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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
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.
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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 [ ]
The number of shares of Rhone-Poulenc Rorer Inc. common stock
outstanding as of the close of business April 30, 1997 was
137,175,187.
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The Exhibit Index is located on page 1.
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RHONE-POULENC RORER INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 1997
TABLE OF CONTENTS
--------------------------------------------------
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 7-11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12-17
PART II. OTHER INFORMATION
Item 3. Legal Proceedings 18-21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits 22
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
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,
1997, and the related condensed consolidated statements of income
and cash flows for the three-month periods ended March 31, 1997 and
1996. 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, 1996, and the
related consolidated statements of income and cash flows for the
year then ended and in our report dated January 22, 1997, 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, 1996, 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
April 21, 1997
3
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RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - amounts in millions except per share data)
Three Months
Ended
March 31,
------------------
1997 1996
-------- --------
Net sales $1,085.8 $1,272.4
Cost of products sold 324.4 434.2
Selling, delivery and administrative
expenses 445.8 514.2
Research and development expenses 185.0 199.9
-------- --------
Operating income 130.6 124.1
Interest expense, net 38.7 41.0
Other (income), net (5.4) (40.8)
-------- --------
Income before income taxes 97.3 123.9
Provision for income taxes 30.5 38.9
--------- --------
Net income 66.8 85.0
Dividends on preferred stock and
remuneration on capital equity notes 10.1 11.0
--------- --------
Net income available to common
shareholders $ 56.7 $ 74.0
========= ========
Primary earnings per common share $ .41 $ .55
========= ========
Cash dividends per common share $ .32 $ .30
========= ========
Average common shares outstanding 136.8 134.9
========= ========
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,
1997 1996
--------- --------
ASSETS
Current:
Cash and cash equivalents $ 111.9 $ 100.6
Cash pooling arrangements with Rhone-Poulenc
S.A. 4.0 3.2
Short-term investments and notes receivable 66.8 38.7
Trade accounts receivable, less reserves of
$80.2 (1996: $111.3) 781.0 984.1
Inventories 790.2 800.7
Other current assets 788.5 846.2
--------- --------
Total current assets 2,542.4 2,773.5
Time deposits, at cost 128.4 128.4
Property, plant and equipment, net of
accumulated depreciation of $1,429.3
(1996: $1,461.1) 1,452.6 1,525.9
Goodwill, net of accumulated amortization of
$298.1 (1996: $294.9) 2,616.0 2,739.0
Intangibles, net of accumulated amortization
of $208.0 (1996: $231.4) 725.3 766.7
Other assets 838.9 834.6
--------- ---------
Total assets $8,303.6 $8,768.1
========= =========
LIABILITIES
Current:
Short-term debt $ 169.8 $ 126.7
Accounts payable 485.1 594.7
Other current liabilities 1,211.7 1,331.5
-------- ---------
Total current liabilities 1,866.6 2,052.9
Long-term debt 2,297.4 2,272.0
Notes payable to Rhone-Poulenc S.A. &
affiliates 195.2 253.0
Deferred income taxes 192.9 218.0
Other liabilities, including minority
interests 1,244.9 1,322.4
-------- ---------
Total liabilities 5,797.0 6,118.3
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 600,000,000 shares;
issued and outstanding 137,004,842 shares
(1996: 136,615,917 shares) 142.0 141.6
Capital in excess of stated value 251.4 234.8
Retained earnings 1,850.7 1,837.9
Employee Benefits Trust (185.7) (185.7)
Cumulative translation adjustments (226.8) (53.8)
-------- ---------
Total shareholders' equity 2,506.6 2,649.8
-------- ---------
Total liabilities and
shareholders' equity $8,303.6 $8,768.1
======== =========
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,
-------------------
1997 1996
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 70.7 $(132.0)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (71.9) (90.8)
Assets sold, net -- 196.4
Increase in/purchases of interest-bearing
receivables and investments (37.4) --
Net investment hedging, net 3.0 --
------- -------
Net cash provided by (used in) investing
activities (106.3) 105.6
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings (repayments):
Short-term debt, net 31.1 23.1
Long-term debt, net 49.8 (4.7)
Dividends and remuneration paid (45.4) (42.9)
Issuances of common stock 16.7 34.8
-------- -------
Net cash provided by (used in) financing
activities 52.2 10.3
Effect of exchange rate changes on cash and
cash equivalents (5.3) (4.8)
-------- -------
Net decrease in cash and cash equivalents 11.3 (20.9)
Cash and cash equivalents at beginning of
period 100.6 115.4
-------- --------
Cash and cash equivalents at end of period $ 111.9 $ 94.5
======== ========
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'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 8 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 1996 is
on file with the Securities and Exchange Commission and should be
read in conjunction with these condensed consolidated financial
statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," effective for periods ending after December
15, 1997. The Statement simplifies earnings per share calculations
and requires presentation of both basic and diluted earnings per
share on the face of the statement of income. The Company does not
expect that adoption of SFAS No. 128 will have a material impact on
the Company's earnings per share calculations.
NOTE 2.- OTHER (INCOME), NET
Losses from equity affiliates, principally the Company's interest
in the Centeon joint venture, totaled $5.6 million in 1997 as
compared with income of $37.1 million in 1996. Centeon's first
quarter results were adversely affected by the temporary suspension
of production and distribution at its U.S. facility related to an
October 1996 voluntary worldwide recall of Albuminar(r)/Plasma-
Plex(r) products and a January 1997 consent decree with the U.S.
Food and Drug Administration ("FDA"). The negative contribution
from Centeon for the first quarter 1997 was also impacted by $18.2
million of pretax recall-related and manufacturing start-up costs,
including costs related to work-in-process and idle capacity issues
and costs associated with compliance with the consent decree.
In January 1997, Centeon entered into a consent decree with the FDA
which specifies conditions for the shipment by Centeon of both
plasma-based products and certain pharmaceutical products
manufactured at its U.S. facility. The consent decree, which has a
term of at least five years, provides, among other things, that
Centeon will not distribute product manufactured at the facility
until (1) a third party expert retained by Centeon has inspected
the facility and reported to the FDA the status of both the
observations made by the FDA and Centeon's compliance with current
Good Manufacturing Practices ("GMPs"), (2) Centeon has certified to
its compliance with GMPs and (3) the FDA has made such inspections
at the U.S. facility as it deems necessary and has notified Centeon
that it appears to be in compliance with GMPs and may distribute
the manufactured products.
As contemplated under the terms of the consent decree, in April
1997, the third party expert consultant submitted a final report to
the FDA and to Centeon stating that Centeon had addressed the
issues identified in the FDA's December 1996 report of inspection
observations. In late April, Centeon certified to the FDA that the
actions taken by Centeon ensure that operations at the U.S.
facility will continuously comply with GMPs and the FDA began its
7
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inspection of the facility. The FDA inspection is still ongoing and,
therefore, the FDA has yet to notify Centeon as to its compliance with
GMPs. Once the conditions of the consent decree are satisfied,
distribution, initially on a limited basis, of plasma-based products,
contingent upon completion of testing and lot release by the FDA,
and distribution of pharmaceutical products can begin. Centeon
continues to work closely with the FDA in an effort to resume
distribution of the products manufactured at the U.S. facility
into the marketplace. Centeon has begun a phased-in resumption of
production of both plasma-based and pharmaceutical products at its
U.S. facility.
Centeon sales for the first quarter of 1997, including sales to
certain RPR affiliates, totaled $172.1 million (1996: $237.7
million). At $62.6 million, gross profit as a percentage of sales
approximated 36% of sales (1996: 57%). Income before income taxes
("IBT") totaled $1.4 million (1996: $82.0 million).
In addition to the Company's interest in equity affiliates, other
(income), net also included net gains totaling $7.1 million on
foreign currency exchange contracts used to hedge a portion of the
Company's non-U.S.-based forecasted quarterly pretax earnings;
similar gains in the prior year period were not significant.
NOTE 3.- INCOME TAXES
The Company records income tax expense based on an estimated full
year effective income tax rate. The year-to-date March 31 reported
effective income tax rate approximated 31.3% in 1997 compared with
31.4% in 1996.
NOTE 4.- INVENTORIES
Inventories consisted of the following:
March 31, December 31,
1997 1996
---------- -------------
(Dollars in millions)
Finished goods $ 331.9 $ 376.9
Work in process 164.2 159.8
Raw materials and supplies 294.1 264.0
---------- -------------
$ 790.2 $ 800.7
========== =============
8
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NOTE 5.- SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Money Common Capital
market Capital stock at in excess Employee Cumulative
preferred equity stated of stated Retained Benefits translation
stock notes value value earnings Trust adjustments
------- ------ ------ -------- -------- -------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 175.0 $ 500.0 $ 141.6 $ 234.8 $ 1,837.9 $ (185.7) $ (53.8)
Net income 66.8
Cash dividends, $.32 per
common share (43.9)
Dividends on preferred
stock (1.7)
Remuneration on capital
equity notes (8.4)
Issuance of shares under
employee benefit plans .4 16.6
Translation adjustments (173.0)
------- ------- ------- ------- --------- --------- --------
Balance, March 31, 1997 $ 175.0 $ 500.0 $ 142.0 $ 251.4 $ 1,850.7 $ (185.7) $ (226.8)
======= ======= ======= ======= ========= ========= ========
</TABLE>
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NOTE 6.- RESTRUCTURING
In December 1995, the Company established a combined $160.0 million
reserve related to the restructuring of Fisons and RPR operations
as a direct result of the acquisition of Fisons. The $160 million
liability represented expected cash outlays, primarily severance-
related, associated with eliminating approximately 1,900 positions
principally in the marketing, administrative and manufacturing
functions. At March 31, 1997, the remaining 1995 restructuring
reserve of $34.8 million represented outstanding social costs. For
the three-month period ended March 31, 1997, cash outlays
associated with the 1995 restructuring program totaled $7.7 million
(1996: $27.8 million).
NOTE 7.- RELATED PARTY TRANSACTIONS
Rhone-Poulenc S.A.
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.
Receivables from RP at March 31, 1997 included $5.6 million in
accounts receivable from sales of products to RP and $25.5 million
classified as other current assets.
Accounts payable related to the purchase of materials and services
from RP were $8.4 million at March 31, 1997; accrued and other
liabilities due to RP totaled $16.9 million. As of March 31,1997
the Company had $.2 million short-term and $195.2 million long-term
debt outstanding with RP.
Sales to RP totaled $4.7 million in the first quarter; materials
and services purchased from and interest paid to RP totaled $11.0
million in the first quarter. For the comparable 1996 period,
sales to RP were $9.8 million; materials and services purchased
from and interest paid to RP totaled $9.5 million.
In connection with the 1995 acquisitions from RP, the Company
issued preferred shares to RP which have a liquidation preference
approximating 645.0 million French francs (approximately $114.3
million) and pay dividends of 7.5% per annum on a stated value of
145.0 million French francs. The preferred shares are accounted
for as minority interest in other liabilities. The acquisition
agreements call for potential adjustments to the purchase price of
the businesses based on several factors, including earnings
performance.
Centeon L.L.C.
Short-term notes receivable from Centeon, which bear interest after
45 days at LIBOR plus a margin, totaled $45.7 million at March 31,
1997. Other current receivables related to Centeon totaled $4.5
million at March 31, 1997. At March 31, 1997, the Company's net
investment in capital leasing arrangements with Centeon totaled
$55.9 million. In March 1997, the Company executed a shareholders
loan to Centeon for $15.0 million bearing interest at a rate of
LIBOR plus a margin; the interest is payable quarterly if certain
financial ratio requirements of Centeon are met. The shareholder
loan is due on June 30, 1997 but is renewable for successive 90-day
periods, ending on December 31, 1999, subject to certain partial
repayment provisions and financial ratio requirements of Centeon.
Current liabilities due to Centeon at March 31, 1997 totaled $5.2
million; short-term notes payable to Centeon totaled $29.0 million.
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NOTE 8.- CONTINGENCIES
The Company is involved in litigation incidental to its business,
including, but not limited to: (1) approximately 550 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. In August 1996, the Company, with
the three other U.S. plasma fractionators defending the U.S. AHF
litigation, signed a Settlement Agreement with the plaintiffs with
respect to this litigation which, subject to certain conditions,
provides for payment of $100,000 to each eligible claimant or
claimant group and the payment of up to $40 million in attorneys
fees. Following a fairness hearing on May 6, 1997, the court
declared the class settlement offer to be fair to the class. After
consideration of insurance recoveries and existing reserves, the
settlement may have a moderate adverse impact on the Company's
second quarter 1997 earnings, but is not expected to have a
material impact on the Company's full-year earnings; (2) antitrust
actions alleging that certain pharmaceutical companies, including
the Company, engaged in price discrimination practices to the
detriment of certain independent community pharmacists and
consumers; and (3) alleged breach of contract by a subsidiary of
the Company with respect to agreements involving a bisphosphonate
compound and Lozol(r).
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 class settlement 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.
The Company has been advised of its potential liability related to
alleged past waste disposal practices, including potential
involvement at five sites on the U.S. National Priority List
created by the Comprehensive Environmental Response Compensation
and Liability Act (Superfund). For the majority of these sites,
the Company's estimated liability is not significant. With respect
to two of the sites, the Company is currently not able to estimate
its share of potential liability as the assessment of site
conditions, the identification of remediation methods and costs,
and the quantification of relative contributions among potentially
responsible parties have not yet advanced to the stage where a
reasonable estimate of loss can be made.
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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.
RESULTS OF OPERATIONS (FIRST QUARTER 1997 VERSUS FIRST QUARTER
1996)
At $57 million ($.41 per share), first quarter net income available
to common shareholders was below the prior year quarter ($74
million or $.55 per share). Earnings comparisons were impacted by
the reduced contribution from the Centeon joint venture due to lost
business associated with the temporary suspension of production and
distribution at its U.S. facility as well as recall-related and
manufacturing start-up costs.
The Company's interest in Centeon's results for the remainder of
1997 will be impacted by additional recall-related and
manufacturing start-up costs, reduced sales levels pending recovery
of market share, and costs to regain market share. The Company
expects that, based upon Centeon's anticipated second-quarter
resumption of distribution, the Company will achieve a 10-14%
growth in full-year reported earnings per share from prior year
reported earnings per share.
Sales
At $1,086 million, reported sales for the first quarter declined
15% from the first quarter of 1996. Sales comparisons were
negatively impacted by more than 8 percentage points by
divestitures and licensing arrangements in mid- to late-1996 and
the absence of sales in 1997 of Rynacrom(r), the OTC form of which is
currently marketed by McNeil Consumer Products. The effects of currency
fluctuations also negatively impacted first quarter sales (-6%). Net higher
prices (principally in the U.S.) contributed less than one percentage
point to the change in sales. Excluding these items, sales were
essentially level quarter-on-quarter as wholesaler buying patterns
in the U.S. as well as weakness in certain European markets
(France, Germany) resulting from health care regulation affected
the Company's sales performance during the quarter. Overall growth
in strategic products, including contributions from new products
(Taxotere(r), Rilutek(r), Nasacort(r) AQ) and good performance of
Azmacort(r), was offset by sales declines of non-strategic products
including Lozol(r), DDAVP(r) and shortfalls in sales of
Albuminar(r) in Japan.
In the tables and discussion which follow, percentage comparisons
of sales are presented excluding the effects of product
divestitures and currency fluctuations unless otherwise noted.
Sales by geographic area were as follows:
Three Months ended
March 31,
--------------------- %
($ in millions) 1997 1996 Change*
-------- ------- -------
U.S. $ 165 $ 206 -1%
-------- ------- -------
France 399 472 -4%
Other Europe 321 394 --%
Rest of World 201 200 +9%
-------- ------- -------
Total Non-U.S. 921 1,066 --%
-------- ------- -------
Total sales $ 1,086 $ 1,272 --%
======== ======= =======
* Percentage change calculation excludes effects of product
divestitures and currency fluctuations.
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Sales in the United States were affected by wholesaler buying
patterns and competition as good performance of Azmacort(r) and
contribution from Taxotere(r) were offset by sales declines of
Intal(r), Lozol(r)/indapamide and DDAVP(r).
France recorded reduced sales of Doliprane(r),
Clexane(r)/Lovenox(r), and anti-infectives while contributions from
Taxotere(r) added to reported sales. Generally, sales in France
continued to be affected by a slowdown in market growth due in part
to restricted physician prescribing practices in response to on-
going government initiatives to reduce health care expenditures.
Sales performance in Other Europe was mixed. Sales in Germany were
essentially level with the prior year quarter as reduced sales of
Maalox(r) due to competitive pressures negated contributions from
oncology products (Taxotere(r), Granocyte(r)) and the newly-
launched Rilutek(r). Governmental pressures affecting physician
prescribing practices continued to negatively impact sales
performance in the German market. Sales declines in the U.K.
resulted primarily from lower export sales of the respiratory
products Intal(r) and Opticrom(r) to Japan due to distributor
stocking patterns. Sales of strategic products within the U.K.
market experienced quarter-on-quarter sales growth. Sales gains
during the quarter in Italy reflected higher sales of strategic
products (Taxotere(r), Granocyte(r)). Strategic products also
performed well in Central and Eastern European markets.
Sales growth in the Rest of World area reflected higher sales in
Asia and Africa. Increased sales of Maalox(r) and
Imovane(r)/Amoban(r) in Japan were offset by the reduction in sales
of Albuminar(r) due to the suspension of production and
distribution of plasma products at Centeon's U.S. facility.
The Company is focusing on innovation and leadership in targeted
key therapeutic areas including respiratory & allergy,
thrombosis/cardiology, anti-infectives and oncology. 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 therapeutic area were as follows:
Three Months ended
March 31,
Therapeutic Area/Principal ------------------ %
Offerings 1997 1996 Change*
------- -------- -------
($ in millions)
Total Respiratory & Allergy $211 $266 -4%
Azmacort(r) 54 43 26%
Intal(r)/Aarane(r) 49 62 -16%
Nasacort(r)/Nasacort(r) AQ 15 12 30%
Tilade(r) 17 17 8%
Total Thrombosis/Cardiology
and Cardiovascular 193 235 -8%
Clexane(r)/Lovenox(r) 81 84 3%
Dilacor XR(r) 19 20 -8%
Lozol(r)/indapamide 4 15 -74%
Total Anti-infectives 144 155 3%
Flagyl(r) 29 27 11%
Central Nervous System 143 158 2%
Doliprane(r) 32 37 -4%
Imovane(r)/Amoban(r) 33 34 5%
Rilutek(r) 8 3 N/A
Total Hormone Replacement
Therapy/Bone 78 87 -1%
Orudis(r)/Profenid(r)/
Oruvail(r) 43 47 -5%
Calcitonins 16 19 -10%
Total Oncology 63 31 121%
Granocyte(r) 17 15 22%
Taxotere(r) 36 4 N/A
Other Therapeutic Areas 254 340 -7%
Maalox(r) 37 44 -8%
DDAVP(r) 12 19 -38%
* Percentage change calculation excludes effects of product
divestitures and currency fluctuations.
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Azmacort(r) sales increased quarter-on-quarter although increased
market competition negatively impacted the rate of growth in
Azmacort(r) prescriptions written during the period. First quarter
sales contribution from Nasacort(r) AQ more than exceeded the
shortfall in sales of Nasacort(r) resulting from increased
competition and expansion of the aqueous segment. Sales of
Intal(r) in the U.S. and Intal(r) exports from the U.K. declined
quarter-on-quarter due to prior year stocking patterns as well as
competition in the United States.
Clexane(r)/Lovenox(r) posted sales gains in the Company's major
markets except for France, where Lovenox(r) sales have been
affected by increased competition. Clexane(r)/Lovenox(r) recently
received approval from the U.S. Food and Drug
Administration ("FDA") for the prevention of deep vein thrombosis
in abdominal surgery. Sales of
Dilacor XR(r) were slightly below prior year levels due, in part,
to trade buying patterns in anticipation of the entrance of
generics into the market in 1997. Sales of the Company's branded
(Lozol(r)) and generic indapamide diuretics continued to be
negatively impacted by generic competition.
Anti-infectives recorded sales growth in Asian and African markets.
In France, sales of anti-infectives generally were affected by
restricted physician prescribing practices. Zagam(r), approved by
the FDA for treatment of community-acquired pneumonia and acute
bacterial exacerbations of chronic bronchitis, was launched in the
U.S. in late April 1997.
Sales of central nervous system products included higher sales of
Imovane(r)/Amoban(r) in other European markets and contributions
from sales of Rilutek(r) in Europe and the U.S. while sales of
Doliprane(r) in France fell below prior year levels due to
increased competitive pressures in the marketplace.
Sales of hormone replacement therapy/bone products were slightly
below the prior year quarter due to lower sales of
Orudis(r)/Profenid(r)/Oruvail(r) in European markets (U.K., Italy)
and the continued impact of competition on calcitonin sales in many
markets.
Sales of oncology products were led by sales of Taxotere(r), which
has been approved in more than 50 countries for the treatment of
advanced or metastatic breast cancer and in 24 countries for the
treatment of non-small-cell lung cancer ("NSCLC"). Taxotere(r) was
launched late in the first half of 1996 in major European markets
and the U.S. and continues to show good acceptance in those
markets. Taxotere(r) is approved in the U.S. for the treatment of
patients with locally advanced or metastatic breast cancer whose
disease has progressed during anthracycline-based therapy or who
have relapsed during anthracycline-based adjuvant therapy.
Taxotere(r) is approved in Japan for both breast cancer and NSCLC
and is expected to be the first taxoid sold in that market when it
is launched in the second quarter of 1997. Granocyte(r) also
recorded good sales performance in European markets. Gliadel(r)
Wafer, for use as an adjunct to surgery to prolong survival in
patients with recurrent glioblastoma multiforme for whom surgical
resection is indicated, was launched in the U.S. in the first
quarter of 1997.
Declines in other therapeutic area sales reflected reduced sales of
plasma derivatives, Maalox(r) and DDAVP(r). Sales of plasma
derivatives, particularly Albuminar(r), sold through operations not
contributed to Centeon, were significantly lower due to the
temporary suspension of Centeon's U.S. manufacture and distribution
of plasma-derived products. Sales of Maalox(r) were below the
prior year quarter due primarily to competitive pressures in
Germany. Sales declines of DDAVP(r) resulted from trade buying
patterns and anticipation of the introduction of the room
temperature spray form expected later in 1997.
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Operating Income
Three Months ended March 31,
----------------------------
1997 1996
----------- -----------
% of % of %
($ in millions) $ Sales $ Sales Change
---- ------ ---- ------ -------
Gross margin $761 70.1% $838 65.9% -9%
Selling, delivery and
administrative expenses 446 41.1% 514 40.4% -13%
Research and development
expenses 185 17.0% 200 15.7% -8%
Operating income 131 12.0% 124 9.8% +5%
Gross margin improvement reflected the favorable impact of new
products, changes in business structure, including recognition of
royalty income from the Medeva transaction, and productivity
initiatives. Gross margin also benefited from higher royalty
income from the Company's joint venture partner on in-market sales
in Japan due to a strong pollen season.
Reported selling, delivery and administrative expenses decreased
quarter-on-quarter as a result of the realization of additional
synergies from the integration of the Fisons business and benefits
from cost containment efforts. Selling, delivery and
administrative expenses increased as a percentage of sales
primarily as a result of a lower comparative reported sales base.
On a reported basis, current year research and development
investment was below the prior year level due to significant
spending in the first half of 1996 related to several later stage
projects. On a full-year basis, the Company expects that
investment in research and development will approximate 17% of
sales.
Operating margin growth reflected gross margin improvements and
incremental synergy benefits.
Interest
First quarter net interest expense was slightly lower than the
prior year period as the effect of reduced average net debt
balances and the net favorable impact of non-U.S. interest rates
was partially offset by imputed interest associated with certain
prepaid licensing fees related to the Medeva transaction.
Other (Income), Net
Losses from equity affiliates, principally the Company's interest
in the Centeon joint venture, totaled $6 million in 1997 as
compared with income of $37 million in 1996. Centeon's first
quarter results were adversely affected by the temporary suspension
of production and distribution at its U.S. facility related to an
October 1996 voluntary worldwide recall of Albuminar(r)/Plasma-
Plex(r) products and a January 1997 consent decree with the FDA.
The negative contribution from Centeon for the first quarter 1997
was also impacted by $18 million of pretax recall-related and
manufacturing start-up costs, including costs related to work-in-
process and idle capacity issues and costs associated with
compliance with the consent decree.
In January 1997, Centeon entered into a consent decree with the FDA
which specifies conditions for the shipment by Centeon of both
plasma-based products and certain pharmaceutical products
manufactured at its U.S. facility. The consent decree, which has a
term of at least five years, provides, among other things, that
Centeon will not distribute product manufactured at the facility
until (1) a third party expert retained by Centeon has inspected
the facility and reported to the FDA the status of both the
observations made by the FDA and Centeon's compliance with current
Good Manufacturing Practices ("GMPs"), (2) Centeon has certified to
its compliance with GMPs and (3) the FDA has made such inspections
at the U.S. facility as it deems necessary and has notified Centeon
that it appears to be in compliance with GMPs and may distribute
the manufactured products.
As contemplated under the terms of the consent decree, in April
1997, the third party expert consultant submitted a final report to
the FDA and to Centeon stating that Centeon had addressed the
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issues identified in the FDA's December 1996 report of inspection
observations. In late April, Centeon certified to the FDA that the
actions taken by Centeon ensure that operations at the U.S.
facility will continuously comply with GMPs and the FDA began its
inspection of the facility. The FDA inspection is still ongoing and,
therefore, the FDA has yet to notify Centeon as to its compliance
with GMPs. Once the conditions of the consent decree are satisfied,
distribution, initially on a limited basis, of plasma-based products,
contingent upon completion of testing and lot release by the FDA,
and distribution of pharmaceutical products can begin. Centeon
continues to work closely with the FDA in an effort to resume
distribution of the products manufactured at the U.S. facility into
the marketplace. Centeon has begun a phased-in resumption of production
of both plasma-based and pharmaceutical products at its U.S. facility.
Due to available inventory and alternate sources of supply, there
was no significant interruption in supply of the Company's
pharmaceutical products manufactured at the Centeon U.S. facility
in the first quarter of 1997 and the Company does not expect that
there will be a material impact on sales of these products in the
second quarter.
Centeon sales for the first quarter of 1997, including sales to
certain RPR affiliates, totaled $172 million (1996: $238 million).
Gross margin approximated 36% of sales (1996: 57%). Income before
income taxes totaled $1 million (1996: $82 million). Sales
declines and reduced gross margin reflected the impact of lost
sales of Albuminar(r)/Plasma-Plex(r) in addition to reduced sales
of the other plasma-derived products whose production was also
temporarily suspended and/or which are typically marketed with the
albumin products. Gross margin also reflected the impact of recall-
related and manufacturing start-up costs.
In addition to the Company's interest in equity affiliates, other
(income), net also included net gains totaling $7 million on
foreign currency exchange contracts used to hedge a portion of the
Company's non-U.S.-based forecasted quarterly pretax earnings;
similar gains in the comparable prior year period were not
significant.
Income Taxes
The Company's first quarter reported effective income tax rate was
31% in both 1997 and 1996.
FINANCIAL CONDITION
Restructuring Programs
In December 1995, the Company established a combined $160 million
reserve related to the restructuring of Fisons and RPR operations
as a direct result of the Fisons acquisition. The liability
represented expected cash outlays, principally severance-related,
associated with eliminating approximately 1,900 positions primarily
in the marketing, administrative and manufacturing functions. Cash
outlays associated with the restructuring programs totaled $8
million in the first quarter of 1997 (1996: $28 million).
Cash Flows
Operating activities yielded cash inflows of $71 million in 1997
compared with cash outflows of $132 million in 1996, reflecting
decreased working capital needs and reduced cash outlays for income
tax payments and restructuring activities.
Investing activities used cash of $106 million in the first quarter
of 1997 and provided $106 million of cash in 1996. Current year
investing cash outlays reflected capital expenditures and interest-
bearing receivables with Centeon. Although first quarter spending
was below the prior year period, capital expenditures on a full-
year basis are expected to approximate 1996 levels. Net investing
cash inflows in 1996 included $236 million from the sale of Fisons'
Scientific Instruments Division.
Current year financing cash inflows of $52 million compared with
$10 million in 1996 reflected higher proceeds from new borrowings
partially offset by reduced proceeds from common stock issuances.
16
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First quarter dividends paid to common shareholders totaled $44
million ($.32 per share) in 1997 and $40 million ($.30 per share)
in 1996. In April 1997, the Board of Directors declared a second
quarter cash dividend of $.32 per share payable on May 30, 1997 to
holders of record on May 9, 1997.
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, notes receivable and time
deposits) to net debt plus equity ratio increased slightly to .48
to 1 from .47 to 1 at December 31, 1996, principally as a result of
a net reduction in shareholders' equity due to the exchange rate
impact recorded in cumulative translation adjustments. At March
31, 1997, the Company's net debt approximated $2,351 million
compared with $2,381 million at yearend 1996. The ratio of current
assets to current liabilities was 1.36 to 1 at March 31, 1997
compared with 1.35 to 1 at December 31, 1996.
At March 31, 1997, the Company had total committed lines of credit
of $2,325 million. Of this amount, $1,825 million represented
multicurrency medium-term facilities with fourteen banks expiring
in the year 2000. The additional $500 million represented two
medium-term credit agreements with Rhone-Poulenc S.A. expiring in
2000 and 2002. At March 31, 1997, borrowings outstanding under the
Company's medium-term arrangements totaled $521 million. These
borrowings plus an additional $1,569 million of short-term
borrowings were classified as long-term debt at March 31, 1997 as
the Company had the ability and intent to refinance these amounts
on a long-term basis under the above medium-term facilities.
In 1995, the Company issued $500 million of undated capital equity
notes to RP. Pursuant to the remaining portion of a $500 million
shelf registration, the Company has the ability to issue $325
million in public debt securities and/or preferred shares.
In April 1997, the Company announced the authorization by its Board
of Directors of the open market repurchase from time to time of up
to five million of the Company's common shares, to be funded under
existing lines of credit. The shares will be held in the Employee
Benefits Trust to fund future employee benefits in the United
States.
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. Long-term liquidity
is dependent upon the Company's competitive position, including its
ability to discover, develop and market innovative therapies, build
leadership positions in targeted therapeutic areas, expand its
presence in key geographic markets, and maximize the benefits of
business acquisitions and alliances. The Company believes that the
recent approvals of important new products in key markets,
strategic acquisitions and alliances, as well as other innovative
products and business strategies, will contribute to the Company's
long-term liquidity.
The Company is involved in litigation incidental to its business.
A discussion of contingencies appears in Note 8 of the Notes to
Condensed Consolidated Financial Statements and in Legal
Proceedings in Part II of this Form 10-Q. Following a fairness
hearing on May 6, 1997, the United States District Court for the
Northern District of Illinois declared the class settlement offer
by the four U.S. plasma fractionators, including the Company,
defending the U.S. anti-hemophilic factor litigation to be fair to
the class. The offer under the August 13, 1996 Settlement
Agreement provides, subject to certain conditions, a payment of
$100,000 to each eligible claimant or claimant group and the
payment of up to $40 million in attorneys' fees. After
consideration of insurance recoveries and existing reserves, the
settlement may have a moderate adverse impact on the Company's
second quarter 1997 earnings, but is not expected to have a
material impact on the Company's full-year earnings.
17
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PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings
AHF Litigation
There are approximately 485 lawsuits in the United States, 7 in
Canada and 58 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 142 cases and claims have been resolved either by
dismissal by the plaintiffs or the Court or through settlement. It
is not possible 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 including one each in Idaho, Alabama and Wyoming
and two in Louisiana, and three proposed state court class actions
in Arizona, Idaho and Louisiana, have been filed against several
fractionators, including Armour. The federal actions are part of
the MDL proceeding in Chicago. Evidentiary hearings on plaintiffs'
motion for nationwide and statewide class certification in a
Florida case have been completed and the judge has indicated his
intention to deny certification. In July 1996, the judge in the
Arizona case denied plaintiffs' motion for partial certification of
a class of Arizona plaintiffs.
In April 1996, the Company, with the three other U.S. plasma
fractionators defending the U.S. AHF litigation, announced a
settlement proposal to resolve the U.S. litigation. Negotiations
with the plaintiffs culminated in the signing of an August 13, 1996
Settlement Agreement which, subject to certain conditions, provides
for payment of $100,000 to each eligible claimant or claimant
group, and the payment of up to $40 million in attorneys fees. One
significant condition of the settlement agreement was that
potential subrogation claims by third party medical providers be
resolved to the mutual satisfaction of the parties and that the
class members' eligibility for entitlements to public assistance be
maintained.
An overwhelming majority of the HIV-infected hemophilia community
has accepted the proposed settlement. The number of valid claims
will not be known until all of the ineligible claimants (i.e.,
those not meeting the definition of a claimant, fraudulent claims,
etc.) are identified and eliminated. The Settlement Administrator
reported that as of May 1, 1997, there were approximately 6,064
apparently eligible claimants and approximately 535 apparently
eligible opt-outs.
Following a final fairness hearing on May 6, 1997, Judge John F.
Grady declared the settlement to be fair to the class. Within
thirty (30) days after the judge's order becomes final, the
fractionators will begin to make settlement payments in the amount
of $100,000 to those eligible claimants who have signed the court
approved form of release and will continue with such payments as
additional eligible class members have their
subrogation/reimbursement and public sector eligibility issues
resolved.
The court intends to terminate the settlement and deem to be opt-
outs those claimants whose subrogation/reimbursement and/or
eligibility issues are not resolved by December 31, 1997. It is
not currently possible to estimate the number of claimants who may
ultimately become opt-outs if these specific issues cannot be
18
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resolved for them in a timely manner. However, given that the
federal government, nearly all private insurance carriers and many
states have already compromised their claims to the settlement
moneys, the fractionators are optimistic that
subrogation/reimbursement problems for a majority of claimants will
be satisfactorily resolved within the time period allotted by the
court. With respect to the issue of eligibility for needs-based
public assistance programs, special needs trusts and possible
federal legislation are expected to resolve that impediment for
many affected claimants.
With respect to the AHF 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. 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").
After consideration of insurance recoveries and existing reserves,
the class settlement may have a moderate adverse impact on the
Company's second quarter 1997 earnings, but is not expected to have
a material adverse impact on the Company's full-year earnings.
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 a BM
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 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. A
preliminary hearing on liability in the bisphosphonate development
portion of the dispute was held in December 1996. A preliminary
hearing on liability in the Lozol(r) portion of the matter was held
in January 1997. In February 1997, based on the partial evidence
provided as of that date, the arbitration panel issued a
preliminary, non-binding opinion in which it questioned the merits
of RPRP's defense and BM's ability to prove every element of its
damages claim. A final hearing on liability in the bisphosphonate
case, with the possible opportunity to present additional
witnesses, is scheduled for August 1997. No final hearing date has
been set in the Lozol(r) case. The Company believes that the
claims asserted by BM are without merit and RPRP is vigorously
defending its position.
Antitrust Litigation
The Company has been named as a defendant in 138 antitrust
lawsuits. It is presently a party to ten state court actions
pending in California, two each in Minnesota and Wisconsin, and one
each in the District of Columbia, Alabama, Washington, Colorado,
Arizona, Maine, New York, Kansas, Florida, Tennessee and Michigan.
Additionally, the Company has been named in 113 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 in Chicago (the MDL case). 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.
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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 Minnesota and Wisconsin and
the cases in the District of Columbia, Kansas, New York, Arizona,
Colorado, Washington, Maine, Florida, Tennessee and Michigan allege
proposed consumer class claims. An Alabama state court case that
alleged a proposed consumer class was successfully removed to
federal court in Alabama and transferred for coordination with the
federal MDL proceeding in Chicago. The MDL judge denied
plaintiffs' motion to remand the case to Alabama state court, but
subsequently granted plaintiffs' motion to certify this ruling for
immediate appeal to the Seventh Circuit Court of Appeals. The
Seventh Circuit has not yet accepted this appeal. In October 1995,
the Washington state court action was dismissed with prejudice.
This ruling is currently on appeal. The New York action was
similarly dismissed and is currently on appeal. The Colorado
consumer case was dismissed with prejudice in January 1996 and
plaintiffs did not appeal.
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 coordinating
federal MDL court certified the class alleged in the amended
consolidated Complaint in November 1994. The coordinating
California state court certified retail and consumer classes in
June 1995. The California cases have been stayed in order to trail
the federal litigation proceedings.
In April 1996, the federal court denied summary judgment motions
filed by the pharmaceutical companies but granted summary judgment
motions filed by the wholesaler defendants. The court entered
final judgment in favor of the wholesalers and certified certain
issues relating to the denial of the manufacturer defendants'
summary judgment motions for interlocutory appeal to the United
States Court of Appeals for the Seventh Circuit. Plaintiffs have
also filed appeals on the orders granting the wholesaler
defendants' summary judgment motions. Due to the pendency of the
appellate proceedings, the court withdrew the May 7, 1996 trial
date previously set in the federal class conspiracy case and has
not set a new trial date in any federal action. In addition,
several of the companies named as defendants in the federal class
action, excluding RPR, entered into a settlement with independent
and chain pharmacies who are members of that class. That
settlement was approved by the court on June 21, 1996. Certain
plaintiffs have appealed the approval of this settlement to the
United States Court of Appeals for the Seventh Circuit. In
November 1996, the Company entered into a confidential settlement
with the non-class, chain plaintiffs which had filed separate
federal actions. 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 during the 1960s. 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 has been advised of its potential liability related to
alleged past waste disposal practices, including potential
involvement at five sites on the U.S. National Priority List
created by the Comprehensive Environmental Response Compensation
and Liability Act (Superfund). For the majority of these sites,
the Company's estimated liability is not significant. With respect
to two of the sites, the Company is currently not able to estimate
its share of potential liability as the assessment of site
conditions, the identification of remediation methods and costs,
and the quantification of relative contributions among potentially
responsible parties have not yet advanced to the stage where a
reasonable estimate of loss can be made.
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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(r) product. In January
1995, the ITC Administrative Judge ruled that Dilacor XR(r) 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 appealed to the Court of Appeals for the
Federal Circuit which affirmed the lower court's ruling in March
1997.
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 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. 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
impact of the class settlement in the U.S. AHF litigation as
discused 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.
21
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ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 7, 1997, the six
nominees to the Board of Directors were elected, four for three-
year terms ending in 2000 and two for one-year terms ending in
1998, and the selection of independent accountants for 1997 was
ratified.
ITEM 6. Exhibits
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).
22
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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)
May 14, 1997 /s/ PATRICK LANGLOIS
-----------------------------------
Patrick Langlois
Executive Vice President and
Chief Financial Officer
May 14, 1997 /s/ PHILIPPE MAITRE
----------------------------------
Philippe Maitre
Vice President and
Corporate Controller
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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).
<PAGE>
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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,
----------------------
1997 1996
---------- ----------
Earnings per common share, primary:
Net income before preferred dividends and
remuneration $ 66.8 $ 85.0
Less: Dividends on preferred stock and
remuneration on capital equity notes (10.1) (11.0)
---------- ----------
Net income available to common shareholders $ 56.7 $ 74.0
========== ==========
Average shares outstanding 136.8 134.9
========== ==========
Earnings per share $ .41 $ .55
========== ==========
Earnings per common share, fully diluted:
Net income before preferred dividends and
remuneration $ 66.8 $ 85.0
Less: Dividends on preferred stock and
remuneration on capital equity notes (10.1) (11.0)
--------- -----------
Net income available to common shareholders $ 56.7 $ 74.0
========= ===========
Average shares outstanding 136.8 134.9
Shares contingently issuable for stock plan 2.3 2.2
--------- -----------
Average shares outstanding, assuming full
dilution 139.1 137.1
========= ===========
Earnings per share, assuming full dilution $ .41 $ .54
========= ===========
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%.
<PAGE>
<PAGE>
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 21, 1997, on our review
of interim financial information of Rhone-Poulenc Rorer Inc.
("the Company"), for the period ended March 31, 1997, 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-
18707, Registration No. 33-18701, Registration No. 33-18703,
Registration No. 33-18705, 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 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE RELATED CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 112
<SECURITIES> 0
<RECEIVABLES> 861
<ALLOWANCES> 80
<INVENTORY> 790
<CURRENT-ASSETS> 2542
<PP&E> 2882
<DEPRECIATION> 1429
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0
175
<COMMON> 142
<OTHER-SE> 2190
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<CGS> 324
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<EPS-DILUTED> .41
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