (73) -- (73) (539) $ (612)
Cash payments during 1999 (4,264) (3,539) (7,803) --
Non-cash activities 123 (298) (175) --
-------- -------- -------- --------
Balance at December 31, 1999 1,560 4,423 5,983 (612)
Reversal of restructuring costs
charged in prior years (628) (3,907) (4,535) (4,535)
Cash payments during 2000 (795) (422) (1,217) --
Non-cash activities (27) 525 498 --
-------- -------- -------- --------
Balance at December 31, 2000 110 619 729 (4,535)
Accrual of (reversal of prior
year) restructuring costs 2,395 (28) 2,367 2,367
Cash payments during 2001 (2,756) (344) (3,100) --
Non-cash activities 718 143 861 --
-------- -------- -------- --------
Balance at December 31, 2001 $ 467 $ 390 $ 857 $ 2,367
-------- -------- -------- --------
(9) INCOME TAXES:
The provision for income taxes on continuing operations before minority
interest consists of the following:
Year Ended December 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
Current:
U.S. Federal $ 71,365 $ 25,111 $ 6,505
State 4,520 966 1,439
Puerto Rico and the U.S. Virgin Islands 860 999 81
Foreign 16,783 15,222 11,735
Deferred (43,645) (29,084) (4,910)
-------- -------- --------
Total $ 49,883 $ 13,214 $ 14,850
======== ======== ========
F-23
The components of income from continuing operations before income taxes
and minority interest are as follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
United States $198,141 $112,656 $ 43,339
Puerto Rico and the U.S. Virgin Islands 17,928 4,451 6,874
Foreign 69,613 36,484 36,266
-------- -------- --------
Total $285,682 $153,591 $ 86,479
======== ======== ========
A reconciliation of the difference between the expected provision for
income taxes using the statutory U.S. Federal tax rate and IVAX' actual
provision is as follows:
Year Ended December 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
Tax using statutory U.S. Federal tax rate at 35% $ 99,989 $ 53,757 $ 30,268
Effect of state income taxes 2,938 59 833
Write-down of non-deductible cost in excess of
net assets of acquired companies 18 66 63
Utilization of previously reserved net operating loss
and tax credit carryforwards (29,590) (29,326) (18,900)
Tax effect of intercompany income eliminated on books 7,600 17,500 --
Reduction of valuation allowance on deferred
tax assets (11,216) (31,113) (11,365)
Foreign tax rate differential (20,253) (8,374) (2,194)
Effect of Puerto Rico taxes and tollgate 860 999 81
Puerto Rico and U.S. possessions tax incentives (6,275) (1,558) (2,406)
Foreign operating losses not benefited 13,984 11,290 5,275
Tax claims and other matters (6,333) (3,180) 5,094
Other (1,839) 3,094 8,101
-------- -------- --------
Total $ 49,883 $ 13,214 $ 14,850
======== ======== ========
The domestic current provision was favorably impacted by $29,590,
$29,326 and $18,900 during 2001, 2000 and 1999, respectively, from utilization
of previously reserved net operating loss ("NOL") and tax credit carryforwards.
The 2001 domestic current provision was also favorably impacted by the
non-taxable gain on the partial sale of IVAX Diagnostics, Inc. All of the
reductions in 2000 and 1999 were used against continuing operations. The
current tax provision for 2000 recognized by foreign operations was favorably
impacted by $3,180 as a result of the resolution of an Inland Revenue audit in
the United Kingdom closing tax years 1992 through 1997. Payment of the current
tax provision for the year ended December 31, 2001, for domestic and foreign
operations will be reduced by $8,040 and $2,571, respectively, representing the
incremental impact of compensation expense deductions associated with
non-qualified stock option exercises during the current year. In addition,
during 2001 IVAX recorded $7,390 of tax effect of prior years' stock option
exercises. These amounts were credited to "Capital in excess of par value".
During 2001 and 2000, IVAX recognized $20,000 and $45,000, respectively, U.S.
taxable income on the intercompany assignment of a contract. For financial
reporting purposes these transactions were eliminated in consolidation.
During 2001, 2000 and 1999, $11,216, $31,113 and $11,365, respectively,
of the valuation allowance previously recorded against the domestic net deferred
tax asset were reversed due to management's expectation of increased domestic
taxable income in the coming year.
F-24
As of December 31, 2001, the domestic net deferred tax asset was $97,619 and
the aggregate net deferred tax asset in foreign countries with positive net
deferred tax assets was $7,934. The domestic deferred tax asset was
approximately 4 percent reserved as of December 31, 2001, approximately 50
percent reserved as of December 31, 2000, and approximately 90 percent reserved
as of December 31, 1999. Realization of the net deferred tax assets is
dependent upon generating sufficient future domestic and foreign taxable
income. Although realization is not assured, management believes it is more
likely than not that the net deferred tax assets will be realized.
Deferred taxes arise due to temporary differences in reporting of
certain income and expense items for book purposes and income tax purposes. A
detail of the significant components of deferred tax assets (liabilities) in the
accompanying consolidated balance sheets is as follows:
December 31,
-------------------------
2001 2000
-------- --------
Accounts receivable allowances $ 70,100 $ 35,781
Reserves and accruals 16,139 18,221
Differences in capitalization of inventory costs 158 1,102
Other 3,847 798
Valuation allowance -- (7,742)
-------- --------
Amount included in "Other current assets" 90,244 48,160
-------- --------
Basis differences on fixed assets 3,402 7,013
Depreciation differences on fixed assets 3,457 3,828
Recognition of revenue (643) (734)
Carrying value of long-term assets 4,703 1,099
Other -- 5,175
Tax credits 4,326 15,184
Net operating losses 6,909 8,652
Valuation allowance (4,000) (21,641)
-------- --------
Amount included in "Other assets" 18,154 18,576
-------- --------
Other, amount included in "Accrued expenses and other current
liabilities" (514) (9,841)
-------- --------
Other, amount included in "Other long-term liabilities" (31,035) (8,797)
-------- --------
Net deferred tax asset $ 76,849 $ 48,098
======== ========
United States income taxes have not been provided on undistributed
earnings of foreign subsidiaries, as such earnings are being retained
indefinitely by such subsidiaries for reinvestment. The distribution of these
earnings would first reduce the domestic valuation allowance before resulting in
additional United States income taxes. The cumulative amount of such
undistributed earnings is approximately $190,807. Any U.S. tax amounts due would
be reduced by allowable foreign tax credits.
Income from IVAX Pharmaceuticals, Inc.'s Puerto Rico manufacturing
operations is subject to certain tax exemptions under the terms of a grant from
the Puerto Rican government which will expire in 2017. The grant reduced tax
expense by approximately $4,499, $721 and $747 for the years ended December 31,
2001, 2000 and 1999, respectively. Under the terms of the grant, IVAX
Pharmaceuticals is required to maintain certain employment levels.
IVAX has historically received a United States tax credit under Section
936 of the Internal Revenue Code for certain income generated by its Puerto Rico
and Virgin Islands operations. For 2001, 2000 and 1999, this credit was
approximately $6,275, $1,558 and $2,406, respectively, and completely
F-25
offset the entire United States tax liability of such operations. In 1996,
Congress repealed the Section 936 tax credit and it will be phased out over four
years beginning in 2002. Under the current tax law, no tax credit will be
available after December 31, 2005.
At December 31, 2001, IVAX has a limited U.S. NOL carryforward which
can be used only at an annual rate of $3,028 and foreign NOL carryforwards which
are comprised of:
Expire U.S. Foreign
------ ---- -------
2002 $ -- $ --
2003 -- 1,800
2004 -- 2,600
2005 1,799 7,500
2006 10,313 7,500
2007 2,733 12,000
2008 4,896 9,100
Indefinite -- 26,200
------- -------
Total $19,741 $66,700
======= =======
Minority interest included in the accompanying consolidated statements
of operations is net of a provision for income taxes of $(67), $(199) and
$(2,122) for the years ended December 31, 2001, 2000 and 1999, respectively.
(10) 401(k) PLANS:
IVAX' employees within the United States and the Virgin Islands are
eligible to participate in a 401(k) retirement plan and Puerto Rico employees
are eligible to participate in a 165(e) plan, which permit pre-tax employee
payroll contributions (subject to certain limitations) and discretionary
employer matching contributions. Total matching contributions (including those
of discontinued operations) for the years ended December 31, 2001, 2000 and 1999
were $1,275, $1,092 and $816, respectively.
(11) SHAREHOLDERS' EQUITY:
AUTHORIZED SHARES - At the June 15, 2000, Annual Meeting of
Shareholders, IVAX' shareholders approved an increase in the number of
authorized shares of common stock from 250,000 to 350,000. As a result of the
5-for-4 stock split that was approved by the Board of Directors on April 20,
2001, authorized shares have increased from 350,000 to 437,500.
STOCK SPLITS - On April 20, 2001, IVAX' Board of Directors approved a
5-for-4 stock split effective May 18, 2001, in the form of a stock dividend for
shareholders of record on May 1, 2001. "Common stock" was increased and "Capital
in excess of par value" was decreased by $3,971 in 2000 to reflect the stock
split. On January 14, 2000, IVAX' Board of Directors approved a 3-for-2 stock
split effective February 22, 2000, in the form of a stock dividend for
shareholders of record February 1, 2000. To reflect the split, common stock was
increased and capital in excess of par value was decreased by $5,075 in 1999.
All weighted average shares, outstanding shares, per share earnings and price
and stock plan data contained in the accompanying consolidated financial
statements have been retroactively adjusted to reflect the stock splits.
STOCK OPTION PLANS - IVAX administers and has stock options outstanding
under IVAX' 1997 Employee Stock Option Plan ("1997 Plan"), IVAX' 1994 Stock
Option Plan ("1994 Plan"), IVAX' 1985 Stock Option Plan ("1985 Plan"), and
certain stock option plans assumed in business acquisitions. The options
outstanding under the plans assumed in the business acquisitions were converted
into options to
F-26
acquire IVAX common stock using the applicable exchange ratios. No additional
stock options may be issued under the 1985 Plan or the plans assumed in the
business acquisitions.
The 1997 Plan permits the issuance of options to employees and
consultants to purchase up to 7,500 shares of IVAX common stock. On February 26,
1999, IVAX' Board of Directors approved an increase to 15,000 shares of IVAX
common stock that may be issued under the 1997 Plan. The 1994 Plan permits the
issuance of options to employees, non-employee directors and consultants to
purchase up to 13,125 shares of IVAX common stock. Both plans provide that the
exercise price of the issued options shall be no less than the fair market value
of the common stock on the date of grant and that the option terms shall not
exceed ten years.
The following table presents additional information concerning the
activity in the stock option plans (number of shares in thousands):
2001 2000 1999
------------------------ ------------------------ ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ --------- ------ ---------- ------ ----------
Balance at beginning of year 13,685 $ 11.88 12,240 $ 7.31 16,806 $ 7.60
Granted 5,097 27.97 6,634 17.63 1,118 7.62
Exercised (1,531) 9.18 (4,483) 7.83 (2,369) 5.16
Terminated/exchanged (495) 13.20 (706) 10.68 (3,315) 9.60
------ ------ ------
Balance at end of year 16,756 16.98 13,685 11.88 12,240 7.31
====== ====== ======
Exercisable at December 31, 5,804 $ 9.60 4,593 $ 7.55 6,658 $ 8.66
The following table summarizes information about fixed stock options
outstanding at December 31, 2001 (number of shares in thousands):
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices At 12/31/01 Contractual Life Exercise Price At 12/31/01 Exercise Price
--------------- ----------- ----------------- -------------- ------------ --------------
$ 0.00 - $ 3.94 133 2.8 $ 3.62 133 $ 3.62
3.95 - 7.88 4,400 3.6 5.15 3,233 5.11
7.89 - 11.82 618 1.9 10.12 498 10.40
11.83 - 15.76 3,983 6.1 14.55 1,354 14.37
15.77 - 19.70 1,663 5.4 18.45 282 18.39
19.71 - 23.64 388 5.3 21.71 85 21.66
23.65 - 27.58 2,434 6.2 26.07 6 25.99
27.59 - 31.52 2,538 8.5 28.80 98 28.53
31.53 - 35.46 361 6.1 34.41 80 34.54
35.47 - 39.40 238 6.8 38.21 35 38.56
------- -------
16,756 5.6 $ 16.98 5,804 $ 9.60
======= =======
F-27
IVAX' pro forma net income, pro forma net income per common share and
pro forma weighted average fair value of options granted, with related
assumptions, assuming IVAX had adopted the fair value method of accounting for
all stock-based compensation arrangements consistent with the provisions of SFAS
No. 123, using the Black-Scholes option pricing model for all options granted
after January 1, 1995, are indicated below:
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
----------- ----------- ----------
Net income as reported 243,263 $ 131,044 $ 70,722
Pro forma net income 218,844 114,098 66,298
Basic net income per share as reported 1.22 0.67 0.35
Pro forma basic net income per share 1.10 0.47 0.33
Diluted net income per share as reported 1.19 0.64 0.34
Pro forma diluted net income per share 1.07 0.45 0.32
Pro forma weighted average fair value of options granted $ 12.03 $ 8.31 $ 3.24
Expected life (years) 5.6 5.4 4.1
Risk-free interest rate 3.85-5.155% 5.44-6.63% 4.57-6.08%
Expected volatility 30% 25% 27%
Dividend yield 0% 0% 0%
As the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. In
addition, valuations are based on highly subjective assumptions about the
future, including stock price, volatility and exercise patterns.
EMPLOYEE STOCK PURCHASE PROGRAM - On June 17, 1999, the IVAX
Corporation 1999 Employee Stock Purchase Plan ("ESPP") was approved at the
Annual Meeting of Shareholders. IVAX' Board of Directors also approved the
purchase of common stock in the open market, as needed, for the ESPP. The
maximum number of shares available for sale under the ESPP is 5,250 subject to
future increases as stated in the plan. The ESPP became effective January 1,
2000, for employees based in the United States and Puerto Rico and allows them
to purchase IVAX common stock at 85% of the fair market value on the enrollment
date or exercise date, whichever is lower. The maximum amount of stock an
employee may purchase in a year is $25 and subsequent resale is restricted as
stated in the plan. The ESPP is accounted for as a non-compensatory plan.
SHARE REPURCHASE PROGRAM - In December 1998, IVAX' Board of Directors
approved an increase of 14,063 shares to a total of 23,438 shares of IVAX common
stock that may be repurchased. In April, June and November 1999, IVAX' Board of
Directors approved increases of 9,375, 2,813 and 9,375 shares, respectively, in
the share repurchase program. In August 2000, IVAX' Board of Directors approved
an increase of 12,500 shares, bringing the total authorized for repurchase to
57,500 shares. Cumulatively through December 31, 2001, IVAX repurchased 49,742
shares of common stock at a total cost, including commissions, of $494,023.
Under Florida law, unless otherwise designated by IVAX' Board of Directors,
repurchased shares constitute authorized but unissued shares.
PUT OPTIONS - During 2001, in connection with the share repurchase
program, IVAX issued eight free-standing put options for 1,850 shares, bearing
strike prices ranging from $19.00 to $31.50, expiring from November 2001 through
April 2002 and collected premiums totaling $4,670 that were credited to "Capital
in excess of par value" in the accompanying consolidated balance sheet at
December 31, 2001. In addition, IVAX rolled forward (renewed) three put options
for 875 shares into two put options for 875 shares prior to expiration, bearing
strike prices ranging from $29.80 to $31.80, expiring from May 2001 through
January 2002 and collected premiums totaling $153 that were credited to "Capital
in excess of
F-28
par value" in the accompanying consolidated balance sheet at December 31, 2001.
In the event the put options are exercised, IVAX may elect to settle by one of
three methods: physical settlement by payment in exchange for IVAX shares, net
cash settlement or net share settlement. These European style options are
exercisable only on the respective expiration dates and would be exercised "in
the money" once the strike price per option exceeds the market value of IVAX'
common stock on the expiration date of the option.
Seven free-standing put options for 2,063 shares of IVAX common stock
expired unexercised; one of which was issued in 2001 for 200 shares. Five put
options were exercised for 1,638 shares by the holders at strike prices ranging
from $27.68 to $31.50 during 2001. IVAX elected the physical settlement method
upon the exercise of one put option for 281 shares and paid $7,785 in exchange
for the underlying shares. IVAX elected the net share settlement method for the
exercises of the remaining four put options for 1,356 shares and issued 314
shares of IVAX' common stock in settlement of the obligation.
At December 31, 2001, IVAX had five put options for 1,200 shares
outstanding, bearing strike prices from $19.00 to $31.80, and expiring between
January 2002 to April 2002. The maximum potential repurchase obligation under
the physical settlement method is $34,650. In the event the put options expire
unexercised, the obligation associated with these instruments will be
extinguished. At December 31, 2001, the market value of IVAX' common stock was
$20.14, which was lower than the strike prices for four outstanding put options
for 950 shares with a maximum repurchase obligation under the physical
settlement method of $29,900. Under the net settlement method the repurchase
obligation would be $10,800.
During 2001, IVAX repurchased 6,779 shares of its common stock at a
total cost, including commissions, of $155,097.
During 2000, IVAX issued twelve put options for 3,675 shares of its
common stock; 625 of which have expired as of December 31, 2000, and collected
$11,259 in premiums that were credited to "Capital in excess of par value" in
the accompanying consolidated balance sheet at December 31, 2000. Prior to
adopting EITF 00-19 in 2001, IVAX reclassified the maximum repurchase obligation
under the physical settlement method of $84,503 from "Capital in excess of par
value" into a separate temporary equity account "Put options" in the
accompanying consolidated balance sheet at December 31, 2000.
DIAGNOSTICS STOCK OPTION PLAN - Effective June 29, 1999, the Board of
Directors of IVAX Diagnostics, Inc., a wholly-owned subsidiary of IVAX at the
time, approved the IVAX Diagnostics, Inc. 1999 Stock Option Plan. The plan
permits the issuance of options to employees, non-employee directors and
consultants of IVAX Diagnostics to purchase up to 2,000 shares of the 50,000
authorized shares of IVAX Diagnostics, Inc. In June and August 1999,
non-qualified options of 1,145 shares of common stock were granted to employees
of IVAX Diagnostics with an exercise price of $.73 per share, a vesting schedule
of 50% at the end of year two, 25% at the end of years three and four and an
expiration date of June to August 2006. As of December 31, 2001, options for
1,109 shares of common stock were outstanding.
CONVERTIBLE DEBT - See Note 7, Debt, for comments regarding convertible
subordinated notes.
DIVIDENDS - IVAX did not pay dividends during the years ended December
31, 2001, 2000 and 1999.
F-29
(12) BUSINESS SEGMENT INFORMATION:
IVAX is a multinational company with subsidiaries that operate in the
pharmaceutical business and are engaged in the research, development,
manufacture, marketing and sale of pharmaceutical products. Pharmaceutical
products include prescription drugs and over-the-counter products. IVAX reviews
financial information, allocates resources and manages its business by major
operating subsidiary. However, IVAX' pharmaceutical subsidiaries utilize similar
production processes, and sell similar types of products to similar types of
customers under similar regulatory environments using similar methods of
distribution. IVAX also expects these subsidiaries to have similar long-term
financial performance. Since these pharmaceutical subsidiaries meet the
aggregation criteria under paragraph 17 of Statement of Financial Accounting
Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
Information, the pharmaceutical operating subsidiaries are aggregated into one
reportable segment, pharmaceutical, and all other subsidiaries are reported in
Corporate and Other.
To provide additional information, IVAX has disaggregated its
pharmaceutical segment results into the geographic regions in which the
subsidiaries are located. The North America region contains IVAX subsidiaries in
the United States and Canada. The Europe region contains subsidiaries located in
Europe. Latin America consists of subsidiaries in South America. Corporate and
Other includes the diagnostic subsidiaries, animal health subsidiary and
subsidiaries located in other geographic regions as well as corporate activities
and elimination of intercompany transactions.
The information provided is based on internal reports and was developed
and utilized by management for the sole purpose of tracking trends and changes
in the results of the regions. The information, including the allocations of
expense and overhead, was calculated based on a management approach and may not
reflect the actual economic costs, contributions or results of operations of the
regions as stand-alone businesses. If a different basis of presentation or
allocation were utilized, the relative contributions of the regions might differ
but the relative trends would, in management's view, likely not be materially
impacted.
F-30
The table below sets forth net revenues and profits in the regional
presentation.
North Latin Corporate Total
2001 America Europe America & Other IVAX
- ---- ----------- ----------- ----------- ----------- -----------
External net sales $ 582,471 $ 302,569 $ 222,444 $ 36,554 $ 1,144,038
Intercompany sales 2,838 61,267 -- (64,105) --
Other revenues 9,652 55,269 1,740 4,678 71,339
----------- ----------- ----------- ----------- -----------
Net revenues 594,961 419,105 224,184 (22,873) 1,215,377
----------- ----------- ----------- ----------- -----------
Asset impairment and restructuring -- 343 2,024 -- 2,367
Income (loss) from operations 200,054 36,795 32,652 (1,612) 267,889
Interest income 79 2,981 1,933 16,256 21,249
Interest expense (36) (999) (4,506) (36,250) (41,791)
Other income/expense 33,969 (13,152) 4,277 12,171 37,265
Equity earnings of affiliates -- -- 28 1,042 1,070
Tax provision (benefit) 75,407 9,438 13,495 (48,457) 49,883
Income from continuing operations before
minority interest 158,659 16,187 20,889 40,064 235,799
2000
- ----
External net sales $ 319,028 $ 278,627 $ 62,299 $ 39,717 $ 699,671
Intercompany sales 1,638 28,999 -- (30,637) --
Other revenues 20,573 71,996 1,136 29 93,734
----------- ----------- ----------- ----------- -----------
Net revenues 341,239 379,622 63,435 9,109 793,405
----------- ----------- ----------- ----------- -----------
Reversal of restructuring accrual (3,677) (858) -- -- (4,535)
Income from operations 64,121 39,626 6,570 26,415 136,732
Interest income 115 2,219 371 11,281 13,986
Interest expense (20) (135) (55) (14,414) (14,624)
Other income/expense 53,633 (3,741) 816 (34,060) 16,648
Equity earnings of affiliates -- (210) -- 1,059 849
Tax provision (benefit) 40,781 9,993 3,120 (40,680) 13,214
Income from continuing operations before
minority interest 77,068 27,766 4,582 30,961 140,377
1999
- ----
External net sales $ 247,424 $ 290,743 $ 31,469 $ 34,983 $ 604,619
Intercompany sales 461 8,332 -- (8,793) --
Other revenues 26,761 23,570 1,512 20 51,863
----------- ----------- ----------- ----------- -----------
Net revenues 274,646 322,645 32,981 26,210 656,482
----------- ----------- ----------- ----------- -----------
Reversal of asset impairment
and restructuring accrual (1,289) 677 -- -- (612)
Income (loss) from operations 45,745 39,483 2,342 (21,190) 66,380
Interest income 95 931 4 5,112 6,142
Interest expense 53 (188) (84) (5,337) (5,556)
Other income/expense 26,886 (5,157) (735) (1,927) 19,067
Equity earnings of affiliates -- -- -- 446 446
Tax provision (benefit) 9,129 19,679 1,067 (15,025) 14,850
Income (loss) from continuing operations
before minority interest 63,650 15,390 460 (7,871) 71,629
F-31
Subsequent to December 31, 2001, the Argentine peso and Venezuelan
bolivar devalued in relation to the United States dollar. The operating results
in these currencies will decrease when converted into United States dollars.
The following table reconciles long-lived assets by geographic region
to the consolidated total:
North Latin Corporate Total
Year America Europe America & Other IVAX
- ---- ---------- ---------- ---------- ---------- ----------
2001 $ 207,608 $ 226,071 $ 544,638 $ 107,826 $1,086,143
2000 60,624 219,701 63,443 46,728 390,496
1999 54,491 207,188 7,413 21,200 290,292
Long-lived assets exclude the long-term net deferred tax asset included
in "Other assets" on the accompanying consolidated balance sheets.
The following table shows capital expenditures and
depreciation/amortization by region:
Region Capital Expenditures Depreciation/Amortization
- ------ -------------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ------
North America $ 32,491 $ 17,510 $ 6,386 $ 13,324 $ 12,357 $ 8,005
Europe 32,923 31,294 33,588 20,372 15,072 16,446
Latin America 5,903 429 539 12,763 2,576 1,133
IVAX sells products in a large number of countries; however, only two
countries, the United States and the United Kingdom, have net revenues that are
material to consolidated net revenues. Additionally, IVAX has material amounts
of long-lived assets in only those two countries. The following table summarizes
net revenues based on the location of the third party customer and long-lived
assets based on the country of physical location:
United United
Geographic Areas: States Kingdom Other Total
- ----------------- ------------- ------------- ------------ -------------
Net revenues 2001 $ 567,507 $ 262,037 $ 385,833 $ 1,215,377
2000 389,055 220,191 184,159 793,405
1999 303,607 229,769 123,106 656,482
Long-lived assets 2001 317,345 147,891 620,907 1,086,143
2000 106,977 153,021 130,498 390,496
1999 75,569 158,544 56,179 290,292
Net Revenues by Product Type:
Net Revenues
---------------------------------------------
2001 2000 1999
------------ ------------ ------------
Proprietary and branded $ 528,652 $ 377,101 $ 255,572
Brand equivalent 686,725 416,304 400,910
------------ ------------ ------------
Total $ 1,215,377 $ 793,405 $ 656,482
============ ============ ============
No single customer accounted for 10% or more of IVAX' consolidated net
revenues for any of the three years ended December 31, 2001. Other revenues
included in net revenues in the accompanying consolidated statements of
operations consist of license fees, royalties, and development service fees.
Other revenues include $19,402 during 1999 from the settlement of patent
litigation with Abbott Laboratories discussed in Note 13, Commitments and
Contingencies.
F-32
In November 1999, IVAX entered into a three-year product collaboration
and development services agreement with Bristol-Myers Squibb Company ("BMS") in
the areas of inhalation technology and oncology. With respect to inhalation
technology, the agreement calls for IVAX and BMS to collaborate to develop one
or more of BMS' proprietary molecules using IVAX' patented devices, which BMS
would purchase from IVAX. BMS would retain the worldwide rights to market
respiratory products containing its compounds. On the oncology side, BMS'
Taxol(R) (paclitaxel) is the leading anti-cancer drug in the world, with 2000
sales of approximately $1.6 billion. However, Taxol(R) is an injectable product
and is not orally available. As part of the agreement, BMS was granted an option
to negotiate, for six months, a license to IVAX' patented system for making
paclitaxel orally available, which option expired.
(13) COMMITMENTS AND CONTINGENCIES:
SALES OF BUSINESSES AND GAIN ON SALE - Significant assumptions in the
preparation of the financial statements include IVAX' belief that the outcome of
contingencies indemnified by IVAX in the sale of certain businesses will not
have a material effect on future operations and that the probability of a refund
of previously recognized gain on sale of product rights is remote.
LEASES - IVAX leases office, plant and warehouse facilities and
automobiles under non-cancelable operating leases. Motor vehicles, production
equipment and certain manufacturing facilities are also leased under capital
leases. Rent expense for the three years ended December 31, 2001, totaled
approximately $8,686, $6,360 and $5,626, respectively. The future minimum lease
payments under non-cancelable capital leases and their related assets recorded
at December 31, 2001 and 2000, were not material. The future minimum lease
payments under non-cancelable operating leases with initial or remaining terms
of one year or more at December 31, 2001, were as follows:
Operating
Leases
---------
2002 $ 5,073
2003 2,959
2004 1,286
2005 402
2006 371
Thereafter 30
-------
Total minimum lease payments $10,121
=======
LEGAL PROCEEDINGS - In late April 1995, IVAX Pharmaceuticals NV (which
was formerly named Zenith Laboratories, Inc.), one of IVAX' wholly-owned
subsidiaries ("Zenith"), received approvals from the FDA to manufacture and
market the antibiotic cefaclor in capsule and oral suspension formulations.
Cefaclor is the brand equivalent of Ceclor(R), a product of Eli Lilly and
Company ("Lilly"). On April 27, 1995, Lilly filed a lawsuit against Zenith and
others styled ELI LILLY AND COMPANY V. AMERICAN CYANAMID COMPANY, BIOCRAFT
LABORATORIES, INC., ZENITH LABORATORIES, INC. AND BIOCHIMICA OPOS S.P.A. in the
United States District Court for the Southern District of Indiana, Indianapolis
Division. In general, the lawsuit alleged that Biochimica Opos S.p.A. ("Opos"),
Zenith's cefaclor raw material supplier, manufactured cefaclor raw material in a
manner which infringed two process patents owned by Lilly, and that Zenith and
the other defendants knowingly and willfully infringed and induced Opos to
infringe the patents by importing the raw material into the United States. The
lawsuit sought to enjoin Zenith and the other defendants from infringing or
inducing the infringement of the patents and from making, using or selling any
product incorporating the raw material provided by Opos, and sought an
unspecified amount of monetary damages and the destruction of all cefaclor raw
material manufactured by Opos and imported into the United States. In August
1995, the Court denied Lilly's motion for preliminary injunction which sought to
prevent Zenith from selling cefaclor until the merits of Lilly's allegations
could be determined at trial. On
F-33
May 10, 1996, the United States Court of Appeals for the Federal Circuit
affirmed the district court's denial of Lilly's motion for preliminary
injunction. On February 28, 1997, Lilly filed an amended complaint alleging the
infringement of an additional patent. Lilly subsequently filed a second amended
complaint but did not revise its allegations regarding Zenith. Zenith asserted a
counterclaim, alleging antitrust violations. On December 21, 2001, this matter
was settled and each party dismissed their claims accordingly.
On December 21, 1998, an action purporting to be a class action, styled
LOUISIANA WHOLESALE DRUG CO. VS. ABBOTT LABORATORIES, GENEVA PHARMACEUTICALS,
INC. AND ZENITH GOLDLINE PHARMACEUTICALS, INC., was filed against IVAX
Pharmaceuticals and others in the United States District Court for the Southern
District of Florida, alleging a violation of Section 1 of the Sherman Antitrust
Act. Plaintiffs purport to represent a class consisting of customers who
purchased a certain proprietary drug directly from Abbott Laboratories during
the period beginning on October 29, 1998. Plaintiffs allege that, by settling
patent-related litigation against Abbott in exchange for quarterly payments, the
defendants engaged in an unlawful restraint of trade. The complaint seeks
unspecified treble damages and injunctive relief. Eighteen additional class
action lawsuits containing allegations similar to those in the LOUISIANA
WHOLESALE case were filed in various jurisdictions between July 1999 and
February 2001, the majority of which have been consolidated with the LOUISIANA
WHOLESALE case. On December 13, 2000, plaintiffs' motion for summary judgement
on the issue of whether the settlement agreement constituted a PER SE violation
of Section 1 of the Sherman Antitrust Act in the LOUISIANA WHOLESALE case was
granted. IVAX Pharmaceuticals has sought leave to appeal to the United States
Court of Appeals for the Eleventh Circuit. On March 13, 2000, the Federal Trade
Commission ("FTC") announced that it had issued complaints against, and
negotiated consent decrees with, Abbott Laboratories and Geneva Pharmaceuticals
arising out of an investigation of the same subject matter that is involved in
these lawsuits. The FTC took no action against IVAX Pharmaceuticals. Settlement
has been reached with those plaintiffs representing approximately one third of
the direct purchaser class.
IVAX Pharmaceuticals has been named in a number of individual and class
action lawsuits in both state and federal courts involving the diet drug
combination of fenfluramine and phentermine, commonly known as "fen-phen".
Generally, these lawsuits seek damages for personal injury, wrongful death and
loss of consortium, as well as punitive damages, under a variety of liability
theories including strict products liability, breach of warranty and negligence.
IVAX Pharmaceuticals did not manufacture either fenfluramine or phentermine, but
did distribute the brand equivalent version of phentermine manufactured by Eon
Labs Manufacturing, Inc. ("Eon") and Camall Company. Although IVAX
Pharmaceuticals had a very small market share, to date, IVAX Pharmaceuticals has
been named in approximately 5,027 cases and has been dismissed from
approximately 4,757 of these cases, with additional dismissals pending. IVAX
Pharmaceuticals intends to vigorously defend all of the lawsuits, and while
management believes that its defense will succeed, as with any litigation, there
can be no assurance of this. Currently Eon is paying for approximately 50% of
IVAX Pharmaceuticals' costs in defending these suits and is fully indemnifying
IVAX Pharmaceuticals against any damages IVAX Pharmaceuticals may suffer as a
result of cases involving product manufactured by Eon. In the event Eon
discontinues providing this defense and indemnity, IVAX Pharmaceuticals has its
own product liability insurance. While IVAX Pharmaceuticals' insurance carriers
have issued reservations of rights, IVAX Pharmaceuticals believes that it has
adequate coverage. Although it is impossible to predict with certainty the
outcome of litigation, in the opinion of management, this litigation will not
have a material adverse impact on IVAX' financial condition or results of
operation.
On March 7, 2000, individuals purporting to be IVAX' shareholders filed
a class action complaint styled GOLDFISHER V. IVAX CORPORATION, ET AL. against
IVAX and certain of IVAX' current and former officers and directors in the
Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida. The
plaintiff seeks to act as the representative of a class consisting of all
purchasers of IVAX' common
F-34
stock between December 19, 1997, and the date of class certification. The
complaint generally alleges that IVAX' adoption of a shareholder rights plan
containing a provision that would limit the ability of certain members who might
be added to the Board of Directors following a change of control to approve a
decision to redeem the rights, which is commonly known as a "dead hand"
provision, is a violation of the Florida Business Corporation Act and IVAX'
articles of incorporation and by-laws. Plaintiffs seek an injunction
invalidating this provision, as well as damages in an unspecified amount which,
in the opinion of management, would not be material. On February 8, 2001, a
motion for summary judgment was granted in IVAX' favor, and on January 4, 2002,
Plaintiff's motion for attorneys' fees was denied.
PACLITAXEL RELATED LITIGATION
On March 26, 1998, Bristol Myers Squibb Company ("BMS") filed a
complaint in the United States District Court for the District of New Jersey
styled BRISTOL MYERS SQUIBB COMPANY V. ZENITH GOLDLINE PHARMACEUTICALS, INC., ET
AL. alleging patent infringement of two of its patents relating to Taxol(R).
IVAX Pharmaceuticals filed various counterclaims based on antitrust and unfair
competition. On March 3, 2000, the court granted IVAX Pharmaceuticals' motion
for summary judgment of invalidity. On April 17, 2000, BMS filed an appeal. On
April 20, 2001, the appellate court affirmed the district court's grant of
summary judgment of invalidity with respect to all but two of the asserted
claims of Bristol's `803 and `537 patents. The appellate court remanded the case
to the district court for further proceedings on these two claims. On January
16, 2002, this matter was settled in its entirety with both parties dismissing
their remaining claims with prejudice.
On August 11, 2000, American BioScience, Inc. ("ABI") filed a complaint
in the United States District Court for the Central District of California
styled AMERICAN BIOSCIENCE, INC. V. BRISTOL MYERS SQUIBB COMPANY for a temporary
restraining order and preliminary injunction compelling BMS to list in the FDA's
Orange Book ABI's `331 patent, which purportedly covers BMS's Taxol(R) product.
The listing of the patent in the FDA's Orange Book would have the effect of
blocking brand equivalent competition. A hearing was held on September 6, 2000,
and the Court denied ABI's request for preliminary injunction, declined to
approve the settlement between ABI and BMS and dismissed ABI's complaint and
ordered that BMS de-list the `331 patent. ABI appealed and sought a stay of the
Order from the Ninth Circuit Court of Appeals, which was denied on September 13,
2000. The appeal remains pending.
On September 7, 2000, ABI filed a lawsuit for patent infringement
styled AMERICAN BIOSCIENCE, INC. V. BAKER NORTON PHARMACEUTICALS, INC., ZENITH
GOLDLINE PHARMACEUTICALS, INC., AND IVAX CORPORATION in the United States
District Court for Central District of California alleging infringement of its
`331 patent, which purports to cover paclitaxel, and seeking damages in an
unspecified amount. On January 10, 2002, Zenith's motion for summary judgment
was granted and the court held the patent was invalid. American BioScience, Inc.
has filed a motion for reconsideration which was denied on March 2, 2002.
On September 20, 2000, ABI filed a complaint in the United States
District Court for the District of Columbia styled AMERICAN BIOSCIENCE, INC. V.
DONNA E. SHALALA, ET AL., which sought by temporary restraining order and
preliminary injunction a rescission of Baker Norton Pharmaceuticals' final
marketing approval by the FDA for its brand equivalent paclitaxel product. Both
BMS and Baker Norton Pharmaceuticals intervened in the action. On October 3,
2000, the Court denied ABI's request for relief. ABI filed an appeal and on
March 30, 2001, the appellate court vacated the district court's decision and
remanded the case based on the lack of administrative record from the FDA. The
FDA filed an administrative record and ABI then renewed its motion for a
temporary restraining order and preliminary injunction. On April 19, 2001, the
district court again denied ABI's motion and ABI appealed. On November 6, 2001,
the appellate court ordered the district court to vacate the FDA's approval of
the IVAX' ANDA and remanded the matter to the agency. On January 25, 2002, the
FDA vacated IVAX'
F-35
approval for paclitaxel and reinstated it the same day based on the delisting by
Bristol Myers Squibb of the `331 patent in the FDA's Orange Book.
IVAX intends to vigorously defend each of the foregoing lawsuits, but
their respective outcomes cannot be predicted. Any of such lawsuits, if
determined adversely to IVAX, could have a material adverse effect on IVAX'
financial position and results of operations. IVAX' ultimate liability with
respect to any of the foregoing proceedings is not presently determinable.
IVAX is involved in various other legal proceedings arising in the
ordinary course of business, some of which involve substantial amounts. In order
to obtain brand equivalent approvals prior to the expiration of patents on
branded products, and to benefit from the exclusivity allowed to ANDA applicants
that successfully challenge these patents, IVAX frequently becomes involved in
patent infringement litigation brought by branded pharmaceutical companies.
Although these lawsuits involve products that are not yet marketed and therefore
pose little or no risk of liability for damages, the legal fees and costs
incurred in defending such litigation can be substantial. While it is not
feasible to predict or determine the outcome or the total cost of these
proceedings, in the opinion of management, based on a review with legal counsel,
any losses resulting from such legal proceedings will not have a material
adverse impact on IVAX' financial position or results of operations.
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following tables summarize selected quarterly data of IVAX for the
years ended December 31, 2001 and 2000:
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -------------
2001
- ----
Net revenues(3) $ 259,932 $ 301,781 $ 321,990 $ 331,674 $ 1,215,377
Gross profit 136,208 158,443 171,862 165,276 631,789
Income from continuing operations 60,132 67,863 54,341 53,807 236,143
Net income 60,132 67,863 61,461 53,807 243,263
Basic earnings per common share:
Continuing operations 0.30 0.34 0.27 0.27 1.18
Extraordinary item -- -- 0.04 -- 0.04
Net earnings 0.30 0.34 0.31 0.27 1.22
Diluted earnings per common share:
Continuing operations 0.29 0.33 0.26 0.27 1.15
Extraordinary item -- -- 0.04 -- 0.04
Net earnings 0.29 0.33 0.30 0.27 1.19
2000
- ----
Net revenues $ 183,258 $ 184,827 $ 182,566 $ 242,754 $ 793,405
Gross profit 88,085 89,620 88,174 117,623 383,502
Income from continuing operations (1) 26,666 32,480 30,920 49,703 139,769
Net income (2) 20,195 30,226 30,920 49,703 131,044
Basic earnings per common share:
Continuing operations 0.14 0.17 0.16 0.25 0.71
Extraordinary item -- (0.01) -- -- (0.01)
Net earnings 0.11 0.16 0.16 0.25 0.67
Diluted earnings per common share:
Continuing operations 0.13 0.16 0.15 0.24 0.68
Extraordinary item -- (0.01) -- -- (0.01)
Net earnings 0.10 0.15 0.15 0.24 0.64
F-36
(1) The second, third and fourth quarters of 2000 include reversals of
previously recorded restructuring reserves of $3,144, $895 and $496,
respectively.
(2) The first quarter of 2000 includes a cumulative effect of a change in
accounting principle charge of $6.5 million which was recorded during
the fourth quarter. The first, second, third and fourth quarters
include $1,245, $160, $160 and $160, respectively, pretax increases in
other revenue from amortization of deferred revenue related to the
accounting change.
(3) As part of IVAX' normal review of estimates and reserve levels, during
the fourth quarter of 2001, certain sales return and allowance reserves
amounting to $8,000 that had been established prior to 1998 were
determined to no longer be necessary and were reversed.
(15) RELATED PARTY TRANSACTIONS:
IVAX paid $2,023, $1,969 and $1,637 during 2001, 2000 and 1999,
respectively, to PharmAir Corporation for use of an airplane. PharmAir
Corporation is indirectly, beneficially owned by IVAX' Chairman and CEO.
(16) SUBSEQUENT EVENTS:
During January 2002, IVAX repaid $48,000 of U.S. denominated loans held
by an Argentine subsidiary. This resulted in a pretax foreign exchange loss of
approximately $2,800.
During January and February 2002, IVAX rolled forward three put options
for 750 shares that bore strike prices ranging from $31.50 to $31.80. No
additional premiums were collected. These put options have strike prices ranging
from $31.90 to $32.28 and expire between April and May 2002.
During February 2002, IVAX repurchased $25,000 of 4.5% Convertible
Senior Subordinated Notes for $20,787, plus accrued interest of $313, and wrote
off debt issuance costs of $594. This resulted in an extraordinary gain on
extinguishment of debt of approximately $2,400, net of tax.
IVAX elected the net share settlement method to settle one put option
for 200 shares bearing a strike price of $31.00 that expired on March 1, 2002.
IVAX issued 160 shares of IVAX' common stock in settlement of this obligation on
March 5, 2002.
Through March 6, 2002, IVAX repurchased 986 shares of its stock at a
total cost, including commissions, of $17,566.
On March 15, 2002, the Board of Directors authorized the repurchase of
an additional 10,000 shares of common stock under our share repurchase program.
F-37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of IVAX Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements included in IVAX Corporation's annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 12, 2002 (except with respect to the
matters discussed in Note 16, as to which the date is March 15, 2002). Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The Financial Statement Schedule II listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This financial statement schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 12, 2002.
SCHEDULE II
IVAX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2001
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance At Charged to
Beginning Cost and Net Balance At
Description of Year Expenses Deductions Other End of Year
- ----------- ------- ---------- ---------- ------ -----------
Year ended December 31, 1999 $22,834 4,147 (3,747) (1,176) $22,058
======= ======= ======= ======= =======
Year ended December 31, 2000 $22,058 (132) (1,680) (543) $19,703
======= ======= ======= ======= =======
Year ended December 31, 2001 $19,703 1,143 (2,575) 3,399 $21,670
======= ======= ======= ======= =======
ENVIRONMENTAL AND LITIGATION ACCRUAL RELATED TO DISCONTINUED OPERATIONS
Balance At Charged to
Beginning Cost and Net Balance At
Description of Year Expenses Deductions End of Year
- ----------- ---------- ---------- ---------- -----------
Year ended December 31, 1999 $4,436 308 (1,524) $3,220
====== === ====== ======
Year ended December 31, 2000 $3,220 -- (1,636) $1,584
====== === ====== ======
Year ended December 31, 2001 $1,584 663 (346) $1,901
====== === ====== ======
RESTRUCTURING RESERVES
Employee
Termination Plant
Benefits Closures Total
----------- -------- --------
Balance at January 1, 1999 $ 5,774 $ 8,260 $ 14,034
Reversals of restructuring costs charged in prior years (73) -- (73)
Cash payments during 1999 (4,264) (3,539) (7,803)
Non-cash activity 123 (298) (175)
-------- -------- --------
Balance at December 31, 1999 1,560 4,423 5,983
Reversals of restructuring costs charged in prior years (628) (3,907) (4,535)
Cash payments during 2000 (795) (422) (1,217)
Non-cash activity (27) 525 498
-------- -------- --------
Balance at December 31, 2000 110 619 729
Accrual of (reversals of prior years) restructuring costs 2,395 (28) 2,367
Cash payments during 2001 (2,756) (344) (3,100)
Non-cash activity 718 143 861
-------- -------- --------
Balance at December 31, 2001 $ 467 $ 390 $ 857
======== ======== ========
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
10.31 Termination Agreement dated March 20, 1998 by and among NaPro BioTherapeutics,
Inc., IVAX Corporation, Baker Norton Pharmaceuticals, Inc. and D & N Holding Company
(Confidential Treatment Requested).
21 Subsidiaries of IVAX Corporation.
23 Consent of Arthur Andersen LLP.
99.1 Letter Containing Certain Representations Regarding Arthur Andersen LLP.