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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-5851
Rhone-Poulenc Rorer Inc.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-1699163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Arcola Road
Collegeville, Pennsylvania 19426-0107
- ------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(610)454-8000
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(Registrant's telephone number, including area code)
(Former name, address and fiscal year,
if changed since last report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
134,083,862 shares as of October 31, 1994.
The exhibit index is located on page 29.
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RHONE-POULENC RORER INC.
TABLE OF CONTENTS
--------------------------------------------------
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Report of Independent Accountants 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 16-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22-26
Item 6. Exhibits 27
2
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Rhone-Poulenc Rorer Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Rhone-Poulenc Rorer Inc. and subsidiaries as of September 30, 1994, and the
related condensed consolidated statements of income and cash flows for the
three and nine-month periods ended September 30, 1994 and 1993. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Rhone-Poulenc Rorer Inc. and
subsidiaries as of December 31, 1993, and the related consolidated statements
of income and cash flows for the year then ended (not presented herein) and,
in our report, which includes an explanatory paragraph on the Company's change
in its method of accounting for income taxes in 1992, dated January 26, 1994, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1993, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ COOPERS & LYBRAND L.L.P.
---------------------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
October 21, 1994
3
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
---------------------
<TABLE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - amounts in millions except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------
1994 1993 1994 1993
------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,040.7 $960.1 $2,884.3 $2,884.5
Cost of products sold 343.4 322.6 959.4 957.8
Selling, delivery and administrative
expenses 378.2 357.4 1,067.9 1,056.2
Research and development expense 151.5 138.6 426.1 407.8
Restructuring and other charges -- -- 121.2 77.2
Proceeds from litigation settlement -- -- -- 105.0
------------------------------------------
Operating income 167.6 141.5 309.7 490.5
Interest expense - net 12.7 10.1 36.0 47.7
Other expense - net 3.3 28.7 26.0 25.2
------------------------------------------
Income before income taxes 151.6 102.7 247.7 417.6
Provision for income taxes 44.2 27.7 65.1 124.6
------------------------------------------
Net income 107.4 75.0 182.6 293.0
Dividend on preferred stock 4.9 4.0 13.8 8.2
----------------------------------------
Net income available to common
shareholders $102.5 $71.0 $168.8 $284.8
========================================
Earnings per common share $.76 $.51 $1.25 $2.06
========================================
Cash dividend per common share $.28 $.26 $.84 $.72
Average common shares outstanding 134.8 138.3 135.6 138.3
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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<TABLE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in millions)
<CAPTION>
September 30, December 31,
--------------------------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $39.3 $35.4
Short-term investments 7.2 --
Trade accounts and notes receivable,
less reserves of $59.4 (1993: $68.3) 592.4 746.6
Inventories 621.8 504.1
Other current assets 471.9 382.7
----------------------------
Total current assets 1,732.6 1,668.8
Time deposits, at cost 55.9 64.3
Property, plant and equipment, net of accumulated
depreciation of $1,076.0 (1993: $926.6) 1,115.1 1,032.0
Goodwill, net of accumulated amortization of
$205.5 (1993: $172.1) 717.3 676.5
Intangibles, net of accumulated amortization of
$99.8 (1993: $96.5) 226.0 206.1
Other assets 404.7 402.5
---------------------------
Total assets $4,251.6 $4,050.2
===========================
LIABILITIES
Current:
Short-term debt $90.7 $108.6
Notes payable to Rhone-Poulenc S.A.
and affiliates 112.4 201.3
Accounts payable 357.4 365.6
Other current liabilities 669.1 546.7
----------------------------
Total current liabilities 1,229.6 1,222.2
Long-term debt 598.1 432.2
Deferred income taxes 8.7 29.5
Other liabilities 536.7 545.1
----------------------------
Total liabilities 2,373.1 2,229.0
Contingencies
SHAREHOLDERS' EQUITY
Market Auction Preferred Shares, without par value
(liquidation preference $1,000 per share);
authorized, issued and outstanding
225,000 shares 225.0 225.0
Money market preferred stock, without par value
(liquidation preference $100,000 per share);
authorized, issued and outstanding 1,750 shares 175.0 175.0
Common stock, without par value; stated value
$1 per share; authorized 200,000,000 shares;
issued and outstanding 134,088,878 shares
(1993: 136,996,345 shares) 139.0 139.0
Capital in excess of stated value 300.0 290.0
Retained earnings 1,262.1 1,207.3
Employee Benefits Trust (185.3) (75.8)
Cumulative translation adjustments (37.3) (139.3)
----------------------------
Total shareholders' equity 1,878.5 1,821.2
----------------------------
Total liabilities and shareholders'equity $4,251.6 $4,050.2
============================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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<TABLE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in millions)
<CAPTION>
Nine Months Ended
September 30,
------------------------
1994 1993
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 407.4 $ 574.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (139.9) (167.3)
Equity investment in Applied Immune Sciences, Inc . -- (117.3)
Assets (acquired) sold, net (18.2) 10.0
Net investment hedging, net (33.4) (6.1)
Net cash used in investing activities (191.5) (280.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings (repayments):
Long-term debt, net 35.9 (18.2)
Short-term debt, net (16.2) (268.3)
Issuance of money market preferred stock -- 171.9
Redemption of Market Auction Preferred Shares -- (75.0)
Issuances of common stock 1.8 20.4
Shares repurchased for Employee Benefits Trust (109.5) (21.4)
Dividends paid (127.9) (106.4)
-------------------------
Net cash used in financing activities (215.9) (297.0)
Effect of exchange rate changes on cash 3.9 (3.0)
-------------------------
Net increase (decrease) in cash and cash
equivalents 3.9 (6.6)
Cash and cash equivalents at beginning of year 35.4 39.5
-------------------------
Cash and cash equivalents at September 30 $ 39.3 $ 32.9
=========================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
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RHONE-POULENC RORER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1.- RESULTS FOR INTERIM PERIODS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments necessary for a fair presentation
of financial position, cash flows and results of operations for the periods
presented. Certain adjustments have been made to reflect transactions which
are of a nonrecurring nature; significant unusual and nonrecurring transactions
are described in detail in the accompanying footnotes. Certain prior year
items have been reclassified to conform to current classifications.
The statements are presented in accordance with the requirements of Form 10-Q
and do not include all disclosures required by generally accepted accounting
principles or those made in the Annual Report on Form 10-K. The Annual Report
on Form 10-K for the year 1993 is on file with the Securities and Exchange
Commission and should be read in conjunction with these condensed consolidated
financial statements.
NOTE 2.- ACCOUNTING POLICIES/RECENTLY ISSUED ACCOUNTING STANDARDS
Goodwill
Goodwill represents the excess of cost over the fair market value of net assets
of businesses acquired. The Company assesses potential impairment of goodwill
by comparing the carrying value of goodwill at the balance sheet date with
anticipated undiscounted future operating income before amortization.
Advertising Costs
In December 1993, the AICPA issued Statement of Position (SOP) 93-7, "Reporting
on Advertising Costs," effective for fiscal years beginning after June 15,
1994. SOP 93-7 requires that the costs of advertising other than direct
response advertising be expensed as incurred or the first time the
advertising takes place. Adoption of the SOP in 1995 is not expected to have a
material impact on the Company's quarterly or annual financial statements.
NOTE 3.- RESTRUCTURING AND OTHER CHARGES AND PROCEEDS FROM
LITIGATION SETTLEMENT
In the 1994 second quarter, the Company recorded a $121.2 million ($.58 per
share) pretax charge in connection with a global restructuring plan that is
expected to be completed in 1995. The restructuring will reduce the Company's
workforce by approximately 1,300 positions, or 6%. The reductions will be
primarily from manufacturing, sales/marketing and administrative functions in
North America and in France, although other locations in Europe and elsewhere
are also included. Reductions are being effected through a variety of local
programs which typically include retirement incentives or other severance
benefits as well as outplacement services. The cash outlay related to the
plan is expected to approximate $100.0 million. The remainder of the
restructuring charge relates to asset writeoffs in conjunction with certain
production facilities. Annual pretax savings should grow to over $60.0 million
in 1996.
7
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A rollforward of the 1994 restructuring provision from June 30, 1994 is as
follows:
(Dollars in millions)
Payments/ Translation
June 30, asset adjustments/ September 30,
1994 writeoffs other 1994
----------------------------------------------------------
Social costs $ 89.6 $ (15.0) $ 4.8 $ 79.4
Third parties 12.5 (1.7) (3.5) 7.3
Asset writeoffs 19.1 (11.3) 2.6 10.4
----------------------------------------------------------
Total $ 121.2 $ (28.0) $ 3.9 $ 97.1
==========================================================
As of September 30, 1994, the Company's workforce has been reduced by more than
400 employees as a result of the 1994 restructuring program.
In the 1993 second quarter, the Company recorded charges of $77.2 million for
the cost of certain restructuring and manufacturing streamlining programs and
increased provisions for certain litigation. In the 1993 fourth quarter, the
Company recorded additional restructuring charges of $16.6 million. The 1993
restructuring programs, principally in Europe, include restructuring of
marketing and manufacturing operations in the Company's German and Italian
prescription pharmaceutical businesses following governmental actions aimed
at reducing prices and limiting prescription volume. The programs also
include a plan to divest a portion of a manufacturing facility in Monts, France
by the end of 1995. Total workforce reductions associated with the plan will
approximate 800 positions; as of September 30, 1994, the Company's workforce
had been reduced by over 650 employees. For the full year 1994, pretax savings
associated with the 1993 restructuring programs are expected to approach $30
million.
A rollforward of the 1993 restructuring provision from December 31, 1993 is as
follows:
(Dollars in millions)
Payments/ Translation
January 1, asset adjustments/ September 30,
1994 writeoffs other 1994
-------------------------------------------------------
Social costs $ 26.6 $ (12.5) $ .3 $ 14.4
Third parties 1.8 (0.9) .6 1.5
Asset writeoffs 9.4 -- .8 10.2
--------------------------------------------------------
Total $ 37.8 $ (13.4) $ 1.7 $ 26.1
========================================================
During the 1993 second quarter, the Company also recorded $105.0 million cash
proceeds from the settlement of patent litigation.
8
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NOTE 4.- INCOME TAXES
The Company records income tax expense based on an estimated full year
effective income tax rate. The third quarter and year-to-date estimated
effective tax rate on operations excluding nonrecurring items was approximately
29% in both 1994 and 1993.
NOTE 5.- INVENTORIES
Inventories consisted of the following:
(Dollars in millions) September 30, 1994 December 31, 1993
---------------------------------------
Finished goods $ 312.8 $ 235.3
Work in process 138.3 111.5
Raw materials and supplies 170.7 157.3
---------------------------------------
$ 621.8 $ 504.1
=======================================
9
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<TABLE>
NOTE 6.- SHAREHOLDERS' EQUITY
<CAPTION>
Market Money Common Capital in
Auction market shares at excess of Employee Cumulative
Preferred preferred stated stated Retained Benefits translation
Shares stock value value earnings Trust adjustment
-----------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 225.0 $ 175.0 $ 139.0 $ 290.0 $ 1,207.3 $ (75.8) $ (139.3)
Net income 182.6
Cash dividends, $.84 per
common share (114.0)
Dividends on preferred stock (13.8)
Issuance of shares under
employee benefit plans 10.0
Repurchase of shares for
Employee Benefits Trust (109.5)
Translation adjustments, net of
$29.5 million after-tax reductions
due to hedging activities 102.0
----------------------------------------------------------------------------------------
Balance, September 30, 1994 $ 225.0 $ 175.0 $ 139.0 $ 300.0 $ 1,262.1 $ (185.3) $ (37.3)
========================================================================================
In March 1993, the Company's Board of Directors approved the repurchase of up to 5 million of its common shares on
the open market from time to time; at September 30, 1994, the Company had substantially completed the authorized
repurchase program. During the first nine months of 1994, the Company acquired approximately 3.1 million of its
common shares at a cost approximating $109.5 million. These shares are held in an Employee Benefits Trust to
fund employee benefits in the U.S.
10
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NOTE 7.- FINANCIAL INSTRUMENTS
The Company's financial instruments consisted of the following:
September 30, 1994 December 31, 1993
--------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
--------------------------------------------
(Dollars in millions)
Cash, cash equivalents and
short-term investments $ 46.5 $ 46.5 $ 35.4 $ 35.4
Long-term time deposits 55.9 55.9 64.3 64.3
Cost investments:
- - practical to estimate 22.5 21.0 21.2 18.8
- - not practical to estimate 16.1 N/A 13.5 N/A
Long-term debt (619.1) (624.4) (454.2) (470.5)
Foreign exchange contracts (4.6)* (4.6) 2.6* 2.6
Interest rate swap contracts 1.3* 1.1 2.0* 11.8
* The carrying amount represents the net unrealized gain/loss or net interest
receivable/payable associated with the contracts at the end of the period.
Fair Value Disclosures
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and cash equivalents and short-term investments
The carrying amount approximates the fair value due to the short-term maturity
of these instruments.
Time deposits
The carrying amount approximates the fair value due to the variable rate nature
of the long-term deposits.
Cost investments
For those cost investments for which it was practicable, fair value was
estimated using quoted market prices or pricing models.
Long-term debt
The majority of the Company's long-term debt is at variable rates of interest
and therefore the Company believes that the carrying amount approximates fair
value. For long-term debt at fixed interest rates, fair value was determined
by discounting future cash flows based on interest rates currently available
to the Company for debt with similar terms and maturities.
Foreign exchange contracts
The fair value of foreign exchange contracts was estimated by valuing the
contracts at current exchange rates.
11
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Interest rate swap contracts
The fair value of interest rate swap contracts reflects the amount at which
they could be settled based on bank pricing models.
Credit Risk
The Company places its cash investments and time deposits with credit-worthy,
high quality financial institutions and, by policy, limits the amount of credit
exposure to any one institution. The Company therefore does not anticipate
nonperformance by any of the counterparties to these financial instruments.
Concentrations of credit risk with respect to trade receivables is limited
due to a large customer base in a wide geographic area.
Foreign exchange contracts do not expose the Company to accounting risk due
to exchange rate movements as gains and losses on the contracts offset gains
and losses on the transactions being hedged. Management believes that the risk
of incurring losses on these contracts due to default by the other party is
remote as the contracts are entered into with major financial institutions.
As interest rate swap contracts involve exchanges of fixed and floating interest
payment obligations without exchanges of underlying principal amounts, the
Company's exposure to credit loss is significantly less than the notional
amounts of the contracts. Management believes that the risk of incurring
losses due to default by the other party is remote as the contracts are
entered into with major financial institutions.
Financial Instruments with Off-Balance Sheet Risk
Foreign Exchange Contracts--Net Investment Hedges
The Company's principal foreign currency net investment exposures were as
follows:
September 30, 1994 December 31, 1993
---------------------------------------------------
Local U.S. Local U.S.
Currency Dollars Currency Dollars
---------------------------------------------------
France FF 4,167 $ 789 FF 3,996 $ 678
Germany DEM 301 194 DEM 268 155
United Kingdom GBP 54 86 GBP 54 80
Unhedged net investment positions fluctuate with currency movements with
corresponding translation adjustments recorded in shareholders' equity. The
Company may enter into foreign exchange contracts to limit the exposure of its
net investments in foreign subsidiaries to such currency fluctuations. Gains
and losses from these contracts which are designated as hedges of the Company's
net foreign investments are recorded as translation adjustments in shareholders'
equity and offset the gains and losses on the related net investments. For the
nine months ended September 30, 1994, the reduction to shareholders' equity,
net of tax effects, associated with net investment hedging contracts
12
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totaled $29.5 million. Effects of similar net investment hedging contracts
increased shareholder's equity by $1.8 million for the year ended
December 31, 1993.
In determining which, if any, net investment positions to hedge, the Company
considers such factors as the magnitude of the exposed position and the cost
of financing hedging instruments. At approximately one-third of total
shareholders' equity, the French franc net investment represents the largest
single exposure to the Company; accordingly, the Company has hedged a portion
of its net investment in France. At September 30, 1994, the Company was a party
to foreign currency exchange contracts maturing in the fourth quarter with a
combined notional amount of FF 1.9 billion ($345.7 million) to sell French
francs. Similar contracts which matured in January 1994 totaled FF 1.5 billion
($248.4 million) at December 31, 1993.
Foreign Exchange Contracts--Foreign Currency Transaction Hedges
The Company also enters into foreign exchange contracts to minimize exposure of
foreign currency transactions and firm commitments to fluctuating exchange
rates. Gains or losses from these contracts are recognized in the basis of the
transaction being hedged.
The Company's principal net transactional exposures by major currency were as
follows:
asset (liability) in millions
September 30, 1994 December 31, 1993
------------------------------------------------
Local Local
currency U.S. dollar currency U.S. dollar
amount equivalent amount equivalent
------------------------------------------------
U.S.$* 23 $ 23 18 $ 18
FF (93) (18) (97) (16)
GBP (11) (17) (22) (32)
YEN 2,524 26 556 5
All other (each <$20 million) various 40 various 45
------------------------------------------------
Total N/A $ 54 N/A $ 20
================================================
*Represents U.S. dollar-denominated transactions of affiliates with functional
currencies other than the U.S. dollar
The Company's policy is to hedge substantially all of its foreign currency
transactional exposures. At September 30, 1994, the Company had entered into
multiple forward contracts maturing in the fourth quarter to buy or sell various
currencies with notional amounts totaling $63.3 million and $112.2 million,
respectively. Such contracts, which matured in the first quarter of 1994,
totaled $105.8 million and $125.3 million at December 31, 1993, respectively.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage its interest
rate exposures and minimize its overall cost of borrowings. The net receivable
or payable under the interest rate swap arrangements is recognized as an
adjustment to interest expense over the life of the underlying contracts.
The Company's weighted average interest rate for the nine months ended September
was reduced by 15 basis points or approximately $1.0 million
13
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(45 basis points or $3.5 million for the year ended December 31, 1993) as a
result of interest rate swap contracts.
At September 30, 1994, the Company was party to contracts to convert certain
floating rate obligations into fixed rate instruments and contracts to convert
certain fixed rate debt into floating rate debt as determined by the interest
rate environment of the currency in which the underlying obligation was
denominated. Interest rate swap contracts outstanding at September 30, 1994
were as follows:
(U.S. dollars, in millions)
Estimated
Fixed Notional Carrying fair mkt. Average
Currency variable amount amount value Term rate
- ------------------------------------------------------------------------------
..receivable (payable)..
U.S.$ V $ 80 $ .4 $ 1.1 7/92-7/99 Pay Libor 3 mos;
Rec 7.1%
FF F 400FF (0.3) (1.1) 2/93-2/95 Pay 6.7%;
Rec Pibor 6 mos
FF V 400FF 1.2 1.1 6/93-6/95 Pay Pibor 3 mos;
Rec 6.0%
The Company was party to similar contracts at December 31, 1993.
NOTE 8.- RELATED PARTY TRANSACTIONS
Receivables from Rhone-Poulenc S.A. and affiliates (RP) at September 30, 1994
include $14.8 million in accounts receivable from sales of products and
services to RP and $50.2 million classified as other current assets.
Accounts payable related to the purchase of materials and services from RP were
$14.8 million at September 30, 1994; accrued and other liabilities due to RP
totaled $14.1 million.
As of September 30, 1994, the Company had $112.4 million short-term and $31.6
million long-term debt outstanding with RP.
Sales to RP in 1994 were $37.9 million in the third quarter and $78.9 million
for the nine-month period; services purchased from and interest paid to RP were
$13.0 million in the third quarter and $31.0 million for the nine-month period.
In the third quarter of 1994, the Company performed services with respect to an
RP affiliate totaling approximately $4.9 million. For the comparable 1993
quarter and nine months, sales to RP were $9.8 million and $26.9 million,
respectively. Amounts paid to RP in the prior year for services and interest
were $8.6 million for the third quarter and $31.1 million for the nine-month
period.
14
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NOTE 9.- CONTINGENCIES
The Company is involved in litigation incidental to its business, including, but
not limited to: (1) approximately 295 pending lawsuits in the United States,
Canada and Ireland against the Company and its Armour Pharmaceutical Company
subsidiary ("Armour"), in which it is claimed by individuals infected with the
Human Immunodeficiency Virus (HIV) that their infection with HIV and, in some
cases, resulting illnesses, including Acquired Immune Deficiency Syndrome-
related conditions or death therefrom, may have been caused by administration
of antihemophilic factor (AHF) concentrates processed by Armour in the early
and mid-1980's. Armour has also been named as a defendant in five proposed
class action lawsuits filed on behalf of HIV-infected hemophiliacs and their
families. None of the cases involves Armour's currently distributed AHF
concentrates; (2) legal actions pending against one or more subsidiaries of the
Company and various groupings of more than one hundred pharmaceutical companies,
in which it is generally alleged that certain individuals were injured as a
result of the development of various reproductive tract abnormalities because
of in utero exposure to diethylstilbestrol (DES) (typically, two former
operating subsidiaries of the Company are named as defendants, along with
numerous other DES manufacturers, when the claimant is unable to identify the
manufacturer); (3) antitrust actions in the U.S. alleging that the Company
engaged in price discrimination practices to the detriment of certain
independent community pharmacists; (4) two lawsuits alleging breach of contract
by a subsidiary of the Company with respect to agreements involving a
bisphosphonate compound and Lozol(R); (5) an alleged infringement by the Company
of a process patent for the manufacture of bulk diltiazem, an ingredient in the
Company's product Dilacor XR(R); (6) potential responsibility relating to past
waste disposal practices, including potential involvement, for which the Company
believes its share of liability, if any, to be negligible, at three sites on the
U.S. National Priority List created by Superfund legislation.
The eventual outcomes of the above matters of pending litigation cannot be
predicted with certainty. The defense of these matters and the defense of
expected additional lawsuits related to these matters may require substantial
legal defense expenditures. The Company follows Statement of Financial
Accounting Standards No. 5 in determining whether to recognize losses and accrue
liabilities relating to such matters. Accordingly, the Company recognizes a
loss if available information indicates that a loss or range of losses is
probable and reasonably estimable. The Company estimates such losses on the
basis of current facts and circumstances, prior experience with similar matters,
the number of claims and the anticipated cost of administering, defending and,
in some cases, settling such claims. The Company has also recorded as an asset
certain insurance recoveries which are determined to be probable of occurrence
on the basis of the status of current discussions with its insurance carriers.
If a contingent loss is not probable but is reasonably possible, the Company
discloses this contingency in the notes to its consolidated financial
statements if it is material. Based on the information available, the Company
does not believe that reasonably possible uninsured losses in excess of amounts
recorded for the above matters of litigation would have a material adverse
impact on the Company's financial position or results of operations.
15
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ITEM 2.
RHONE-POULENC RORER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Rhone-Poulenc Rorer Inc. ("RPR" or "the Company") was formed in 1990 by the
combination of Rorer Group Inc. (Rorer) and substantially all of the Human
Pharmaceutical Business of Rhone-Poulenc S.A. (RP). RP, based in Paris, France,
owns approximately two-thirds of RPR's common stock and controls the Company.
Rhone-Poulenc Rorer is one of the largest research-based pharmaceutical
companies in the world. In the discussion which follows, percentage
comparisons of year-to-year sales, except when noted as reported sales, exclude
the effects of exchange rate fluctuations.
RESULTS OF OPERATIONS (Three and nine months ended September 30, 1994 versus
comparable 1993 periods)
The Company recorded net income for the third quarter of $102.5 million ($.76
per common share) compared with net income of $71.0 million ($.51 per common
share) in 1993. Third quarter 1993 results included a $27.0 million pretax
charge ($.13 per common share) for the portion of the Applied Immune Sciences,
Inc. ("AIS") purchase price representing acquired research and development
expense.
On sales of $2,884.3 million, net income available to common shareholders for
the nine months ended September 30, 1994 was $168.8 million ($1.25 per common
share) compared with $284.8 million ($2.06 per common share) for the
corresponding prior year period. Year-to-date 1994 results include pretax
restructuring charges of $121.2 million ($78.8 million after-tax or $.58 per
common share) recorded during the second quarter. In addition to the third
quarter AIS-related charge of $.13 per common share, prior year results
included after-tax income of $14.6 million ($.11 per common share) from the
net effects of proceeds from settlement of patent litigation less restructuring
and other charges recorded during the 1993 second quarter.
The Company's third quarter reported sales increased over 8% from the comparable
1993 quarter to $1,040.7 million; on a year-to-date basis, sales were level with
the prior year. On a basis which excludes the effects of currency fluctuations
and product divestitures, net sales increased by almost 6% and 2% for the three-
and nine-month periods, respectively. The net impact of price changes reduced
sales by approximately one percentage point for the quarter and first nine
months of 1994. The global pharmaceutical industry continues to be affected
by initiatives in several markets to reduce pharmaceutical prices and limit
the volume of prescriptions written.
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Quarterly and year-to-date sales by geographic area were as follows:
(in millions) Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------
1994 1993 % 1994 1993 %
Change* Change*
---------------------------------------------------------
U.S. $ 317.9 $ 269.9 18% $ 819.7 $ 751.0 9%
---------------------------------------------------------
France 328.9 323.5 (3) 946.1 1,022.6 (5)
Other Europe 250.9 240.3 (1) 727.9 728.4 2
Rest of World 143.0 126.4 15 390.6 382.5 5
---------------------------------------------------------
Total Non-U.S. 722.8 690.2 1 2,064.6 2,133.5 (1)
---------------------------------------------------------
Total Sales $1,040.7 $ 960.1 6% $2,884.3 $2,884.5 2%
=========================================================
* excludes effects of currency fluctuations and product divestitures
Third quarter sales growth in the United States was driven by higher sales of
cardiovascular products, continued good performance by the Armour plasma
derivatives business, and higher sales of Azmacort(R). Year-to-date growth in
the U.S. was negatively affected by the impact of trade inventory practices on
ex-factory sales of certain prescription pharmaceuticals.
Quarterly and year-to-date sales declines in France resulted from reduced sales
of anti-infectives following increasing competition in the antibiotics market
and strong demand in 1993 related to a higher incidence of influenza. Cost
containment measures and physician prescribing habits also restricted growth of
the French pharmaceutical market and are expected to continue. Performance in
certain other key European markets has been affected by restrictive government
programs and reduced prescription prices. On a year-to-date basis, prescription
pharmaceutical sales in Germany have recovered by approximately 13% from
depressed prior year levels while ethical product sales in Italy and the U.K.
were 19% and 15% below the first nine months of 1993, respectively.
Quarterly and year-to-date sales growth in the Rest of World region was led by
sales of anti-infectives in South America and Asia. Although reported sales in
Japan were up slightly during the third quarter due to higher Albuminar(R) sales
,the price reductions which became effective in the first half of the year have
contributed to overall sales declines in that market on a year-to-date basis.
Sales of cardiovascular products, particularly Dilacor XR(R) and Lovenox(R)/
Clexane(R), increased during the quarter and first nine months of the year.
The impact of reduced third quarter sales of the Lozol(R) brand indapamide,
whose FDA exclusivity expired in mid-1993, was mitigated by sales of the
Company's generic indapamide; on a year-to-date basis, total indapamide
product sales trailed prior year levels as expected.
Sales of plasma derivatives continued to outpace the prior year on a quarterly
and year-to-date basis. Quarterly sales growth was led by U.S. sales of
Gammar(R) IV and sales of Albuminar in the U.S. and Japan; however, year-to-
date sales of Albuminar(R) in Japan
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remained below the prior year. Sales of Monoclate-P(R) and
Mononine(TM) in the U.S. and Germany increased for the first nine months of
1994.
The Company's respiratory products, particularly Azmacort(R), recorded sales
increases in the third quarter. For the nine-month period, U.S. ex-factory
sales of Azmacort(R) and Nasacort(R) remained below the prior year due to trade
inventory adjustments in the first half of 1994. A declining market due to a
shift in use to inhaled steroids coupled with increasing generic competition
contributed to reduced year-to-date sales of Slo-bid(TM). The Company launched
its own generic version of Slo-bid(TM) in the U.S. in the 1994 second quarter.
Sales of central nervous system/analgesia products were flat for the quarter
while sales of anti-infectives were slightly below the prior year. For the
first nine months of 1994, both therapeutic categories have experienced sales
shortfalls following unusually strong prior year demand in France and increasing
competitive pressure in the French antibiotics market. Sales declines of anti-
infectives have been partially mitigated by the third quarter introduction of
the quinolone antibiotic Zagam(R) in France and increased sales, particularly
of Flagyl(R), in the Rest of World region.
Quarterly Maalox (R)sales improved slightly as declines in the United States and
France were offset by sales increases in other countries, particularly Germany.
On a year-to-date basis, sales remained just below 1993 levels. The Company's
share of the U.S. antacid market continued to trail the prior year due to
competitive activity and a shift away from the liquid segment where Maalox(R)
has a strong presence. In an effort to protect the Maalox brand position in
the U.S., the Company has committed additional resources for marketing and
advertising initiatives.
As anticipated, sales of calcitonin products continued to be well below prior
year levels due to government cost containment programs in Italy, Spain and
Japan and generic competition in the United States. The non-reimbursement
status of calcitonin in Italy has been appealed, but management does not
anticipate any modifications to the reimbursement classification of calcitonin
in the near-term.
Sales of oncology products have increased over the prior year periods, driven by
the launch of Granocyte(R) for chemotherapy-induced neutropenia in France,
Germany and other European markets in the first half of 1994. The Company
also acquired the U.S. and Canadian marketing rights to Oncaspar(TM) for use
in the treatment of acute lymphoblastic leukemia.
Quarterly operating income benefitted from product mix-related gross margin
improvements and lower administrative expenses, partially offset by increased
marketing expenses in Germany and in Asian markets. On a year-to-date basis,
excluding the effects of nonrecurring items, operating income margin was one
percentage point below the prior year due to higher marketing expenses and
increased investment in research and development which approached 15% of net
sales. Gross margin was essentially level with the comparable 1993 period as
unfavorable changes in price, particularly in Europe, offset product mix
improvements.
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In second quarter of 1994, the Company recorded a $121 million charge related
to a global restructuring plan. The plan, which is expected to be completed
in 1995, is intended to contribute to management's objective to reduce the
Company's cost base (exclusive of research and development expenditures) as a
percentage of sales. Annual pretax savings should grow to over $60 million in
1996. Cash outlays under the plan are expected to approximate $100 million;
the remainder of the restructuring charge relates to asset writeoffs in
conjunction with certain production facilities. As of September 30, 1994,
actual cash outlays and asset writeoffs related to the 1994 plan totaled $17
million and $11 million, respectively. Total workforce reductions will
approximate 1,300 positions, or 6%, primarily from manufacturing, sales
/marketing and administrative functions in North America and in France,
although other locations in Europe and elsewhere are also included. Reductions
are being effected through a variety of local programs which typically include
retirement incentives or other severance benefits as well as outplacement
services. As of September 30, 1994, the Company's workforce had been reduced
by over 400 positions as a result of the 1994 restructuring.
In the 1993 second quarter, the Company recorded charges of $77 million for the
cost of certain restructuring and manufacturing streamlining programs and
increased provisions for certain litigation. In the 1993 fourth quarter,
the Company recorded additional restructuring charges of $17 million. The 1993
restructuring programs, principally in Europe, include restructuring of the
marketing and manufacturing operations in the Company's German and Italian
prescription pharmaceutical businesses following governmental actions aimed at
limiting prices and prescription volume. The programs also include a plan to
invest a portion of a French manufacturing facility by the end of 1995. For
the nine months ended September 30, 1994, cash outlays associated with the
programs totaled $13 million; there were no asset writeoffs during the period.
Total workforce reductions will approximate 800 employees; as of September 30,
1994, over 650 positions had been affected by the programs. For the full year
1994, pretax savings related to the 1993 restructuring program are expected to
approach $30 million.
Quarterly net interest expense grew 27% to $13 million due, in part, to higher
U.S. average debt balances and short-term interest rates. Year-to-date net
interest expense remained 24% below the prior year as a result of lower average
worldwide net debt balances and lower average interest rates in Europe. On a
full year basis, net interest expense is expected to be below 1993. Preferred
dividends were higher due to a net increase in outstanding preferred shares and
the effect on auction rate dividends of higher U.S. short-term interest rates
during 1994.
Other expense included losses associated with the Company's equity investment
in AIS approximating $5 million and $15 million for the three- and nine-month
periods, respectively. The comparable 1993 periods included a $27 million
pretax charge representing AIS-related acquired research and development
expense. Third quarter gains on the sale of certain assets and product rights
totaled $5 million and $3 million in 1994 and 1993, respectively ($9 million
and $15 million on a year-to-date basis, respectively). Year-to-date foreign
exchange losses, including effects of translation and financing policy in high-
inflation economies, totaled $8 million.
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The Company records income tax expense based on an estimated full year effective
income tax rate. Excluding the effects of nonrecurring items, the estimated
effective tax rate for the third quarter and first nine months of both 1994 and
1993 was approximately 29%. Beginning in December 1994, a reduction in the
Company's Possessions Tax Credit benefit under the U.S. Omnibus Budget
Reconciliation Act of 1993 could contribute to an increase in the Company's tax
rate of up to three percentage points in 1995 and thereafter. The Company will
seek to mitigate this effect through routine tax planning.
FINANCIAL CONDITION
Net cash provided by operating activities was $407 million for the first nine
months of 1994, representing a $167 million decrease versus the comparable
prior year period. The reduction reflects lower earnings and an $89 million
increase in cash outlays for income taxes due to the prior year deferral of
tax payments, partially offset by lower working capital needs. Prior year
earnings and operating cash flows included $105 million proceeds from the
settlement of patent litigation.
At $191 million, cash outlays for investing activities were $89 million lower
than prior year. Capital expenditures totaled $140 million versus $167 million
in 1993, but are expected to approximate 1993 levels on a full year basis.
Current year investing activities reflected cash outflows of $29 million for
the acquisition of various product rights and investments while prior year
investing activities included the acquisition of approximately 37% of AIS
for $117 million. Year-to-date net cash outflows associated with hedging
certain net investment exposures approximated $33 million compared with $6
million in 1993. The Company anticipates that known cash outflows in the
first half of 1995 associated with certain investments in technologies will
approximate $60 million.
Cash used in financing activities decreased $81 million to $216 million due to a
lower level of debt repayments, offset in part by higher cash outlays for common
share repurchases and dividends. The Company substantially completed its
authorized common share repurchase program, acquiring approximately three
million of its common shares ($109 million) throughout the first nine months
of 1994; such share repurchases totaled $21 million for the comparable 1993
period. Dividends paid to common shareholders totaled $114 million or $.84
per share, an increase of 17% per share. Prior year financing activities
included the $175 million issuance of money market preferred stock, the net
proceeds of which were used to redeem $75 million of Market Auction Preferred
Shares and to reduce short-term debt.
The Company's net debt (short- and long-term debt including notes payable to
RP, less cash and cash equivalents, short-term investments and time deposits)
to net debt plus equity ratio was .27 to 1 at June 30, 1994 compared with .26
to 1 at December 31, 1993. At September 30, 1994, the Company classified
approximately $374 million of notes payable as long-term debt in accordance
with the Company's intention and ability to refinance such obligations on a
long-term basis.
The Company had committed lines of credit totaling $1.2 billion on October 31,
1994 with approximately $44 million of borrowings outstanding under these lines.
Of the $1.2 billion, $500 million relates to a long-term revolving credit
facility unconditionally guaranteed by RP.
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The amount available reduces by
$200 million per year until expiration of the facility in 1997; during 1994,
$200 million of the facility expired. In a separate agreement with RP, the
Company has agreed to maintain as unused under this facility the smaller of
$325 million or the principal amount of debt outstanding (excluding borrowings
from, or guaranteed by, RP). The Company has an additional $695 million
available under several multi-currency line of credit agreements expiring
throughout the next four years.
Pursuant to a U.S. shelf registration filed in 1993, the Company has the
ability to issue $325 million in public debt securities and/or preferred shares.
At September 30, 1994, the ratio of current assets to current liabilities was
1.41 to 1 compared with 1.37 to 1 at year-end. Management believes that cash
flows from operations, supplemented by financing expected to be available from
external sources, will provide sufficient liquidity for the foreseeable future.
long-term liquidity is dependent upon the Company's competitive position,
including its ability to discover, develop and market innovative new
therapies, and maximize the benefits of new business alliances. In addition to
its 1993 collaboration with AIS, the Company has also recently entered into
several relationships to collaborate on cell and gene therapy programs in the
areas of oncology, cardiovascular disease and central nervous system disorders.
In 1994, the Company also entered into an alliance with Caremark International
Inc., a U.S. pharmaceutical benefit management company, to enhance the delivery
of cost-effective drug therapies. The Company will continue to explore new
strategic business alliances as such opportunities arise.
On October 26, 1994, the Board of Directors declared a cash dividend of $.28 per
common share payable November 30, 1994 to shareholders of record November 10,
1994. Full year 1994 dividends per share increased 12% from the prior year.
The Company is involved in litigation incidental to its business. A discussion
of contingencies appears in Note 9 of the Notes to Condensed Consolidated
Financial Statements and in Legal Proceedings in Part II of Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Diethylstilbestrol ("DES") Litigation
There are approximately two hundred legal actions pending against one or more
subsidiaries of the Company and various groupings of more than one hundred
pharmaceutical companies, in which it is generally alleged that "DES daughters"
and/or their offspring were injured as a result of the development of various
reproductive tract abnormalities in the "DES daughters" because of their in
utero exposure to DES. Typically, William H. Rorer, Inc. ("WHR") and Kremers-
Urban Company ("K-U"), two former operating subsidiaries of the Company, are
named as defendants, along with numerous other former DES manufacturers, when
the claimant is unable to identify the manufacturer of the DES to which she was
exposed. While the aggregate monetary damages sought in all of these DES
actions are substantial, the Company believes that both WHR and K-U have
adequate defenses to DES claims. In May 1994, a proposed class action was
filed on behalf of persons alleging injuries caused by DES living in the state
of Ohio (Kurczi, et al. v. Eli Lilly, et al., United States District Court for
the Northern District of Illinois). The Company and certain of its current and
former subsidiaries were named among the 192 defendants. In at least seven prior
DES actions, plaintiffs have sought certification of a class and have been
unsuccessful. As the facts of each individual lawsuit vary widely, the
Company does not believe that class action status is warranted and it intends
to vigorously oppose this petition requesting class action certification. All
pending cases are currently being defended by insurance carriers, sometimes
under a reservation of rights. The Company is also responsible for the
obligations of Nattermann & Cie GmbH ("Nattermann") with respect to DES-related
legal actions brought against certain of its former U.S. subsidiaries. Under
the terms of the 1990 Acquisition Agreement with Rhone-Poulenc S.A. (RP), RP is
obligated to indemnify the Company for amounts expended on the Nattermann DES
claims in excess of $2 million. The Company believes that the former Nattermann
subsidiaries have adequate defenses to DES claims.
AHF Litigation
There are approximately two hundred twenty-six pending lawsuits in the United
States, fourteen in Canada and fifty-five in Ireland against the Company's
Armour Pharmaceutical Company ("Armour") subsidiary, and in some instances, the
Company and certain of its other subsidiaries, in which individuals with
hemophilia who are infected with the Human Immunodeficiency Virus ("HIV"),
or their representatives, claim that such infection and, in some cases,
resulting illnesses (including Acquired Immune Deficiency Syndrome-related
conditions) or death therefrom, may have been caused by administration of
anti-hemophilic factor ("AHF") concentrates processed by Armour in the early
and mid-1980's; none of these cases involves Armour's currently distributed
AHF concentrates. In most of these suits, Armour is one of a number of
defendants, including other fractionators who supplied AHF during that
period. To date, approximately one hundred two claims have been resolved
either by dismissal by the plaintiffs or the Court or through settlement. A
majority of the currently pending lawsuits were filed in 1993, and management
believes the number of lawsuits filed will continue to trend upward. It is not
possible, however, to predict with
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certainty the number of additional lawsuits
that may eventually be filed alleging HIV-related claims.
In January 1993, a jury in Florida held that Armour was liable to the parents
of a deceased HIV-infected hemophiliac for damages of approximately $2 million.
Armour believes this verdict to be inconsistent with evidence specific to the
case and, accordingly, filed motions with the trial court seeking reversal or,
alternatively, a new trial. The trial court denied both motions and Armour has
appealed the judgment to the United States Court of Appeals for the Eleventh
Circuit. Oral arguments on the appeal were recently held. Regardless of the
outcome of this case, and because the facts vary widely in such cases, the
Company does not view this verdict as predictive of, or as precedent for,
decisions in any other cases. Juries in other AHF cases have determined that
Armour and the other plasma fractionators acted responsibly and were not
negligent. In October 1993, Armour obtained a directed verdict dismissing
it from a lawsuit pending in Louisiana State Court on the basis that the
plaintiff had not presented evidence sufficient to maintain an action against
Armour. Additionally, in November 1993, a jury verdict in favor of Armour and
the other plasma fractionators was obtained in an action pending in the United
States District Court for the Northern District of Illinois. The jury
concluded that the fractionators of Factor VIII concentrate in the early 1980's
were not negligent as alleged and accordingly were not liable to the claimant.
Plaintiff's post-trial motion seeking a new trial was denied and plaintiff has
appealed the judgment to the United States Court of Appeals for the Seventh
Circuit. Although there are no other actions pending against Armour which
are presently at trial or set for trial in 1994, Armour reasonably expects
that other cases will proceed to trial in the future.
In December 1993, the Federal Multi-District Litigation Panel authorized the
consolidation of all AHF litigation pending in U.S. Federal Courts for purposes
of pre-trial discovery and the transfer of such cases to the U.S. District Court
for the Northern District of Illinois for this purpose. As of September 30,
1994, four proposed federal class action lawsuits (Wadleigh, et al. v. Armour
Pharmaceutical Company, et al., United States District Court, Northern District,
Illinois; Richard Roe and his mother, Jane Roe v. Armour Pharmaceutical Company,
et al., United States District Court, Idaho District; Jose Alvarez, Jr. et al.
v. Armour Pharmaceutical Company, et al., United States District Court for the
Eastern District of Louisiana; and Timmy Dale Martin, et al. v. Armour
Pharmaceutical Company, et al., United States District Court for the Northern
District of Alabama); and one proposed state class action (Jeffrey Stanger, et
al. v. Armour Pharmaceutical Company, et al., Superior Court, Pima County,
Arizona), have been filed against several fractionators, including Armour.
In a bench ruling on August 5, 1994, and a Memorandum Opinion filed August 17,
1994, the Court in Wadleigh stated that it intended to certify the issue of
negligence in that action for class action treatment, but that it would deny
plaintiffs' motion for certification of an all-purpose class action and
plaintiffs' motion for certification of the issues of strict liability, breach
of warranty, proximate cause, and punitive damages. On September 22, 1994, the
Court denied the defendants' motion for reconsideration, and also denied
defendants' request that it certify the issues for immediate consideration by
the Court of Appeals. In an order entered October 31, 1994, the Court ruled
that it would not certify plaintiffs' concert of action claim for class
treatment. On November 3, 1994, the Court entered its formal
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class certification order. Various issues regarding notice to the class remain
pending. The Court has scheduled a hearing in early December, 1994 with
respect to these issues. Under the issue certification contemplated by the
Court, only the issue of negligence would be tried on a classwide basis. In
the event of a defense verdict, all class members would be bound thereby; in
the event of a plaintiffs' verdict, it would be necessary for each class member
to attempt to utilize that favorable outcome in his own separate litigation.
The class trial would not involve any issues of causation or damages, or a
determination as to any defenses such as the statute of limitations.
As the facts in each individual lawsuit vary widely, Armour does not believe
that class action status is warranted in any of these actions and it intends
to challenge the Court's ruling in Wadleigh at the earliest possible time.
Previously, two U.S. Federal Courts and one State Court had denied petitions
for class action certification, and in April 1994, the New Jersey Superior
Court denied permission to bring a previously proposed state class-action
lawsuit (D.K., L.K.; R.K., Sr., et al. v. Armour Pharmaceutical Company, et al.,
Superior Court, Middlesex County, New Jersey). The Company intends to
vigorously oppose the remaining petitions requesting class action certification.
In the U.S., Armour and other plasma fractionators have participated in
discussions with representatives of the hemophilia community, including
the National Hemophilia Foundation, concerning the issue of assistance for
U.S. hemophiliacs infected with HIV. Armour and Baxter Healthcare
Corporation ("Baxter") reached a tentative settlement with attorneys
representing claimants in the purported class-action lawsuits pending against
the respective companies and submitted a Memorandum of Understanding to the
Court in that regard on August 2, 1994. However, as a result of the Court's
August 5, 1994 statements with respect to class certification in Wadleigh,
plaintiffs' counsel withdrew from their recommendation concerning the
settlement. Armour will continue to vigorously defend its position in all
cases and claims brought against it.
With respect to this litigation, the Company has contractual rights to certain
insurance coverage provided by insurance carriers to Revlon, Inc., the party
from which it purchased the Armour business in 1986 ("Revlon carriers"). The
Company also believes it has certain insurance coverage from an umbrella
insurance carrier and that it has access to "excess" liability insurance
coverage from other carriers, effective in 1986, for certain of these cases if
certain self-insured retention levels from relevant insurable losses are
exceeded. The Company has been involved in litigation with a principal
insurance carrier ("the principal carrier") and the umbrella carrier as well
as with certain of the Revlon carriers, relative to carrier defense and
indemnity obligations associated with AHF litigation. A trial in the insurance
coverage litigation, if necessary, would take place in the United States
District Court for the Eastern District of Pennsylvania sometime in late 1994
or early 1995. Recently, the Company settled the dispute being litigated with
the principal carrier by entering into an agreement which defines the principal
carrier's obligations with respect to the underlying AHF litigation.
Additionally, the Company and certain of the other carriers are engaged in
extensive discussions aimed principally at settling the extent and other
conditions of coverage of those carriers. Based upon these discussions, the
Company believes that, although not a certainty, a substantial level of
coverage (including substantial coverage for legal defense expenditures) for the
Company's estimated liability determined in
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accordance with Statement of
Financial Accounting Standards No. 5 ("SFAS 5") is probable of occurrence.
Certain Contract Litigation
Rhone-Poulenc Rorer Pharmaceuticals ("RPRP"), a subsidiary of the Company, has
been named as a defendant in two related breach of contract lawsuits initiated
by Boehringer Mannheim GmbH and its American affiliate, Boehringer Mannheim
Pharmaceuticals Corporation (collectively, "BM"), seeking compensatory damages.
Specifically, BM has commenced arbitration proceedings in Switzerland and
litigation in the state court of Maryland alleging that RPRP breached an
agreement related to the development of BM's bisphosphonate compound and
a copromotion agreement pertaining to the Company's licensed product Lozol(R).
The Company believes that the claims are without merit and RPRP intends to
vigorously defend these actions. RPRP has filed a counterclaim against BM.
Antitrust Litigation
The Company has been named as a defendant in thirty-nine antitrust lawsuits.
It is presently a party to six state court actions in California, one in
Alabama, and one in Wisconsin. Additionally, the Company is named in
thirty-one federal court actions, filed in various jurisdictions. The suits
allege that RPR, certain other pharmaceutical companies and wholesalers, a
large mail order concern and certain pharmacy benefits managers engaged in
discriminatory conduct against independent community pharmacist plaintiffs with
respect to the prices charged for pharmaceutical products and further conspired
to maintain prices at artificially high levels to the detriment of these
pharmacies. One suit alleges injury to a proposed class of California residents
who are consumers of brand name prescription products. Some of the federal
actions purport to be class actions, as do nine of the various state cases.
Plaintiffs in these lawsuits seek injunctive relief and a monetary award for
past damages alleged. The federal class plaintiffs and the California class
plaintiffs have filed amended consolidated Complaints so that issues affecting
the alleged class are pleaded consistently.
In February 1994, the Judicial Panel on Multi-District Litigation consolidated
federal cases in which the Company is a named defendant with other related
federal actions in which the Company is not named as a defendant for purposes
of coordinating overlapping pre-trial proceedings, such as discovery. The
federal cases have been transferred to the United States District Court for
the Northern District of Illinois. Similarly, six state cases in which the
Company is named have been coordinated with four other cases in which the
Company is not named as a defendant in the Superior Court for the County of
San Francisco.
While the aforementioned cases are in their early stages, the Company believes
that the claims are without merit and it intends to vigorously defend these
lawsuits.
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Patent and Intellectual Property Litigation
The Company is a plaintiff in a patent infringement lawsuit with Chiron
Corporation filed in the United States District Court in California involving
the patent licensed exclusively to the Company by the Scripps Research
Institute ("Scripps") covering the antihemophilic Factor VIII:C(R). The Court
is considering pending summary judgment motions. If this case goes to trial,
such trial is likely to be scheduled to commence within the next six to twelve
months.
In February 1993, Tanabe Seiyaku Company ("Tanabe") of Japan and their U.S.
licensee, Marion Merrell Dow Inc. ("MMD") initiated an action before the
International Trade Commission ("ITC"), the administrative agency responsible
for handling complaints of imports which allegedly infringe U.S. patent rights.
The complaint names ten domestic and foreign respondents, including the Company,
and alleges infringement of a Tanabe U.S. patent, claiming a process for
preparing bulk diltiazem, the active ingredient in the Company's Dilacor XR(R)
product. Tanabe and MMD are requesting relief in the form of an Exclusion
Order and a Cease and Desist Order. The Company has raised several defenses,
including lack of jurisdiction, patent invalidity, and non-infringement. The
ITC had suspended the proceeding indefinitely in view of a reexamination
proceeding in the U.S. Patent and Trademark office involving the Tanabe U.S.
process patent. Reexamination is complete and a hearing began in October
1994.
The eventual outcomes of the above matters of pending litigation cannot be
predicted with certainty. The defense of these matters and the defense of
expected additional lawsuits related to these matters may require substantial
legal defense expenditures. The Company follows SFAS 5 in determining whether
to recognize losses and accrue liabilities relating to such matters.
Accordingly, the Company recognizes a loss if available information indicates
that a loss or range of losses is probable and reasonably estimable. The
Company estimates such losses on the basis of current facts and circumstances,
prior experience with similar matters, the number of claims and the anticipated
cost of administering, defending and, in some cases, settling such claims. The
Company has also recorded as an asset insurance recoveries which are determined
to be probable of occurrence on the basis of the status of current discussions
with its insurance carriers. If a contingent loss is not probable, but is
reasonably possible, the Company discloses this contingency in the notes to
its consolidated financial statements if it is material. Based on the
information available, the Company does not believe that reasonably possible
uninsured losses in excess of amounts recorded for the above matters of
litigation would have a material adverse impact on the Company's financial
position or results of operations.
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ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
11 Statement re computation of earnings per common share.
15 Letter re unaudited interim financial information.
27 Financial Data Schedule.
b. Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements 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.
RHONE-POULENC RORER INC.
----------------------------------
(Registrant)
November 11, 1994 /s/ PATRICK LANGLOIS
--------------------- -------------------------------
Patrick Langlois
Senior Vice President and
Chief Financial Officer
November 11, 1994 /s/ DANIEL J. PEDRIANI
--------------------- -------------------------------
Daniel J. Pedriani
Vice President-Corporate Controller
Chief Accounting Officer
28
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Page
- ----------- -------
11 Statement re computation of earnings
per common share. 30-31
15 Letter re unaudited interim financial
information. 32
27 Financial Data Schedule 33
29
</TABLE>
EXHIBIT 11
RHONE-POULENC RORER INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
(Unaudited-dollars and shares in millions except per share data)
Three Months Ended
September 30,
-----------------------------
1994 1993
-----------------------------
Net income per common share as reported:
Net income before preferred dividend $ 107.4 $ 75.0
Less: Dividend on preferred stock (4.9) (4.0)
------------------------------
Net income available to common shareholders
$ 102.5 $ 71.0
==============================
Average shares outstanding
134.8 138.3
==============================
Net income available to common
shareholders per share $ .76 $ .51
==============================
Net income per common share assuming full dilution:
Net income before preferred dividend $ 107.4 $ 75.0
Less: Dividend on preferred stock (4.9) (4.0)
-----------------------------
Net income available to common shareholders $ 102.5 $ 71.0
=============================
Average shares outstanding 134.8 138.3
Shares contingently issuable for stock plan .4 .8
-----------------------------
Average shares outstanding, assuming full
dilution 135.2 139.1
=============================
Net income available to common shareholders per
share, assuming full dilution $ .76 $ .51
=============================
This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3%.
30
<PAGE>
<PAGE>
EXHIBIT 11
RHONE-POULENC RORER INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
(Unaudited-dollars and shares in millions except per share data)
Nine Months Ended
September 30,
------------------------
1994 1993
------------------------
Net income per common share as reported:
Net income before preferred dividend $ 182.6 $ 293.0
Less: Dividend on preferred stock (13.8) (8.2)
-------------------------
Net income available to common shareholders $ 168.8 $ 284.8
=========================
Average shares outstanding 135.6 138.3
=========================
Net income available to common shareholders per share $ 1.25 $ 2.06
=========================
Net income per common share assuming full dilution:
Net income before preferred dividend $ 182.6 $ 293.0
Less: Dividend on preferred stock (13.8) (8.2)
-------------------------
Net income available to common shareholders,
assuming full dilution $ 168.8 $ 284.8
=========================
Average shares outstanding 135.6 138.3
Shares contingently issuable for stock plan .5 .9
-------------------------
Average shares outstanding, assuming full dilution 136.1 139.2
=========================
Net income available to common shareholders per
share, assuming full dilution $ 1.24 $ 2.05
=========================
This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No.
15 because it results in dilution of less than 3%.
31
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Rhone-Poulenc Rorer Inc.
Quarterly Report on Form 10-Q
We are aware that our report dated October 21, 1994, on our review of interim
financial information of Rhone-Poulenc Rorer Inc. (the Company), for the period
ended September 30, 1994, and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in the
registration statements of the Company on Form S-3 (Registration No. 33-62052,
Registration No. 33-36558, Registration No. 33-30795, Registration No. 33-23754
,Registration No. 33-4876, Registration No. 33-19936, Registration No. 22-18034
,Registration No. 33-43941, Registration No. 33-53378 and Registration No. 33-
55694) and on Form S-8 (Registration No. 33-58998, Registration No. 33-24537,
Registration No. 2-61635, Registration No. 2-78374 and Registration No. 33-
2403). Pursuant to Rule 436(c) under the Securities Act of 1933, this report
should not be considered a part of the registration statements prepared or
certified by us within the meaning of Sections 7 and 11 of that Act.
/s/ COOPERS & LYBRAND L.L.P.
-----------------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
November 11, 1994
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEET AND THE RELATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE-MONTH
PERIOD ENDING SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 39300
<SECURITIES> 0
<RECEIVABLES> 651800
<ALLOWANCES> 59400
<INVENTORY> 621800
<CURRENT-ASSETS> 471900
<PP&E> 2191100
<DEPRECIATION> 1076000
<TOTAL-ASSETS> 4251600
<CURRENT-LIABILITIES> 1229600
<BONDS> 0
<COMMON> 139000
0
400000
<OTHER-SE> 1339500
<TOTAL-LIABILITY-AND-EQUITY> 4251600
<SALES> 2884300
<TOTAL-REVENUES> 2884300
<CGS> 959400
<TOTAL-COSTS> 2574600
<OTHER-EXPENSES> 26000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36000
<INCOME-PRETAX> 247700
<INCOME-TAX> 65100
<INCOME-CONTINUING> 182600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168800
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
</TABLE>
