Back to GetFilings.com
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 COMMISSION FILE NUMBER 1-09623
DECEMBER 31, 2002
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
LONDON 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [X] No [ ]
As of February 28, 2003, there were 195,189,863 shares of Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates
of the registrant on June 28, 2002, was approximately $1.7 billion, based on the
closing price on the American Stock Exchange on such date of $10.80 per share.
Solely for the purpose of this calculation, shares held by directors, executive
officers and 10% shareholders of the registrant have been excluded. Such
exclusion should not be deemed a determination or an admission by the registrant
that these individuals are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Part III is incorporated by reference to
portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Registrant's 2002 year end.
IVAX CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 26
Item 3. Legal Proceedings....................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders..................................... 29
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................... 31
Item 6. Selected Financial Data................................................................. 32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 47
Item 8. Financial Statements and Supplementary Data............................................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 48
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 48
Item 11. Executive Compensation.................................................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 49
Item 13. Certain Relationships and Related Transactions.......................................... 49
Item 14. Controls and Procedures................................................................. 49
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.......................... 50
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, the United Kingdom and Latin America.
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, the United States, Puerto Rico and the U.S.
Virgin Islands and Venezuela. We conduct our research and development programs
in Hungary, India, the United Kingdom and the United States. We also have
marketing and sales operations in Azerbaijan, Croatia, Estonia, Finland, France,
Hong Kong, Kazakhstan, Latvia, Lithuania, Peru, Poland, Russia, the Slovak
Republic, Sweden, Switzerland, Taiwan, Ukraine, United Arab Emirates and
Uzbekistan 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 2002, we spent $76.0
million for company-sponsored research and development activities compared to
$88.0 million in 2001 and $65.3 million in 2000.
Among the proprietary compounds in development that have either entered
or that we expect to enter clinical trials in the near future are:
o Paxoral(TM)an oral form of paclitaxel;
o a compound for the treatment of multiple sclerosis and epilepsy;
o a compound for the treatment of inflammation disorders;
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, HIV infection and neurological disorders such as
Parkinson's disease.
We believe that our research programs 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 certain drugs.
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 we expect the acquisition to:
o be accretive to earnings;
o allow us to leverage our expertise in our areas of therapeutic
focus by adding new products or product development capabilities;
o offer geographic expansion opportunities into key strategic
markets; and
o allow us to penetrate further our existing markets.
In addition to business acquisitions, we will continue to actively
pursue strategic product acquisitions and other collaborative arrangements.
2
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. In 2000, we began marketing proprietary products through
our subsidiaries in the United States and in Eastern Europe.
We have completed acquisitions of pharmaceutical companies and
facilities in Argentina, Chile, Mexico and Venezuela, which complement our
existing 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 further integrate operations and
are continuously 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 and final
dosage form cyclosporin, a drug used to prevent rejection in organ transplant
recipients. Cyclosporin is also used in conjunction with 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.
We have substantial expertise in the development, manufacture and
marketing of respiratory drugs, primarily for asthma, in metered-dose inhaler
formulations. Our subsidiary in the United Kingdom, Norton Healthcare Limited,
trading as IVAX Pharmaceuticals UK, is the third largest respiratory company in
that market. At the core of our respiratory franchise are advanced delivery
systems, which include a patented breath-activated metered-dose inhaler called
Easi-Breathe(R) and a patented dry powder inhaler called Airmax(TM), 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 Easi-Breathe(R) through our subsidiaries in
France, Ireland, Poland, the United Kingdom, the Czech Republic, the Slovak
Republic and Mexico.
We have pioneered the development of aerosol products that do not
contain CFCs (chlorofluorocarbon), 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 May 2001, we received approval in the United Kingdom,
Germany and
3
Ireland, respectively, for a CFC-free presentation of albuterol. Beclomethasone
and albuterol are two of the most widely-prescribed products for respiratory
diseases.
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. In March 2002, we also acquired from
the Roche Group 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.
In April 2002, we entered into an exclusive U.S. agreement with
Minnesota Mining and Manufacturing Company, also known as 3M, related to the
QVAR(R) brand (beclomethasone dipropionate) inhalation aerosol, an inhaler
prescribed to treat chronic asthma. QVAR(R) is a novel metered-dose inhaler that
delivers asthma medicine via a non-ozone depleting HFA (hydrofluoroalkane)
aerosol rather than conventional CFC propellant. Under the terms of the
agreement, we have obtained exclusive U.S. rights to the QVAR(R) product as well
as a non-exclusive worldwide license to certain 3M patents covering HFA
formulations of various asthma drugs. In addition, in 2007 we can exercise an
option to obtain ownership of the U.S. QVAR(R) trademark, as well as related
patents and the NDA. QVAR(R) is currently a registered trademark of 3M through
its subsidiary, Riker Laboratories, Inc. 3M manufactures the QVAR(R) product for
us under a long-term contract.
In January of 2003 we entered into a license agreement with Novartis
Pharma AG to utilize IVAX' patented multi-dose dry powder inhaler, Airmax(TM),
for Novartis' trademarked medicines Foradil(R) (formoterol) and Miflonide(R)
(budesonide) in the European Union and certain other countries. IVAX will
register and manufacture the products. Novartis will be the exclusive
distributor of the new products in some countries, while we may distribute them
in others jointly with Novartis.
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.
RESPIRATORY
INHALATION PRODUCTS. In light of international agreements calling for
the eventual phase-out of CFC, we are developing CFC-free inhalation aerosol
products using HFA propellants and powder formulations. 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. In the
United States, Phase III clinical trials to support marketing approval of an
albuterol CFC-free formulation in our standard metered-dose inhaler have been
completed and an NDA was submitted for this product in January 2003.
4
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 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 January 2003 we entered into a license agreement with
Novartis Pharma AG to utilize our multi-dose dry powder inhaler for Novartis'
Foradil(R) (formoterol) and Miflonide(R) (budesonide) in the European Union and
certain other countries.
We are continuing to develop the Easi-Breathe(R) inhaler for use with
various compounds. During 2003, we plan to complete Phase III clinical trials
for Volare(TM) in Easi-Breathe(R). In addition, Phase III clinical trials for
QVAR(R) in Easi-Breathe(R) are scheduled to begin in 2003.
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 HFA 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. In our
license agreement with 3M, we have also obtained access to several of 3M's
patented HFA based formulations.
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
currently marketing paclitaxel injection in the United States under the name
Onxol(TM) and in other countries under the name Paxene(R). 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. We have completed Phase II clinical trials
with patients with advanced lung cancer and advanced stomach 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. We completed a Phase I trial of TP-38 as a treatment of malignant
brain tumors. Preparations for large multinational Phase II studies in patients
with less heavily pre-treated glioblastoma are in progress.
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.
5
E2CDS. In March 2002, we completed a pilot Phase II study in
postmenopausal women of our brain targeted estrogen, E2CDS. In this study, LH
levels, normally elevated in postmenopausal women, were suppressed following
administration of E2CDS and plasma levels of estradiol were below normal
pre-menopausal levels. Lower plasma levels should reduce the risks associated
with hormone replacement therapy. We intend to commence studies to determine the
appropriate dose for the treatment of postmenopausal hot flashes.
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 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 types of drugs. Initial applications are expected
to treat asthma (as an inhaled product), allergic rhinitis 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 have commenced Phase II clinical
trials for inflammatory bowel diseases, such as regional ileitis (Crohn's
disease). After successfully completing regulatory inhalation toxicology, we
have started Phase I clinical studies with BNP-166 in the United States towards
the development of the compound to treat allergic rhinitis. We are scheduled to
initiate Phase I clinical trials for the indication of bronchial asthma in 2003.
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 have commenced Phase II clinical trials in the
United States to demonstrate further safety and efficacy in atopic dermatitis.
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
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.,
manufactures and markets approximately 58 brand equivalent prescription drugs in
capsule or tablet forms in an aggregate of approximately 127 dosage strengths.
We also distribute in the United States approximately 178 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 295 brand equivalent
prescription drugs, about half of which we manufacture, in various dosage forms
and dosage strengths, constituting an aggregate of approximately 133 molecules.
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.
6
Brand equivalent products (but not including branded generic products)
represented 56%, 57% and 52% of our revenues for the years ended December 31,
2002, 2001 and 2000, 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 usually 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 2002 we received final FDA approval of 10 ANDAs for 7 molecules,
tentative FDA approval of 2 ANDAs for 2 molecules, approval of 3 ANDs (the
Canadian equivalent of an ANDA) for 3 molecules in Canada, 5 ANDs for 4
molecules were transferred to us from Schein Pharmaceuticals in Canada, approval
of 14 Abridged Marketing Authorization Applications or AMAA's (the European
equivalent of an ANDA) for 6 molecules in the United Kingdom, and approval of 47
AMAA's for 5 molecules in the other European Union (EU) countries.
As of January 1, 2003, we had ANDAs or its foreign equivalent pending
as follows:
NUMBER PENDING COUNTRY
38 (34 molecules) United States
26 (8 molecules) United Kingdom
68 (13 molecules) Other EU Countries
2 (2 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.
CHEMSOURCE CORPORATION. In January 2003, we acquired ChemSource
Corporation, which is based in Puerto Rico. ChemSource Corporation develops,
manufactures and sells active pharmaceutical ingredients for various
pharmaceuticals products, including many products which we currently sell or
have under development.
MERCK SHARP & DOHME FRANCE. In December 2002, we completed the
acquisition of substantially all of the products comprising the generic
pharmaceutical business of Merck & Co, Inc.'s Merck Sharp & Dohme subsidiary in
France.
7
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 and remains
the largest Chilean pharmaceutical company in revenue terms. Through its
Argentine subsidiary, Laboratorio Chile was among the major pharmaceutical
companies in Argentina. Laboratorio Chile manufactures, markets and sells a
broad line of more than 700 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 Indiana 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, hormone replacement therapy and gastrointestinal products. IVAX
Pharmaceuticals Mexico employs approximately 200 medical representatives who
promote IVAX Pharmaceuticals Mexico's products.
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. At the time
of purchase, Elmor was 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. 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 IVAX Drug Research Institute, we obtained a
research capability that includes drug discovery, screening, synthesis and
pre-clinical development. Additionally, 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. 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. 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 the company to 98%. On December 31, 2002 IVAX-CR a.s. was
converted to IVAX Pharmaceuticals s.r.o., a limited liability company, and we
increased our ownership
8
in this company to 100%. IVAX Pharmaceuticals s.r.o. develops, manufactures and
markets a variety of human pharmaceutical and veterinary products, as well as
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 Pharmaceuticals s.r.o. 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. Three of these collaborative
alliances are described below.
SERONO, S.A. In October 2002, we entered into an exclusive worldwide
product development and license agreement for the development and
commercialization of an oral formulation of IVAX' CLADRIBINE for the treatment
of multiple sclerosis with Ares Trading, S.A., an affiliate of Serono, S.A.
CLADRIBINE is an immunosuppressive agent that has demonstrated encouraging
results in Phase II studies.
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.
NOVARTIS PHARMA AG. In January 2003, we entered into a license
agreement with Novartis Pharma AG to utilize our patented multi-dose dry powder
inhaler, Airmax(TM), for Novartis' trademarked medicines Foradil(R) (formoterol)
and Miflonide(R) (budesonide) in the European Union and certain other countries.
LICENSING
We have obtained licenses to technology and compounds for the
development of 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 73% 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)
technology, a clinical technology used worldwide. In addition to an extensive
line of diagnostic kits, IVAX Diagnostics also designs and manufactures
9
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 578 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 and enforce 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
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
10
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. In addition, in
connection with its review of our applications for new products, the FDA
conducts pre-approval and post-approval reviews and plant inspections to
determine whether our systems and procedures comply with good manufacturing
practices and other FDA regulations. Among other things, the FDA may withhold
approval of NDAs, ANDAs or other product applications of a facility if
deficiencies are found at that facility. Vendors that supply to us finished
products or components that we use to manufacture, package or label products are
subject to similar regulation and periodic inspections.
Following such inspections, the FDA may issue notices on Form 483 and
warning letters that could cause us to modify certain activities identified
during the inspection. A Form 483 notice is generally issued at the conclusion
of an FDA inspection and lists conditions the FDA investigators believe may
violate good manufacturing practices or other FDA regulations. Failure to comply
with FDA and other governmental regulations can result in fines, unanticipated
compliance expenditures, recall or seizure of products, total or partial
suspension of production and/or distribution, suspension of the FDA's review of
NDAs, ANDAs or other product applications, enforcement actions, injunctions and
criminal prosecution. Under certain circumstances the FDA also has the authority
to revoke previously granted drug approvals.
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.
11
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.
COMPETITION
The pharmaceutical market is highly competitive and includes many
established companies. Some of our major competitors are:
o Astra Zeneca
o Barr Laboratories, Inc.
o Boehringer Ingelheim
o Bristol-Myers Squibb
o Geneva Pharmaceuticals
o GSK
o Eli Lilly
o Mylan Pharmaceuticals
o Novartis Pharmaceuticals
o Schering-Plough
o Teva Pharmaceuticals
o Watson 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.
12
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 during the 180-day exclusivity period for 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, and in some cases
dramatically. Accordingly, the level of revenues 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;
o our ability to manufacture such products efficiently; and
o our ability to market such products effectively.
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 based on process or other patents that
allegedly are infringed by the brand equivalent products that
automatically delay approval of brand equivalent products because
the approval of the brand equivalent product 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;
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; and
13
o instituting legislative efforts in various states to limit the
substitution of brand equivalent versions of certain types of
branded pharmaceuticals.
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 maximum five-year period for 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 United States market and our
ability to generate revenues associated with these brand equivalent 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.
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, and the
reimbursement policies of third party payors, such as insurance companies,
Medicare and Medicaid. 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, 2003, the dollar amount of backlog orders for IVAX
Pharmaceuticals was $34.4 million compared to $13.2 million as of February 21,
2002, and for IVAX Pharmaceuticals UK it was $0.6 million compared to $0.9
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, a single source. Additionally, in some cases we have listed only one
supplier in applications with the FDA. A problem with the availability of such
approved raw materials could cause production or other delays, and, in the case
of products for which only one approved 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.
14
RETURNS
Based on industry practice in the United States, 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 2002 primarily
due to price changes on certain brand equivalent pharmaceutical products and
changes in sales volume and product mix. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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.
ENVIRONMENTAL MATTERS
We are engaged in a continuing program to comply with federal, state
and local environmental laws and regulations. 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. See "Item 3. Legal Proceedings" for a description of an
environmental proceeding involving one of our subsidiaries.
EMPLOYEES
As of February 28, 2003, we had approximately 8,360 employees
worldwide.
AVAILABLE INFORMATION
Our Internet site is: www.ivax.com. We make available, free of charge
through our website, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after such documents are electronically filed with the Securities and Exchange
Commission. Information contained in our website is not part of this report.
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.
15
RISKS RELATING TO OUR COMPANY
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 COMPONENTS AND RAW MATERIALS OR PRODUCTS COULD
SERIOUSLY AFFECT OUR OPERATIONS.
Some components and 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. Additionally, in some cases we have
listed only one supplier in our applications with the FDA. 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, raw materials, 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.
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.
16
A RELATIVELY SMALL GROUP OF PRODUCTS MAY REPRESENT A SIGNIFICANT PORTION OF OUR
NET REVENUES OR NET EARNINGS FROM TIME TO TIME. IF THE VOLUME OR PRICING OF ANY
OF THESE PRODUCTS DECLINES, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS.
Sales of a limited number of our products often represent a significant
portion of our net revenues or net earnings. This has been particularly relevant
when a product has enjoyed a period of generic marketing exclusivity under the
Hatch-Waxman Act as the first ANDA to be filed containing a paragraph iv
certification for the listed patent. If the volume or pricing of our largest
selling products declines in the future, our business, financial position and
results of operations could be materially adversely affected.
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
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
17
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.
OUR NET REVENUES AND PROFITS WILL BE NEGATIVELY IMPACTED IF WE ARE UNABLE TO
REPLACE OR RENEW LICENSE FEES, ROYALTIES AND DEVELOPMENT SERVICE FEES AS THE
EXISTING RELATED AGREEMENTS EXPIRE OR ARE TERMINATED.
As part of our ongoing business strategy we enter into collaborative
alliances and license arrangements, which permit us to reduce our development
costs and often involve the receipt of an up-front payment, payment of fees upon
completion of certain development milestones and also provide for royalties
based upon sales of the products after successful development. We have received
significant payments in the past from these arrangements and expect that
payments from these arrangements will continue to be an important part of our
business. Our future net revenues and profits will depend and will fluctuate
from period to period, in part, based upon:
o our ability to continue to enter into collaborative alliances and
license agreements, which provide for up-front payments, milestone
payments and royalties;
o our ability to replace or renew license fees, royalties and
development service fees as the existing related agreements expire
or are terminated; and
o our ability to achieve the milestones specified in our license and
development agreements.
DISRUPTION OF PRODUCTION AT OUR PRINCIPAL MANUFACTURING FACILITY COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
Although we have other facilities, a significant amount of our brand
equivalent products are produced at our largest manufacturing facility in Puerto
Rico. A significant disruption at that facility, even on a short-term basis,
could impair our ability to produce and ship products on a timely basis, which
could have a material adverse effect on our business, financial position and
results of operations.
IF WE ARE UNSUCCESSFUL IN OUR COLLABORATIONS OR LICENSING ARRANGEMENTS OUR
OPERATING RESULTS COULD SUFFER.
We have made investments in certain collaborations and licensing
arrangements and may use these and other methods to develop or commercialize
products in the future. These arrangements typically involve other
pharmaceutical companies as partners that may be competitors of ours in certain
markets. In many instances, we will not control these collaborations or the
commercial exploitation of the licensed products, and cannot assure you that
these ventures will be profitable.
OUR RESEARCH AND DEVELOPMENT EXPENDITURES WILL NEGATIVELY IMPACT OUR EARNINGS IN
THE SHORT TERM.
We spent approximately $76.0 million during 2002 and $88.0 million
during 2001 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
18
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.
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.
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.
WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF WAR AND
TERRORISM AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND
THE PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The terrorist attacks in the United States and other countries, which
attacks have brought devastation to many and shaken consumer confidence, have
disrupted commerce throughout the world. The continuing threat of terrorism in
the United States and other countries and heightened security measures, as well
as current and any future military action in response to such threat, may cause
significant disruption to the global economy, including widespread recession. To
the extent that such disruptions result in a general decrease in spending that
could decrease demand for our products, in our inability to effectively market,
manufacture or ship our products, or in financial or operational difficulties
for various suppliers, vendors and customers on which we plan to rely, our
business and results of operations could be materially and adversely affected.
We are unable to predict whether the continuing
19
threat of war and terrorism or the responses to that threat will result in any
long-term commercial disruptions or whether such terrorist activities or
responses will have any long-term material and adverse effects on our business,
results of operations and financial condition.
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 and/or economic 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 for 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. Venezuela was considered a hyperinflationary economic
environment through June 30, 2001. Although Venezuela is no longer considered
hyperinflationary and Argentina is not classified as having a hyperinflationary
economy, each of these economies continues to experience high inflation rates
and devaluation of their respective currencies. The continuing economic
deterioration in Argentina and the continuing political and economic instability
in Venezuela, particularly the labor strikes and other forms of political
protest directed against the Hugo Chavez administration, may adversely impact
our Argentine and Venezuelan operations and our consolidated earnings.
Approximately 19% of our net revenues for 2002 were attributable to our Latin
American operations.
INCREASED INDEBTEDNESS MAY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
On December 31, 2002, we had approximately $915.9 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,
20
these and other factors may affect our ability to make principal and interest
payments on our indebtedness. We anticipate that approximately $93.7 million of
cash flow from operations will be required next year to discharge our annual
obligations on our 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;
o reduce or delay planned capital expenditures; or
o reduce or delay planned research and development 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.
OUR POLICIES REGARDING RETURNS, ALLOWANCES AND CHARGEBACKS, AND MARKETING
PROGRAMS ADOPTED BY WHOLESALERS, MAY REDUCE OUR REVENUES IN FUTURE FISCAL
PERIODS.
Based on industry practice in the United States, brand equivalent
product manufacturers, including us, have liberal return policies and have been
willing to give customers post-sale inventory allowances. Under these
arrangements, from time to time, we give our customers credits on our brand
equivalent products that our customers hold in inventory after we have decreased
the market prices of the same brand equivalent products. If new competitors
enter the marketplace and significantly lower the prices of any of their
competing products, we would likely reduce the price of our product. As a
result, we would be obligated to provide significant credits to our customers
who are then holding inventories of such products, which could reduce sales
revenue and gross margin for the period the credit is provided. Like our
competitors, we also give credits for chargebacks to wholesale customers that
have contracts with us for their sales to hospitals, group purchasing
organizations, pharmacies or other retail customers. A chargeback is the
difference between the price the wholesale customer pays and the price that the
wholesale customer's end-customer pays for a product. Although we establish
reserves based on our prior experience and our best estimates of the impact that
these policies may have in subsequent periods, we cannot ensure that our
reserves are adequate or that actual product returns, allowances and chargebacks
will not exceed our estimates.
INVESTIGATIONS OF THE CALCULATION OF AVERAGE WHOLESALE PRICES MAY ADVERSELY
AFFECT OUR BUSINESS.
Many government and third-party payors, including Medicare, Medicaid,
health maintenance organizations and managed care organizations, reimburse
doctors and others for the purchase of certain prescription drugs based on a
drug's average wholesale price, or AWP, or average manufacturer's price, or AMP.
In the past several years, state and federal government agencies have conducted
ongoing investigations of manufacturers' reporting practices with respect to AWP
and AMP, in which they have suggested that reporting of inflated AWP's or
incorrect AMP's have led to excessive payments for prescription drugs. For
example, beginning in August 2002, we and certain of our subsidiaries, as well
as numerous other pharmaceutical companies, were named as defendants in three
lawsuits filed in the state courts of California alleging improper or fraudulent
practices related to the reporting of AWP of certain products, and other
improper acts in order to increase prices and market shares.
THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH
GAAP. ANY CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
The consolidated and condensed consolidated financial statements
included in the periodic reports we file with the Securities and Exchange
Commission are prepared in accordance with accounting principles generally
accepted in the United States of America, or GAAP. The preparation of financial
statements in accordance with GAAP involves making estimates, judgments and
assumptions that affect reported amounts of assets (including intangible
assets), liabilities, revenues, expenses and income. This includes, but is not
limited to, estimates, judgments and assumptions used in the adoption of the
provisions of SFAS 142, Goodwill and Other Intangible Assets and SFAS 144,
Accounting for the Impairment of Disposal of Long-Lived Assets. Estimates,
judgments and assumptions are inherently subject to change in the future, and
any such changes could result in corresponding changes to the amounts of assets
(including goodwill and other intangible assets), liabilities, revenues,
expenses and income. Any such changes could have a material adverse effect on
our financial position and results of operations.
21
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.
We cannot predict the extent to which we may be affected by legislative
and regulatory developments. We are dependent on receiving FDA and other
governmental or third-party approvals to manufacture, market and ship our
products. Consequently, there is always a risk that we will not obtain FDA or
other necessary approvals, or that the rate, timing and cost of such approvals,
will adversely affect our product introduction plans or results of operations.
We carry inventories of certain product(s) in anticipation of launch and if such
product(s) are not subsequently launched or are not launched when anticipated,
we may be required to write-off the related inventory.
THE CONCENTRATION OF OWNERSHIP AMONG OUR EXECUTIVE OFFICERS AND DIRECTORS MAY
PERMIT THOSE PERSONS TO INFLUENCE OUR CORPORATE MATTERS AND POLICIES.
As of March 14, 2003, our executive officers, directors and one
additional shareholder had or shared voting control over approximately 26% 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.
RISING INSURANCE COSTS COULD NEGATIVELY IMPACT PROFITABILITY.
The cost of insurance, including director and officer, workers
compensation, property, product liability and general liability insurance, have
risen significantly in the past year and are expected to continue to increase in
2003. In response, we may increase deductibles and/or decrease certain coverages
to mitigate these costs. These increases, and our increased risk due to
increased deductibles and reduced coverages, could have a negative impact on our
results of operations, financial condition and cash flows.
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
22
preventing a merger, tender offer or proxy contest, which could have an adverse
effect on the market price of our common stock.
RISKS RELATED 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
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 and managed care organizations. 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.
IF BRANDED PHARMACEUTICAL COMPANIES ARE SUCCESSFUL IN LIMITING THE USE OF BRAND
EQUIVALENT PRODUCTS THROUGH THEIR LEGISLATIVE AND REGULATORY EFFORTS, OUR SALES
OF BRAND EQUIVALENT PRODUCTS MAY SUFFER.
Many branded pharmaceutical companies increasingly have used state and
federal legislative and regulatory means to delay brand equivalent competition.
These efforts have included:
o pursuing new patents for existing products which may be granted
just before the expiration of one patent which could extend patent
protection for additional years or otherwise delay the launch of
brand equivalents products;
o using the Citizen Petition process to request amendments to FDA
standards;
23
o seeking changes to United States Pharmacopeia, an organization
which publishes industry recognized compendia of drug standards;
o attaching patent extension amendments to non-related federal
legislation; and
o engaging in state-by-state initiatives to enact legislation that
restricts the substitution of some brand equivalent drugs, which
could have an impact on products that we are developing.
If branded pharmaceutical companies are successful in limiting the use
of brand equivalent products through these or other means, our sales of brand
equivalent products may decline. If we experience a material decline in brand
equivalent product sales, our results of operations, financial condition and
cash flows will suffer.
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;
o our ability to acquire additional manufacturing and distribution
capabilities;
o our ability to establish additional joint ventures and distribution
channels;
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 develop and market TP-38 for brain cancer;
o our ability to further develop CFC-free inhalation aerosol
products;
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;
24
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 E2CDS;
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;
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 ability to reduce our backlog and manufacture, obtain and
maintain a sufficient supply of products to meet market demand,
retain our customers and meet contractual deadlines and terms;
o that our proposed spending on facilities improvement and expansion
may not be as projected;
o our ability to obtain and maintain FDA approval of our
manufacturing facilities, the failure of which could result in
production stoppage or delays;
o our estimates regarding the capacity of our facilities; and
o our intention to fund 2003 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 and uncertainties related to
the timing or outcome of product development;
o the availability on commercially reasonable terms of raw materials,
particularly raw materials for our paclitaxel product, and other
third-party sourced products;
o our ability to replace or renew license fees, royalties and
development service fees as the related agreements expire or are
terminated;
o difficulties in complying with governmental regulations;
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 (including patent,
trademark and copyright litigation and the United Kingdom National
Health Service Investigation), and the cost, expenses and possible
diversion of management's time and attention arising from such
litigation or investigation;
25
o the impact of new regulations or court decisions or actions by our
competitors regarding the protection of patents and the exclusivity
period for the marketing of branded drugs;
o the impact of the adoption of certain accounting standards;
o our success in acquiring or licensing proprietary technologies that
are necessary for our product development activities;
o the impact of political and economic instability in the countries
in which we operate, particularly Argentina, Venezuela and other
Latin American countries;
o our successful compliance with extensive, costly, complex and
evolving governmental regulations and restrictions;
o our ability to successfully compete in both the branded and brand
equivalent pharmaceutical sectors; and
o other risks and uncertainties detailed herein and from time to time
in our Securities and Exchange Commission filings.
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, Bulgaria, Chile, China, the Czech Republic, Estonia,
Finland, France, Germany, Hong Kong, Hungary, India, Ireland, Italy, Kazakhstan,
Mexico, Latvia, Peru, Poland, Romania, Russia, the Slovak Republic, Sweden,
Switzerland, Taiwan, Ukraine, Uruguay, Uzbekistan, 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; Munro, Argentina; Santiago, Chile; Beijing, China; Opava, Czech
Republic; Runcorn, England; Miami, Florida; Falkenhagen, Germany; Budapest,
Hungary; Waterford, Ireland; Mexico City, Mexico; Ramos Arizpe, Mexico;
Northvale, New Jersey; Cidra, Puerto Rico; Guayama, Puerto Rico, St. Croix, US
Virgin Islands; and Guacara, Venezuela. We own our Budapest, Buenos Aires,
Cidra, Falkenhagen, Guacara, Mexico City, Miami, Munro, Opava and Ramos Arizpe
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 $90.0 million and
$100.0 million in 2003 to improve and expand our pharmaceutical and other
related facilities. We are currently building a new manufacturing facility in
Preston Brook, England and expanding our facility in Puerto Rico. 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 and earthquake casualty
risks. 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.
26
ITEM 3. LEGAL PROCEEDINGS
TERAZOSIN LITIGATION
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 judgment 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. 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. To date, seventeen of the actions naming IVAX
Pharmaceuticals have either been settled or dismissed.
FEN-PHEN LITIGATION
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 5,066 cases and has been dismissed from
approximately 4,879 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, we do not believe this litigation will have a material
adverse impact on our financial condition or results of operation.
AVERAGE WHOLESALE PRICE LITIGATION
On July 12, 2002, an action purporting to be a class action styled JOHN
RICE V. ABBOTT LABORATORIES, INC., ET AL. was filed against IVAX
Pharmaceuticals, Inc. and others in the Superior Court of the State of
California, alleging violations of California's Business & Professional Code
Section 17200 et seq. with respect to the way pharmaceutical companies report
their AWP. Plaintiffs allege that each defendant reported an AWP to Medicare and
Medicaid which materially misrepresented the actual prices paid to defendants by
physicians and pharmacies for prescription drugs. The complaint seeks
27
unspecified damages, including punitive damages, and injunctive relief. Two
other class actions, THOMPSON V. ABBOTT LABORATORIES, INC., ET AL. and TURNER V.
ABBOTT LABORATORIES, INC., ET AL., containing similar allegations against IVAX
Pharmaceuticals, Inc. and others were filed in California courts in August and
September 2002, respectively, as well. We believe that we have substantial
defenses to these claims and will defend ourselves vigorously. However, as with
any litigation, there can be no assurance that we will prevail.
UNITED KINGDOM SERIOUS FRAUD OFFICE INVESTIGATION
In April 2002, we received notice of an investigation by United Kingdom
National Health Service officials concerning prices charged by generic drug
companies, including Norton Healthcare Limited, trading as IVAX Pharmaceuticals
UK, for penicillin-based antibiotics and warfarin sold in the United Kingdom
from 1996 to 2000. This is an investigation by the Serious Fraud Office of the
United Kingdom involving all pharmaceutical companies that sold these products
in the United Kingdom during this period. According to statements by
investigating agencies, this is a complex investigation expected to continue for
some time and there is no indication from the agencies when or if charges will
be made against any of these companies. The company is cooperating fully with
this investigation. In December 2002, the Secretary of State for Health, on
behalf of itself and others, filed a civil claim for damages and interest
against Norton Healthcare, Norton Pharmaceuticals and other defendants alleging
that certain of their actions adversely affected competition in the sale and
supply of warfarin in the United Kingdom between 1996 and 2000. This claim seeks
damages against all defendants in the approximate aggregate amount of 28.6
million Pounds Sterling (approximately $46 million at the December 31, 2002
exchange rate). It is reasonably likely that similar allegations and claims for
damages will be asserted by the Secretary of State for Health against the
companies with respect to the sale of penicillin-based antibiotics. We
presently intend to seek a stay of the civil claim, pending completion of the
United Kingdom Serious Fraud Office investigation.
PACLITAXEL RELATED LITIGATION
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 ("BMS") 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. On December 17, 2002, this case was dismissed as part of the settlement of
the litigation recited below.
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, our 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 December 13, 2002, this
matter was settled and dismissed accordingly.
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.
28
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 our ANDA and remanded the matter to the
agency. On January 25, 2002, the FDA vacated our 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. On December 17, 2002, this case was concluded as part of
the settlement recited above.
ENVIRONMENTAL RELATED PROCEEDING
On January 22, 2003, our subsidiary, ChemSource Corporation, received
an Administrative Compliance Order issued by the United States Environmental
Protection Agency dated January 2, 2003 alleging that ChemSource Corporation was
not in compliance with certain conditions of the National Pollutant Discharge
Elimination System Permit and certain pretreatment standards. The Order also
required that ChemSource Corporation submit particular certified documentation
associated with achieving compliance with the given standards. The Order further
required that ChemSource Corporation submit certified information concerning
stormwater pollution control matters and costs. This claim was tendered to the
sellers of ChemSource Corporation for defense and indemnity based on the terms
of the agreement by which ChemSource Corporation was sold to us.
ChemSource Corporation believes that the issuance of the Order was
unjustified and that it is in compliance with the pretreatment standards imposed
by the Control Authority for purposes of the Pretreatment Program in Puerto Rico
(Puerto Rico Aqueduct and Sewer Authority) and the National Pollutant Discharge
Elimination System permit.
OTHER LITIGATION
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.
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.
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, 2002.
29
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions held and business
experience during the past five years of our executive officers as of March 26,
2003. 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 57, 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 62, 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
Neil Flanzraich, age 59, 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 is
a director of Whitman Education Group, Inc. (proprietary education), IVAX
Diagnostics, Inc. (diagnostic reagent kits), Continucare Corporation (integrated
health care) and RAE Systems, Inc. (gas detection and security monitoring
systems).
PHILLIP FROST, M.D.
Phillip Frost, age 66, 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. He is Chairman of the Board of
Directors of Whitman Education Group, Inc. (proprietary education) and of IVAX
Diagnostics, Inc. (diagnostic reagent kits). He is a director of Northrop
Grumman Corp. (aerospace). 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.
Jane Hsiao, age 55, 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
30
Assurance, Quality Control and Regulatory Affairs of IVAX Research, Inc. She is
a director of IVAX Diagnostics, Inc. (diagnostic reagent kits).
ISAAC KAYE
Isaac Kaye, age 73, has served as our Deputy Chief Executive Officer
since 1990 and as Chairman and Chief Executive Officer of IVAX Pharmaceuticals
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, 2003, there
were approximately 3,829 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 2001 and 2002 as reported by the American Stock Exchange and
restated to give effect to the 5 for 4 stock split paid on May 18, 2001:
2002 HIGH LOW
---- ---- ---
First Quarter $21.07 $15.40
Second Quarter 15.90 10.53
Third Quarter 14.49 10.05
Fourth Quarter 13.59 10.84
2001
First Quarter $31.08 $21.19
Second Quarter 39.60 21.46
Third Quarter 41.87 17.00
Fourth Quarter 23.85 17.00
We did not pay cash dividends on our common stock during 2001 or 2002
and we do not intend to pay any cash dividends in the foreseeable future.
Information regarding our stock option programs is set forth under page
F-31 of this report.
31
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data as of
and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, that has
been 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,
-------------------------------------------------------------------
2002 2001(1) 2000(2) 1999 1998
------------ ------------- ----------- --------- ---------
(in thousands, except per share data)
OPERATING DATA
Net revenues $ 1,197,244 $ 1,215,377 $ 793,405 $ 656,482 $ 625,727
Cost of sales 663,708 583,588 409,903 377,967 405,991
------------ ------------ ----------- --------- ---------
Gross profit 533,536 631,789 383,502 278,515 219,736
Selling 168,952 143,629 92,032 71,131 71,152
General and administrative 118,416 110,477 84,900 85,092 88,434
Research and development 76,041 88,015 65,331 53,403 47,886
Amortization 16,158 19,412 9,042 3,121 3,673
Restructuring costs (reversal of accrual) 4,242 2,367 (4,535) (612) 12,222
------------ ------------ ----------- --------- ---------
Operating income (loss) 149,727 267,889 136,732 66,380 (3,631)
Interest income 8,090 21,249 13,986 6,142 11,972
Interest expense (48,639) (41,791) (14,624) (5,556) (6,857)
Other income (3) 60,321 49,637 15,243 20,106 33,898
Income taxes (3) 51,742 54,065 13,214 14,850 10,047
Minority interest 838 344 (608) (2,085) 403
------------- ------------- ----------- --------- ---------
Income from continuing operations (3) 118,595 243,263 137,515 70,137 25,738
Income from discontinued operations -- -- -- 585 48,904
Cumulative effect of accounting change (4) 4,161 -- (6,471) -- (3,048)
------------ ------------ ----------- --------- ---------
Net income $ 122,756 $ 243,263 $ 131,044 $ 70,722 $ 71,594
============ ============ =========== ========= =========
Basic earnings per common share:
Continuing operations (3) $ 0.61 $ 1.22 $ 0.70 $ 0.35 $ 0.11
Discontinued operations -- -- -- -- 0.22
Cumulative effect (4) 0.02 -- (0.03) -- (0.01)
----------- ------------ ---------- --------- ---------
Net earnings $ 0.63 $ 1.22 $ 0.67 $ 0.35 $ 0.32
=========== =========== ========== ========= =========
Diluted earnings per common share:
Continuing operations (3) $ 0.60 $ 1.19 $ 0.67 $ 0.34 $ 0.11
Discontinued operations -- -- -- -- 0.22
Cumulative effect (4) 0.02 -- (0.03) -- (0.01)
----------- ------------ ---------- --------- ----------
Net earnings $ 0.62 $ 1.19 $ 0.64 $ 0.34 $ 0.32
=========== ============ ========== ========= =========
Weighted average number of
Common shares outstanding:
Basic 195,037 199,099 196,276 201,885 223,342
Diluted 197,378 204,639 204,058 205,501 223,621
Cash dividends per common share $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA
Working capital $ 447,154 $ 597,578 $ 438,490 $124,373 $ 269,511
Total assets 2,047,759 2,105,449 1,068,186 634,514 778,015
Total long-term debt, net of current portion 872,339 913,486 253,755 93,473 77,776
Shareholders' equity 684,863 718,354 484,120 292,371 453,208
OTHER INFORMATION
Ratio of Earnings to Fixed Charges 4.4 7.9 11.0 15.3 5.9
(1) Includes post-acquisition results of companies acquired, primarily
Laboratorio Chile S.A. ("Lab Chile"), IVAX Scandinavia A.B. and IVAX
Pharmaceutical Mexico S.A. de C.V. ("IVAX Mexico"), 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, Inc.
("Laboratories") and Laboratorios Elmor, S.A. ("Elmor"), which were
acquired on September 7, 2000, and June 19, 2000, respectively, both of
which were accounted for under the purchase method of accounting.
32
(3) Certain amounts presented in prior years have been reclassified in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
145, discussed in Note 2, Summary of Significant Accounting Policies, in
the accompanying financial statements.
(4) The cumulative effect of a change in accounting principle relates to
adoption of SFAS No. 142 in 2002, Securities and Exchange Commission Staff
Accounting Bulletin No. 101 in 2000 and AICPA Statement of Position 98-5
in 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Except for the historical information contained herein, the following
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties and other factors that may cause our actual results
to differ materially from those expressed or implied by such forward-looking
statements. We discuss such risks, uncertainties and other factors throughout
this report and specifically under the caption "Risk Factors" in Item 1 of this
Form 10-K. In addition, the following discussion and analysis should be read in
conjunction with the 2002 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Net income for the year ended December 31, 2002, was $122.8 million, or
$0.62 per diluted share, compared to $243.3 million, or $1.19 per diluted share,
in 2001. Income from continuing operations for the year ended December 31, 2002,
was $118.6 million, or $0.60 per diluted share, compared to $243.3 million, or
$1.19 per diluted share, in 2001. As of January 1, 2002, we recorded a
cumulative change in accounting principle credit in the amount of $4.2 million,
or $0.02 per diluted share, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, BUSINESS COMBINATIONS.
NET REVENUES AND GROSS PROFIT
Net revenues for the year ended December 31, 2002, totaled $1.2 billion
consistent with the $1.2 billion reported in 2001. The net revenues decrease in
North American subsidiaries was offset by increases from European subsidiaries,
Latin American subsidiaries and other operations. As a result of exchange rate
differences, net revenues decreased by $45.2 million in 2002 as compared to
2001.
North American subsidiaries generated net revenues of $508.6 million in
2002 compared to $595.0 million in 2001. The $86.4 million, or 15%, decrease in
net revenues was primarily attributable to decreased volume and lower prices of
our paclitaxel product and higher sales returns and allowances, partially offset
by increased volume and prices of certain other brand equivalent pharmaceutical
products, increased sales of proprietary respiratory products and the receipt of
increased product development fees. North American subsidiaries recorded
provisions for sales returns and allowances that reduced gross sales by $576.2
million in 2002 and $370.0 million in 2001. The increase of $206.2 million, or
56%, was primarily due to price changes on certain brand equivalent
pharmaceutical products and changes in sales volume and product mix.
European subsidiaries generated net revenues of $454.4 million in 2002
compared to $419.1 million in 2001. The $35.3 million, or 8%, increase in net
revenues was primarily due to higher sales volumes and favorable effects of
currency exchange rates and $5.8 million of other revenues from a previously
deferred up-front payment received under a license agreement that was terminated
during the third quarter of 2002, partially offset by reduced product
development fees and lower prices for certain brand equivalent products.
European subsidiaries recorded provisions for sales returns and allowances that
reduced gross sales by $51.2 million in 2002 and $34.7 million in 2001. The
increase of $16.5
33
million, or 47%, was primarily due to reduced prices on certain brand equivalent
pharmaceutical products and increased financial discounts.
Latin American subsidiaries generated net revenues of $229.1 million in
2002 compared to $224.1 million in 2001. The $5.0 million, or 2%, increase was
primarily due to revenue generated by Laboratorio Chile S.A. ("Lab Chile"),
which was acquired July 5, 2001, partially offset by unfavorable effects of
currency exchange rates. Latin American subsidiaries recorded provisions for
sales returns and allowances that reduced gross sales by $33.8 million in 2002
and $25.7 million in 2001. The increase of $8.1 million, or 32%, was primarily
due to the inclusion of the operations of Lab Chile for the full year in 2002 as
compared to only a partial period in 2001.
Gross profit for the year ended December 31, 2002, decreased $98.3
million, or 16%, to $533.5 million (45% of net revenues) from $631.8 million
(52% of net revenues) in 2001. The decrease in gross profit percentage was
primarily attributable to reduced volume and pricing of our paclitaxel product.
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 results for 2002 were also adversely impacted by
significant currency devaluations in Argentina and Venezuela, reductions in
government purchases of our products in Mexico and continued pricing pressures
in the United States and the United Kingdom. Revenues from the sale of our
paclitaxel product did not contribute significantly to our revenues and gross
profits during 2002 and, because of the continuing price erosion and
competition, are not likely to contribute significantly in the near future to
our North American results.
As part of our ongoing business strategy, we enter into collaborative
alliances, which allow us to exploit our drug discovery and development
capabilities or provide us with intellectual property and technologies. Many of
these alliances involve licenses to other companies relating to technologies or
compounds under development and, in some cases, finished products. These
licenses permit us to reduce our development costs and often involve the receipt
of an up-front payment and fees upon completion of certain development
milestones and also provide for royalties based on sales of the products. We
have received significant payments in the past from these arrangements,
including, but not limited to, payments under the Product Collaboration and
Development Services Agreement with Bristol-Myers Squibb ("BMS"), which expired
in November 2002. In October 2002, we entered into a new agreement with BMS that
supersedes, effective November 2002, the prior product collaboration agreement.
The new agreement, which in part relates to some of the subject matter of the
earlier agreement, also encompasses additional arrangements between the parties
and has a term of ten months, although the parties may enter into additional
collaboration agreements if certain option rights contained therein are
exercised. We expect that milestone, developmental, royalty and other payments
under existing and new collaboration and license agreements with other parties,
including expected payments under the new agreement with BMS, the development
agreement with Serono S.A. for our cladribine product for the treatment of
multiple sclerosis, and the recently announced license agreement with Novartis
Pharma AG to utilize our Airmax(TM) multi-dose dry powder inhalers for Novartis'
trademarked medicines Foradil(R) (formoterol) and Miflonide(R) (budesonide) in
the European Union and certain other countries, as well as other agreements
which we expect to enter into, will continue to be an important part of our
business. Our future net revenues and profits will depend and will fluctuate
from period to period, in part, based upon our ability to replace or renew
license fees, royalties and development service fees as the related agreements
expire or are terminated. We expect that our future net revenues and profits
will also depend upon:
o our ability to obtain and maintain FDA approval of our
manufacturing facilities;
o our ability to maintain a pipeline of products in development;
o our ability to achieve the milestones specified in our license and
development agreements;
34
o our ability to manufacture, obtain and maintain a sufficient
supply of products to meet market demand, retain our customers and
meet contractual deadlines and terms;
o our ability to develop and rapidly introduce new products;
o the timing of regulatory approval of such products;
o our ability to manufacture such products efficiently;
o the number and timing of regulatory approvals of competing
products;
o our ability to forecast inventory levels and trends at our
customers and their end-customers; and
o our and our competitors' pricing and chargeback policies.
OPERATING EXPENSES
Selling expenses increased $25.3 million, or 18%, to $169.0 million
(14% of net revenues) in 2002 compared to $143.6 million (12% of net revenues)
in 2001. The increase was due to higher expenses associated with the operations
of Lab Chile and IVAX Pharmaceuticals Mexico S.A. de C.V. ("IVAX Mexico"), which
was acquired on February 9, 2001, and increased sales and promotional expenses
at IVAX Laboratories, Inc. ("Laboratories"), our U.S. proprietary respiratory
subsidiary, and our European subsidiaries, partially offset by reduced sales and
promotional expenses at Elvetium Argentina, which was merged into IVAX
Argentina, S.A., during 2002, and favorable effects of foreign currency rates.
General and administrative expenses increased $7.9 million, or 7%, to
$118.4 million (10% of net revenues) in 2002 compared to $110.5 million (9% of
net revenues) in 2001. The increase was primarily attributable to additional
general and administrative expenses from the operations of Lab Chile and IVAX
Mexico and increased expenses at Laboratories and our European subsidiaries,
partially offset by reduced expenses at Elvetium Argentina, favorable effects of
foreign currency rates and lower professional fees at our corporate level. In
June 2002, we received $2.2 million in partial settlement of a vitamin
price-fixing class action lawsuit. In addition, we paid $2.1 million to settle
the Louisiana Wholesale Drug Co. v. Abbott Laboratories and Valley Drug Co. v.
Abbott Laboratories et al. cases.
Research and development expenses decreased $12.0 million, or 14%, to a
total of $76.0 million (6% of net revenues) in 2002 compared to $88.0 million
(7% of net revenues) in 2001. The decrease was primarily due to lower legal fees
paid during 2002 related to patent challenges. 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, collaborative alliances and
liquidity.
During 2002, we incurred $4.2 million of restructuring costs, which
were substantially paid out during the second quarter, at two subsidiaries,
consisting primarily of employee termination benefits.
OTHER INCOME (EXPENSE)
Interest income decreased $13.2 million and interest expense increased
$6.8 million compared to 2001 primarily due to the cash purchases of Lab Chile
on July 5, 2001, and Nasarel(R) and Nasalide(R) on October 16, 2001, and the
issuance of $725.0 million of 4.5% Convertible Senior Subordinated Notes in
2001.
Other income, net increased $10.7 million for the year ended December
31, 2002, compared to the prior year. During 2002, we realized a gain of $6.3
million on the sale of certain intangible assets in the Czech Republic, earned
$15.2 million of royalty and milestone payments recorded as additional
35
consideration for the 1997 sale of Elmiron(R) to ALZA Corporation, and realized
gains of $17.3 million on the repurchase of subordinated notes, which were
partially offset by $1.5 million of net foreign currency losses. During the
fourth quarter of 2002, we also received $20.0 million in connection with
certain amendments to the contract for the 1997 sale of Elmiron(R) with
Ortho-McNeil Pharmaceutical, Inc. ("OMP"), a subsidiary of Johnson & Johnson,
which acquired ALZA Corporation in 2002. As this payment was nonrefundable and
we have no further obligations under the agreement, this payment was recorded as
additional consideration for the sale. We will continue to receive payments from
OMP over the next several years based upon sales of Elmiron(R) by OMP, with
specified minimum royalty payments due for the period of 2003 through 2006.
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 $0.64 per diluted share,
for the prior year. Income from continuing operations was $243.3 million, or
$1.19 per diluted share, for the year ended December 31, 2001, compared to
$137.5 million, or $0.67 per diluted share, for the prior year.
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. As a
result of exchange rate differences, net revenues decreased by $19.8 million in
2001 compared to 2000.
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 $370.0 million in 2001 and $182.8
million in 2000. The increase of $187.2 million, or 102%, was primarily due to
price changes on certain brand equivalent pharmaceutical products and changes in
sales volume and product mix. 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 31, 2001, compared to $63.4 million in 2000. The
253% increase was primarily due to the sales volume of Lab Chile, IVAX Mexico,
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.
36
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, IVAX Mexico
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.
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, IVAX
Mexico, Elmor, and Laboratories, and increased sales force and promotional
expenses at our 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 was due to increased professional fees at
corporate headquarters and additional general and administrative expenses from
the operations of Lab Chile, IVAX Mexico, 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.
Amortization expense increased $10.4 million, to $19.4 million in 2001
from $9.0 million in 2000, due primarily to the amortization of goodwill arising
from the acquisitions of Elmor and IVAX Mexico.
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 $725.0 million of 4.5%
Convertible Senior Subordinated Notes in May 2001.
Other income, net increased $34.4 million for 2001 compared to 2000.
The increase was due primarily to $3.8 million of investment gains and a $6.6
million increase in royalty and milestone payments from ALZA Corporation,
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. ("IVAX Diagnostics") of $10.3 million in connection with IVAX
Diagnostics' March 2001 merger with b2bstores.com, Inc. The early adoption of
SFAS No. 145, during the second quarter of 2002, resulted in the
reclassification into income from continuing operations of extraordinary
gains/losses from the early retirement of subordinated notes. The impact of the
adoption resulted in the reclassification to other income of an extraordinary
gain of $7.1 million, net of taxes of $4.2 million in 2001 and an extraordinary
loss of $2.3 million in 2000.
37
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 Accounting Principles Board Opinion ("APB") 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. On January 1, 2002, we reversed 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.
Effective January 1, 2002, we adopted SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. Intangible assets that have indefinite lives and goodwill are
no longer amortized. This increased net income by approximately $1.75 million
per quarter, or $7.0 million per year. The life of one product intangible asset
with a net book value of $6.5 million as of January 1, 2002, was extended based
on a review of the expected remaining estimated useful life. Intangible assets
with indefinite lives were tested for impairment resulting in the write-down of
one intangible asset by $0.2 million. The initial test for impairment of
goodwill as of January 1, 2002, was completed during the second quarter and no
impairments were indicated. An independent valuation firm was used to perform
the test.
Goodwill and Other Intangible Assets - Adoption of SFAS No. 142 (in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Reported net income $ 122,756 $ 243,263 $ 131,044
Addback: Goodwill amortization -- 5,209 559
Addback: Workforce in place amortization -- 216 --
Adjust: Product intangible amortization -- 3,611 3,611
---------- ---------- ----------
Adjusted net income $ 122,756 $ 252,299 $ 135,214
========== ========== ==========
Basic earnings per common share:
Reported net income $ 0.63 $ 1.22 $ 0.67
Goodwill amortization -- 0.03 --
Product intangible amortization -- 0.02 0.02
---------- ---------- ----------
Adjusted net income $ 0.63 $ 1.27 $ 0.69
========== ========== ==========
Diluted earnings per common share:
Reported net income $ 0.62 $ 1.19 $ 0.64
Goodwill amortization -- 0.03 --
Product intangible amortization -- 0.02 0.02
---------- ---------- ----------
Adjusted net income, diluted $ 0.62 $ 1.24 $ 0.66
========== ========== ==========
38
The following table displays the changes in the carrying amounts of
goodwill by geographic segment (in thousands):
NORTH LATIN CORPORATE CONSOLIDATED
AMERICA EUROPE AMERICA & OTHER GOODWILL
----------- ----------- ------------ ------------ -----------
January 1, 2001 $ -- $ 8,600 $ 45,725 $ 33,451 $ 87,776
Acquisitions 4,095 15,790 452,237 15,753 487,875
Amortization (123) 311 (6,215) (1,988) (8,015)
Foreign exchange and other -- (501) (64,590) (468) (65,559)
----------- ----------- ----------- ----------- -----------
December 31, 2001 3,972 24,200 427,157 46,748 502,077
Foreign exchange and other -- 8,639 (104,020) 707 (94,674)
----------- ----------- ----------- ----------- -----------
December 31, 2002 $ 3,972 $ 32,839 $ 323,137 $ 47,455 $ 407,403
=========== =========== ============ ============ ===========
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. The impact of adoption of this statement is
not expected to 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 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
Accounting Research Bulletin 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. The impact
of adoption of this statement was not significant.
During the second quarter of 2002, we elected to early adopt SFAS No.
145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. The impact of adoption was the
reclassification into income from continuing operations of extraordinary losses
from the early retirement of subordinated notes of $2.3 million in 2000, an
extraordinary gain of $7.1 million, net of taxes of $4.2 million, during the
third quarter of 2001, an extraordinary gain of $3.4 million, net of taxes of
$2.0 million, during the first quarter of 2002 and an extraordinary gain of $2.7
million, net of taxes of $1.5 million, during the second quarter of 2002.
SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, addresses financial accounting and reporting for costs associated
with exit or disposal activities. This statement nullifies EITF Issue No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). It
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred (rather than when the exit
or disposal decision is made). It also establishes fair value as the objective
for the initial measurement of the liability. It is effective for fiscal years
beginning after December 31, 2002. We believe the impact of adoption of this
statement will not be significant.
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
provide alternative methods of transition
39
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. Finally, this Statement amends APB No. 28,
INTERIM FINANCIAL REPORTING, to require disclosure about those effects in
interim financial information. It is effective for financial statements for
fiscal years ending after December 15, 2002. We have not adopted the fair value
based method of accounting for stock-based compensation.
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, an interpretation of Accounting
Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, addresses
consolidation by business enterprises of variable interest entities. It is
effective immediately for variable interest entities created or obtained after
January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities acquired before
February 1, 2003. If it is reasonably possible that an entity will consolidate
or disclose information about the variable interest entity, disclosure is
required for all financial statements initially issued after January 31, 2003.
As part of our acquisition of Lab Chile, we acquired a note receivable secured
by an option to acquire all of the outstanding shares of common stock of a
company that owns 50.1% of a Latin American pharmacy chain, which had net
revenues of approximately $36.0 million in 2002. We are currently reviewing
whether this security interest will require consolidation of the pharmacy on
adoption of FASB Interpretation No. 46, but the impact of such adoption is not
expected to be material. Our maximum exposure to loss is the recorded value of
the receivable, which was $1.7 million at December 31, 2002. We do not have an
obligation to fund losses of this entity.
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 was required. The impact of adoption was not
significant.
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.
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 was
required. The impact of adoption was not significant.
EITF Issue No. 02-07, UNIT OF ACCOUNTING FOR TESTING IMPAIRMENT OF
INDEFINITE-LIVED INTANGIBLE ASSETS, is effective upon the initial application of
SFAS No. 142, or for entities that early applied SFAS No. 142 this issue is
applicable for impairment testing of indefinite-lived intangibles asset
performed after March 21, 2002. The impact of adoption was not significant.
EITF Issue No. 02-13, DEFERRED INCOME TAX CONSIDERATIONS IN APPLYING
THE GOODWILL IMPAIRMENT TEST IN FASB STATEMENT NO. 142, is applicable
prospectively in performing goodwill impairment tests after September 12, 2002.
The impact of adoption was not significant.
EITF Issue No. 02-17, RECOGNITION OF CUSTOMER RELATIONSHIP INTANGIBLE
ASSETS ACQUIRED IN A BUSINESS COMBINATION, is effective for purchase business
combinations consummated after October 25,
40
2002. It states that when an entity recognizes a customer-related intangible
asset in accordance with the recognition criteria in SFAS No. 141, the
determination of the fair value of that intangible asset should consider all
aspects of the relationship. The impact of adoption was not significant.
Staff Accounting Bulletin ("SAB") 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 $0.03 per
share, recorded retroactively in the first quarter of 2000. The offsetting
impact was recorded in deferred revenue.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, working capital was $447.1 million compared to
$597.6 million at December 31, 2001, and $438.5 million at December 31, 2000.
Cash and cash equivalents were $155.4 million at December 31, 2002, compared to
$178.3 million at December 31, 2001, and $174.8 million at December 31, 2000.
Short-term marketable securities were $28.9 million at December 31, 2002,
compared to $154.8 million at December 31, 2001, and $76.7 million at December
31, 2000.
Net cash of $151.1 million was provided by operating activities during
2002 compared to $199.0 million in 2001 and $80.7 million in 2000. The decrease
in cash provided by operating activities during 2002 was primarily the result of
reduced operating earnings and increases in inventories, partially offset by
increased collections of accounts receivable. 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.
Net cash of $28.3 million was provided by investing activities during
2002 compared to $705.3 million used for investing activity in 2001 and $136.3
million used for investing activity in 2000. During 2002, our capital
expenditures increased to approximately $98.7 million as compared to $73.5
million in 2001 and $50.0 million in 2000. The increase in 2002 was due to
improvement and expansion of certain facilities. The increase in 2001 was due to
increased investments in information systems at our North American subsidiaries.
During 2002, we received $1.6 million in proceeds from the sale of assets as
compared to $41.7 million in 2001 and $1.4 million in 2000. During 2002, we
spent $38.3 million to acquire intangible assets as compared to $133.9 million
in 2001 and $1.5 million in 2000. During 2001, $480.2 million was used to
acquire businesses and increase our ownership interest in affiliates compared to
$16.6 million in 2000. During 2002, we received $128.6 million in net proceeds
from the sale of marketable securities as compared to $73.2 million used for the
purchase of marketable securities in 2001 and $76.7 million used for the
purchase of marketable securities in 2000. During December 2002, we purchased
for $2.2 million the remaining outstanding minority interest shares of IVAX
Pharmaceuticals s.r.o. (formerly known as "IVAX-CR a.s.").
On March 1, 2002, we acquired from Syntex Pharmaceuticals International
Ltd. the non-U.S. rights to pharmaceutical products containing flunisolide
hemihydrate, sold under the tradenames Syntaris(TM), Nasalide(R), Rhinalar(TM),
Locasyn(TM) and Lokilan(TM), for 10.2 million Swiss francs ($6.0 million at the
February 28, 2002, currency exchange rate).
During April 2002, we entered into an agreement to acquire the
technical files and French marketing authorizations to substantially all of the
products comprising the generic pharmaceutical business of Merck & Co. Inc.'s
subsidiary in France for total consideration of approximately $5.0 million,
payable half on signing and half in four months. On July 19, 2002, the agreement
was amended reducing the second payment to 2.6 million Euros ($2.5 million as of
the August 2, 2002, payment date).
41
On April 22, 2002, we acquired an exclusive U.S. license to the patent
rights to market QVAR(R) (beclomethasone dipropionate HFA), an aerosol inhaler
prescribed to treat asthma. In addition, we have an option to obtain ownership
of the U.S. QVAR(R) trademark, as well as related patents and the New Drug
Application in five years. 3M Drug Delivery Systems will manufacture the QVAR(R)
product for us under a long-term contract. The total consideration due under the
contract, including options and extensions, is $105.0 million, $21.0 million of
which was paid on the effective date, $22.0 million is due on the first
anniversary, $31.0 million is due on the second anniversary, $26.0 million is
due on the third anniversary and $5.0 million is due on the fifth anniversary
upon exercise of the option. The payments carry no stated interest rate and were
discounted at a 3.7% rate.
During the second quarter of 2002, we received a refund of $6.4 million
from the seller of IVAX Mexico, based on resolution of the working capital and
debt covenant adjustments as specified in the purchase agreement, which reduced
goodwill.
On July 1, 2002, in connection with the termination of a license we
granted to specified products in our proprietary dry powder inhaler device
("MDPI"), we agreed to acquire, for 5.0 million Pounds Sterling ($7.7 million at
the July 1, 2002, currency exchange rate), the technical files, trademark and
related rights invented or produced by the licensee in connection with the
commercialization of products under the license. An additional payment up to 1.1
million Pounds Sterling will also be paid to the licensee upon the receipt of
marketing approval and launch of a specified product using the acquired rights
and data.
On August 30, 2002, we acquired for $6.0 million in cash Glaxo Wellcome
S.A. (subsequently renamed "IVAX Manufacturing Argentina S.A."), an Argentine
manufacturing pharmaceutical company, consisting primarily of a manufacturing
facility.
During the fourth quarter of 2002, we received $20.0 million in
connection with certain amendments to the contract for the 1997 sale of
Elmiron(R) with OMP. We will continue to receive payments from OMP over the next
several years based upon sales of Elmiron(R) by OMP, with specified minimum
royalty payments due for the period of 2003 through 2006.
On January 24, 2003, we acquired ChemSource Corporation in Puerto Rico
from Chemo Iberica S.A. and Quimica Sintetica S.A. for one million shares of our
common stock, valued at $12.4 million, and $0.1 million in cash. ChemSource is
primarily a 170,000 square foot manufacturing facility on 45 acres in Puerto
Rico.
Net cash of $179.3 million was used by financing activities during 2002
compared to financing activities providing $492.9 million in 2001 and $195.8
million in 2000. During 2002, we repaid $59.5 million of bank debt, made $12.7
million of new borrowings, and repurchased $98.8 million of our convertible
debentures for $79.3 million, and reduced our repurchases of common stock by
$95.7 million compared to 2001. On March 15, 2002, our Board of Directors
expanded the authorization of our repurchase program by an additional 10.0
million shares of our common stock or a like-valued amount of our convertible
debentures. The increase in financing activities in 2001 from 2000 was due to
the issuance of $725.0 million of 4.5% Convertible Senior Subordinated Notes in
2001, partially offset by increased repurchases of our common stock and payments
on long-term debt and loans payable.
During October 2001, we repaid $15.0 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 2002 we repurchased $98.8
42
million and during 2001 we repurchased $65.0 million face value of the 4.5%
Notes at a total cost of $79.3 million in 2002 and $52.0 million in 2001.
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.
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. Including shares repurchased via the physical settlement
method disclosed below, we repurchased 3.9 million shares of our common stock at
a total cost, including commissions, of $59.4 million during 2002, 6.8 million
shares at a total cost, including commissions, of $155.1 million during 2001,
and 1.8 million shares at a total cost, including commissions, of $51.6 million
during 2000. During 2000, in connection with our share repurchase program, we
received $11.3 million in premiums on the issuance of freestanding put options
for 3.7 million shares of our common stock. These amounts were credited to
"Capital in excess of par value." During 2001, 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 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 were exercised, we had the right to elect to settle by one of three
methods: physical settlement by payment in exchange for our shares, net cash
settlement or net share settlement. During 2002, five put options were
exercised for 1.2 million shares by the holders at strike prices ranging from
$19.00 to $32.28. IVAX elected the physical settlement method upon the exercise
of two put options for 0.5 million shares and paid $12.7 million in exchange for
the underlying shares. IVAX elected the net share settlement method for the
exercises of the remaining three put options for 0.7 million shares and issued
1.0 million shares of IVAX' common stock in settlement of the obligation.
We plan to spend between $90 million and $100 million in 2003 to
continue the research and development of pharmaceutical products. Research and
development expenses may fluctuate from quarter to quarter and from year to year
based on the timing of clinical studies, regulatory filings and litigation.
Accordingly, we cannot assure that our level of research and development
spending will be at these levels. In addition, we plan to spend between $90
million and $100 million in 2003 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 principally utilize internally generated funds,
which are anticipated to be derived primarily from the sale of existing
pharmaceutical products, pharmaceutical products currently under development and
pharmaceutical products we license or acquire. 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 or that we will acquire any such products. 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
43
acquisition of businesses, assets or securities. In conjunction with the
availability under our previous shelf S-4 registration statement, as of the date
of this report, we have the ability to issue up to 39.3 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 under the universal shelf registration
statement in connection with the net settlement of the put options discussed
above. Under this registration statement, as of the date of this report, we have
the ability to issue any combination of debt securities or common stock in an
aggregate amount of $382.5 million.
INCOME TAXES
We recognized a $51.7 million tax provision for 2002, compared to $54.1
million in 2001 and $13.2 million in 2000. Our effective tax rate was 31% for
2002, 18% for 2001 and 9% for 2000. In 2002, the effective tax rate was less
than the statutory rate due primarily to low tax rates applicable to our Puerto
Rico and Waterford, Ireland manufacturing operations and our Swiss and Chilean
operations. In 2001 and 2000, the effective tax rate 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.
At December 31, 2002, domestic net deferred tax assets totaled $108.7
million and aggregate foreign net deferred tax assets totaled $7.5 million. At
December 31, 2001, domestic net deferred tax assets totaled $97.6 million and
aggregate foreign 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.
Payment of the current tax provision for the year ended December 31,
2002, will be reduced by $1.4 million for our domestic operations and $0.4
million for our foreign operations, representing the incremental impact of
compensation expense deductions associated with non-qualified stock option
exercises during 2002. During 2001, the domestic current provision was favorably
impacted by $29.6 million from utilization of previously reserved net operating
loss and tax credit carryforwards and the non-taxable gain on the partial sale
of IVAX Diagnostics. Payment of the current tax provision for the year ended
December 31, 2001, was 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 2001. 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 $20.0 million in 2001 and $45.0 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.
The valuation allowance previously recorded against the domestic net
deferred tax asset was reversed in the amount of $3.6 million in 2002, $11.2
million in 2001 and $31.1 million in 2000, 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 and the statutory tax rates of the related
tax jurisdictions. The mix between our foreign and
44
domestic taxable income may be significantly affected by the jurisdiction in
which new products are developed and manufactured.
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 $3.9 million in
2002, $6.3 million for 2001 and $1.6 million for 2000 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 subject 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).
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 base our estimates and judgments on historical experience and
other assumptions that we believe are reasonable. We do not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below using different yet still reasonable
estimates and judgments. 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. Management periodically evaluates estimates and assumptions
used in the preparation of the financial statements and makes changes on a
prospective basis when adjustments are necessary. Significant estimates include
amounts for accounts receivable exposures, deferred tax asset allowances,
inventory reserves, environmental reserves, litigation and sales returns and
allowances, including chargebacks, rebates, returns and shelf-stock adjustments,
and the useful lives of intangible assets.
Revenue Recognition, Sales Returns and Allowances - Revenues and the
related cost of sales are recognized at the time title to our products passes to
our customers. Our pharmaceutical revenues are affected by the level of
provisions for estimated returns, inventory credits, discounts, promotional
allowances, volume rebates, chargebacks, reimbursements relating to Medicaid and
Medicare and other allowances. The custom in the U.S. 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. We have
contractual agreements with many of our customers, which require that we grant
these customers inventory credit following a price decrease. In other cases, the
determination to grant a credit to a customer following a price decrease is at
our discretion. These credits allow customers
45
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
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 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 remaining
shelf-life and 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. In accordance with SAB No. 101, our accounting policy is to review
each contract and, if appropriate, we defer up-front payments, whether or not
they are refundable, and recognize them in income over the obligation 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.
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 Corporation amounted to $15.1 million in 2002,
$13.8 million in 2001 and $7.2 million in 2000, and are included in other income
as additional gain on the sale of product rights. During the fourth quarter of
2002, we received $20.0 million in connection with certain amendments to the
contract for the 1997 sale of Elmiron(R) with OMP. As this payment was
nonrefundable and we have no further obligations under the agreement, this
payment was recorded as additional consideration for the sale. We will continue
to receive payments from OMP over the next several years based upon sales of
Elmiron(R) by OMP, with specified minimum royalty payments due for the period of
2003 through 2006. A portion of the up-front and milestone payments received and
included in other income in prior years, $39.6 million as of December 31, 2002,
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, we elected income statement
recognition as our accounting policy for sales of subsidiary stock and recorded
a gain of $10.3 million, related to the merger of IVAX Diagnostics, with
b2bstores.com, which is included in "Other income, net" in the consolidated
statements of operations.
46
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 or investigations, 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 these 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. During 2002, sales outside the United States accounted
for approximately 52% of worldwide sales. Virtually all of these sales were
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
$45.2 million in 2002, as compared to 2001 and decreased by $19.8 million in
2001 compared to 2000. 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, 2002, we
had $19.6 million in foreign exchange forward contracts outstanding, primarily
to hedge Euro-based operating cash flows against Pounds Sterling. As of December
31, 2001, we had $68.7 million in foreign exchange forward contracts
outstanding, of which $55.0 million related to United States dollar denominated
bank loans of $48.0 million of our Argentine based subsidiary, IVAX Argentina.
47
The $48 million of bank loans were repaid in January 2002 resulting in a pretax
loss of $2.8 million. As of December 31, 2000, we had $27.6 million in foreign
exchange forward contracts outstanding.
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 the
amounts we owe for the purchase of QVAR(R), which carry no stated interest rate.
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-43.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 24, 2002, we dismissed our independent certified public
accountants, Arthur Andersen LLP ("Andersen") and engaged the services of Ernst
& Young LLP ("Ernst & Young") as our new independent auditors for our fiscal
year ending December 31, 2002, effective immediately. These actions followed our
decision to seek proposals from independent accountants to audit our financial
statements for the fiscal year ending December 31, 2002. The decision to dismiss
Andersen and retain Ernst & Young was approved by our Board of Directors upon
the recommendation of our Audit Committee.
None of the audit reports of Andersen on our consolidated financial
statements as of and for the fiscal years ended December 31, 2000 and 2001
contained an adverse opinion or a disclaimer of opinion nor was any such audit
report qualified or modified as to uncertainty, audit scope or accounting
principles.
During the two most recent fiscal years ended December 31, 2000 and
2001, and the subsequent interim period through May 24, 2002, there were no
disagreements between us and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter of the disagreement in
connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the two most recent fiscal years ended December
31, 2000 and 2001, or within the interim period through May 24, 2002.
We previously provided Andersen with a copy of the foregoing
disclosures. A letter from Andersen confirming its agreement with these
disclosures was filed as an exhibit to our current report on Form 8-K/A filed
with the Securities and Exchange Commission on May 31, 2002.
During the two most recent fiscal years ended December 31, 2000 and
2001, and the subsequent interim period through May 24, 2002, we did not consult
with Ernst & Young regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
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 2003 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of our 2002 year end. The information concerning
48
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 2003 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
our 2002 year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by item 12 is incorporated by reference to our
Proxy Statement for our 2003 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
our 2002 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 2003 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
our 2002 year end.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have evaluated the design and operation of our disclosure controls
and procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including our principal executive officer and principal financial
officer within the 90-day period prior to the filing of this Annual Report on
Form 10-K. The principal executive officer and principal financial officer have
concluded, based on their review and subject to the limitations noted below,
that our disclosure controls and procedures, as defined at Exchange Act Rules
13a-14(c) and 15d-14(c), are effective to ensure that information required to be
disclosed by us in reports that we file under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS
No significant changes were made to our internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and internal
controls will prevent all error and fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent
49
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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, 2002
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.
3.2 Amended and Restated Bylaws. Incorporated by reference to our
Form 10-Q for the quarter ended June
30, 2002.
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.
50
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, Form S-3 dated July 31, 2001.
as 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 Incorporated by reference to our
due 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.
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.
51
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 IVAX Corporation 1999 Employee Stock Purchase Plan. Incorporated by reference to our
Form 10-K for the year ended
December 31, 1999.
10.13 IVAX Corporation 1997 Stock Option Plan. Incorporated by reference to our
Form S-8 dated December 22, 1997.
10.14 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.
10.15 Registration Rights Agreement dated May 12, 2000 Incorporated by reference to our
Incorporated by reference to our by and between IVAX Form S-3 dated August 7, 2000.
Corporation, UBS Warburg LLC and ING Form S-3 dated
August 7, 2000. Baring L.L.C.
10.16 Form of Registration Rights Agreement between the Incorporated by reference to our
Company and UBS AG. Form S-3 dated April 10, 2001.
10.17 Registration Rights Agreement, dated May 4, 2001, Incorporated by reference to our
between IVAX Corporation and UBS Warburg LLC, Form S-3 dated July 31, 2001.
as the Initial Purchaser, with respect to the
$725,000,000 4 1/2% Convertible Senior
Subordinated Notes due 2008.
10.18 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.
10.19 Termination Agreement dated March 20, 1998 by and among Incorporated by reference to our
NaPro BioTherapeutics, Inc., IVAX Corporation, Baker Form 10-K for the year ended
Norton Pharmaceuticals, Inc. and D & N Holding Company December 31, 2001.
(Confidential Treatment Requested).
21 Subsidiaries of IVAX Corporation. Filed herewith.
52
23.1 Consent of Ernst & Young LLP. Filed herewith.
23.2 Information Regarding Consent of Arthur Andersen LLP. Filed herewith.
99.1 Certificate of the Chairman and Chief Executive Officer Filed herewith.
of IVAX Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certificate of the Chief Financial Officer of IVAX Filed herewith.
Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
None.
53
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 31, 2003 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 has been 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 31, 2003
- ------------------------------------ Chief Executive Officer
Phillip Frost, M.D. (Principal Executive Officer)
/s/ Thomas E. Beier Chief Financial Officer March 31, 2003
- ------------------------------------ (Principal Financial Officer)
Thomas E. Beier
/s/ Thomas E. McClary Vice President - Accounting March 31, 2003
- ------------------------------------ (Principal Accounting Officer)
Thomas E. McClary
/s/ Mark Andrews Director March 31, 2003
- ------------------------------------
Mark Andrews
/s/ Ernst Biekert, Ph.D. Director March 31, 2003
- ------------------------------------
Ernst Biekert, Ph.D.
/s/ Charles M. Fernandez Director March 31, 2003
- ------------------------------------
Charles M. Fernandez
54
/s/ Jack Fishman, Ph.D. Director March 31, 2003
- ------------------------------------
Jack Fishman, Ph.D.
/s/ Neil Flanzraich Director, President and Vice Chairman March 31, 2003
- ------------------------------------
Neil Flanzraich
/s/ Jane Hsiao, Ph.D. Director and Vice Chairman- March 31, 2003
- ------------------------------------
Jane Hsiao, Ph.D. Technical Affairs
/s/ Isaac Kaye Director and Deputy Chief March 31, 2003
- ------------------------------------
Isaac Kaye Executive Officer
/s/ David A. Lieberman Director March 31, 2003
- ------------------------------------
David A. Lieberman
/s/ Richard C. Pfenniger, JR. Director March 31, 2003
- ------------------------------------
Richard C. Pfenniger, Jr.
55
I, Phillip Frost, M.D., certify that:
1. I have reviewed this annual report on Form 10-K of IVAX
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Phillip Frost, M.D.
------------------------------------
Phillip Frost, M.D.
Chairman and Chief Executive Officer
March 31, 2003
56
I, Thomas E. Beier, certify that:
1. I have reviewed this annual report on Form 10-K of IVAX
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Thomas E. Beier
-----------------------------------
Thomas E. Beier
Senior Vice President - Finance and
Chief Financial Officer
March 31, 2003
57
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF IVAX CORPORATION:
We have audited the accompanying consolidated balance sheet of IVAX Corporation
and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. 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 audit. The financial statements of IVAX Corporation and
subsidiaries as of December 31, 2001 and for the two years in the period then
ended, were audited by other auditors who have ceased operations and whose
report dated February 12, 2002, expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IVAX
Corporation and subsidiaries at December 31, 2002, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for business combinations and goodwill and its
method of reporting gains and losses on the extinguishment of debt during the
year ended December 31, 2002.
As discussed above, the financial statements of IVAX Corporation and
subsidiaries as of December 31, 2001 and for the two years then ended, were
audited by other auditors who have ceased operations. As described in Note 2,
these financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards (Statement)
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which was adopted by the Company
as of January 1, 2002. Our audit procedures with respect to the disclosures in
Note 2 with respect to 2001 and 2000 include (a) agreeing the previously
reported net income to the previously issued financial statements and the
adjustments to reported net income representing amortization expense (including
any related tax effects) recognized in those periods related to goodwill,
intangible assets that are no longer being amortized, and changes in
amortization periods for intangible assets that will continue to be amortized as
a result of initially applying Statement No. 142 (including any related tax
effects) to the Company's underlying records obtained from management and (b)
testing the mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related earnings-per-share amounts. As described
in Note 10, these financial statements have also been revised to include the
disclosures required by Statement No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS.
Our audit procedures with respect to the disclosures in Note 10 with respect to
2001 and 2000 included (a) agreeing actuarial assumptions, net pension expense,
projected benefit obligation for service rendered, plan assets at fair value,
unrecognized net obligation and accumulated benefit obligation to the Company's
underlying records obtained from management, and (b) testing the mathematical
accuracy of the reconciliation of the projected benefit obligation for the
pension plan to the recorded prepaid pension expense. In our opinion, the
disclosures for 2001 and 2000 in Note 2 and Note 10 described above are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.
/s/ Ernst & Young LLP
Miami, Florida,
February 13, 2003 (except for the third
and fourth paragraphs of Note 16, as to
which the date is March 26, 2003)
F-1
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).
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with IVAX Corporation's filing on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued by Arthur Andersen
LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for further
discussion.
F-2
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31,
---------------------------
2002 2001
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 155,408 $ 178,264
Marketable securities 28,873 154,842
Accounts receivable, net of allowances for doubtful
accounts of $21,719 in 2002 and $21,670 in 2001 224,768 247,670
Inventories 309,655 253,471
Other current assets 162,513 164,692
------------ -------------
Total current assets 881,217 998,939
Property, plant and equipment, net 420,246 356,304
Goodwill, net 407,403 502,077
Intangible assets, net 283,298 187,479
Other assets 55,595 60,650
------------ -------------
Total assets $ 2,047,759 $ 2,105,449
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 111,590 $ 97,465
Current portion of long-term debt 28,617 52,199
Loans payable 14,935 13,249
Accrued income taxes payable 50,555 41,861
Accrued expenses and other current liabilities 228,366 196,587
------------ -------------
Total current liabilities 434,063 401,361
Long-term debt, net of current portion 872,339 913,486
Other long-term liabilities 46,115 57,536
Minority interest 10,379 14,712
Commitments and contingencies - see Note 13
Shareholders' equity:
Common stock, $0.10 par value, authorized 437,500 shares,
issued and outstanding 194,372 shares in 2002 and 196,523 in 2001 19,437 19,652
Capital in excess of par value 311,367 328,095
Put options -- 34,650
Retained earnings 569,225 446,469
Accumulated other comprehensive loss (215,166) (110,512)
------------ -------------
Total shareholders' equity 684,863 718,354
------------ -------------
Total liabilities and shareholders' equity $ 2,047,759 $ 2,105,449
============ =============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-3
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------ ------------ -----------
Net revenues $ 1,197,244 $ 1,215,377 $ 793,405
Cost of sales 663,708 583,588 409,903
------------ ------------ -----------
Gross profit 533,536 631,789 383,502
------------ ------------ -----------
Operating expenses:
Selling 168,952 143,629 92,032
General and administrative 118,416 110,477 84,900
Research and development 76,041 88,015 65,331
Amortization of intangible assets 16,158 19,412 9,042
Restructuring costs (reversal of accrual) 4,242 2,367 (4,535)
------------ ------------ -----------
Total operating expenses 383,809 363,900 246,770
------------ ------------ -----------
Income from operations 149,727 267,889 136,732
Other income (expense):
Interest income 8,090 21,249 13,986
Interest expense (48,639) (41,791) (14,624)
Other income, net 60,321 49,637 15,243
------------ ------------ -----------
Total other income 19,772 29,095 14,605
------------ ------------ -----------
Income before income taxes and minority interest 169,499 296,984 151,337
Provision for income taxes 51,742 54,065 13,214
------------ ------------ -----------
Income before minority interest 117,757 242,919 138,123
Minority interest 838 344 (608)
------------ ------------ -----------
Income before cumulative effect of accounting change 118,595 243,263 137,515
Cumulative effect of accounting change, net of tax
of $2,773 in 2000 4,161 -- (6,471)
------------ ------------ -----------
Net income $ 122,756 $ 243,263 $ 131,044
============ ============ ===========
Basic earnings per common share:
Continuing operations $ 0.61 $ 1.22 $ 0.70
Cumulative effect of accounting change 0.02 -- (0.03)
----------- ------------- -----------
Net income $ 0.63 $ 1.22 $ 0.67
=========== ============ ===========
Diluted earnings per common share:
Continuing operations $ 0.60 $ 1.19 $ 0.67
Cumulative effect of accounting change 0.02 -- (0.03)
----------- ------------ -----------
Net income $ 0.62 $ 1.19 $ 0.64
=========== ============ ===========
Weighted average number of common shares outstanding:
Basic 195,037 199,099 196,276
============ ============ ===========
Diluted 197,378 204,639 204,058
============ ============ ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-4
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
COMMON STOCK ACCUMULATED
--------------------- CAPITAL IN OTHER
NUMBER OF EXCESS OF PUT RETAINED COMPREHENSIVE
SHARES AMOUNT PAR VALUE OPTIONS EARNINGS INCOME (LOSS) TOTAL
--------- ---------- --------- --------- --------- ------------- ----------
BALANCE, January 1, 2000 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 benefit 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
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
=========== ========== ========== ========== ========== ========== ==========
(Continued)
F-5
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Continuation)
COMMON STOCK ACCUMULATED
--------------------- CAPITAL IN OTHER
NUMBER OF EXCESS OF PUT RETAINED COMPREHENSIVE
SHARES AMOUNT PAR VALUE OPTIONS EARNINGS INCOME (LOSS) TOTAL
--------- ---------- --------- --------- --------- ------------- ----------
BALANCE, December 31, 2001 196,523 19,652 328,095 34,650 446,469 (110,512) 718,354
Comprehensive income:
Net income -- -- -- -- 122,756 -- 122,756
Translation adjustment -- -- -- -- -- (104,816) (104,816)
Unrealized net gain on
available-for-sale equity
securities and derivatives,
net of tax -- -- -- -- -- 162 162
----------
Comprehensive income 18,102
Exercise of stock options 681 68 5,188 -- -- -- 5,256
Tax benefit of option exercises -- -- 1,467 -- -- -- 1,467
Employee stock purchases 79 8 920 -- -- -- 928
Repurchase and retirement of
common stock (3,882) (388) (46,315) (12,725) -- -- (59,428)
Shares issued to settle put options 971 97 21,828 (21,925) -- -- --
Value of stock options issued to
non-employees -- -- 184 -- -- -- 184
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2002 194,372 $ 19,437 $ 311,367 $ -- $ 569,225 $ (215,166) $ 684,863
========== ========== ========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
F-6
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
---------- ---------- -------
Cash flows from operating activities:
Net income $ 122,756 $ 243,263 $ 131,044
Adjustments to reconcile net income to net cash
flows from operating activities:
Restructuring accrual (reversal) 4,242 2,367 (4,535)
Depreciation and amortization 59,877 52,158 32,948
Deferred tax benefit (8,110) (43,645) (29,084)
Tax effect of stock option exercises 1,467 18,001 25,469
Value of stock options issued to non-employees 184 173 --
Provision for doubtful accounts 4,239 1,143 (132)
Provision for inventory obsolescence 15,446 25,397 12,801
Interest accretion on notes payable 1,935 -- --
Minority interest in earnings (838) (344) 608
Equity in earnings of unconsolidated affiliates (877) (1,070) (849)
Gain on sale of marketable securities (4) (3,807) --
Gain on sale of product rights (35,150) (13,792) (7,175)
(Gains) losses on sale of assets, net 2,930 (12,328) (310)
(Gains) losses on extinguishment of debt (17,346) (11,302) 2,254
Cumulative effect of a change in accounting principle (4,161) -- 6,471
Changes in operating assets and liabilities:
Accounts receivable 12,493 (37,643) (45,111)
Inventories (68,591) (45,920) (44,254)
Other current assets (293) (34,680) 1,143
Other assets 5,800 3,059 (5,306)
Accounts payable, accrued expenses and other
current liabilities 48,318 62,547 6,941
Other long-term liabilities 6,821 (4,540) (2,242)
---------- ---------- ----------
Net cash flows from operating activities 151,138 199,037 80,681
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of product rights 35,150 13,792 7,175
Capital expenditures (98,670) (73,484) (49,955)
Proceeds from sales of assets 1,602 41,668 1,350
Acquisitions of patents, trademarks, licenses and other
intangibles (38,274) (133,864) (1,537)
Acquisitions of businesses, net of cash acquired 3,629 (466,153) (11,497)
Investment in affiliates (3,677) (14,052) (5,137)
Purchases of marketable securities (445,864) (378,176) (82,734)
Proceeds from sales of marketable securities 574,429 304,955 6,000
---------- ---------- ----------
Net cash flows from investing activities 28,325 (705,314) (136,335)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings on long-term debt and loans payable 12,745 723,818 254,048
Payments on long-term debt and loans payable (138,812) (95,533) (53,495)
Exercise of stock options and employee stock purchases 6,184 14,850 35,601
Repurchase of common stock, net of put option premium (59,428) (150,274) (40,338)
---------- ---------- ----------
Net cash flows from financing activities (179,311) 492,861 195,816
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents (23,008) 16,886 (6,776)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (22,856) 3,470 133,386
Cash and cash equivalents at the beginning of the year 178,264 174,794 41,408
---------- ---------- ----------
Cash and cash equivalents at the end of the year $ 155,408 $ 178,264 $ 174,794
========== ========== ==========
(Continued)
F-7
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continuation)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Supplemental disclosures:
Interest paid, net of capitalized interest $ 44,671 $ 12,563 $ 10,311
========== ========== ==========
Income tax payments $ 46,585 $ 50,890 $ 20,355
========== ========== ==========
Supplemental schedule of non-cash investing and financing activities:
Purchase of intangible assets through the issuance of debt $ 80,054 $ -- $ --
========== ========= ==========
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
Liabilities assumed (180,834) (10,154)
---------- ----------
58,028 14,558
Reduction of minority interest -- 9,832
---------- ----------
Net assets acquired 58,028 24,390
---------- ----------
Purchase price:
Cash, net of cash acquired 459,788 11,359
Acquisition costs 6,365 138
Fair market value of stock and options issued 79,750 86,922
---------- ----------
Total 545,903 98,419
---------- ----------
Goodwill $ 487,875 $ 74,029
========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL 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. For purposes of these financial statements, North America
includes the United States and Canada. Mexico is included within Latin America.
Certain amounts presented in the accompanying consolidated financial statements
for prior periods have been reclassified to conform to the current year
presentation.
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 in certain circumstances
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. 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. Management bases its estimates and judgments on
historical experience and other assumptions that management believes are
reasonable. Management does not believe there is a great likelihood that
materially different amounts would be reported related to the accounting
policies described below using different yet still reasonable estimates and
judgments. 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. Management
periodically evaluates estimates and assumptions used in the preparation of the
financial statements and makes changes on a prospective basis when adjustments
are necessary. Significant estimates include amounts for accounts receivable
exposures, deferred tax asset allowances, inventory reserves, environmental
reserves, litigation and sales returns and allowances, including chargebacks,
rebates, returns and shelf-stock adjustments, and the useful lives of intangible
assets.
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
F-9
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.
At December 31, 2002 and 2001, 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 $28,873 and $154,842, respectively.
Net unrealized gains (losses) of $(29) and $796 at December 31, 2002 and 2001,
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.
Inventories consist of the following:
DECEMBER 31,
-------------------------
2002 2001
---------- ----------
Raw materials $ 117,485 $ 110,443
Work-in-process 50,678 34,820
Finished goods 141,492 108,208
---------- ----------
Total inventories $ 309,655 $ 253,471
=========== ==========
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation and amortization and consist of
the following:
DECEMBER 31,
--------------------------
2002 2001
---------- -----------
Land $ 21,881 $ 22,535
Buildings and improvements 202,894 188,590
Machinery and equipment 246,397 221,243
Furniture and computer equipment 78,576 63,822
Construction in process 77,862 25,025
------------ -----------
Total cost 627,610 521,215
Less: Accumulated depreciation and amortization 207,364 164,911
------------ -----------
Property, plant and equipment, net $ 420,246 $ 356,304
============ ===========
F-10
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 $42,848, $32,062 and $23,906 during 2002,
2001 and 2000, respectively.
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 2002, IVAX capitalized $430 of
interest costs on certain plant and product line projects. During 2001, IVAX
capitalized $940 of interest costs on certain software development projects.
INTANGIBLE ASSETS - 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, was no
longer allowed. Effective January 1, 2002, all goodwill amortization ceased and
goodwill is evaluated for impairment annually.
Intangible assets with definite lives are amortized and carried at cost
less accumulated amortization. Intangible assets with indefinite lives are
carried at cost and are not amortized. Intangible assets consist of the
following:
DECEMBER 31,
--------------------------------------------------------
2002 2001
-------------------------- ------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------
Amortized intangible assets:
Patents and related licenses $ 71,716 $ 40,989 $ 73,031 $ 40,766
Trademarks 113,160 7,518 112,958 2,114
Licenses and other intangibles 132,457 7,205 22,768 4,352
---------- ---------- ---------- ----------
Total $ 317,333 $ 55,712 $ 208,757 $ 47,232
========== ========== ========== ==========
Unamortized intangible assets:
Trademarks & product registrations $ 21,677 $ 25,954
========== ==========
During 2002 and 2001, patents, trademarks, licenses and other
intangible assets with finite lives were amortized using the straight-line
method over their respective estimated lives (ranging from 1 - 20 years), while
those with indefinite lives were not amortized. IVAX, on an annual basis by
region, evaluates the recoverability of intangible assets and evaluates events
or circumstances that have occurred that warrant revised estimates of useful
lives or that indicate that an impairment exists. As of December 31, 2002 and
F-11
2001, the weighted average life of patents, trademarks, licenses and other
intangibles was 13.0 and 16.4 years, respectively. Amortization expense was
$17,029, $20,096 and $9,042 during 2002, 2001 and 2000, respectively.
Estimated intangible assets amortization expense for the next five
years is approximately $17,360 in 2003, $17,889 in 2004, $17,497 in 2005,
$16,116 in 2006, and $15,960 in 2007.
On July 1, 2002, in connection with the termination of a license
granted by IVAX to specified products in IVAX' proprietary dry powder inhaler
device ("MDPI"), IVAX entered into an agreement to acquire the technical files,
trademark and related rights invented or produced by the licensee in connection
with the commercialization of products under the license. The total
consideration due is 5,000 Pounds Sterling ($7,665 at the July 1, 2002, currency
exchange rate). The preliminary allocation of the purchase price was recorded as
other intangible assets and amortized over its estimated useful life of ten
years pending receipt of final information regarding the values and lives of the
intangible assets acquired. An additional payment of between 250 to 1,100 Pounds
Sterling will be paid to the licensee upon the receipt of marketing approval and
launch of a specified product using the acquired rights and data.
On April 22, 2002, IVAX acquired an exclusive U.S. license to the
patent rights to market QVAR(R) (beclomethasone dipropionate HFA), an aerosol
inhaler prescribed to treat asthma. In addition, IVAX has an option to obtain
ownership of the U.S. QVAR(R) trademark, as well as related patents and the New
Drug Application in five years. 3M Drug Delivery Systems will manufacture the
QVAR(R) product for IVAX under a long-term contract. The purchase price was
allocated to the fair values of the assets acquired pursuant to an independent
appraisal resulting in a value of $27,140 for the license agreement, which is
being amortized over its five year life, and $67,141 for the option, which is
not being amortized. If the option is exercised, the value of the option will be
allocated to the underlying assets acquired by the exercise and appropriate
lives determined. The total consideration due under the contract, including
options and extensions, is $105,000, $21,000 of which was paid on the effective
date, $22,000 is due on the first anniversary, $31,000 is due on the second
anniversary, $26,000 is due on the third anniversary and $5,000 is due on the
fifth anniversary upon exercise of the option. IVAX also acquired a
non-exclusive worldwide license to certain 3M patents covering HFA formulations
of various asthma drugs.
On April 2, 2002, IVAX entered into an agreement to acquire the
technical files and French marketing authorizations to substantially all of the
products comprising the generic pharmaceutical business of Merck & Co., Inc.'s
subsidiary in France. The total consideration due was 5,641 Euros ($4,917 at the
March 31, 2002, currency exchange rate) one-half of which was paid upon signing
and the remainder in four months. The purchase price was recorded as other
intangible assets, which is being amortized over its estimated useful life of
thirteen years. On July 19, 2002, the agreement was amended reducing the second
payment to 2,565 Euros ($2,531 as of the August 2, 2002, payment date).
On March 1, 2002, IVAX acquired from Syntex Pharmaceuticals
International Ltd. the non-U.S. rights to pharmaceutical products containing
flunisolide hemihydrate, sold under the trademarks Syntaris(TM), Nasalide(R),
Rhinalar(TM), Locasyn(TM) and Lokilan(TM), for 10,156 Swiss francs ($5,986 at
the February 28, 2002, currency exchange rate). The preliminary allocation of
the purchase price resulted in $1,120 of trademarks, $1,150 of patents and
related licenses and $3,716 of other intangibles. These intangible assets were
amortized over an estimated thirteen year weighted average life. The allocation
of purchase price and lives of the respective intangible assets are subject to
change based on receipt of final information regarding the values and lives of
the assets acquired.
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
F-12
Nasarel(R)/Nasalide(R) patents and tradename from Elan Corporation for $121,037.
The fair values of the Nasarel(R) 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.
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 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.
Laboratorios Elmor, S.A. ("Elmor") is located in Venezuela, which was considered
a hyperinflationary economic environment through June 30, 2001. Prior to July 1,
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 $19,586 at December 31,
2002, which mature in January 2003 through August 2003, and $68,681 at December
31, 2001, which matured from January 2002 through July 2002.
Prior to its acquisition by IVAX, Laboratorio Chile S.A. ("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 have been 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
F-13
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 resulting in a pretax gain of
$21,655 recorded at December 31, 2001, which was recorded in other income.
In addition, IVAX has short-term 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, 2002, 2001 and 2000, IVAX recorded net
foreign exchange transaction losses of $1,483, $9,856 and $2,297, respectively,
which are included in "Other income, net" in the accompanying consolidated
statements of operations. Approximately $2,327 and $19,014 of the currency
losses during 2002 and 2001, respectively, related to bank and other liabilities
denominated in currencies foreign to the Argentine operations.
CONCENTRATION OF CREDIT RISK - IVAX sells a significant amount of
United States brand equivalent pharmaceutical products to a relatively small
number of retail drug chains and drug wholesalers, 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, that meet certain minimum credit rating and size requirements,
generally, to the lesser of $10,000 or 10% of program size.
REVENUE RECOGNITION - Revenues and the related cost of sales are
recognized at the time title to IVAX' products and the risks and rewards of
ownership passes to customers. Net revenues are comprised of gross revenues less
provisions for expected customer returns, inventory credits, discounts,
promotional allowances, volume rebates, chargebacks, reimbursements relating to
Medicaid and Medicare and other allowances. These sales provisions totaled
$664,565, $433,653 and $215,433 in the years ended December 31, 2002, 2001 and
2000, 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 $147,580 and $94,937, respectively, at December 31, 2002, and
$115,752 and $88,955, respectively, at December 31, 2001.
The custom in the U.S. 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. Contractual
agreements with many customers require that IVAX grant these customers inventory
credit following a price decrease. In other cases, the determination to grant a
credit to a customer following a price decrease is at the discretion of IVAX.
These credits allow customers with established inventories to compete with those
buying product 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
F-14
sell-through levels by IVAX' wholesaler customers to customers with contractual
pricing arrangements with 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 remaining
shelf-life, price competition and the level of customer inventories at the time
of any price decreases. 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 2002, 2001 and 2000 included $745, $879 and $1,820,
respectively, of royalties under license agreements. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101,
IVAX' accounting policy is to review each contract and, if appropriate, defer
up-front payments, whether or not they are refundable, and recognize them in
income over the obligation 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 2002,
2001 and 2000 included $318, $879 and $1,725, respectively, of amortization of
revenue deferred in accordance with SAB No. 101. Upon termination of a license
agreement, during the third quarter of 2002, the remaining $5,981 of deferred
revenue was recognized in income.
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 basis 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).
F-15
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,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Basic weighted average number of shares outstanding 195,037 199,099 196,276
Effect of dilutive securities - stock options and warrants 2,341 5,540 7,782
---------- ---------- ----------
Diluted weighted average number of shares outstanding 197,378 204,639 204,058
========== ========== ==========
Not included in the calculation of diluted earnings per share because their
impact is antidilutive:
Stock options outstanding 13,669 2,784 206
Convertible debt 23,643 24,891 8,412
Put options -- -- 3,050
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 and losses 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 ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, as interpreted by Financial Accounting Standards Board ("FASB")
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.
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,
---------------------------------------------
2002 2001 2000
------------- ------------ -------------
Net income as reported $ 122,756 $ 243,263 $ 131,044
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 18,921 20,024 15,421
------------- ------------- -------------
Pro forma net income $ 103,835 $ 223,239 $ 115,623
Basic net income per share as reported 0.63 1.22 0.67
Pro forma basic net income per share 0.53 1.12 0.47
Diluted net income per share as reported 0.62 1.19 0.64
Pro forma diluted net income per share 0.53 1.09 0.45
Pro forma weighted average fair value of options granted $ 7.99 $ 12.03 $ 8.31
Expected life (years) 5.3 5.6 5.4
Risk-free interest rate 3.39-4.77% 3.85-5.16% 5.44-6.63%
Expected volatility 27% 30% 25%
Dividend yield 0% 0% 0%
F-16
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.
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 $0.03 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.
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 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. On January 1, 2002, IVAX reversed $4,161 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.
Effective January 1, 2002, IVAX adopted SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. Intangible assets that have indefinite lives and
goodwill are no longer amortized. This increased net income by approximately
$1,750 per quarter, or $7,000 per year. The life of one product intangible asset
with a net book value of $6,519 as of January 1, 2002, was extended based on a
review of the expected remaining estimated useful life. Intangible assets with
indefinite lives were tested for impairment resulting in the write-down of one
intangible asset by $177. The initial test for impairment of goodwill as of
January 1, 2002, was completed during the second quarter and no impairments were
indicated. An independent valuation firm was used to perform the test.
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Reported net income $ 122,756 $ 243,263 $ 131,044
Addback: Goodwill amortization -- 5,209 559
Addback: Workforce in place amortization -- 216 --
Adjust: Product intangible amortization -- 3,611 3,611
---------- ---------- ----------
Adjusted net income $ 122,756 $ 252,299 $ 135,214
========== ========== ==========
Basic earnings per common share:
Reported net income $ 0.63 $ 1.22 $ 0.67
Goodwill amortization -- 0.03 --
Product intangible amortization -- 0.02 0.02
---------- ---------- ----------
Adjusted net income $ 0.63 $ 1.27 $ 0.69
========== ========== ==========
Diluted earnings per common share:
Reported net income $ 0.62 $ 1.19 $ 0.64
Goodwill amortization -- 0.03 --
Product intangible amortization -- 0.02 0.02
---------- ---------- ----------
Adjusted net income, diluted $ 0.62 $ 1.24 $ 0.66
========== ========== ==========
F-17
The following table displays the changes in the carrying amounts of
goodwill by geographic segment:
NORTH LATIN CORPORATE CONSOLIDATED
AMERICA EUROPE AMERICA & OTHER GOODWILL
----------- ----------- ------------ ------------ -----------
January 1, 2001 $ -- $ 8,600 $ 45,725 $ 33,451 $ 87,776
Acquisitions 4,095 15,790 452,237 15,753 487,875
Amortization (123) 311 (6,215) (1,988) (8,015)
Foreign exchange and other -- (501) (64,590) (468) (65,559)
----------- ----------- ----------- ----------- -----------
December 31, 2001 3,972 24,200 427,157 46,748 502,077
Foreign exchange and other -- 8,639 (104,020) 707 (94,674)
----------- ----------- ----------- ----------- -----------
December 31, 2002 $ 3,972 $ 32,839 $ 323,137 $ 47,455 $ 407,403
=========== =========== ============ ============ ===========
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. The impact of adoption of this statement is
not expected to 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 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
Accounting Research Bulletin 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. The impact
of adoption of this statement was not significant.
During the second quarter of 2002, IVAX elected to early adopt SFAS No.
145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. The impact of adoption was the
reclassification into income from continuing operations of extraordinary losses
from the early retirement of subordinated notes of $2,254 in 2000, an
extraordinary gain of $7,120, net of taxes of $4,182, during the third quarter
of 2001, an extraordinary gain of $3,413, net of taxes of $1,962, during the
first quarter of 2002 and an extraordinary gain of $2,664, net of taxes of
$1,531, during the second quarter of 2002.
SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, addresses financial accounting and reporting for costs associated
with exit or disposal activities. This statement nullifies EITF Issue No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). It
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred (rather than when the exit
or disposal decision is made). It also establishes fair value as the objective
for the initial measurement of the liability. It is effective for fiscal years
beginning after December 31, 2002. Management believes the impact of adoption of
this statement will not be significant.
F-18
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB No. 28, INTERIM FINANCIAL
REPORTING, to require disclosure about those effects in interim financial
information. It is effective for financial statements for fiscal years ending
after December 15, 2002. We have not adopted the fair value based method of
accounting for stock-based compensation.
FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, an interpretation of Accounting Research Bulletin No. 51, CONSOLIDATED
FINANCIAL STATEMENTS, addresses consolidation by business enterprises of
variable interest entities. It is effective immediately for variable interest
entities created or obtained after January 31, 2003. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities acquired before February 1, 2003. If it is reasonably possible
that an entity will consolidate or disclose information about the variable
interest entity, disclosure is required for all financial statements initially
issued after January 31, 2003. As part of the acquisition of Lab Chile, IVAX
acquired a note receivable secured by an option to acquire all of the
outstanding shares of common stock of a company that owns 50.1% of a Latin
American pharmacy chain, which had net revenues of approximately $36,000 in
2002. Management is currently reviewing whether this security interest will
require consolidation of the pharmacy on adoption of FASB Interpretation No. 46,
but the impact of such adoption is not expected to be material. IVAX' maximum
exposure to loss is the recorded value of the receivable, which was $1,728 at
December 31, 2002. IVAX does not have an obligation to fund losses of this
entity.
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 was required. The impact of adoption was not
significant.
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 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.
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 was
required. The impact of adoption was not significant.
EITF Issue No. 02-07, UNIT OF ACCOUNTING FOR TESTING IMPAIRMENT OF
INDEFINITE-LIVED INTANGIBLE ASSETS, is effective upon the initial application of
SFAS No. 142, or for entities that early applied SFAS No. 142 this issue is
applicable for impairment testing of indefinite-lived intangibles assets
performed after March 21, 2002. The impact of adoption was not significant.
F-19
EITF Issue No. 02-13, DEFERRED INCOME TAX CONSIDERATIONS IN APPLYING
THE GOODWILL IMPAIRMENT TEST IN FASB STATEMENT NO. 142, is applicable
prospectively in performing goodwill impairment tests after September 12, 2002.
The impact of adoption was not significant.
EITF Issue No. 02-17, RECOGNITION OF CUSTOMER RELATIONSHIP INTANGIBLE
ASSETS ACQUIRED IN A BUSINESS COMBINATION, is effective for purchase business
combinations consummated after October 25, 2002. It states that when an entity
recognizes a customer-related intangible asset in accordance with the
recognition criteria in SFAS No. 141, the determination of the fair value of
that intangible asset should consider all aspects of the relationship. The
impact of adoption was not significant.
(3) MERGERS AND ACQUISITIONS:
Acquisitions accounted for under APB No. 16, BUSINESS COMBINATIONS:
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 held in escrow. 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.
On March 13, 2001, IVAX acquired IVAX Scandinavia A.B. (formerly known
as "Netpharma Scandinavia AB"), 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 $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, 2003. In 2002, no additional shares of
IVAX' common stock have been issued related to the purchase of IVAX Scandinavia
A.B. The fair value of net assets acquired was $274, resulting in goodwill of
$15,790 being recorded. The operating results of IVAX Scandinavia A.B. are
included in the consolidated financial statements subsequent to the March 13,
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 February 9, 2001, IVAX acquired IVAX Pharmaceuticals Mexico, S.A. de
C.V. ("IVAX Mexico," formerly known as "Laboratorios Fustery, S.A. de C.V."), a
Mexican pharmaceutical company, by purchasing the outstanding securities of IVAX
Mexico's parent, Maancirkel Holding B.V., 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. The purchase price for Maancirkel was 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 the seller of IVAX Mexico,
F-20
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.
During the second quarter of 2002, IVAX received a refund of $6,417, based on
resolution of the working capital and debt covenant adjustments as specified in
the purchase agreement, which further reduced goodwill. The operating results of
IVAX Mexico are included in the consolidated financial statements subsequent to
the February 9, 2001, acquisition date.
Acquisitions accounted for under SFAS No. 141:
During 2002, IVAX Pharmaceuticals s.r.o. (formerly known as "IVAX-CR
a.s.," formerly known as "Galena, a.s."), IVAX' subsidiary in the Czech
Republic, acquired the remaining outstanding shares owned by minority interest
for $2,151 resulting in IVAX Pharmaceuticals s.r.o. becoming wholly owned.
During 2001, IVAX Pharmaceuticals s.r.o. acquired one share of its own stock for
$41. During 2000, IVAX, through its Netherlands subsidiary IVAX International
B.V., purchased 238 additional shares of IVAX Pharmaceuticals s.r.o. 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. On September 1, 2000, IVAX Pharmaceuticals s.r.o.
commenced a tender offer for 9.26% of outstanding shares, which it did not own.
The tender offer was for a period of 60 days. During the second half of 2000,
IVAX Pharmaceuticals s.r.o. 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. Prior to these purchases, IVAX owned
86% of the outstanding shares of IVAX Pharmaceuticals s.r.o.
On August 30, 2002, IVAX acquired for $6,000 in cash Glaxo Wellcome
S.A. (subsequently renamed "IVAX Manufacturing Argentina S.A."), an Argentine
manufacturing pharmaceutical company consisting primarily of a manufacturing
facility, in order to consolidate manufacturing operations in Argentina. The
operating results of this company are included in the consolidated financial
statements subsequent to its acquisition date.
During the third quarter of 2001, IVAX 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. 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 and 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
F-21
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.
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.
(4) PARTIAL SALE OF IVAX DIAGNOSTICS, INC.:
On March 14, 2001, IVAX' wholly owned subsidiary, IVAX Diagnostics,
Inc. ("IVAX Diagnostics"), 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 and b2bstores.com's name was changed to IVAX
Diagnostics. For accounting purposes, this transaction is treated as a partial
sale of IVAX Diagnostics 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 tax-free. Also
recorded was $1,041 of nondeductible compensation expense from outstanding
options under the IVAX Diagnostics 1999 Stock Option Plan converting to a fair
value plan as a result of the merger. IVAX Diagnostics 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 $15,150, $13,792 and $7,175 in 2002, 2001 and 2000,
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 $12,276, $11,070 and $5,524 at December 31, 2002, 2001 and 2000,
respectively. During the fourth quarter of 2002, IVAX received $20,000 in
connection with certain amendments to the contract for the 1997 sale of
Elmiron(R) with Ortho-McNeil Pharmaceutical, Inc. ("OMP"), a subsidiary of
Johnson & Johnson, which acquired ALZA Corporation in 2002. As this payment was
nonrefundable and IVAX has no further obligations under the agreement, this
payment was recorded as additional consideration for the sale. IVAX will
continue to receive payments from OMP over the next several years based upon
sales of Elmiron(R) by OMP, with
F-22
specified minimum royalty payments due for the period of 2003 through 2006. A
portion of the up-front and milestone payments received and included in other
income in prior years, $39,638 as of December 31, 2002, 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.
(6) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES:
IVAX has ownership interests of 50% or less in various unconsolidated
affiliates. At December 31, 2002 and 2001, IVAX' non-marketable investments in
these affiliates totaled $6,638 and $10,338, 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,
-------------------------
2002 2001
---------- ----------
4.5% Convertible Senior Subordinated Notes due 2008. Interest
payable semi-annually. Convertible at the option of the holders into
14,013 shares of common stock at December 31, 2002 at a
conversion rate of $40.05 per share. 4.9% effective interest rate. $ 561,200 $ 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, 2002, at a
conversion rate of $29.72 per share. 5.9% effective interest rate. 250,000 250,000
QVAR(R)long-term debt 75,086 --
International subsidiaries' debt, due from 2003 to 2010, at interest rates
ranging from 3.5% to 7.9% 14,670 55,268
Other -- 417
---------- ----------
Total long-term debt 900,956 965,685
Less: Current portion of long-term debt 28,617 52,199
----------- ----------
Long-term debt, net of current portion $ 872,339 $ 913,486
========== ==========
During January 2002, IVAX repaid $48,000 of U.S. denominated loans held
by an Argentine subsidiary resulting in a pretax foreign exchange loss of
$2,824.
See Note 2, Recently Issued Accounting Standards, for a discussion of
the classification of gains on extinguishment of debt. During 2002, IVAX
repurchased $98,800 of 4.5% Convertible Senior Subordinated Notes due 2008 for
$79,252, plus accrued interest of $1,257, and wrote off debt issuance costs of
$2,202, resulting in a gain on extinguishment of debt of $17,346. During 2001,
IVAX repurchased $65,000 of 4.5% Convertible Senior Subordinated Notes due 2008
for $52,070, plus accrued interest of $1,155, and wrote off debt issuance costs
of $1,628, resulting in a gain on extinguishment of debt of $11,302.
As described in Note 2, payments for the acquisition of QVAR(R) are due
through the third anniversary of the effective date. The payments carried no
stated interest rate and were discounted at a 3.7% rate resulting in $75,086 of
additional long-term debt as of December 31, 2002, including accretion of
interest, of which $22,000 is current. In addition, payments for the technical
files, trademark and related rights to the MDPI are due through June 30, 2005.
The payments carried no stated interest rate
F-23
and were discounted at a 3.5% rate resulting in $7,359 of additional long-term
debt as of December 31, 2002, including accretion of interest, of which $105 is
current.
During May 2001, IVAX sold $725,000 of its 4.5% Convertible Senior
Subordinated Notes due 2008 pursuant to Rule 144A of the Securities Act. IVAX
received net proceeds of approximately $705,742. The 4.5% Notes were initially
issued in transactions exempt from registration under the Securities Act;
however, as of November 2001, IVAX has registered the resale of the 4.5% Notes
by certain note holders. 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, 2002 and 2001, the
unamortized debt issuance costs related to the 4.5% Notes was $11,390 and
$15,888, respectively, which is being amortized on a straight line basis to
interest expense over the life of the 4.5% Notes.
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 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, 2002 and 2001, the unamortized debt issuance costs related to the
5.5% Notes was $3,905 and $4,869, respectively, which is being amortized on a
straight line basis to interest expense over the life of the 5.5% Notes.
Certain of IVAX' international subsidiaries maintain relationships with
foreign banks providing short-term lines of credit in the aggregate amount of
approximately $22,000 and $28,000 at December 31, 2002 and 2001, respectively.
Short-term borrowings totaled $14,935 and $13,249 at December 31, 2002 and 2001,
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,
-------------------------
2002 2001
----------- -----------
4.5% Convertible Senior Subordinated Notes due 2008 $ 461,893 $ 549,912
5.5% Convertible Senior Subordinated Notes due 2007 224,173 250,250
QVAR(R) long-term debt 75,086 --
Other 14,671 55,685
----------- -----------
Total $ 775,823 $ 855,847
=========== ===========
Fair value of the 4.5% and 5.5% Convertible Senior 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 $28,617, $33,286, $24,085, $1,420,
$250,098 and $563,450, respectively.
F-24
(8) RESTRUCTURING COSTS:
During 2002, IVAX incurred $4,242 of restructuring costs, which were
substantially paid out during the second quarter, at two subsidiaries,
consisting primarily of employee termination benefits.
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 accruals 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, 2002,
2001 and 2000 are shown in the table below. These restructuring costs are shown
as "Restructuring costs (reversal of accrual)" 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.
EMPLOYEE
TERMINATION PLANT
BENEFITS CLOSURES TOTAL
------------- ------------ -----------
Balance at January 1, 2000 $ 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
Accrual of (reversals of prior years) restructuring costs 4,398 (156) 4,242
Cash payments during 2002 (4,291) (241) (4,532)
Non-cash activity 84 7 91
------------ ------------ -----------
Balance at December 31, 2002 $ 658 $ -- $ 658
============ ============ ===========
(9) INCOME TAXES:
The provision for income taxes on continuing operations before minority
interest consists of the following:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Current:
U.S. Federal $ 34,635 $ 75,547 $ 25,111
State 2,267 4,520 966
Puerto Rico and the U.S. Virgin Islands 854 860 999
Foreign 22,096 16,783 15,222
Deferred (8,110) (43,645) (29,084)
----------- ----------- -----------
Total $ 51,742 $ 54,065 $ 13,214
=========== =========== ===========
F-25
The components of income from continuing operations before income taxes
and minority interest are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
United States $ 83,539 $ 209,443 $ 110,402
Puerto Rico and the U.S. Virgin Islands 11,693 17,928 4,451
Foreign 74,267 69,613 36,484
----------- ----------- -----------
Total $ 169,499 $ 296,984 $ 151,337
=========== =========== ===========
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,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Tax using statutory U.S. Federal tax rate at 35% $ 59,324 $ 104,171 $ 53,757
Effect of state income taxes 1,474 2,938 59
Write-down of non-deductible cost in excess of
net assets of acquired companies -- 18 66
Utilization of previously reserved net
operating loss and tax credit carryforwards -- (29,590) (29,326)
Tax effect of intercompany income eliminated on books -- 7,600 17,500
Reduction of valuation allowance on deferred
tax assets (3,565) (11,216) (31,113)
Foreign tax rate differential (10,131) (20,253) (8,374)
Effect of Puerto Rico taxes and tollgate 854 860 999
Puerto Rico and U.S. possessions tax incentives (3,881) (6,275) (1,558)
Foreign operating losses not benefited 5,615 13,984 11,290
Tax claims and other matters -- (6,333) (3,180)
Other 2,052 (1,839) 3,094
----------- ----------- -----------
Total $ 51,742 $ 54,065 $ 13,214
=========== =========== ===========
In 2002, the effective tax rate was less than the statutory rate due
primarily to low tax rates applicable to our Puerto Rico and Waterford, Ireland
manufacturing operations and our Swiss and Chile operations. The domestic
current provision was favorably impacted by $29,590 and $29,326 during 2001 and
2000, respectively, from utilization of previously reserved net operating loss
("NOL") and tax credit carryforwards. In 2001 and 2000, the effective tax rate
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. The 2001 domestic current provision was also favorably impacted by the
non-taxable gain on the partial sale of IVAX Diagnostics. All of the reductions
in 2000 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, 2002, for domestic and foreign operations will be
reduced by $1,411 and $421, respectively, representing the incremental impact of
compensation expense deductions associated with non-qualified stock option
exercises during 2002. Payment of the current tax provision for the year ended
December 31, 2001, for domestic and foreign operations was reduced by $8,040 and
$2,571, respectively, representing the incremental impact of compensation
expense deductions associated with non-qualified stock option exercises during
2001. 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
F-26
$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 2002, 2001 and 2000, $3,565, $11,216 and $31,113, respectively,
of the valuation allowances 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. As of December 31, 2002 and 2001,
the domestic net deferred tax asset was $108,654 and $97,619, respectively, and
the aggregate net deferred tax asset in foreign countries was $7,508 and $7,934,
respectively. As of December 2002 and 2001, the domestic deferred tax asset was
approximately 0% and 4% reserved, respectively. 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,
-----------------------
2002 2001
--------- ---------
Accounts receivable allowances $ 77,755 $ 70,100
Reserves and accruals 16,969 16,139
Differences in capitalization of inventory costs 406 158
Other 4,809 3,847
--------- ---------
Amount included in "Other current assets" 99,939 90,244
--------- ---------
Basis differences on fixed assets 513 3,402
Depreciation differences on fixed assets (3,055) 3,457
Recognition of revenue 146 (643)
Carrying value of long-term assets 1,978 4,703
Other 10,564 --
Tax credits 1,600 4,326
Net operating losses 5,850 6,909
Valuation allowance -- (4,000)
--------- ---------
Amount included in "Other assets" 17,596 18,154
--------- ---------
Other, amount included in "Accrued expenses and other current
liabilities" (6,732) (514)
--------- ---------
Other, amount included in "Other long-term liabilities" (17,374) (31,035)
--------- ---------
Net deferred tax asset $ 93,429 $ 76,849
========= =========
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 $233,258 as of December 31, 2002. Any
U.S. tax amounts due would be reduced by allowable foreign tax credits.
Income from IVAX Pharmaceuticals' Puerto Rico manufacturing operations
is subject to certain tax exemptions under the terms of a grant from the Puerto
Rican government, which will expire on January 1, 2021. The grant reduced tax
expense by approximately $3,515, $4,499 and $721 for the years ended December
F-27
31, 2002, 2001 and 2000, 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 2002, 2001 and 2000, this credit was
approximately $3,881, $6,275 and $1,558, respectively, and completely 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, 2002, IVAX had 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
------ ---------- ----------
2003 $ -- $ --
2004 -- 400
2005 -- 3,800
2006 9,084 5,700
2007 2,733 44,700
2008 4,896 9,100
2009 -- 5,700
2012 -- 8,700
Indefinite -- 19,300
---------- ----------
Total $ 16,713 $ 97,400
========== ==========
Minority interest included in the accompanying consolidated statements
of operations is net of a provision for income taxes of $37, $(67) and $(199)
for the years ended December 31, 2002, 2001 and 2000, respectively.
(10) RETIREMENT PLANS:
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 for
the years ended December 31, 2002, 2001 and 2000 were $1,454, $1,275 and $1,092,
respectively.
PENSION PLANS - IVAX' employees within Ireland are eligible to
participate in a defined benefit pension plan. The plan requires employees to
share in the costs. At December 31, 2002, approximately 560 employees were
covered by this plan and 78 former members have retained entitlements to
deferred benefit from the plan.
Actuarial assumptions for the plan include: (a) 7.0% for the expected
long-term rate of return on plan assets, (b) 5.5% for 2002 and 6.0% for 2001 for
the discount rate calculating the projected benefit obligation and (c) 4.0% for
the rate of average future increases in compensation levels.
Net pension expenses, representing IVAX' contributions to the plan,
were $994, $936, and $864, for the twelve months ended December 31, 2002, 2001
and 2000, respectively.
F-28
A reconciliation of the projected benefit obligation for the pension
plan to the recorded prepaid pension expense is as follows:
DECEMBER 31,
-----------------------
2002 2001
--------- ---------
Projected benefit obligation for service rendered to date $ (14,315) $ (8,416)
Plan assets at fair value, primarily mutual funds 8,262 7,206
--------- ---------
Projected benefit obligation in excess of plan assets (6,053) (1,210)
Unrecognized net obligation 6,053 1,210
--------- ---------
Prepaid pension expense $ -- $ --
========= =========
The accumulated benefit obligation was $6,494, of which $5,569 was
vested, and $3,664, of which $3,127 was vested, at December 31, 2002 and 2001,
respectively.
IVAX sponsored a defined benefit pension plan for employees within the
United Kingdom, which was closed in 1998 and IVAX ceased contributions to the
plan. IVAX has initiated the process of terminating the pension plan. As a
result of closing the plan, the accumulated benefit obligation, all of which was
vested, equals the projected benefit obligation.
Actuarial assumptions for the plan include: (a) 5.4% for the expected
long-term rate of return on plan assets, (b) 5.4% for the discount rate
calculating the projected benefit obligation and (c) 2.4% for the rate of
average future increases in compensation levels.
Net pension expenses were $0 for each of the three years in the
period ended December 31, 2002.
A reconciliation of the projected benefit obligation for the pension
plan to the recorded prepaid pension expense as of December 31, 2002, is as
follows:
Projected benefit obligation for service rendered to date $ (16,008)
Plan assets at fair value, primarily mutual funds 13,651
---------
Projected benefit obligation in excess of plan assets (2,357)
Unrecognized net obligation 2,357
---------
Prepaid pension expense $ --
=========
(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 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.
F-29
EQUITY COMPENSATION PLAN INFORMATION - The following table summarizes
information about equity compensation plans (number of shares in thousands):
(A) (B) (C)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
----------------------- --------------------- -----------------------
Equity compensation plan
approved by security holders:
1994 Plan 9,147 $ 16.10 1,449
Equity compensation plans not
approved by security holders:
1997 Plan 9,855 18.63 3,584
1985 Plan 38 9.00 --
-------- --------
Total 19,040 $ 17.40 5,033
======== ========
IVAX administers and has stock options outstanding under IVAX' 1997
Employee Stock Option Plan ("1997 Plan"), IVAX' 1994 Stock Option Plan ("1994
Plan") and IVAX' 1985 Stock Option Plan ("1985 Plan"). The options outstanding
under the plans assumed in the business acquisitions were converted into options
to acquire IVAX' common stock using the applicable exchange ratios. No
additional stock options may be issued under the 1985 Plan. On November 15,
2002, IVAX' Board of Directors approved an increase to 17,000 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):
2002 2001 2000
------------------------ ------------------------ ------------------------
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 16,756 $ 16.98 13,685 $ 11.88 12,240 $ 7.31
Granted 3,874 17.78 5,097 27.97 6,634 17.63
Exercised (681) 7.72 (1,531) 9.18 (4,483) 7.83
Terminated/exchanged (909) 20.65 (495) 13.20 (706) 10.68
---------- ---------- ----------
Balance at end of year 19,040 17.40 16,756 16.98 13,685 11.88
========== ========== ==========
Exercisable at December 31, 8,771 $ 13.07 5,804 $ 9.60 4,593 $ 7.55
F-30
The following table summarizes information about fixed stock options
outstanding at December 31, 2002 (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 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
------------------ -------------------------------- -------------- ---------------- --------------
$ 0.00 - $ 3.94 103 2.0 $ 3.63 103 $ 3.63
$ 3.95 - $ 7.88 3,970 2.7 5.13 3,879 5.08
$ 7.89 - $ 11.82 426 4.8 10.06 234 9.37
$ 11.83 - $ 15.76 4,456 5.4 14.30 2,141 14.48
$ 15.77 - $ 19.70 4,462 6.5 18.97 714 18.43
$ 19.71 - $ 23.64 267 3.6 21.72 149 21.70
$ 23.65 - $ 27.58 2,277 5.1 26.08 557 26.03
$ 27.59 - $ 31.52 2,521 7.5 28.80 723 28.77
$ 31.53 - $ 35.46 330 4.4 34.36 185 34.54
$ 35.47 - $ 39.40 228 5.8 38.22 86 38.33
------------ ------------
19,040 5.3 $ 17.40 8,771 $ 13.07
============ ============
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. On March 15, 2002, IVAX' Board
of Directors expanded the authorization of our repurchase program by an
additional 10,000 shares of common stock or a like-valued amount of IVAX'
convertible debentures, bringing the total authorized for repurchase to 67,500
shares. Cumulatively through December 31, 2002, IVAX repurchased 53,625 shares
of common stock at a total cost, including commissions, of $553,413. Under
Florida law, unless otherwise designated by IVAX' Board of Directors,
repurchased shares constitute authorized but unissued shares.
During 2002, 2001, and 2000, IVAX repurchased (including shares
repurchased via the physical settlement method disclosed below) 3,882, 6,779,
and 1,841 shares, respectively, of its common stock at a total cost, including
commissions, of $59,391, $155,097, and $51,597, respectively.
PUT OPTIONS - During 2000, in connection with the share repurchase
program, IVAX issued twelve put options for 3,675 shares of its common stock;
625 of which had expired as of December 31, 2000, and collected $11,259 in
premiums that were credited to "Capital in excess of par value." Prior to
adopting EITF Issue No. 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."
During 2001, 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
F-31
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 par value" in the
accompanying consolidated balance sheet at December 31, 2001. In the event the
put options were exercised, IVAX had the right to 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.
During 2001, 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.
During 2002, five put options were exercised for 1,200 shares by the
holders at strike prices ranging from $19.00 to $32.28. IVAX elected the
physical settlement method upon the exercise of two put options for 500 shares
and paid $12,725 in exchange for the underlying shares. IVAX elected the net
share settlement method for the exercises of the remaining three put options for
700 shares and issued 971 shares of IVAX' common stock in settlement of the
obligation.
DIAGNOSTIC WARRANTS - As of December 31, 2002, IVAX Diagnostic's has
warrants outstanding that expire in February 2005 to purchase up to 400 shares
of IVAX Diagnostic's common stock at a price of $13.20 per share.
DIAGNOSTICS STOCK OPTION AND PERFORMANCE PLANS - Effective June 29,
1999, the Board of Directors of IVAX Diagnostics, a wholly owned subsidiary of
IVAX at the time, approved the IVAX Diagnostics 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. 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. On September 30, 1999, prior to the merger of IVAX
Diagnostics with b2bstores.com, the Board of Directors of b2bstores.com approved
the 1999 Performance Equity Plan (the "Performance Plan"). The Performance Plan
authorizes the grant of up to 2,000 share of common stock to key employees,
officers, directors and consultants. Both incentive and non-qualified options
may be issued under the Performance Plan. Prior to the creation of the
Performance Plan, options to purchase an additional 1,000 shares of common stock
were granted by the Board of Directors of b2bstores.com to certain of its former
officers. As of December 31, 2002 and 2001, options for 2,034 and 1,674 shares,
respectively, of common stock were outstanding under these plans.
DIAGNOSTICS SHARE REPURCHASE PROGRAM - During 2002, IVAX Diagnostics'
Board of Directors authorized the repurchase of up to 2,000 shares of its
publicly held common stock. During 2002, IVAX Diagnostics repurchased publicly
held common stock to bring the total amount of shares held by IVAX to
approximately 20,000 shares of the total 27,500 IVAX Diagnostics common shares
outstanding, or 73% ownership.
CONVERTIBLE DEBT - See Note 7, Debt, for comments regarding convertible
senior subordinated notes.
DIVIDENDS - IVAX did not pay dividends during the years ended December
31, 2002, 2001 and 2000.
F-32
(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 SFAS 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 and Mexico.
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-33
The table below sets forth net revenues and profits in the regional
presentation.
NORTH LATIN CORPORATE TOTAL
2002 AMERICA EUROPE AMERICA & OTHER IVAX
- -------------------------------------------------------------------------------------------------------------------
External net sales $ 476,085 $ 371,987 $ 227,933 $ 44,713 $ 1,120,718
Intercompany sales 1,554 40,872 -- (42,426) --
Other revenues 30,971 41,573 1,204 2,778 76,526
---------- ---------- ---------- --------- -----------
Net revenues 508,610 454,432 229,137 5,065 1,197,244
---------- ---------- ---------- --------- -----------
Asset impairment and restructuring (183) 3,382 1,043 -- 4,242
Income (loss) from operations 100,360 36,911 33,699 (21,243) 149,727
Interest income 4 2,031 2,500 3,555 8,090
Interest expense (1,265) (1,029) (1,728) (44,617) (48,639)
Other income (expense) 28,558 (4,883) 1,929 33,839 59,443
Equity earnings of affiliates -- -- -- 878 878
Tax provision (benefit) 43,146 11,654 9,201 (12,259) 51,742
Income (loss) from continuing operations
before minority interest 84,511 21,376 27,199 (15,329) 117,757
2001
- -------------------------------------------------------------------------------------------------------------------
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 23,473 48,567
Equity earnings of affiliates -- -- 28 1,042 1,070
Tax provision (benefit) 75,407 9,438 13,495 (44,275) 54,065
Income from continuing operations before
minority interest 158,659 16,187 20,889 47,184 242,919
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 (36,314) 14,394
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 28,707 138,123
F-34
In 2002, the Argentine peso and Venezuelan bolivar devalued
significantly in relation to the United States dollar. As a result, the
operating results and net asset position in these currencies decreased
significantly 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
- ---- ----------------------------------------------------------------------
2002 $ 310,422 $ 306,361 $ 423,576 $ 108,589 $ 1,148,948
2001 207,608 226,071 544,638 107,826 1,086,143
2000 60,624 219,701 63,443 46,728 390,496
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 additions to long-lived assets and
depreciation/amortization by region:
ADDITIONS TO LONG-LIVED ASSETS DEPRECIATION/AMORTIZATION
--------------------------------------- ---------------------------------------
REGION 2002 2001 2000 2002 2001 2000
- ------ ----------- ------------ ----------- ----------- ----------- -----------
North America $ 116,900 $ 159,395 $ 17,510 $ 21,845 $ 13,324 $ 12,357
Europe 68,784 49,204 32,638 26,252 20,372 15,072
Latin America 14,996 458,755 47,430 7,711 12,763 2,576
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 the United States, the United Kingdom and Chile. 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 CHILE OTHER TOTAL
-----------------------------------------------------------------------
Net revenues 2002 $ 570,676 $ 218,097 $ 81,630 $ 326,841 $ 1,197,244
2001 567,507 262,037 39,856 345,977 1,215,377
2000 389,055 220,191 -- 184,159 793,405
Long-lived assets 2002 417,696 192,729 220,080 318,443 1,148,948
2001 317,345 147,891 243,520 377,387 1,086,143
2000 106,977 153,021 -- 130,498 390,496
NET REVENUES BY PRODUCT TYPE:
NET REVENUES
---------------------------------------------
2002 2001 2000
------------- ------------- -------------
Proprietary and branded $ 530,607 $ 528,652 $ 377,101
Brand equivalent 666,637 686,725 416,304
------------- ------------- -------------
Total $ 1,197,244 $ 1,215,377 $ 793,405
============= ============= =============
No single customer accounted for 10% or more of IVAX' consolidated net
revenues for any of the three years ended December 31, 2002. Other revenues
included in net revenues in the accompanying consolidated statements of
operations consist of license fees, royalties, and development service fees.
F-35
In October 2002, IVAX entered into a new agreement with Bristol-Myers
Squibb that supersedes, effective November 2002, the prior product collaboration
agreement. The new agreement, which in part relates to some of the subject
matter of the earlier agreement, also encompasses additional arrangements
between the parties and has a term of ten months, although the parties may enter
into additional collaboration agreements if certain option rights contained
therein are exercised.
(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 years ended December 31, 2002, 2001 and 2000,
totaled approximately $7,755, $8,686, and $6,360, respectively. The future
minimum lease payments under non-cancelable capital leases and their related
assets recorded at December 31, 2002 and 2001, 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, 2002, were as follows:
OPERATING
LEASES
------------
2003 $ 5,423
2004 3,512
2005 2,342
2006 1,364
2007 1,164
Thereafter 5,926
------------
Total minimum lease payments $ 19,731
============
LEGAL PROCEEDINGS -
TERAZOSIN LITIGATION
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 judgment 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. 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
F-36
involved in these lawsuits. The FTC took no action against IVAX Pharmaceuticals.
To date, seventeen of the actions naming Zenith Goldline Pharmaceuticals have
either been settled or dismissed.
FEN-PHEN LITIGATION
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 5,066 cases and has been dismissed from
approximately 4,879 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.
AVERAGE WHOLESALE PRICE LITIGATION
On July 12, 2002, an action purporting to be a class action styled JOHN
RICE V. ABBOTT LABORATORIES, INC., ET AL. was filed against IVAX
Pharmaceuticals, Inc. and others in the Superior Court of the State of
California, alleging violations of California's Business & Professional
Code Section 17200 et seq. with respect to the way pharmaceutical companies
report their AWP. Plaintiffs allege that each defendant reported an AWP to
Medicare and Medicaid which materially misrepresented the actual prices paid to
defendants by physicians and pharmacies for prescription drugs. The complaint
seeks unspecified damages, including punitive damages, and injunctive relief.
Two other class actions, THOMPSON V. ABBOTT LABORATORIES, INC., ET AL. and
TURNER V. ABBOTT LABORATORIES, INC., ET AL., containing similar allegations
against IVAX Pharmaceuticals, Inc. and others were filed in California courts
in August and September 2002, respectively, as well. IVAX believes that it has
substantial defenses to these claims and will defend itself vigorously.
However, as with any litigation, there can be no assurance that IVAX will
prevail.
UNITED KINGDOM SERIOUS FRAUD OFFICE INVESTIGATION
In April 2002, IVAX received notice of an investigation by United
Kingdom National Health Service officials concerning prices charged by generic
drug companies, including Norton Healthcare Limited trading as IVAX
Pharmaceuticals UK, for penicillin-based antibiotics and warfarin sold in the
United Kingdom from 1996 to 2000. This is an investigation by the Serious Fraud
Office of the United Kingdom involving all pharmaceutical companies that sold
these products in the United Kingdom during this period. According to statements
by investigating agencies, this is a complex investigation expected to continue
for some time and there is no indication from the agencies when or if charges
will be made against any of these companies. IVAX is cooperating fully with this
investigation. In December 2002, the Secretary of State for Health, on behalf of
itself and others, filed a civil claim for damages and interest
F-37
against Norton Healthcare, Norton Pharmaceuticals and other defendants alleging
that certain of their actions adversely affected competition in the sale and
supply of warfarin in the United Kingdom between 1996 and 2000. This claim seeks
damages against all defendants in the approximate aggregate amount of 28,584
Pounds Sterling (approximately $46,000 at the December 31, 2002, exchange rate).
It is reasonably likely that similar allegations and claims for damages will be
asserted by the Secretary of State for Health against the companies with
respect to the sale of penicillin based antibiotics. IVAX presently intends to
seek a stay of the civil claim, pending completion of the United Kingdom
Serious Fraud Office investigation.
PACLITAXEL RELATED LITIGATION
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 ("BMS") 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. On December 17, 2002, this case was dismissed as part of the settlement of
the litigation recited below.
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, IVAX' 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 December 13, 2002, this
matter was settled and dismissed accordingly.
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 IVAX'
ANDA and remanded the matter to the agency. On January 25, 2002, the FDA vacated
IVAX' 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. On December 17,
2002, this case was concluded as part of the settlement recited above.
ENVIRONMENTAL RELATED PROCEEDING
On January 22, 2003, IVAX' subsidiary, ChemSource Corporation, received
an Administrative Compliance Order issued by the United States Environmental
Protection Agency dated January 2, 2003, alleging that ChemSource Corporation
was not in compliance with certain conditions of the National Pollutant
Discharge Elimination System Permit and certain pretreatment standards. The
Order also required that ChemSource Corporation submit particular certified
documentation associated with achieving compliance with the given standards. The
Order further required that ChemSource Corporation submit
F-38
certified information concerning stormwater pollution control matters and costs.
This claim was tendered to the sellers of ChemSource Corporation for defense and
indemnity based on the terms of the agreement by which ChemSource Corporation
was sold to IVAX.
ChemSource Corporation believes that the issuance of the Order was
unjustified and that it is in compliance with the pretreatment standards imposed
by the Control Authority for purposes of the Pretreatment Program in Puerto Rico
(Puerto Rico Aqueduct and Sewer Authority) and the National Pollutant Discharge
Elimination System permit.
OTHER LITIGATION
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.
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 our
financial position and results of operations. IVAX' ultimate liability with
respect to any of the foregoing proceedings is not presently determinable.
F-39
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following tables summarize selected quarterly data of IVAX for
the years ended December 31, 2002 and 2001:
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ---------- -------------
2002
- ----
Net revenues $ 272,222 $ 280,406 $ 319,394 $ 325,222 $ 1,197,244
Gross profit 121,975 130,563 142,802 138,196 533,536
Income from continuing operations (1) 19,300 31,722 30,803 36,770 118,595
Net income 23,461 31,722 30,803 36,770 122,756
Basic earnings per common share:
Continuing operations (1) 0.10 0.16 0.16 0.19 0.61
Cumulative effect of accounting
change 0.02 -- -- -- 0.02
Net earnings 0.12 0.16 0.16 0.19 0.63
Diluted earnings per common share:
Continuing operations (1) 0.10 0.16 0.16 0.19 0.60
Cumulative effect of accounting
change 0.02 -- -- -- 0.02
Net earnings 0.12 0.16 0.16 0.19 0.62
2001
- ----
Net revenues (2) $ 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 (1) 60,132 67,863 61,461 53,807 243,263
Net income 60,132 67,863 61,461 53,807 243,263
Basic earnings per common share:
Continuing operations (1) 0.30 0.34 0.31 0.27 1.22
Net earnings 0.30 0.34 0.31 0.27 1.22
Diluted earnings per common share:
Continuing operations (1) 0.29 0.33 0.30 0.27 1.19
Net earnings 0.29 0.33 0.30 0.27 1.19
(1) In the second quarter of 2002, IVAX elected to early adopt SFAS No. 145.
The impact of adoption was the reclassification into income from continuing
operations of extraordinary gain from the early retirement of convertible
senior subordinated notes of $7,120, net of taxes of $4,182, during the
third quarter of 2001, an extraordinary gain of $3,413, net of taxes of
$1,962, during the first quarter of 2002 and an extraordinary gain of
$2,664, net of taxes of $1,531, during the second quarter of 2002.
(2) 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:
Whitman Education Group, Inc. ("Whitman") leases office space from IVAX
in Miami, Florida. During 2002, 2001 and 2000, Whitman leased approximately
13,849, 12,428 and 7,828 square feet, respectively, at an annual rate of $290,
$233 and $146, respectively. The lease may be terminated by either party upon
180 days notice. Dr. Frost, our Chairman of the Board of Directors and Chief
Executive Officer, is Chairman of the Board of Directors of Whitman. Mr.
Flanzraich, our Vice Chairman, President and a Director, is a Director of
Whitman. Mr. Pfenniger, one of our Directors, is Chief Executive Officer and
Vice Chairman of the Board of Directors of Whitman. In addition, Dr. Frost is a
principal shareholder of Whitman.
F-40
IVAX paid $2,702, $2,023 and $1,969 during 2002, 2001 and 2000,
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 2003, IVAX received $6,610 in settlement of a lawsuit,
which was recorded as a reduction of general and administrative expenses during
the first quarter of 2003.
On January 24, 2003, IVAX acquired ChemSource Corporation in Puerto
Rico from Chemo Iberica S.A. and Quimica Sintetica S.A. for one million shares
of IVAX' common stock, valued at $12,393, and $100 in cash. ChemSource is
primarily a 170,000 square foot manufacturing facility on 45 acres in Puerto
Rico.
Through March 26, 2003, IVAX repurchased 550 shares of its stock at a
total cost, including commissions, of $6,155.
Through March 26, 2003, IVAX repurchased $19,300 of 4.5% Convertible
Senior Subordinated Notes for $16,762, plus accrued interest of $243, and wrote
off debt issuance costs of $481. This resulted in a gain on the extinguishment
of debt of $2,057. Through March 26, 2003, IVAX repurchased $1,000 of 5.5%
Convertible Senior Subordinated Notes for $935, plus accrued interest of $12,
and wrote off debt issuance costs of $16. This resulted in a gain on the
extinguishment of debt of $49.
F-41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
IVAX Corporation
We have audited the consolidated financial statements of IVAX Corporation as of
December 31, 2002, and for the year then ended, and have issued our report
thereon dated February 13, 2003 (except for the third and fourth paragraphs of
Note 16, as to which the date is March 26, 2003) (included elsewhere in this
Form 10-K). Our audit also included Schedule II--Valuation and Qualifying
Accounts as of December 31, 2002, and for the year then ended, included in this
Annual Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our audit. The financial statement schedule of IVAX Corporation as of
December 31, 2001 and 2000, and for the years then ended was subjected to the
auditing procedures applied by other auditors, who have ceased operations, in
their audit of the consolidated financial statements for those years and whose
report dated February 12, 2002, indicated that such financial statement schedule
fairly stated in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
In our opinion, the financial statement schedule as of December 31, 2002, and
for the year then ended, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Miami, Florida
February 13, 2003
F-42
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.
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH IVAX CORPORATION'S FILING ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER
DISCUSSION.
F-43
SCHEDULE II
IVAX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2002
(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, 2000 $ 22,058 (132) (1,680) (543) $ 19,703
========== ========== ========== ======== ===========
Year ended December 31, 2001 $ 19,703 1,143 (2,575) 3,399 $ 21,670
========== ========== ========== ======== ===========
Year ended December 31, 2002 $ 21,670 4,239 (2,153) (2,037) $ 21,719
========== ========== ========== ======== ===========
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, 2000 $ 3,220 -- (1,636) $ 1,584
============= ============= ============ =============
Year ended December 31, 2001 $ 1,584 663 (346) $ 1,901
============= ============= ============ =============
Year ended December 31, 2002 $ 1,901 1,272 (1,822) $ 1,351
============= ============= ============ =============
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
21 Subsidiaries of IVAX Corporation.
23.1 Consent of Ernst & Young LLP.
23.2 Information Regarding Consent of Arthur Andersen LLP.
99.1 Certificate of the Chairman and Chief Executive Officer of
IVAX Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certificate of the Chief Financial Officer of IVAX
Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.