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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5851
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RHONE-POULENC RORER INC.
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(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 23-1699163
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 ARCOLA ROAD
COLLEGEVILLE, PENNSYLVANIA 19426-0107
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(Address of principal (Zip Code)
executive offices)
(610) 454-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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.
135,632,368 shares as of April 30, 1996.
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The Exhibit Index is located on page 25
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RHONE-POULENC RORER INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 1996
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Page
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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 7-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 13-18
PART II. OTHER INFORMATION
Item 3. Legal Proceedings 19-22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
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 March
31, 1996, and the related condensed consolidated statements of
income and cash flows for the three-month periods ended
March 31, 1996 and 1995. 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,
1995, and the related consolidated statements of income and cash
flows for the year then ended and in our report dated January
26, 1996, 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, 1995, 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.
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COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
April 23, 1996
3
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
----------------------
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - amounts in millions except per share data)
Three Months Ended
March 31,
-------------------
Restated
1996 1995
------- -------
Net sales $1,272.4 $1,098.4
Cost of products sold 434.2 404.0
Selling, delivery and administrative expenses 514.2 386.8
Research and development expenses 199.9 158.7
------- -------
Operating income 124.1 148.9
Interest expense - net 41.0 10.6
Gain on sale of assets -- (49.5)
Other (income) expense - net (40.8) 49.0
------- -------
Income before income taxes 123.9 138.8
Provision for income taxes 38.9 43.6
------- -------
Net income 85.0 95.2
Remuneration on preferred stock and capital
equity notes (11.0) (5.7)
------- -------
Net income available to common shareholders $ 74.0 $ 89.5
======= =======
Primary earnings per common share:
Net income available to common
shareholders per share $ .55
=======
Net income available to common
shareholders per share, restated pro forma $ .66
=======
Cash dividend per common share $ .30 $ .30
======= =======
Average common shares outstanding 134.9 134.1
======= =======
See Notes to Condensed Consolidated Financial Statements.
4
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RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in millions)
March 31, December 31,
1996 1995
--------- ---------
ASSETS
Current:
Cash and cash equivalents $ 94.5 $ 115.4
Cash pooling arrangements with
Rhone-Poulenc S.A. 11.7 16.0
Short-term investments 57.3 --
Trade accounts and notes receivable, less
reserves of $107.2 (1995: $87.3) 909.2 956.8
Inventories 786.1 765.6
Assets held for sale 9.3 228.8
Other current assets 841.5 707.0
-------- --------
Total current assets 2,709.6 2,789.6
Time deposits, at cost 83.0 83.0
Property, plant and equipment, net of
accumulated depreciation of $1,455.2
(1995: $1,255.5) 1,560.3 1,621.0
Goodwill, net of accumulated amortization of
$256.5 (1995: $241.6) 2,888.8 2,953.5
Intangibles, net of accumulated amortization
of $120.0 (1995: $106.3) 854.5 866.8
Other assets 739.8 673.2
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Total assets $8,836.0 $8,987.1
======== ========
LIABILITIES
Current:
Short-term debt $ 445.8 $ 384.2
Notes payable to Rhone-Poulenc S.A. &
affiliates 79.5 127.6
Accounts payable 525.0 601.8
Other current liabilities 1,176.8 1,291.5
-------- --------
Total current liabilities 2,227.1 2,405.1
Long-term debt 2,398.0 2,159.0
Notes payable to Rhone-Poulenc S.A. &
affiliates 274.8 525.4
Deferred income taxes 374.6 365.5
Other liabilities, including minority
interests 1,184.6 1,174.9
-------- --------
Total liabilities 6,459.1 6,629.9
Contingencies
SHAREHOLDERS' EQUITY
Money market preferred stock, without par
value (liquidation preference $100,000 per
share); authorized,issued and
outstanding: 1,750 shares 175.0 175.0
Capital equity notes 500.0 500.0
Common stock, without par value; stated value
$1 per share; authorized 200,000,000 shares;
issued and outstanding 135,490,839 shares
(1995: 134,528,487 shares) 140.5 139.5
Capital in excess of stated value 187.0 153.2
Retained earnings 1,613.8 1,580.3
Employee Benefits Trust (185.7) (185.7)
Cumulative translation adjustments (53.7) (5.1)
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Total shareholders' equity 2,376.9 2,357.2
-------- --------
Total liabilities and
shareholders'equity $8,836.0 $8,987.1
======== ========
See Notes to Condensed Consolidated Financial Statements.
5
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RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in millions)
Three Months Ended
March 31,
-------------------
Restated
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(132.0) $ (3.6)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (90.8) (64.6)
Assets (acquired) sold, net 196.4 (1.3)
Net investment hedging, net -- (4.4)
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Net cash provided by (used in) investing
activities 105.6 (70.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings (repayments):
Long-term debt, net (4.7) (2.3)
Short-term debt, net 23.1 44.5
Issuances of common stock 34.8 1.0
Dividends paid (42.9) (45.9)
-------- -------
Net cash provided by (used in) financing
activities 10.3 (2.7)
Effect of exchange rate changes on cash (4.8) 2.5
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Net decrease in cash and cash equivalents (20.9) (74.1)
Cash and cash equivalents at January 1 115.4 118.8
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Cash and cash equivalents at March 31 $ 94.5 $ 44.7
======= =======
See 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 the
adjustments, all of which are of a normal recurring nature,
necessary for a fair presentation of financial position, cash
flows and results of operations for the periods presented.
Certain prior year items have been reclassified to conform to
current classifications. The Company restated its first quarter
1995 results to include the accounts of businesses acquired from
Rhone-Poulenc S.A. ("RP") (see Note 9). Earnings per share
(restated pro forma) for the first quarter of 1995 reflect pro
forma charges totaling $1.6 million relative to the acquisition
transactions.
The Company's consolidated financial statements are prepared on
a basis in conformity with U.S. generally accepted accounting
principles ("U.S. GAAP"). The preparation of the financial
statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. See
Note 10 for disclosure of contingent liabilities and related
matters.
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 1995 is on file with the Securities and Exchange
Commission and should be read in conjunction with these
condensed consolidated financial statements.
NOTE 2.- FISONS
In late October 1995, the Company acquired the outstanding
shares of Fisons plc ("Fisons"), a U.K.-based pharmaceutical
company, for a total purchase price, including expenses, of $3.0
billion. The Company is currently finalizing the fixed asset
appraisal and intangible valuation processes. To date, the
preliminary purchase price allocation has resulted in goodwill
of $2.2 billion and intangibles of $600.0 million that will be
amortized on a straight-line basis over lives of 40 years and 15
to 30 years, respectively.
In March 1996, the sale of the majority of Fisons' Scientific
Instruments Division to Thermo Instruments Systems Inc. was
completed; the remaining mass spectrometry and PlasmaTrace
assets of the division were also sold in March. Total
consideration approximated $271.8 million, representing $235.9
million in cash and the assignment of $35.9 million of external
debt. The sale resulted in a decrease in goodwill of
approximately $30.0 million.
NOTE 3.- PRO FORMA FINANCIAL INFORMATION
In October 1995, the Company acquired Fisons (see Note 2). In
late November 1995, the Company acquired the remaining 53% that
it did not already own of Applied Immune Sciences, Inc. ("AIS"),
a pioneer in cell therapy. The Company's reported results for
1995 included the operations of Fisons and AIS from November
and December, respectively, as well as acquisition-related costs,
financing charges and goodwill amortization incurred during
the respective periods. Prior to the November transaction, the
Company recorded its share of AIS' results under the equity
method.
7
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On January 1, 1996, the joint control and profit-sharing
provisions of the global plasma proteins joint venture formed
between the Company's Armour Pharmaceutical Company subsidiary
and Behringwerke AG ("Centeon") became effective. As a result,
the Company has discontinued consolidation of the operations
contributed to the joint venture and, under the equity method,
is now reporting its share of Centeon's results as income from
equity affiliates.
The following unaudited pro forma financial information shows
the results of the Company's operations for the three months
ended March 31, 1995 as if the acquisitions of Fisons and AIS
and the formation of Centeon had occurred on January 1, 1995.
Adjustments have been made for financing charges and goodwill
amortization, and income taxes were provided at an estimated
full year effective income tax rate of 36%. The operations of
Fisons' Scientific Instruments Division and Laboratory Supplies
Division, sold in 1996 and 1995, respectively, are not included
in the pro forma results. Research and development expenses
approximating $14.3 million associated with research operations
sold by Fisons in mid-1995 are also excluded. In addition, the
pro forma information excludes acquired research and development
of $13.0 million recorded in the first quarter of 1995
associated with the Company's prior equity investment in AIS.
The pro forma information does not purport to be indicative of
the Company's results of operations had the transactions
actually occurred on the dates presented nor is it necessarily
indicative of future operating results.
Three months
ended
March 31, 1995
------------
(in millions, except per share data)
Net sales $ 1,177.9
Cost of products sold 388.0
Selling, delivery and administrative
expenses 491.4
Research and development 176.6
-----------
Operating income 121.9
Interest expense - net 43.4
Gain on sales of assets (49.5)
Other (income) expense - net (8.7)
-----------
Income before income taxes 136.7
Provision for income taxes 51.6
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Net income from continuing operations
before nonrecurring charges 85.1
Remuneration on preferred stock and capital
equity notes 14.2
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Net income from continuing operations
before nonrecurring charges available
to common shareholders, pro forma $ 70.9
===========
Earnings per common share, restated
pro forma $ .52
===========
Average common shares outstanding 134.1
===========
NOTE 4.- RESTRUCTURING AND OTHER CHARGES
In December 1995, the Company recorded a $60.0 million pretax
charge related to the restructuring of RPR operations as a
direct result of the acquisition of Fisons. As part of the
Fisons purchase price allocation, the Company has also recorded
a $100.0 million liability for the restructuring of Fisons
operations. The combined $160.0 million liability represents
expected cash outlays, which will be principally severance-
related, associated with eliminating positions principally in
the marketing, administrative and manufacturing functions. Many
of these positions are based in the U.S. and the U.K.,
although other locations will also be affected. For
8
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the three months ended March 31, 1996, cash outlays associated
with the restructuring programs totaled $27.8 million with just
under 800 positions affected.
A rollforward of the 1995 restructuring liability from January 1,
1996 is as follows:
Payments/ Translation
January 1, asset adjustments/ March 31,
1996 writeoffs other 1996
--------- ---------- ---------- ----------
(Dollars in millions)
Social costs $148.5 $(24.4) $ (.2) $123.9
Third parties
and asset
writeoffs 11.5 (3.4) -- 8.1
-------- ---------- ---------- ---------
Total $160.0 $(27.8) $ (.2) $132.0
======== ========== ========== =========
In June 1994, the Company recorded a $121.2 million pretax
charge in connection with a global restructuring plan. At March
31, 1996, the remaining reserve approximated $17.3 million, the
majority of which represented outstanding social costs. Cash
outlays during the quarter were not significant.
NOTE 5.- GAIN ON SALE OF ASSETS AND OTHER (INCOME) EXPENSE - NET
In the first quarter of 1995, the Company recorded pretax gains
totaling $49.5 million from the sale to Ciba-Geigy Ltd. of
assets related to the Company's Canadian over-the-counter
business and the sale of certain European product rights.
Other (income) expense - net for the first quarter of 1996
included pretax income totaling $37.1 million from equity
affiliates, including the Centeon joint venture. Sales of
Centeon, including sales to certain RPR affiliates, approached
$238.0 million for the three months ended March 31, 1996 while
gross profit and income before taxes as a percentage of sales
approximated 57% and 34%, respectively.
Other (income) expense - net for the first quarter of 1995
included $13.0 million of acquired research and development
expense related to an additional investment in AIS and pretax
charges of $25.4 million related to the reassessment of the
carrying value of certain assets, including those associated
with the Company's prior investment in The Immune Response
Corporation.
NOTE 6.- INCOME TAXES
The Company records income tax expense based on an estimated
full year effective income tax rate. For the three months ended
March 31, 1996 and 1995, the reported effective income tax rate
approximated 31.4%.
NOTE 7.- INVENTORIES
Inventories consisted of the following:
March 31, December 31,
1996 1995
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(Dollars in millions)
Finished goods $ 310.7 $ 346.2
Work in process 168.2 140.6
Raw materials and supplies 307.2 278.8
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$ 786.1 $ 765.6
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NOTE 8.- SHAREHOLDERS' EQUITY
Money
market Capital Common Capital in
preferred equity stock at excess of
stock notes stated value stated value
--------- -------- ---------- ---------
(Dollars in millions)
Balance, January 1, 1996 $ 175.0 $ 500.0 $ 139.5 $ 153.2
Net income
Cash dividends, $.30 per
common share
Dividends on preferred
stock
Remuneration on capital
equity notes
Issuance of shares under
employee benefit plans 1.0 33.8
Translation adjustments
-------- --------- --------- ----------
Balance, March 31, 1996 $ 175.0 $ 500.0 $ 140.5 $ 187.0
======== ========= ========= ==========
Employee Cumulative
Retained Benefits translation
earnings Trust adjustments
-------- ---------- ------------
(Dollars in millions)
Balance, January 1, 1996 $ 1,580.3 $ (185.7) $ (5.1)
Net income 85.0
Cash dividends, $.30 per
common share (40.5)
Dividends on preferred
stock (2.4)
Remuneration on capital
equity notes (8.6)
Issuance of shares under
employee benefit plans
Translation adjustments (48.6)
-------- ----------- -----------
Balance, March 31, 1996 $ 1,613.8 $ (185.7) $ (53.7)
======== =========== ===========
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NOTE 9.- RELATED PARTY TRANSACTIONS
The entities comprising the Company manage their cash
separately. In the largest countries such as the U.S., France,
the U.K. and Germany, the local entities have access to RP cash
pooling arrangements whereby they can, at their own request,
lend to or borrow from RP at market terms and conditions. At
March 31, 1996 and 1995, cash pooling arrangements with RP
totaled $11.7 million and $16.0 million, respectively.
Receivables from RP at March 31, 1996 included $12.2 million in
accounts receivable from sales of products to RP and $42.6
million classified as other current assets. Receivables and
investments related to Centeon and classified as current assets
totaled $69.7 million at March 31, 1996.
Accounts payable related to the purchase of materials and
services from RP were $11.1 million at March 31, 1996; accrued
and other liabilities due to RP totaled $21.8 million. Current
liabilities due to Centeon totaled $45.5 million.
As of March 31, 1996, the Company had $79.5 million short-term
and $274.8 million long-term debt outstanding with RP.
Sales to RP totaled $9.8 million in the first quarter; services
purchased from and interest paid to RP totaled $11.7 million in
the first quarter of 1996. For the comparable 1995 period,
sales to RP were $8.5 million; services purchased from and
interest paid to RP totaled $9.5 million.
In the 1995 second quarter, the Company acquired Cooperation
Pharmaceutique Francaise and a pharmaceutical business in Brazil
from RP for cash and preferred stock of an RPR subsidiary
aggregating approximately $273.2 million. The preferred shares,
accounted for as minority interest in other liabilities, have a
liquidation preference approximating 645.0 million French francs
(approximately $127.5 million) and pay dividends of 7.5% per
annum on a stated value of 145.0 million French francs. The
acquisition agreements call for potential earnings adjustments
to the purchase price of the businesses based on several
factors, including earnings performance.
NOTE 10.- CONTINGENCIES
The Company is involved in litigation incidental to its
business, including, but not limited to: (1) approximately 450
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 certain 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 alleging that
certain pharmaceutical companies, including the Company, engaged
in price discrimination practices to the detriment of certain
independent community pharmacists, retail chains and consumers;
(4) alleged breach of contract by a subsidiary of the Company
with respect to agreements involving a bisphosphonate compound
and Lozol(r); and (5) potential responsibility relating to past
waste disposal practices, including potential involvement at
three sites on the U.S. National Priority List created by
Superfund legislation.
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In April 1996, the Company, with the three other U.S. plasma
fractionators defending the U.S. AHF litigation, announced a
proposed class settlement offer to resolve this litigation. The
proposed offer is conditioned upon, among other things,
acceptance by 95% of existing U.S. plaintiffs, a number of opt-
outs not to exceed 100, and approval by the court. The Company
estimates that the proposed settlement, after consideration of
insurance recoveries and existing reserves, would have a
moderate adverse impact on earnings in the quarter it was
recognized, but it would not have a material adverse impact on
earnings on an annual basis.
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. 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, except for the
proposed class settlement offer in the U.S. AHF litigation
discussed above, 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, results of operations or
cash flows.
12
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ITEM 2. Management's Discussion and Analysis of Results of
--------------------------------------------------
Operations and Financial Condition
----------------------------------
Rhone-Poulenc Rorer Inc. ("RPR" or "the Company") is one of the
largest research-based pharmaceutical companies in the world.
RPR was formed in 1990 by the combination of Rorer Group Inc.
and substantially all of the Human Pharmaceutical Business of
Rhone-Poulenc S.A. ("RP"), based in Paris, France. RP owns
approximately two-thirds of RPR's common stock and controls the
Company.
Strategic Business Developments Affecting Comparability
In the second quarter of 1995, the Company acquired from RP the
businesses of Cooperation Pharmaceutique Francaise ("Cooper")
and a pharmaceutical business in Brazil. The acquisitions of
entities under common control were treated for accounting
purposes on an "as-if pooling" basis; accordingly, the Company's
1995 first quarter results were restated to include the accounts
of Cooper and the Brazilian business. Earnings per share for
the first quarter of 1995 reflect pro forma charges totaling
$1.6 million relative to the acquisition transactions.
In late October 1995, RPR acquired the U.K.-based pharmaceutical
company, Fisons plc ("Fisons"), which significantly added to the
Company's global respiratory franchise. In late November 1995,
the Company acquired the remaining 53% of the shares of the cell
therapy pioneer Applied Immune Sciences, Inc. ("AIS") that it
did not already own. Results for 1995 included the operating
results of Fisons and AIS from November and December,
respectively, as well as acquisition-related costs, financing
charges and goodwill amortization incurred during the respective
periods. Prior to the November transaction, the Company
recorded its share of AIS' operating losses in equity from
investments in affiliates.
On January 1, 1996, the joint control and profit-sharing
provisions of the global plasma proteins joint venture formed
between the Company's Armour Pharmaceutical Company subsidiary
and Behringwerke AG ("Centeon") became effective. As a result,
the Company has discontinued consolidation of the operations
contributed to the joint venture and, under the equity method,
is now reporting its share of the venture's results as income
from equity affiliates.
The above strategic business developments affect comparability
of first quarter 1996 results with reported results for the
first quarter of 1995. A more meaningful analysis can be made
by comparing 1996 results with the 1995 pro forma results
appearing in Note 3, "Pro Forma Financial Information" starting
on page 7 in the Notes to Condensed Consolidated Financial
Statements. The 1995 pro forma information does not purport to
be indicative of the Company's results of operations had the
transactions described above actually occurred on the dates
presented nor is it necessarily indicative of future operating
results. The 1995 pro forma information does not include the
effects of cost savings and sales synergies expected to be
realized as a result of the Fisons acquisition and Centeon joint
venture. The following "Results of Operations" discussion
describes the comparison of first quarter 1996 to first quarter
1995 pro forma results, unless otherwise noted.
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Results of Operations (1996 versus pro forma 1995)
First quarter 1996 net income available to common shareholders
was $74 million ($.55 per common share) as compared with $71
million on a pro forma basis in the prior year ($.52 per common
share). Pro forma results for the first quarter of 1995
included $.10 per common share of asset gains, net of the
effects of the reassessment of certain asset values.
Sales
At $1,272 million, first quarter 1996 sales increased by 8% over
1995 pro forma sales. Excluding currency fluctuations of
approximately one percentage point, sales increased by 7%
primarily due to volume increases, including new product
presentations. Net higher prices contributed less than one
percentage point to sales growth.
In the tables and discussion which follow, percentage
comparisons of sales are presented excluding the effects of
currency fluctuations unless otherwise noted. Certain
reclassifications of amounts shown in prior periods have been
made between therapeutic area categories to conform to
classifications now used by the Company.
Sales by geographic area were as follows (% change excludes the
effects of product divestitures and currency fluctuations):
Three Months ended March 31,
Pro Forma %
($ in millions) 1996 1995 Change
------- ------- -----
U.S. $ 206 $ 186 11%
------- ------- -----
France 472 454 1%
Other Europe 394 352 12%
Rest of World 200 186 10%
------- ------- -----
Total Non-U.S. 1,066 992 7%
------- ------- -----
Total Sales $ 1,272 $ 1,178 7%
======= ======= =====
Three-month sales in the United States exceeded prior year
levels on a pro forma basis with good growth of the prescription
pharmaceuticals Azmacort(r), Lovenox(r) and DDAVP(r). The
quarter-on-quarter sales comparison in France reflected higher
sales of the analgesic Doliprane(r) and cardiovascular products,
particularly Clexane(r)/Lovenox(r), partially offset by
significantly lower Zagam(tm) sales. In Other European countries,
sales out-performed the prior year period in Germany (Maalox(r),
Clexane(r)/Lovenox(r)) and in the U.K., which benefited from
increased sales of former Fisons respiratory products
(principally Intal(r) and Opticrom(r)). Sales in Italy were
slightly above the prior year due to contributions from
Granocyte(r), which was launched in Italy in the second quarter
of 1995, and growth of self-medication products. Sales also
increased in Central and Eastern Europe for the three-month
period. The Rest of World area reported higher quarterly sales
in Brazil (anti-infectives and rheumatology products) and in
Japan, where good performance of Albuminar(r), sold through
operations not contributed to Centeon, and Maalox(r) more than
offset declines in sales of other products in anticipation of an
April 1st government-imposed price reduction.
14
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Sales by therapeutic area were as follows:
Therapeutic Area/Principal
Offerings Three Months ended March 31,
----------------------------
($ in millions) Pro Forma %
1996 1995 Change*
---------------------------------------- ------- -----
Azmacort(r) $ 43 $ 30 46%
Intal(r)/Aarane(r) 62 64 -2%
Nasacort(r) 12 10 15%
Tilade(r) 17 18 -9%
Total Respiratory 266 216 23%
Clexane(r)/Lovenox(r) 84 65 27%
Dilacor(r) XR 20 19 6%
Lozol(r)/Indapamide 15 11 31%
Selectol(r)/Selecor(r) 21 16 29%
Total Cardiovascular/Thrombosis 235 198 17%
Flagyl(r) 28 27 4%
Granocyte(r) 15 9 69%
Total Anti-infectives/Oncology 186 170 8%
Doliprane(r) 37 29 23%
Imovane(r)/Amoban(r) 34 28 20%
Total CNS/Analgesics 168 132 26%
Maalox(r) 44 37 20%
Total Gastrointestinal 106 95 11%
Calcitonins 19 24 -20%
Orudis(r)/Profenid(r)/Oruvail(r) 47 47 -2%
Total Bone
Metabolism/Rheumatology 87 86 1%
DDAVP(r) 19 12 51%
Other Therapeutic Areas 224 281 -21%
* Percentage change calculation excludes effects of currency
fluctuations.
Growth of respiratory products was led by higher sales of
Azmacort(r) and Nasacort(r) in the United States. The increase
in Azmacort(r) was partially reflective of trade buying patterns
during the quarter. Generic competition for the nebulizer form
of Intal(r) triggered sales declines in the U.S. which were
partially offset by higher sales in the U.K. and in Germany
(Aarane(r)). Sales of Tilade(r) also lagged the prior year in
the U.S., although sales gains were registered in Europe. Other
ex-Fisons respiratory products, principally Opticrom(r),
achieved higher sales for the quarter.
The thrombosis product Clexane(r)/Lovenox(r) experienced
substantial growth in the U.S. and performed well during the
quarter in France and Germany. Sales of Dilacor(r) XR also
exceeded prior year. Sales of the Lozol(r) brand of indapamide
increased over a weak prior year quarter; on a full year basis,
sales of total indapamide products will continue to be affected
by generic competition.
Sales of anti-infectives rose slightly as the effect of higher
sales in Eastern European and Asian countries was reduced by
significantly lower Zagam(tm) sales in France. Excluding the
impact of Zagam(tm), sales of anti-infectives in France were
essentially level with the prior year. Expansion of the
Company's oncological products was driven by growth of
Granocyte(r) sales in Europe, particularly in Italy and France,
and modest contributions from sales of Taxotere(r) in Europe,
where launches took place in mid-first
15
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<PAGE>
quarter 1996. In October 1995, Taxotere(r) received an
approvable letter from the U.S. FDA for use in treatment of
advanced breast cancer when other lines of therapy fail; the
Company is currently involved in final labeling discussions with
the FDA.
Increased sales of central nervous system products reflected
higher sales of Imovane(r)/Amoban(r) in Europe, particularly
France and Germany. The analgesic Doliprane(r) also recorded
growth for the three-month period.
Higher quarterly sales of gastrointestinal products were
principally due to good performance of Maalox(r) in European
countries, particularly Germany, and in Japan.
The anti-inflammatory Orudis(r)/Profenid(r)/Oruvail(r)
experienced quarterly sales declines in the U.K. as a result of
generic competition. Sales were also below the prior year in
Japan. Lower three-month sales of bone metabolism products were
due to reduced calcitonin sales in the U.S. and in certain
European markets, mitigated in part by contributions from
European sales of Menorest(r).
Reduced sales in other therapeutic areas reflected lower sales
of the Cooper subsidiary and of certain bulk chemicals products
as well as the reclassification of certain products to other
categories in the current year. Higher sales of DDAVP(r) in the
U.S. are also included in the category.
Operating Income
Three Months ended March 31,
------------------------------------
1996 Pro Forma 1995
------------ --------------
% of % of Total
(in millions) $ Sales $ Sales Change
------------ -------------- ------
Gross margin $838 65.9% $790 67.1% 6%
Selling, delivery and
administrative 514 40.4% 491 41.7% 5%
Research and development 200 15.7% 177 15.0% 13%
Operating income 124 9.8% 122 10.3% 2%
Reductions in first quarter 1996 gross margin compared with pro
forma 1995 reflected the effects of unfavorable product mix and
lower royalties on in-market sales made by Fisons' joint venture
partner in Japan due to a delayed pollen season. Selling,
delivery and administrative expenses declined as a percentage of
sales as the benefits of ongoing cost containment efforts and
reduced support of certain non-strategic products exceeded
increased spending associated with new products. Higher
research and development as a percentage of sales reflects
increased investment in later stage development projects
including Synercid(tm) and new indications for
Clexane(r)/Lovenox(r), and the movement of certain Gencell
projects into the clinical development stage. Quarterly
operating income margin declined slightly as higher Cost of
Products Sold and an increased investment in research and
development offset reduced selling, delivery and administrative
expenses as a percentage of sales.
In the fourth quarter of 1995, the Company recorded a $60
million pretax charge related to the restructuring of RPR
operations as a direct result of the acquisition of Fisons. In
addition, as part of the Fisons purchase price allocation, the
Company recorded a $100 million liability for the restructuring
of Fisons operations. The combined $160 million liability
represents expected cash outlays, which will be primarily
severance-related, associated with eliminating positions
principally in the marketing, administrative and manufacturing
functions. Many of these positions are based in the U.S. and
the U.K., although other locations will also be affected. For
the three months ended March 31, 1996, cash outlays associated
with the restructuring approached $28 million with just under
800 positions affected. Cost savings and sales synergies
associated with the Fisons acquisition are expected to have a
greater impact
16
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<PAGE>
in the second half of 1996. The Company achieved cost savings in-
line with expectations during the first quarter.
Interest
Net interest expense for the first quarter of 1996 and pro forma
1995 reflected the impact of acquisition debt associated with
the Fisons transaction. Current period interest expense was
favorably impacted by lower weighted average interest rates in
the U.S. and Europe.
A reduction in remuneration on preferred stock and capital
equity notes compared with pro forma 1995 was due to the absence
in 1996 of Market Auction Preferred Shares which were redeemed
in the third quarter of last year. In December 1995, the
Company issued $500 million of capital equity notes to RP,
remuneration on which is based on six-month LIBOR plus a margin.
Other (Income)/Expense - Net and Gain on Sales of Assets
Other (income)expense - net for the first quarter of 1996
included $37 million of income from equity affiliates, including
the Centeon joint venture; income from equity affiliates
approximated $40 million on a pro forma basis in 1995.
Pro forma 1995 other (income)expense - net included charges of
$25 million ($.15 per share) related to the reassessment of the
carrying value of certain assets, including those associated
with the Company's prior investment in The Immune Response
Corporation. Pro forma 1995 results exclude acquired research
and development of $13 million ($.06 per share) related to an
additional investment in AIS.
First quarter 1995 gains on sales of assets totaled $50 million
($.25 per share) and included the sale of assets related to the
Company's Canadian over-the-counter business and certain
European product rights.
Taxes
The Company's first quarter reported effective income tax rate
approximated 31% in 1996 compared with 38% on a pro forma basis
in 1995 reflecting current year tax planning strategies and the
unfavorable impact in 1995 of first quarter asset gains and
carrying value reassessments.
Financial Condition
Cash Flows
Cash outflows associated with first quarter operating activities
totaled $132 million compared with $4 million in 1995,
reflecting increased working capital needs and greater outlays
for restructuring activities and income tax payments. Net
income for 1996 included approximately $37 million of non-cash
earnings of equity affiliates, primarily Centeon.
Cash flows from investing activities included cash proceeds of
$236 million from the March 1996 sale of Fisons' Scientific
Instruments Division. Investing outflows during the quarter
included cash outlays for Fisons acquisition costs that were
accrued at year-end 1995. At $91 million, first quarter 1996
capital expenditures exceeded the prior year by $26 million;
full-year capital spending is expected to surpass 1995 levels
due, in part, to investment in support of new products. In
1995, proceeds from sales of assets
17
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<PAGE>
were substantially offset by cash outflows associated
with certain investments in technologies and product rights.
Cash proceeds from issuances of common stock approached $35
million during the first quarter and essentially offset cash
dividends paid to common shareholders ($40 million or $.30 per
share). In May 1996, the Board of Directors declared a second
quarter cash dividend of $.32 per share payable on May 31, 1996
to holders of record on May 13, 1996. The dividend represents a
7% increase over the comparable prior year period.
Liquidity
The Company's net debt (short- and long-term debt including
notes payable to RP, less cash and cash equivalents, cash
pooling arrangements, short-term investments and time deposits)
to net debt plus equity ratio declined slightly to .55 to 1 at
March 31, 1996 from .56 to 1 at December 31, 1995. The Company
expects to achieve a more significant improvement in its net
debt ratio by the end of 1996, in part, through proceeds from
planned additional divestitures of non-strategic assets. The
ratio of current assets to current liabilities was 1.21 to 1
compared to 1.16 to 1 at December 31, 1995.
At March 31, 1996, the Company had committed lines of credit
totaling $2,325 million. Of this amount, $1,825 million
represented multicurrency medium-term facilities with fourteen
banks expiring in the year 2000. An additional $500 million
represented two medium-term credit agreements with Rhone-Poulenc
S.A. expiring in 2000 and 2002. Borrowings outstanding under
the above lines totaled $1,225 million at March 31, 1996. The
Company classified this amount plus an additional $1,100 million
of short-term borrowings as long-term debt at March 31, 1996 as
it had the ability and intent to finance these amounts on a long-
term basis under the above medium-term facilities.
Pursuant to a shelf registration, the Company has the ability to
issue an additional $325 million in public debt securities
and/or preferred shares.
Management believes that cash flows from operations,
supplemented by proceeds from selected divestitures and
financing expected to be available from external sources, will
provide sufficient liquidity to meet its needs for the
foreseeable future. The Company's competitive position,
including its ability to discover, develop and market innovative
new therapies, build leadership positions in targeted
therapeutic areas and maximize the benefits of business
acquisitions and alliances, will drive its liquidity on a long-
term basis.
The Company is involved in litigation incidental to its
business. A discussion of contingencies appears in Note 10 of
the Notes to Condensed Consolidated Financial Statements and in
Legal Proceedings in Part II of this Form 10-Q. In April 1996,
the Company, with the three other plasma fractionators defending
the U.S. anti-hemophilic factor litigation, announced a proposed
class settlement offer to resolve this litigation. The proposed
offer is conditioned upon, among other things, acceptance by 95%
of existing U.S. plaintiffs, a number of opt-outs not to exceed
100, and approval by the court. The Company estimates that the
proposed settlement, after consideration of insurance recoveries
and existing reserves, would have a moderate adverse impact on
earnings in the quarter it was recognized, but would not have a
material adverse impact on earnings on an annual basis.
18
<PAGE>
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ITEM 3. LEGAL PROCEEDINGS
Diethylstilbestrol ("DES") Litigation
There are approximately four hundred and ninety-nine actions
pending against one or more current and/or former 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, the Company's subsidiaries 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 it has adequate defenses to DES claims.
The Company and certain of its current and former subsidiaries
were named in a putative class action, Ballo et al., v. Abbott
------------------------
Laboratories, et al., No. 96-CV-0774, filed in the United States
- ------------------------------------
District Court for the Eastern District of New York
on February 21, 1996. The case, brought on behalf of
all women in the United States exposed to
DES while in utero, seeks compensation for future medical
expenses allegedly associated with the exposure, as well as
financial support for educational and research efforts related
to DES. The class does not seek compensation for existing DES-
related injuries. All pending cases are currently being
defended by insurance carriers, sometimes under a reservation of
rights.
AHF Litigation
There are approximately 387 lawsuits in the United States, 7 in
Canada and 56 in Ireland pending 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 and 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-1980s. 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 117 cases and 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 expects additional lawsuits will
be filed. It is not possible, however, to predict with
certainty the number of additional lawsuits that may eventually
be filed alleging HIV-related claims.
In December 1993, the Federal Multi-District Litigation Panel
("MDL") 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.
Five proposed federal class action lawsuits (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;
Timmy Dale Martin, et al. v. Armour Pharmaceutical Company, et al.,
- -----------------------------------------------------------------------
United States District Court for the Northern District of
Alabama; Thorne v. Alpha Therapeutic, et al., United States
-------------------------------------
District Court for the Eastern District of Louisiana and Morabito v.
------------
Rhone-Poulenc Rorer, et al., United States District Court for the
- ---------------------------
District of Wyoming [removed from state Colorado court]), and three
proposed state court class actions (Richard Murphy, et al. v.
-------------------------
Armour Pharmaceutical Company, et al., Superior Court,
- -------------------------------------
Pima County, Arizona, James David Hepworth v. Armour, et al., Marion
--------------------------------------
County Superior Court, Indiana; and Jones v. Bayer Corporation et al.,
---------------------------------
Florida), discussed further below, have been filed against
several fractionators, including Armour. The federal actions
are part of the MDL proceeding in Chicago.
In October 1995, the United States Supreme Court denied
plaintiffs' petition for a writ of certiorari related to
plaintiffs' proposed certification of a federal nationwide
class action captioned Wadleigh, et al v. Armour
-------------------------
19
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<PAGE>
Pharmaceutical Company (United States District Court, Northern District,
- ----------------------
Illinois). Wadleigh was decertified in January 1996. As noted above, the
--------
Jones action is pending in a Florida state court against the same defendants
- -----
as in Wadleigh, together with a Florida plasma provider; plaintiffs' counsel
--------
consist of a subgroup of counsel from Wadleigh. The Jones action seeks
-------- -----
certification of a nationwide class and a Florida subclass.
Evidentiary hearings on plaintiffs' motion for class
certification have been completed and the judge has indicated
his intention to deny certification of both proposed classes. A
written opinion will be issued within the next several weeks.
In October 1993, Armour obtained a directed verdict dismissing
it from a lawsuit pending in a state court in Louisiana on the
basis that the plaintiff had not presented evidence sufficient
to maintain an action against Armour. That decision has been
appealed by plaintiff to the state appellate court in Louisiana
and was argued in March 1995.
With respect to the above litigation, the Company has
contractual rights to certain insurance coverage provided by
carriers that insured Revlon, Inc., the party from whom it
purchased Armour in 1986 ("Revlon carriers"). The Company also
has access to "excess" liability insurance coverage from other
carriers, effective in 1986, for certain of these cases if self-
insured retention levels from relevant insurable losses are
exceeded.
From late 1988 until November 1995, the Company was involved in
litigation with a principal insurance carrier ("the principal
carrier"), an umbrella insurance carrier ("the umbrella
carrier") and many of the Revlon carriers, relative to carrier
defense and indemnity obligations associated with the AHF
litigation ("the insurance coverage litigation"). In late 1994,
the Company settled the dispute being litigated with the
principal carriers by entering into an agreement which defines
the principal carrier's obligations with respect to the
underlying AHF litigation. The Company also settled its
disputes with the umbrella carrier and many of the Revlon
carriers. After lengthy discussions, the Company and the
remaining Revlon carriers in the insurance coverage litigation
agreed in November 1995 regarding the extent and other
conditions of coverage of those carriers, and the litigation was
concluded. Based upon the above, the Company believes that
there is a substantial level of coverage (including substantial
coverage for legal defense expenditures) for the Company's
estimated probable liability determined in accordance with
Statement of Financial Accounting Standards No. 5 ("SFAS 5").
In April 1996, the Company, with the three other U.S. plasma
fractionators defending the U.S. AHF litigation, announced a
proposed class settlement offer to resolve this litigation. The
proposal has two primary components: a $600 million fund to be
established available to HIV-infected hemophiliacs and other
designated claimants; and a separate fund for attorneys' fees
and settlement administration costs as determined by the class
settlement judge, up to a maximum of $40 million. The proposed
offer is conditioned upon, among other things, acceptance by 95%
of existing U.S. plaintiffs, a number of opt-outs not to exceed
100, and approval by the court. The Company estimates that the
proposed settlement, after consideration of insurance recoveries
and existing reserves, would have a moderate adverse impact on
earnings in the quarter it was recognized, but would not have a
material adverse impact on earnings on an annual basis.
Commercial Litigation
Rhone-Poulenc Rorer Pharmaceuticals Inc. ("RPRP"), a subsidiary
of the Company, has been named as a defendant in two related
arbitration proceedings in Zurich, Switzerland initiated by
Boehringer Mannheim GmbH and its American affiliate, Boehringer
Mannheim Pharmaceuticals Corporation (collectively, "BM"),
seeking substantial compensatory damages for alleged breach of
contract by RPRP. Specifically, BM 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).
RPR filed a counterclaim in the Maryland litigation against BM
for fraud related to representations made by BM and
20
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its agents prior to the execution of the agreements. In
March 1995, the parties agreed to dismiss the Maryland
litigation and to transfer all of those claims to final and
binding arbitration in Switzerland. At present, two arbitration
proceedings before the same panel are underway. The Company
believes that the claims asserted by BM are without merit and
RPRP is vigorously defending its position.
The Company and it subsidiary, Rhone-Poulenc Rorer International
(Holdings) Inc. ("RIH"), together with three former officers,
and/or directors of a former subsidiary, Rorer International
(Overseas) Inc. ("RIO") have been named as defendants in a
lawsuit filed by a Mexican pharmaceutical company known as
Laboratorios A.F. Aplicaciones Farmaceuticas, S.A. de C.V.
("LAF"). This suit, pending in the United States District Court
for the Eastern District of Pennsylvania, is set for trial in
June 1996. The suit arises out of an action brought in 1985 in
Mexico by RIO against LAF for infringement of intellectual
property rights. The suit alleges that RIO obtained a wrongful
injunction against LAF and pursued its claims against LAF in bad
faith, resulting in lost profits and damage to LAF's reputation.
The Company believes that the claims asserted by LAF are without
merit and is vigorously defending this suit.
Antitrust Litigation
The Company has been named as a defendant in 134 antitrust
lawsuits. It is presently a party to ten state court actions
pending in California, two each in Alabama, Minnesota and
Wisconsin, and one each in the District of Columbia, Washington,
Colorado, Arizona, Maine, New York and Michigan. Additionally,
the Company has been named in 111 antitrust actions brought in
several federal courts which have been coordinated before a
judge in the U. S. District Court for the Northern District of
Illinois (Chicago). All of the cases brought in California
state court have similarly been coordinated before a judge in
the San Francisco Superior Court. The suits allege that many
pharmaceutical companies (including RPR) and wholesalers, in
conjunction with certain pharmacy benefits managers,
discriminated against independent community pharmacist
plaintiffs and/or retail chains with respect to the prices
charged for brand name pharmaceutical products and further
conspired to maintain prices at artificially high levels to the
detriment of these pharmacies. Three of the California actions
allege injury to classes of California residents who are
consumers of brand name prescription products. One of the cases
in each of Alabama, Minnesota, Wisconsin and the cases in New
York, Arizona, Colorado, Washington, Maine and Michigan allege
proposed consumer class claims. An Alabama state court has
conditionally certified a consumer class action on behalf of
Alabama residents and consumers in seven other states and the
District of Columbia. On October 4, 1995, the Washington state
court action was dismissed with prejudice with the court holding
that Washington law did not permit a consumer action in this
instance. This ruling is currently on appeal. The Colorado
state court action was dismissed on January 23, 1996. Many of
the federal actions were brought on behalf of an alleged class
of retail pharmacies throughout the United States; three of the
state cases similarly allege classes of pharmacists within those
states. Plaintiffs in these lawsuits seek injunctive relief and
a monetary award for past damages alleged. The federal class
plaintiffs have filed an amended consolidated Complaint so that
issues affecting the class are pleaded consistently. The
coordinating federal court certified the class alleged in the
amended consolidated Complaint in November 1994. Notice to the
class was given and the opt-out period ended March 10, 1995.
The trial of the class case is scheduled for May 7, 1996. The
coordinating California state court certified retail and
consumer classes in June 1995. These cases have been stayed
pending resolution of the federal litigation. Notice to the
retailer class was given and the opt-out period has expired;
notice to the consumer class has not yet been provided.
In addition, several of the companies named as defendants in the
federal class action, excluding RPR, entered into a tentative
settlement with independent and chain pharmacies who are members
of that class. That settlement was disapproved by the court on
April 4, 1996. A new tentative settlement between the class and
some of the defendants, not including RPR, was preliminarily
approved on May 8, 1996, subject to notice to the class and a
final approval hearing to be scheduled in June. Also on April
4, the court denied summary judgment motions filed by the
pharmaceutical companies and summary
21
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judgment motions filed by the wholesaler
defendants were granted. The Company believes that none of the
claims against it have any merit and is vigorously defending
these lawsuits.
Environmental Litigation
Fisons plc has been named along with other defendants in a U.S.
Federal Court action (Olin Corporation v. Fisons plc, et al.,
----------------------------------------
United States District Court for the District of
Massachusetts) in which Olin Corporation is seeking
to recover its response costs for
environmental contamination resulting from operations at a
Wilmington, Massachusetts facility. The facility was operated
during the late 1960s by a separate Fisons entity. Fisons plc
and another subsidiary, Fisons Finance Ltd., are named in a
cross-claim and third-party complaint, respectively, filed by
one of the co-defendants in the Olin action, NOR-AM Chemical
----
Company ("NOR-AM"). NOR-AM is asserting claims for
indemnification and/or contribution if it is found liable in
Olin. Fisons plc has filed a motion to dismiss the Complaint for
- ----
lack of personal jurisdiction. The Court has not yet ruled on
this motion.
The Company and/or its subsidiaries, including the recently-
acquired Fisons companies, have been named as potentially
responsible parties at three sites on the U.S. National Priority
List created by Superfund legislation.
Patent and Intellectual Property Litigation
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. intellectual property
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
product. In January 1995, the ITC Administrative Judge ruled
that Dilacor XR does not infringe the MMD/Tanabe patent under
any circumstances and that the MMD/Tanabe patent is invalid and
unenforceable. An appeal was taken and the Commission
effectively affirmed the ITC Judge's rulings. MMD/Tanabe has
appealed to the Court of Appeals for the Federal Circuit.
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 anti-hemophilic Factor VIII:C. 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 six
to twelve months after the Court's decision on the summary
judgment motions.
The outcomes of the referenced litigation cannot be predicted
with certainty. The defense of these cases and the defense of
expected additional lawsuits 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 that are probable of occurrence as
a result of the insurance coverage litigation settlement
previously described. 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, except for the
proposed class settlement offer in the U.S. AHF litigation
discussed previously, the Company does not believe that
reasonably possible uninsured losses in excess of amounts
recorded for the referenced litigation would have a material
adverse impact on the Company's financial position, results of
operations or cash flows.
22
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ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Annual Meeting of Shareholders held on May 3, 1996, the
five nominees to the Board of Directors were elected to three-
year terms ending in 1999 and the selection of independent
accountants for 1996 was ratified.
An amendment to the Company's Articles of Incorporation to
increase the number of authorized common shares to 600 million
was approved with 118,131,586 votes in favor; 9,556,802 votes
against and 286,679 abstentions.
Also at the Annual Meeting, the Company recognized Robert
Cawthorn, who retired as Chairman of the Board of Directors.
Mr. Cawthorn has been elected Chairman Emeritus and will remain
a director of the Company. Michel de Rosen, President and Chief
Executive Officer of the Company, has been appointed Chairman of
the Board.
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 (electronic filing only).
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K/A (Amendment
to Form 8-K dated October 20, 1995) on January 5, 1996
containing Fisons plc historical financial statements and
Company pro forma financial information.
23
<PAGE>
<PAGE>
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)
May 10, 1996 /s/ PATRICK LANGLOIS
-------------------------------
Patrick Langlois
Senior Vice President and
Chief Financial Officer
24
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
- -----------
11 Statement re computation of
earnings per common share.
15 Letter re unaudited interim
financial information.
27 Financial data schedule (electronic
filing only).
25
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
March 31,
--------------------
Restated
1996 1995
------- --------
Net income per common share as reported:
Net income before preferred dividend $ 85.0 $ 95.2
Less: Dividend on preferred stock (11.0) (5.7)
------ ------
Net income available to common shareholders $ 74.0 89.5
======
Pro forma adjustments for interest and
preferred dividends, net of tax effects
net of tax effects (1.6)
------
Net income available to common shareholders,
pro forma $ 87.9
======
Average shares outstanding 134.9 134.1
====== ======
Net income available to common shareholders
per share $ .55
======
Net income available to common shareholders
per share, restated pro forma $ .66
======
Net income per common share assuming full
dilution:
Net income before preferred dividend $ 85.0 $ 95.2
Less: Dividend on preferred stock (11.0) (5.7)
------ ------
Net income available to common shareholders $ 74.0 89.5
======
Pro forma adjustments for interest and
preferred dividends, net of tax effects (1.6)
------
Net income available to common shareholders,
pro forma $ 87.9
======
Average shares outstanding 134.9 134.1
Shares contingently issuable for stock plan 2.2 .6
----- -----
Average shares outstanding, assuming full
dilution 137.1 134.7
===== =====
Net income available to common shareholders
per share, assuming full dilution $ .54
=====
Net income available to common shareholders
per share, restated pro forma, assuming full
dilution $ .65
======
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%.
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 April 23, 1996, on our
review of interim financial information of Rhone-Poulenc Rorer
Inc. ("the Company"), for the period ended March 31, 1996, 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. 33-58229, Registration No. 33-62052,
Registration No. 33-36558, Registration No. 33-30795,
Registration No. 33-23754, Registration No. 33-15671,
Registration No. 33-53378 and Registration No. 33-55694) and on
Form S-8 (Registration No. 33-58998, Registration No. 33-24537
and Registration No. 33-21902). 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
May 10, 1996
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE RELATED CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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