<PAGE>
================================================================================
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 June 30, 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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 23-1699163
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 ARCOLA ROAD
COLLEGEVILLE, PENNSYLVANIA 19426-0107
- --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(610) 454-8000
- --------------------------------------------------------------------------------
(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 June 30, 1997 was 137,401,319.
================================================================================
The Exhibit Index is located on page 24.
<PAGE>
RHONE-POULENC RORER INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 1997
TABLE OF CONTENTS
-------------------------------
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 13-19
PART II. OTHER INFORMATION
Item 3. Legal Proceedings 20-23
Item 6. Exhibits 24
</TABLE>
2
<PAGE>
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 June 30, 1997, and the related
condensed consolidated statements of income and cash flows for the three- and
six-month periods ended June 30, 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 (not presented herein); 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
July 17, 1997
3
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - amounts in millions except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Net sales............................... $ 1,238.0 $ 1,346.1 $2,323.8 $ 2,618.5
Cost of products sold................... 367.0 443.8 691.4 878.0
Selling, delivery and administrative
expenses........................... 500.4 532.5 946.2 1,046.7
Research and development expenses....... 220.2 214.4 405.2 414.3
----------- ----------- -------- ----------
Operating income................... 150.4 155.4 281.0 279.5
Interest expense, net................... 37.5 43.5 76.2 84.5
Other (income), net..................... (15.4) (36.6) (20.8) (77.4)
----------- ----------- -------- ----------
Income before income taxes......... 128.3 148.5 225.6 272.4
Provision for income taxes.............. 39.6 46.3 70.1 85.2
----------- ----------- -------- ----------
Net income......................... 88.7 102.2 155.5 187.2
Dividends on preferred stock and
remuneration on capital equity notes 11.8 10.3 21.9 21.3
----------- ----------- -------- ----------
Net income available to common
shareholders................... $ 76.9 $ 91.9 $ 133.6 $ 165.9
=========== =========== ======== ==========
Primary earnings per common share....... $ .56 $ .68 $ .98 $ 1.23
=========== =========== ======== ==========
Cash dividends per common share......... $ .32 $ .32 $ .64 $ .62
=========== =========== ======== ==========
Average common shares outstanding....... 137.1 135.7 137.0 135.3
=========== =========== ======== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - dollars in millions)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents................................... $ 114.4 $ 100.6
Cash pooling arrangements with Rhone-Poulenc S.A............ 4.2 3.2
Short-term investments and notes receivable................. 63.1 38.7
Trade accounts receivable, less reserves of $88.0
(1996: $111.3).......................................... 858.6 984.1
Inventories................................................. 796.7 800.7
Other current assets........................................ 762.3 846.2
---------- ------------
Total current assets......................... 2,599.3 2,773.5
Time deposits, at cost...................................... 128.4 128.4
Property, plant and equipment, net of accumulated
depreciation of $1,435.5 (1996: $1,461.1)............... 1,426.5 1,525.9
Goodwill, net of accumulated amortization of $320.3
(1996: $294.9).......................................... 2,601.0 2,739.0
Intangibles, net of accumulated amortization of $252.2
(1996: $231.4).......................................... 707.4 766.7
Other assets................................................ 839.1 834.6
---------- ------------
Total assets................................. $ 8,301.7 $ 8,768.1
========== ============
LIABILITIES
Current:
Short-term debt............................................. $ 157.9 $ 126.7
Accounts payable............................................ 427.1 594.7
Other current liabilities................................... 1,109.4 1,331.5
---------- ------------
Total current liabilities.................... 1,694.4 2,052.9
Long-term debt.............................................. 2,432.0 2,272.0
Notes payable to Rhone-Poulenc S.A. & affiliates............ 187.9 253.0
Deferred income taxes....................................... 241.6 218.0
Other liabilities, including minority interests............. 1,208.4 1,322.4
---------- ------------
Total liabilities............................ 5,764.3 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
137,401,319 shares (1996: 136,615,917 shares)........... 142.6 141.6
Capital in excess of stated value........................... 273.9 234.8
Retained earnings........................................... 1,883.8 1,837.9
Employee Benefits Trust..................................... (198.1) (185.7)
Cumulative translation adjustments.......................... (239.8) (53.8)
---------- ------------
Total shareholders' equity................... 2,537.4 2,649.8
---------- ------------
Total liabilities and shareholders' equity... $ 8,301.7 $ 8,768.1
========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
RHONE-POULENC RORER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities........... $ 13.0 $ 46.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (130.5) (165.9)
Assets sold, net......................................... 25.7 226.0
Purchases of investments/product rights.................. (44.6) (49.7)
Sales of investments/product rights...................... 20.9 29.5
Net investment hedging, net.............................. 7.7 --
--------- --------
Net cash provided by (used in) investing activities. (120.8) 39.9
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings (repayments):
Short-term debt, net................................ 40.3 (71.7)
Long-term debt, net................................. 168.5 (9.9)
Dividends and remuneration paid.......................... (109.5) (105.2)
Issuances of common stock................................ 39.8 52.5
Repurchases of common stock for the Employee Benefits
Trust................................................. (12.4) --
--------- --------
Net cash provided by (used in) financing activities. 126.7 (134.3)
Effect of exchange rate changes on cash and cash
equivalents........................................... (5.1) (6.6)
--------- --------
Net increase (decrease) in cash and cash equivalents..... 13.8 (54.5)
Cash and cash equivalents at beginning of period......... 100.6 115.4
--------- --------
Cash and cash equivalents at end of period............... $ 114.4 $ 60.9
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
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 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 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. Adoption of SFAS No.
128 will not have a material impact on the Company's earnings per share
calculations.
NOTE 2.- ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Contracts
Foreign Currency Transactions
The Company enters into foreign currency exchange contracts to minimize exposure
of foreign currency transactions (such as export sales, raw materials purchases,
and short-term intercompany financings) and firm commitments to fluctuating
exchange rates. The Company's foreign currency transaction hedges are executed
centrally to minimize transaction costs and to monitor consolidated net
exposures in all currencies and the effectiveness of the hedging relationships.
Contracts hedging foreign currency transactions are marked to market at each
balance sheet date under the fair value method; the resulting gains or losses
are recognized in other (income), net, offsetting the corresponding losses or
gains on the transactions being hedged. Cash flows associated with these
foreign currency exchange contracts are classified in the same category as the
hedged transactions.
The Company may also seek to minimize exposure of its non-U.S.-based forecasted
quarterly pretax earnings to foreign currency fluctuations by utilizing foreign
currency exchange contracts. These contracts are marked to market in other
(income), net at each balance sheet date. Related cash flows are classified as
cash flows from operating activities.
Net Investment Hedges
The Company may utilize foreign currency exchange contracts and foreign
currency-denominated borrowings to limit the exposure of its net investments in
foreign subsidiaries to currency fluctuations and thereby limit the volatility
of reported equity. These arrangements are designated as hedges of the
Company's net foreign investments. Both realized and unrealized gains and
losses on these arrangements which offset the gains and
7
<PAGE>
losses on the related net investments are recorded as cumulative translation
adjustments ("CTA") in shareholders' equity. Cash flows associated with the
hedging instruments are classified as cash flows from investing activities. If a
foreign currency-denominated borrowing or foreign currency exchange contract
that qualifies as a hedge of a net investment is terminated, any gains or losses
previously recorded in CTA remain in CTA. These gains or losses would be
recognized upon liquidation or sale of all or substantially all of the net
foreign investment.
The net receivables (payables) related to the Company's foreign currency
exchange contracts are included in other current assets (liabilities).
Interest Rate Swap Contracts
The Company may enter into interest rate swap contracts to manage its exposures
to movements in interest rates and to minimize its overall cost of borrowings.
The net receivables (payables) under interest rate swap contracts are recorded
in other current assets (liabilities) and recognized as adjustments to interest
expense. Cash flows related to interest rate swap contracts are included in
cash flows from operating activities.
If an interest rate swap contract that hedges underlying debt on the balance
sheet is terminated, the gain or loss on the contract is deferred and amortized
into income as an adjustment to interest expense over the shorter of the
remaining life of the terminated swap contract or the remaining time to maturity
of the hedged debt. If an interest rate swap contract remains outstanding after
termination of the hedging relationship, changes in the market value of the
contract are recognized currently in income.
NOTE 3.- LICENSING AGREEMENT
In June 1997, the Company licensed to Watson Laboratories, Inc. ("Watson")
exclusive worldwide (except for New Zealand and Korea) distribution rights for
Dilacor XR(R) and its generic equivalents for a period of four and one-half
years after which time Watson has the option to purchase the product rights.
Over the licensing period, RPR expects to receive from Watson annual licensing
fees approximating $135.0 million and royalties on future sales of diltiazem
products. In connection with the transaction, the Company transferred remaining
related inventory to Watson in the second quarter for a value approximating its
normal wholesaler selling price. The Company also recorded a pretax gain of
$16.0 million in the second quarter on the termination of a generics diltiazem-
related partnership with Watson. In July 1997, the Company received a $55
million cash payment from Watson representing the prepayment of both the second
half of 1997 licensing fees/royalties and the purchase option, which is
refundable if not exercised by Watson.
NOTE 4.- OTHER (INCOME), NET
Centeon
Losses from equity affiliates, principally the Company's interest in the Centeon
joint venture, totaled $14.2 million in the second quarter of 1997 and $19.8
million on a year-to date basis as compared with income of $40.6 million and
$77.7 million, respectively, for the comparable prior year periods. Centeon's
first half of 1997 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 six months of 1997 was also
impacted by $31.5 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 May 1997, the FDA notified Centeon that it appeared to be in compliance with
current Good Manufacturing Practices and authorized resumption of distribution
of plasma-based products, subject to FDA testing and lot release, and
pharmaceutical products at its U.S. facility. Based on a phased-in production
schedule, newly-manufactured plasma-based products were sent to the FDA for lot
release in June and distribution of new production has begun on a limited basis.
Centeon expects product distribution to ramp up gradually over the remainder of
the year.
8
<PAGE>
Centeon sales for the second quarter of 1997, including sales to certain RPR
affiliates, totaled $175.9 million (1996: $259.0 million). Gross margin
approximated 28% of sales (1996: 48%). Losses before the effect of income taxes
totaled $17.8 million compared to income before taxes ("IBT") of $59.6 million
in 1996. On a year-to-date basis, sales totaled $348.0 million (1996: $496.7
million). Gross margin approximated 32% (1996: 52%) and losses before the
effect of income taxes totaled $16.5 million (1996: IBT of $141.6)
Other Items
Other (income), net included a pretax gain of $16.0 million on the termination
of a partnership arrangement with Watson.
Other (income), net also included net gains totaling $7.3 million and $14.4
million for the three-and six-month periods, respectively, on foreign currency
exchange contracts used to hedge a portion of the Company's non-U.S.-based
forecasted quarterly pretax earnings. Similar gains totaled $4.7 million for
both the comparable prior year periods.
NOTE 5.- INCOME TAXES
The Company records income tax expense based on an estimated full year effective
income tax rate. The year-to-date June 30 reported effective income tax rate
approximated 31.1% in 1997 compared with 31.3% in 1996.
In July 1997, the French government proposed legislation to increase the
corporate income tax on both ordinary income and capital gains. The legislation
is expected to be enacted in September 1997 with retroactive effect to January
1, 1997. The Company is in the process of quantifying the impact such changes
would have on its worldwide effective income tax rate, but estimates that the
legislation has the potential to increase the Company's effective income tax
rate by up to one and one-half percentage points.
NOTE 6.- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -------------
(Dollars in millions)
<S> <C> <C>
Finished goods....................... $ 364.7 $ 376.9
Work in process...................... 142.7 159.8
Raw materials and supplies........... 289.3 264.0
----------- -------------
$ 796.7 $ 800.7
=========== =============
</TABLE>
9
<PAGE>
NOTE 7.- SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Money
market Capital Common Capital in
preferred equity stock at excess of Retained
stock notes stated value stated value earnings
----------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
(Dollars in millions)
Balance, January 1, 1997............... $175.0 $500.0 $141.6 $234.8 $1,837.9
Net income............................. 155.5
Cash dividends, $.64 per common share.. (87.7)
Dividends on preferred stock........... (4.7)
Remuneration on capital equity notes... (17.2)
Repurchase of shares for Employee
Benefits Trust.....................
Issuance of shares under employee
benefit plans...................... 1.0 39.1
Translation adjustments................
----------- ------- ------------ ------------ --------
Balance, June 30, 1997................. $175.0 $500.0 $142.6 $273.9 $1,883.8
=========== ======= ============ ============ ========
</TABLE>
<TABLE>
<CAPTION>
Employee Cumulative
Benefits translation
Trust adjustments
------------ ---------------
<S> <C> <C>
Balance, January 1, 1997............... $ (185.7) $ (53.8)
Net income.............................
Cash dividends, $.64 per common share..
Dividends on preferred stock...........
Remuneration on capital equity notes...
Repurchase of shares for Employee
Benefits Trust..................... (12.4)
Issuance of shares under employee
benefit plans......................
Translation adjustments................ (186.0)
------------ ---------------
Balance, June 30, 1997................. $ (198.1) $ (239.8)
============ ===============
</TABLE>
In 1997, the Company's Board of Directors approved the open market repurchase
from time to time of up to five million of the Company's common shares. In the
second quarter of 1997, the Company repurchased approximately 168,000 of its
common shares at a cost totaling $12.4 million. These shares are held in an
Employee Benefits Trust to fund future employee benefits in the United States.
In August 1997, the Company redeemed the outstanding 750 shares of Series 1
money market preferred stock for $75.0 million plus accrued dividends.
10
<PAGE>
NOTE 8.- 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 liability represented expected cash
outlays, primarily severance-related, associated with eliminating
approximately 1,900 positions principally in the marketing, administrative and
manufacturing functions. At June 30, 1997, the remaining 1995 restructuring
reserve of $28.9 million represented outstanding social costs. For the three-
and six-month periods ended June 30, 1997, cash outlays associated with the
1995 restructuring program totaled $2.7 million and $10.4 million,
respectively (1996: $49.0 million and $76.8 million, respectively).
NOTE 9.- 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 June 30, 1997 included $8.9 million in accounts
receivable from sales of products to RP, $16.0 million classified as other
current assets, and $6.1 million classified as other non-current assets.
Accounts payable related to the purchase of materials and services from RP
were $13.6 million at June 30, 1997; accrued and other liabilities due to RP
totaled $16.6 million. As of June 30,1997 the Company had $2.7 million of
short-term and $187.9 million of long-term debt outstanding with RP.
Sales to RP totaled $6.0 million in the second quarter and $10.7 million on a
year-to-date basis. Services purchased from and interest paid to RP totaled
$7.4 million in the second quarter and $15.4 million for the six-month period.
For the comparable 1996 periods, sales to RP were $7.9 million and $17.7
million respectively. Materials and services purchased from and interest paid
to RP totaled $4.3 million and $16.0 million, respectively.
In connection with the 1995 acquisitions from RP, a subsidiary of the Company
issued preferred shares to RP which have a liquidation preference
approximating 645.0 million French francs (approximately $109.7 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 and are
reflected 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
Short-term notes receivable from Centeon, which bear interest after 45 days at
LIBOR plus a margin, totaled $33.5 million at June 30, 1997. Other current
receivables related to Centeon totaled $2.0 million at June 30, 1997. At June
30, 1997, the Company's net investment in capital leasing arrangements with
Centeon totaled $55.9 million. In 1997, the Company issued a shareholders loan
to Centeon totaling $22.0 million and bearing interest at LIBOR plus a margin.
The shareholder loan is due on September 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 June 30, 1997 totaled $6.2 million;
notes payable to Centeon totaled $18.3 million. In the second quarter, the
Company made a $16.0 million cash payment to Centeon representing the return
of an excess distribution made in 1996 of RPR's share of Centeon's 1996
earnings.
11
<PAGE>
NOTE 10.- CONTINGENCIES
The Company is involved in litigation incidental to its business, including,
but not limited to: (1) approximately 557 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 in May 1997, the
court declared the class settlement offer to be fair to the class. In July
1997, two appeals filed with respect to the settlement were withdrawn and then
dismissed by the Seventh Circuit Court of Appeals. Payment into the
settlement fund will begin in August 1997; (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
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, 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 three sites
on the U.S. National Priority List created by the Comprehensive Environmental
Response Compensation and Liability Act (Superfund). The Company's estimated
liability for these sites is not significant.
12
<PAGE>
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. ("Rorer") 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. In June 1997, RP announced that it is studying increasing its
ownership of RPR from approximately 68% to 100%; such an offer would be
proposed after the expiration on July 31, 1997 of the standstill period under
the Rorer acquisition agreement of March 12, 1990. The RPR Board of Directors
has formed a special committee of independent directors to review any such
proposal should it be made.
RESULTS OF OPERATIONS (THREE AND SIX MONTHS ENDED JUNE 30, 1997 VERSUS
COMPARABLE PRIOR YEAR PERIODS)
At $77 million ($.56 per share), second quarter net income available to common
shareholders was below the prior year quarter ($92 million or $.68 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.
On a year-to-date basis, net income available to common shareholders totaled
$134 million ($.98 per share) versus $166 million ($1.23 per share).
Sales
At $1,238 million, reported sales for the second quarter declined 8% from the
second quarter of 1996. Sales comparisons were negatively impacted by over 7
percentage points by divestitures and licensing arrangements in mid- to late-
1996 and the absence of sales in 1997 of Rynacrom(R), the OTC form of which is
currently marketed by McNeil Consumer Products. The effects of currency
fluctuations also negatively impacted second quarter sales by over 6%.
Excluding these items, sales grew almost 6% due to increased volume, including
strong performance of Clexane(R)/Lovenox(R) and contributions from new
products (Taxotere(R), Rilutek(R), Nasacort(R) AQ), offset by net lower prices
(-1%), principally in the United States.
On a year-to-date basis, reported sales were 11% below the prior year. After
the negative effects of divestitures (-8%) and currency fluctuations (-6%),
operational sales growth was 3%. Weakness in certain European markets, namely
France and Germany, competitive pressures in the U.S. with respect to certain
of the Company's products, and shortfalls in sales of Albuminar(R) in Japan
have impacted sales performance for the first half of 1997.
In the tables and discussion which follow, percentage comparisons of sales are
presented excluding the effects of product divestitures and currency
fluctuations unless otherwise noted.
13
<PAGE>
Sales by geographic area were as follows:
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
------------------------------ -----------------------------
($ in millions) % %
1997 1996 Change* 1997 1996 Change*
-------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S............. $ 287 $ 280 17% $ 452 $ 486 10%
-------- -------- -------- --------- -------- -------
France.......... 389 449 -1% 788 921 -2%
Other Europe.... 329 373 6% 650 768 3%
Rest of World... 233 244 6% 434 444 7%
-------- -------- -------- --------- -------- -------
Total Non-U.S... 951 1,066 3% 1,872 2,133 2%
-------- -------- -------- --------- -------- -------
Total sales..... $1,238 $1,346 6% $2,324 $2,619 3%
======== ======== ======== ========= ======== =======
</TABLE>
* Percentage change calculation excludes effects of product divestitures and
currency fluctuations.
Second quarter sales growth in the U.S. resulted from an almost twofold
increase in sales of Lovenox(R), higher sales of Azmacort(R), and increased
contribution from Taxotere(R). Strong performance of Lovenox(R) reflected good
growth in demand coupled with trade buying patterns. Sales of Azmacort(R)
reflected increased sales to the trade. The first quarter negative impact of
wholesaler buying patterns and competitive pressures with respect to certain
of the Company's products (Intal(R), Lozol(R)/indapamide) affected U.S. sales
results on a year-to-date basis.
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. Reduced sales of
anti-infectives and Clexane(R)/Lovenox(R) in France for the three- and six-
month periods more than offset contributions from Taxotere(R) and higher sales
of Doliprane(R).
Sales performance in Germany improved from earlier in the year although
governmental pressures on physician prescribing practices are still affecting
market growth. Sales of strategic products (Taxotere(R), Clexane(R)/Lovenox(R)
and the newly-launched Rilutek(R)) increased for the three and six months.
Higher sales of Maalox(R) during the quarter reflected benefits from
promotional strategies although competitive pressures impacted year-to-date
sales. While strategic products as a group registered growth within the U.K.,
reduced in-market sales of key respiratory products (Intal(R), Opticrom(R))
limited quarterly sales growth. Year-to-date sales declines for the U.K.
resulted primarily from lower export sales of respiratory products to Japan
due to distributor stocking patterns. Sales gains during the reported periods
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 of strategic
products in South America and growth in Asian markets. Three- and six-month
sales in Japan were significantly affected by reduced Albuminar(R) sales 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:
14
<PAGE>
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
--------------------------------- -------------------------------
Therapeutic Area/Principal Offerings
($ in millions) 1997 1996 % Change* 1997 1996 % Change*
--------- -------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Respiratory & Allergy........ $ 243 $ 277 -1% $ 454 $ 543 -3%
Azmacort(R)..................... 51 41 26% 105 84 26%
Intal(R)/Aarane(R).............. 63 72 -6% 112 134 -11%
Nasacort(R)/Nasacort(R) AQ...... 36 22 58% 51 34 48%
Tilade(R)....................... 17 20 -11% 34 37 -2%
- --------------------------------------------------------------------------------------------------------
Total Thrombosis/Cardiology
and Cardiovascular.............. $ 255 $ 247 15% $ 448 $ 482 4%
Clexane(R)/Lovenox(R)........... 127 93 43% 208 177 24%
Dilacor XR(R)................... 31 28 13% 50 48 4%
- --------------------------------------------------------------------------------------------------------
Total Central Nervous System....... $ 157 $ 159 10% $ 300 $ 317 6%
Doliprane(R).................... 35 36 8% 67 73 2%
Imovane(R)/Amoban(R)............ 38 34 20% 71 68 13%
Rilutek(R)...................... 14 4 N/A 22 7 N/A
- --------------------------------------------------------------------------------------------------------
Total Anti-infectives.............. $ 131 $ 151 1% $ 275 $ 306 2%
Flagyl(R)....................... 29 31 -6% 58 59 2%
- --------------------------------------------------------------------------------------------------------
Total Hormone Replacement
Therapy/Bone...................... $ 79 $ 89 -3% $ 157 $ 176 -2%
Orudis(R)/Profenid(R)/Oruvail(R) 46 49 -2% 89 96 -3%
Calcitonins..................... 14 19 -20% 30 38 -15%
- --------------------------------------------------------------------------------------------------------
Total Oncology..................... $ 81 $ 50 71% $ 144 $ 81 90%
Granocyte(R).................... 19 17 24% 36 32 23%
Taxotere(R)..................... 46 23 111% 82 27 N/A
- --------------------------------------------------------------------------------------------------------
Other Therapeutic Areas............ $ 292 $ 373 -3% $ 546 $ 714 -4%
Maalox(R)....................... 38 38 11% 75 82 1%
DDAVP(R)........................ 19 24 -19% 31 43 -27%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Percentage change calculation excludes effects of product divestitures and
currency fluctuations.
Azmacort(R) and Nasacort(R) sales increases included the effect of trade buying
patterns while intensified market competition negatively impacted the rate of
growth in prescriptions written. Three- and six-month growth in Nasacort(R) AQ
sales reflected the expansion of the aqueous segment. Second quarter declines of
sales of Intal(R) resulted from a poor pollen season in Europe and competition
in the United States; reduced exports from the U.K. due to prior year stocking
patterns contributed to reduced Intal(R) sales on a year-to-date basis.
Clexane(R)/Lovenox(R) posted three- and six-month sales gains in the Company's
major markets except for France, where Clexane(R)/Lovenox(R) sales have been
affected by increased competition. The U.S. Food and Drug Administration ("FDA")
recently approved Lovenox(R) for the prevention of deep vein thrombosis in
abdominal surgery and, in June 1997, an FDA Advisory Committee recommended that
the FDA clear Lovenox(R) for the treatment of unstable angina and non-Q-wave
myocardial infarction. On June 30, 1997, the Company licensed to Watson
Pharmaceuticals Inc. ("Watson") the exclusive worldwide (except for New Zealand
and Korea) distribution rights to Dilacor XR(R) and its generic equivalents for
a four and one-half year term, after which time Watson has the option to
purchase the product rights. In connection with the licensing arrangement, the
Company transferred remaining Dilacor XR(R) inventories to Watson at the end of
the second quarter. Sales of the Company's branded (Lozol(R)) and generic
indapamide diuretics continued to be negatively impacted by generic competition.
Three- and six-month sales growth of central nervous system products reflected
higher sales of Imovane(R)/Amoban(R) in Other European markets and Japan as well
as contributions from Rilutek(R) in
15
<PAGE>
Europe and the United States. Sales of Doliprane(R) improved during the quarter,
although increased competitive pressures in the marketplace affected sales on a
year-to-date basis.
Sales of anti-infectives were comparable to the prior year for the reported
periods. While sales increased in certain Asian and African markets, anti-
infectives sales in France continued to be affected by restricted physician
prescribing practices in response to on-going government initiatives to reduce
health care expenditures. 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 hormone replacement therapy/bone products remained slightly below the
prior year periods 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 55 countries for the treatment of advanced or metastatic breast
cancer and in 27 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) was launched in Japan at the end of June 1997
where it is approved for both breast cancer and NSCLC. Granocyte(R) recorded
good sales performance in other European markets for the three and six months
while sales in France remained essentially at the prior year levels. The
Gliadel(R) Wafer, launched in the U.S. during the first quarter of 1997 for use
as an adjunct to surgery to prolong survival in patients with recurrent
glioblastoma multiforme for whom surgical resection is indicated, added to sales
of the category.
Quarterly and year-to-date declines in other therapeutic area sales primarily
reflected reduced sales of plasma derivatives 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. Reduced
sales of DDAVP(R) resulted from trade buying patterns in anticipation of the
room temperature spray form which was introduced in July 1997.
Operating Income
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
-------------------------------- -------------------------------------
1997 1996 1997 1996
-------------- --------------- ---------------- ---------------
% of % of % % of % of %
($ in millions) $ Sales $ Sales Change $ Sales $ Sales Change
------ --------- -------- ------- -------- -------- --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross margin.................. $871 70.4% $902 67.0% -3% $1,632 70.2% $1,741 66.5% -6%
Selling, delivery and
administrative expenses...... 500 40.4% 532 39.6% -6% 946 40.7% 1,047 40.0% -10%
Research and development
expenses...................... 220 17.8% 214 15.9% +3% 405 17.4% 414 15.8% -2%
Operating income............... 150 12.1% 155 11.5% -3% 281 12.1% 280 10.7% --
</TABLE>
Quarterly gross margin improvement reflected the favorable impact of new
products and changes in business structure, including recognition of royalty
income from the Medeva transaction. On a year-to-date basis, gross margin also
benefited from higher royalty income from the Company's joint venture partner
on in-market sales in Japan.
16
<PAGE>
Reported selling, delivery and administrative expenses ("SD&A") decreased
quarter-on-quarter as benefits from cost containment initiatives exceeded
increased commercial support of global products. Realization of additional
synergies from the integration of the Fisons business also contributed to
lower SD&A for the six-month period. SD&A increased as a percentage of sales
for the reported periods primarily as a result of lower comparative reported
sales bases.
Second quarter growth in research and development reflected increased
investment associated with Gencell projects, drug discovery and expanded
indications of current products (Taxotere(R), Clexane(R)/Lovenox(R)). Six-
month research and development expense was below the prior year level due to
significant spending in the first half of 1996 related to several later stage
projects.
Growth in second quarter and six-month operating income as a percentage of
sales primarily reflected gross margin improvements.
Interest Expense, Net
Net interest expense decreased from the comparable prior year periods due to
lower average net debt balances and the net favorable impact of non-U.S.
interest rates. These reductions were partially offset by imputed interest
associated with certain prepaid licensing fees related to the Medeva
transaction.
Other (Income), Net
Centeon
Losses from equity affiliates, principally the Company's interest in the
Centeon joint venture, totaled $14 million in the second quarter of 1997 and
$20 million on a year-to-date basis as compared with income of $41 million and
$78 million, respectively, for the comparable prior year periods. Centeon's
first half of 1997 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 six months of 1997 was also impacted by $31 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 May 1997, the FDA notified Centeon that it appeared to be in compliance
with current Good Manufacturing Practices and authorized resumption of
distribution of plasma-based products, subject to FDA testing and lot release,
and pharmaceutical products at its U.S. facility. Based on a phased-in
production schedule, newly-manufactured plasma-based products were sent to the
FDA for lot release in June and distribution of new production has begun on a
limited basis. Centeon expects product distribution to ramp up gradually over
the remainder of the year. Centeon's earnings performance in the near- to
medium-term will be affected by the timing and associated costs of market
share recovery, reduced production capacity, product mix and higher on-going
production and commercial costs. In addition, as anticipated, Centeon plans to
temporarily suspend production during the fourth quarter to implement
additional facility enhancements.
Centeon sales for the second quarter of 1997, including sales to certain RPR
affiliates, totaled $176 million (1996: $259 million). Gross margin, including
recall-related and manufacturing start-up costs, approximated 28% of sales
(1996: 48%). Losses before the effect of income taxes totaled $18 million
compared to income before taxes ("IBT") of $60 million in 1996. On a year-to-
date basis, sales totaled $348 million (1996: $497 million). Gross margin
approximated 32% (1996: 52%) and losses before the effect of income taxes
totaled $17 million (1996: IBT of $142 million). Sales declines and reduced
gross margin in 1997 reflected the impact of lost sales of
Albuminar(R)/Plasma-Plex(R) in addition to reduced sales of certain other
plasma-derived products whose production was also temporarily suspended and/or
which are typically marketed with the albumin products. Negative IBT
reflected reduced gross margin and higher
17
<PAGE>
operating expenses as a percentage of sales associated with market share
recovery efforts and increased investment in key research and development
projects.
Other Items
In June 1997, the Company recorded a pretax gain of $16 million ($.08 per
share) on the termination of a partnership arrangement with Watson in
connection with the licensing to Watson of the distribution rights to
diltiazem products.
Other (income), net also included net gains totaling $7 million and $14
million for the three- and six-month periods, respectively, on foreign
currency exchange contracts used to hedge a portion of the Company's non-U.S.-
based forecasted quarterly pretax earnings. Similar gains totaled $5 million
for both the comparable prior year periods.
Income Taxes
The Company's year-to-date reported effective income tax rate was 31.1% in
1997 and 31.3% in 1996. In July 1997, the French government proposed
legislation to increase the corporate income tax on both ordinary income and
capital gains. The legislation is expected to be enacted in September 1997
with retroactive effect to January 1, 1997. The Company is in the process of
quantifying the impact such changes would have on its worldwide effective
income tax rate, but estimates that the legislation has the potential to
increase the Company's effective income tax rate by up to one and one-half
percentage points.
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
$10 million in the first half of 1997 (1996: $ 77 million).
Cash Flows
Operating activities yielded cash flows of $13 million during the first six
months of 1997 compared with $47 million in 1996. Working capital needs
increased during the period, while the impact of greater cash outlays for
income tax payments was essentially offset by reduced outflows associated with
restructuring activities. In the second quarter, the Company made a $16
million cash payment to Centeon representing the return of an excess
distribution made in 1996 of RPR's share of Centeon's 1996 earnings. In June
1997, the Company received a partnership termination payment from Watson
totaling $20 million. Third quarter operating cash flows will include the
prepayment by Watson in July 1997 of licensing fees and royalties for the
second half of 1997 totaling $40 million. In August 1997, the Company will
also make payments approximating $90 million related to initial funding of its
share of the class settlement with respect to the U.S. anti-hemophilic factor
litigation.
Investing activities used cash totaling $121 million in the first half of 1997
and provided $40 million of cash in 1996. Current year cash outlays included
capital expenditures in support of strategic products and interest-bearing
receivables with Centeon. Net investing cash inflows in 1996 included $236
million from the sale of Fisons' Scientific Instruments Division; proceeds
from sales of nonstrategic assets in 1997 totaled $47 million. Although six-
month spending was below the prior year period, capital expenditures on a
full-year basis are expected to approximate 1996 levels.
18
<PAGE>
Current year financing cash inflows totaled $127 million compared with cash
outflows of $134 million in 1996. Net proceeds from new borrowings totaled
$209 million in 1997 compared with net repayments of $82 million in the year
ago period. During the second quarter of 1997, the Company repurchased common
shares on the open market at a cost approximating $12 million. These shares
are held in an Employee Benefits Trust to fund future employee benefits in the
United States. Dividends paid to common shareholders totaled $88 million ($.64
per share) in 1997 and $84 million ($.62 per share) in 1996. In July 1997,
the Board of Directors declared a third quarter cash dividend of $.32 per
share payable on August 29, 1997 to holders of record on August 11, 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 .49 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 June 30, 1997,
the Company's net debt approximated $2,467 million compared with $2,381
million at year-end 1996. The ratio of current assets to current liabilities
was 1.53 to 1 at June 30, 1997 compared with 1.35 to 1 at December 31, 1996,
partially due to a net reduction in trade payables during the period.
At June 30, 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 June 30, 1997, borrowings outstanding under the
Company's medium-term arrangements totaled $493 million. These borrowings plus
an additional $1,826 million of short-term borrowings were classified as long-
term debt at June 30, 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 August 1997, the Company redeemed the outstanding 750 shares of Series 1
money market preferred stock for $75 million plus accrued dividends utilizing
existing lines of credit.
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.
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 10 of the Notes to Condensed Consolidated
Financial Statements and in Legal Proceedings in Part II of this Form 10-Q.
Following a fairness hearing in May 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 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. In July 1997, two appeals
filed with respect to the settlement were withdrawn and then dismissed by the
Seventh Circuit Court of Appeals. Payment into the settlement fund will begin
in August 1997.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings
-----------------
AHF Litigation
There are approximately 493 lawsuits in the United States, 6 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 reports that there are currently approximately 6,000
apparently eligible claimants and approximately 535 apparently eligible opt-
outs.
On May 8, 1997, following a final fairness hearing, Judge John F. Grady
declared the settlement to be fair to the class. On June 9, 1997, the last
day on which to perfect an appeal from the court's final fairness order, an
appeal was filed on behalf of two claimants. On June 14, 1997, a second
appeal was filed on behalf of sixteen claimants pursuant to an appellate court
rule permitting joinder in the original appeal. In both appeals, the
claimants attacked the class settlement on a number of legal grounds, seeking
the right to opt out of the settlement. Each of the appeals was subsequently
withdrawn and then dismissed by the Seventh Circuit Court of Appeals, leaving
the parties free to proceed with the settlement. The Company and the other
fractionators will make payment into the settlement fund for claimants on
August 13, 1997 and payment to the public and private insurers on August 12,
1997.
20
<PAGE>
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 resolved for them in a timely manner. However, given that the
federal government, nearly all private insurance carriers and a majority of
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").
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 either the Lozol(R) case or the damages portion of the
bisphosphonate 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 139 antitrust lawsuits. It is
presently a party to eleven 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, Michigan and Mississippi. 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). 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.
21
<PAGE>
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, Michigan and Mississippi 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 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.
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. These appeals were argued in late June and a decison from
the court is expected shortly. 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. 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 three sites
on the U.S. National Priority List created by the Comprehensive Environmental
Response Compensation and Liability Act (Superfund). The Company's estimated
liability for these sites is not significant.
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
22
<PAGE>
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.
A petition for rehearing before the Federal Circuit en banc has been filed and
-- ----
briefed.
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 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, 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.
23
<PAGE>
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).
24
<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)
August 6, 1997 /s/ GUILLAUME PRACHE
-------------------------------------
Guillaume Prache
Senior Vice President and
Chief Financial Officer
August 6, 1997 /s/ PHILIPPE MAITRE
-------------------------------------
Philippe Maitre
Vice President and
Corporate Controller
25
<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).
<PAGE>
EXHIBIT 11
RHONE-POULENC RORER INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
(Unaudited-dollars and shares in millions except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1997 1996
------------ ---------
<S> <C> <C>
Earnings per common share, primary:
Net income before preferred dividends
and remuneration.............................. $ 88.7 $102.2
Less: Dividends on preferred stock and
remuneration on capital equity notes.......... (11.8) (10.3)
------------ ---------
Net income available to common
shareholders.................................. $ 76.9 $ 91.9
============ =========
Average shares outstanding..................... 137.1 135.7
============ =========
Net income available to common
shareholders per share........................ $ .56 $ .68
============ =========
Earnings per common share, fully
diluted:
Net income before preferred dividends
and remuneration.............................. $ 88.7 $102.2
Less: Dividends on preferred stock and
remuneration on capital equity notes.......... (11.8) (10.3)
------------ ---------
Net income available to common
shareholders.................................. $ 76.9 $ 91.9
============ =========
Average shares outstanding..................... 137.1 135.7
Shares contingently issuable for stock
plan.......................................... 2.8 2.0
------------ ---------
Average shares outstanding, assuming
full dilution................................. 139.9 137.7
============ =========
Net income available to common
shareholders per share, assuming
full dilution................................. $ .55 $ .67
============ =========
</TABLE>
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>
EXHIBIT 11
RHONE-POULENC RORER INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
(Unaudited-dollars and shares in millions except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1997 1996
----------- ----------
<S> <C> <C>
Earnings per common share, primary:
Net income before preferred dividends and remuneration...... $ 155.5 $ 187.2
Less: Dividends on preferred stock and remuneration on
capital equity notes.................................. (21.9) (21.3)
----------- ----------
Net income available to common shareholders................. $ 133.6 $ 165.9
=========== ==========
Average shares outstanding.................................. 137.0 135.3
=========== ==========
Net income available to common shareholders per share....... $ .98 $ 1.23
=========== ==========
Earnings per common share, fully diluted:
Net income before preferred dividends and remuneration...... $ 155.5 $ 187.2
Less: Dividends on preferred stock and remuneration on
capital equity notes.................................. (21.9) (21.3)
----------- ----------
Net income available to common shareholders................. $ 133.6 $ 165.9
=========== ==========
Average shares outstanding.................................. 137.0 135.3
Shares contingently issuable for stock plan................. 2.7 2.0
----------- ----------
Average shares outstanding, assuming full dilution.......... 139.7 137.3
=========== ==========
Net income available to common shareholders per share,
assuming full dilution..................................... $ .96 $ 1.21
=========== ==========
</TABLE>
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>
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 July 17, 1997, on our review of interim
financial information of Rhone-Poulenc Rorer Inc. ("the Company"), for the
period ended June 30, 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
August 6, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 114
<SECURITIES> 0
<RECEIVABLES> 947
<ALLOWANCES> 88
<INVENTORY> 797
<CURRENT-ASSETS> 2,599
<PP&E> 2,862
<DEPRECIATION> 1,436
<TOTAL-ASSETS> 8,302
<CURRENT-LIABILITIES> 1,694
<BONDS> 0
0
175
<COMMON> 143
<OTHER-SE> 2,220
<TOTAL-LIABILITY-AND-EQUITY> 8,302
<SALES> 1,238
<TOTAL-REVENUES> 1,238
<CGS> 367
<TOTAL-COSTS> 1,088
<OTHER-EXPENSES> (15)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 128
<INCOME-TAX> 40
<INCOME-CONTINUING> 89
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
