<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
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 1-2516
PHARMACIA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 43-0420020
(State of incorporation) (I. R. S. Employer
Identification No.)
Pharmacia Corporation, 100 Route 206 North, Peapack, NJ 07977 (Address of
principal executive offices) (Zip Code)
Registrant's telephone number 908/901-8000
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $2 Par Value, outstanding as of November
9, 2000 was 1,289,649,373.
Page 1 of 35 pages
The exhibit index is set forth on page 32
<PAGE> 2
QUARTERLY REPORT ON FORM 10-Q
PHARMACIA CORPORATION
QUARTER ENDED SEPTEMBER 30, 2000
INDEX OF INFORMATION INCLUDED IN REPORT
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION......................................................... 3
Item 1. Financial Statements - Unaudited............................................... 3
Consolidated Statements of Earnings.................................................. 3
Condensed Consolidated Statements of Cash Flows...................................... 4
Condensed Balance Sheets............................................................. 5
Notes to Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 27
PART II - OTHER INFORMATION............................................................ 28
Item 1. Legal Proceedings.............................................................. 28
Item 5. Other Information.............................................................. 29
Item 6. Exhibits and Reports on Form 8-K............................................... 31
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions of U.S. dollars, except per-share data) (Unaudited)
<TABLE>
<CAPTION>
==============================================================================================
For Three Months For Nine Months
Ended September 30, Ended September 30,
==============================================================================================
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 4,286 $ 3,738 $ 13,608 $ 12,197
Cost of products sold 1,295 1,244 4,210 3,978
Research and development 669 732 2,090 2,121
Selling, general and administrative 1,602 1,438 4,958 4,196
Amortization & adjustment of goodwill 57 55 259 183
Interest expense 102 92 303 313
Interest income (34) (24) (88) (74)
Merger and restructuring 226 42 798 42
All other, net 18 (65) (13) (106)
----------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes 351 224 1,091 1,544
Provision for income taxes 78 29 340 499
----------------------------------------------------------------------------------------------
Earnings from continuing operations 273 195 751 1,045
Discontinued operations
Earnings from discontinued
operations, net of tax -- 27 -- 57
(Loss) gain on sale of discontinued
operations, net of tax (26) 12 (27) 12
----------------------------------------------------------------------------------------------
Earnings before cumulative effect
of accounting change 247 234 724 1,114
Cumulative effect of a change in
accounting principle, net of tax -- -- -- (20)
----------------------------------------------------------------------------------------------
Net earnings $ 247 $ 234 $ 724 $ 1,094
==============================================================================================
Net earnings per common share:
Basic
Earnings from continuing operations $ .21 $ .16 $ .58 $ .83
Net earnings .19 .19 .56 .87
Diluted
Earnings from continuing operations .21 .15 .57 .81
Net earnings .19 .18 .55 .85
==============================================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 4
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of U.S. dollars) (Unaudited)
<TABLE>
<CAPTION>
===================================================================================
For the nine months ended September 30 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Net cash provided by continuing operations $ 643 $ 891
Net cash (required) by discontinued operations (25) (144)
-----------------------------------------------------------------------------------
Net cash provided by operations 618 747
-----------------------------------------------------------------------------------
Cash flows provided (required) by investment activities:
Proceeds from sale of subsidiaries 75 122
Additions of properties (960) (990)
Proceeds from sales of investments 113 866
Purchases of investments (126) (204)
Proceeds from sale of discontinued operations, net 1,669 301
Other (60) (96)
-----------------------------------------------------------------------------------
Net cash provided (required)
by investment activities 711 (1)
-----------------------------------------------------------------------------------
Cash flows (required) provided by financing activities:
Proceeds from issuance of debt 12 88
Repayment of debt (587) (259)
Payments of ESOP debt (31) --
Net (decrease) increase in debt with initial maturity
of 90 days or less (1,139) 256
Dividend payments (513) (479)
Purchases of treasury stock -- (170)
Proceeds from exercise of stock options 967 190
-----------------------------------------------------------------------------------
Net cash (required) by financing activities (1,291) (374)
-----------------------------------------------------------------------------------
Effect of exchange rate changes on cash (130) (13)
-----------------------------------------------------------------------------------
Net change in cash and cash equivalents (92) 359
Cash and cash equivalents, beginning of year 1,600 970
-----------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,508 $ 1,329
===================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 5
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All U.S. dollar amounts in millions) (Unaudited)
<TABLE>
<CAPTION>
===============================================================================
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,508 $ 1,600
Short-term investments 107 138
Trade accounts receivable, less allowance
of $266 (1999: $271) 5,286 4,131
Inventories 2,777 2,905
Other current assets 1,853 1,908
-------------------------------------------------------------------------------
Total current assets 11,531 10,682
Long-term investments 698 476
Properties, net 6,916 6,825
Goodwill and other intangible assets, net 5,360 5,796
Other noncurrent assets 1,991 1,858
Net assets of discontinued operations --- 1,557
-------------------------------------------------------------------------------
Total assets $ 26,496 $ 27,194
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 989 $ 1,992
Trade accounts payable 944 1,272
Other current liabilities 4,019 3,910
-------------------------------------------------------------------------------
Total current liabilities 5,952 7,174
Long-term debt and guarantee of ESOP debt 5,503 6,236
Other noncurrent liabilities 2,845 2,873
-------------------------------------------------------------------------------
Total liabilities 14,300 16,283
-------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, one cent par value; at
stated rate; authorized 10,000,000 shares;
issued 6,553 (1999: 6,692 shares) 263 270
Common stock, two dollar par value; authorized
3,000,000,000 shares; issued 1,468,299,000
shares (1999: 1,465,381,000 shares) 2,937 2,931
Capital in excess of par value 2,609 1,791
Retained earnings 10,809 10,696
ESOP-related accounts and other (338) (330)
Treasury stock (2,099) (2,432)
Accumulated other comprehensive loss (1,985) (2,015)
-------------------------------------------------------------------------------
Total shareholders' equity 12,196 10,911
-------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 26,496 $ 27,194
===============================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(ALL U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA)
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all
upper case letters. In the notes that follow, per-share amounts are presented on
a diluted, after-tax basis.
On March 31, 2000, a subsidiary of the former Monsanto Company and Pharmacia &
Upjohn merged and the combined company was renamed Pharmacia Corporation
("Pharmacia" or "the company"). The merger was accounted for as a pooling of
interests. As such, all data presented herein are reflective of the combined
results of operations of the two predecessor companies, their statements of
financial position and their cash flow as though they had always been combined,
by applying consistent disclosures and classification practices.
The former Monsanto Company was made up principally of a pharmaceutical
business and an agricultural products business. As more fully discussed below,
subsequent to the merger forming Pharmacia Corporation, the agricultural
operations of the former Monsanto Company were placed into a subsidiary of the
company with the name Monsanto Company (Monsanto). On October 23, 2000,
Monsanto completed a partial initial public offering of 14.7% of its common
stock.
To avoid confusion throughout this document, "former Monsanto" will be used to
refer to the pre-merger operations of the former Monsanto Company and
"Monsanto" will refer to the agricultural subsidiary. Note that the animal
health business of the former Pharmacia & Upjohn is not a part of Monsanto.
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited. The
interim financial statements and notes thereto do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the 1999 Pharmacia Corporation consolidated financial
statements and notes thereto filed on Form 8-K on May 22, 2000.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. The current period's results of operations are not
necessarily indicative of results that ultimately may be achieved for the year.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Transactions." This statement requires companies to record derivatives
on the balance sheet as assets and liabilities measured at fair value. The
accounting treatment of gains and losses resulting from changes in the value of
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. The company will adopt SFAS 133 and its amendments in the
first quarter of 2001 and does not expect it to have a material effect on the
company's results of operations, cash flows or financial position.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101) which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. SAB 101 allows companies to report any changes
in revenue recognition related to adopting its provisions as an accounting
change at the time of implementation in accordance with Accounting Principles
Board (APB) Opinion No. 20, "Accounting Changes."
In response to a specific dialogue with the SEC, the company recorded a
cumulative effect of a change in accounting principle, effective January 1,
1999, for revenue recognized in 1998 related to the sale of certain marketing
rights. The effect on earnings in 1999 was an after-tax loss of $20 ($0.02 per
share). The pre-tax amount of $32 will be amortized to income over twenty years.
The company is currently in the process of assessing the impact of adopting SAB
101 on its revenue recognition policies and on prior revenue transactions. The
company currently anticipates that SAB 101 will not have a material impact on
financial position, cash flows or results of operations. However, due primarily
to certain up-front and milestone payments from co-promotion partners that were
recognized in earnings in prior years, implementation of SAB 101 is expected to
result in a cumulative effect adjustment. While the company has not yet
finalized its review, it is currently estimated that the pre-tax amount of the
cumulative adjustment will lie within a range from $250 to $400. Any accounting
changes that result from the adoption of SAB 101 must be made no later than the
fourth quarter of 2000, effective as of January 1, 2000.
6
<PAGE> 7
B - MERGER
On March 31, 2000, the company completed a merger accounted for as a pooling of
interests. The merger was accomplished according to an Agreement and Plan of
Merger dated December 19, 1999 as amended on February 18, 2000, whereby a wholly
owned subsidiary of the former Monsanto Company merged with and into Pharmacia &
Upjohn. In connection with this, the former Monsanto Company changed its name
to Pharmacia Corporation.
Pursuant to the merger agreement, each share of common stock of Pharmacia &
Upjohn issued and outstanding was converted into 1.19 shares of common stock of
Pharmacia Corporation and each share of Series A Convertible Perpetual Preferred
Stock of Pharmacia & Upjohn issued and outstanding was converted into one share
of a new series of convertible preferred stock of Pharmacia Corporation
designated as Series B Convertible Perpetual Preferred Stock. The Series B
preferred shares have a conversion ratio into common shares of 1,725.5:1.
Approximately 620 million shares of common stock were issued and approximately
6,640 shares of preferred stock were issued in connection with the merger.
As the merger was accounted for as a pooling of interests under APB Opinion No.
16, "Business Combinations", all prior period consolidated financial statements
have been restated to reflect the combined results of operations, financial
position and cash flows of both companies as if they had always been combined.
There were no material transactions between the former Monsanto Company and
Pharmacia & Upjohn prior to the combination. Certain reclassifications have
been made to conform the respective earnings statement and balance sheet
presentations.
C - PARTIAL AGRICULTURAL BUSINESS INITIAL PUBLIC OFFERING
On October 23, 2000, the company completed the offering of shares in connection
with a partial initial public offering (IPO) of the agricultural business. The
new publicly traded entity, Monsanto Company (Monsanto), assumes the operation
of the Pharmacia agricultural business. In connection with the offering,
approximately 38 million shares were sold at a price of twenty dollars per share
resulting in gross proceeds of approximately $761. Estimated costs and expenses
associated with the offering, including underwriting fees, are $46. Pharmacia
continues to own approximately eighty-five percent of the outstanding stock of
Monsanto. The portion of Monsanto that is not owned by the company will be
accounted for as a minority interest in the financial statements. Proceeds
received in connection with the offering were used to reduce Monsanto debt.
D - INVENTORIES
<TABLE>
<CAPTION>
------------------------------------------------------------------------
September 30, December 31,
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical, Agricultural and other
finished products $ 976 $ 1,281
Raw materials, supplies
and work-in-process 2,021 1,794
------------------------------------------------------------------------
Inventories (FIFO basis) 2,997 3,075
Less reduction to LIFO cost (220) (170)
------------------------------------------------------------------------
Inventories $ 2,777 $ 2,905
========================================================================
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $1,453 at September 30, 2000, and $1,038 at December 31, 1999.
7
<PAGE> 8
E - CONTINGENT LIABILITIES AND LITIGATION
The condensed consolidated balance sheets include accruals for estimated
product, intellectual property and other litigation and environmental
liabilities. The latter includes exposures related to discontinued operations,
including the industrial chemical facility referred to below and several sites
which, under the Comprehensive Environmental Response, Compensation, and
Liability Act, are commonly known as Superfund sites. The company's ultimate
liability in connection with Superfund sites depends on many factors, including
the number of other responsible parties and their financial viability and the
remediation methods and technology to be used. Actual costs to be incurred may
vary from the estimates, given the inherent uncertainties in evaluating
environmental exposures.
Environmental matters -
With regard to the company's discontinued industrial chemical facility in North
Haven, Connecticut, the company will soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). It now
appears that this report will need to be submitted for EPA review during 2001.
It is reasonably possible that a material increase in accrued liabilities will
be required. It is not possible, however, to estimate a range of potential
losses. Accordingly, it is not possible to determine what, if any, additional
exposure exists at this time.
Litigation matters -
In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and Agrigenetics
filed suit against former Monsanto in California State Superior Court in San
Diego alleging that the company failed to license, under an option agreement,
technology relating to Bt corn and glyphosate-tolerant corn, cotton and canola.
On October 20, 1997, the court construed the agreement as a license to receive
genes rather than a license to receive germplasm. Jury trial of the damage claim
for lost future profits from the alleged delay in performance ended March 20,
1998, with a verdict against the company awarding damages totaling $174.9. On
June 28, 2000, the California Court of Appeals for the Fourth Appellate District
issued its opinion reversing the jury verdict and related judgment of the trial
court, and directed that judgment should be entered in the company's favor.
Mycogen's subsequent motion for rehearing has been denied. Mycogen's petition
with the California Supreme Court requesting further review was granted on
October 25, 2000, and their appeal of the reversal of judgment is continuing.
In April 1999, a jury verdict was returned against the company in a lawsuit
filed in U.S. District Court in North Carolina. The lawsuit claims that a 1994
license agreement was induced by fraud stemming from nondisclosure of relevant
information and that the company did not have the right to license, make or sell
products using the plaintiff's technology for glyphosate resistance under this
agreement. The jury awarded $15 in actual damages for unjust enrichment and $50
in punitive damages. The company has appealed this verdict, believes it has
meritorious grounds to overturn the verdict and intends to vigorously pursue all
available means to have the verdict overturned. No provision has been made in
the company's consolidated financial statements with respect to the award for
punitive damages.
8
<PAGE> 9
The company has been a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits, some
of which were consolidated and transferred to the Federal District Court for the
Northern District of Illinois. These suits, brought by independent pharmacies
and chains, generally allege unlawful conspiracy, price discrimination and price
fixing and, in some cases, unfair competition. These suits specifically allege
that the company and the other named defendants violated the following: (1) the
Robinson-Patman Act by giving substantial discounts to hospitals, nursing homes,
mail-order pharmacies and health maintenance organizations without
offering the same discounts to retail drugstores, and (2) Section 1 of the
Sherman Antitrust Act by entering into agreements with other manufacturers and
wholesalers to restrict certain discounts and rebates so they benefited only
favored customers.
The Federal District Court for the Northern District of Illinois certified a
national class of retail pharmacies in November 1994. Eighteen class action
lawsuits seeking damages based on the same alleged conduct have been filed in 14
states and the District of Columbia. The plaintiffs claim to represent consumers
who purchased prescription drugs in those jurisdictions and four other states.
Two of the lawsuits have been dismissed. The former Pharmacia & Upjohn Company
announced in 1998 that it reached a settlement with the plaintiffs in the
federal class action cases for $103; and Searle received a favorable verdict in
1999.
On April 11, 2000, the University of Rochester filed suit in U.S. District Court
for the Western District of New York, asserting patent infringement against the
company and certain of its subsidiaries as well as Pfizer, Inc. The University
asserts that its U.S. patent granted on April 11 is infringed by the sale and
use of CELEBREX. The patent has claims directed to a method of treating human
patients by administering a selective COX-2 inhibitor. The University has
sought injunctive relief, as well as monetary compensation for infringement of
the patent.
The company is also a defendant in a suit filed by Great Lakes Chemical
Company. The original complaint was filed in the U.S. District Court in Delaware
on January 20, 2000, alleging violations of Federal and Indiana Securities
Laws, common law fraud and breach of contract claims. The lawsuit itself is a
result of Great Lakes' purchase of the NSC Technologies unit of former
Monsanto. According to Great Lakes, NSC'S actual sales for 1999 were
significantly below the projected sales. On May 25, 2000, the Federal Court
dismissed Great Lakes' complaint for lack of federal subject matter
jurisdiction holding that the sale of NSC was not a "security" under federal
law. On June 9, 2000, Great lakes filed a new complaint in Delaware Superior
Court. The company's motion to move the case from Superior Court to Delaware
Equity Court was granted.
With respect to the matters described above for which no range has been given,
the company believes it is not possible to estimate a range of potential losses
at this time. Accordingly, it is not possible to determine what, if any,
additional exposure exists at this time. The company intends to vigorously
defend itself in these matters.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, management's belief is that any potential remaining liability from
such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the company's consolidated financial position,
profitability or liquidity.
F - COMPREHENSIVE INCOME
Quarterly comprehensive income for the three months ended September 30, 2000 and
1999 was $332 and $258, respectively. Comprehensive income for the nine months
ended September 30, 2000 and 1999 was $755 and $545, respectively.
9
<PAGE> 10
G - EARNINGS PER SHARE
Basic earnings per share is computed by dividing the earnings measure by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed assuming the exercise of stock options, conversion of
preferred stock, and the issuance of stock as incentive compensation to certain
employees. Under these assumptions, the weighted-average number of common shares
outstanding is increased accordingly, and net earnings is reduced by an
incremental contribution to the applicable Employee Stock Ownership Plan (ESOP).
This contribution is the after-tax difference between the income that the ESOP
would have received from the preferred stock and the assumed dividend yield to
be earned on the common shares.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations on earnings from continuing operations:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30,
2000 2000 1999 1999
Basic Diluted Basic Diluted
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EPS numerator:
Earnings from continuing operations $ 273 $ 273 $ 195 $ 195
Less: Preferred stock dividends,
net of tax (4) -- (4) --
Less: ESOP contribution, net of tax -- (2) -- (2)
-------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
available to common shareholders $ 269 $ 271 $ 191 $ 193
===============================================================================================================================
EPS denominator:
Average common shares outstanding 1,280 1,280 1,249 1,249
Effect of dilutive securities:
Stock options and stock warrants -- 25 -- 22
Convertible instruments and
incentive compensation -- 12 -- 12
-------------------------------------------------------------------------------------------------------------------------------
Total shares (in millions) 1,280 1,317 1,249 1,283
===============================================================================================================================
Earnings per share
from continuing operations $ .21 $ .21 $ .16 $ .15
===============================================================================================================================
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30,
2000 2000 1999 1999
Basic Diluted Basic Diluted
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EPS numerator:
Earnings from continuing operations $ 751 $ 751 $ 1,045 $ 1,045
Less: Preferred stock dividends,
net of tax (10) -- (10) --
Less: ESOP contribution, net of tax -- (6) -- (4)
-------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
available to common shareholders $ 741 $ 745 $ 1,035 $ 1,041
===============================================================================================================================
EPS denominator:
Average common shares outstanding 1,269 1,269 1,248 1,248
Effect of dilutive securities:
Stock options and stock warrants -- 20 -- 24
Convertible instruments and
incentive compensation -- 12 -- 12
-------------------------------------------------------------------------------------------------------------------------------
Total shares (in millions) 1,269 1,301 1,248 1,284
===============================================================================================================================
Earnings per share
from continuing operations $ .58 $ .57 $ .83 $ .81
===============================================================================================================================
</TABLE>
H - SEGMENT INFORMATION
The company operates in two primary segments: pharmaceuticals and agricultural
products. The pharmaceutical segment consists principally of prescription and
nonprescription products for humans and animals, bulk pharmaceuticals and
contract manufacturing. The agricultural segment develops, produces and markets
crop protection products, seeds and related traits.
Corporate and all other amounts represent general and administrative expenses
and restructuring charges associated with corporate support functions and other
corporate items such as litigation accruals, merger costs and nonoperating
income and expense. Certain goodwill and other intangible assets and associated
amortization are not allocated to segments.
The following tables show net sales and earnings for the company's segments.
Information about segment assets, interest income and expense, and income taxes
is not provided as the segments are reviewed based on earnings before interest
and income taxes. Assets are not allocated to segments and accordingly
depreciation is not available. There are no intersegment revenues.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
For the three months ended September 30,
Sales Earnings
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pharmaceutical $ 3,283 $ 2,755 $ 625 $ 506
Agricultural 1,003 983 (48) (145)
---------------------------------------------------------------------------------------------------
$ 4,286 $ 3,738 577 361
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C> <C>
Unallocated corporate and other (158) (69)
-----------------------------------------------------------------------------------------------------
Earnings from continuing operations
before interest and taxes 419 292
Interest expense, net 68 68
-----------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes $ 351 $ 224
=====================================================================================================
<CAPTION>
For the nine months ended September 30,
Sales Earnings
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pharmaceutical $ 9,315 $ 8,078 $1,704 $1,547
Agricultural 4,293 4,119 559 572
------------------------------------------------------------------------------------------------------
$ 13,608 $ 12,197 2,263 2,119
======== ========
Unallocated corporate and other (957) (336)
------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before interest and taxes 1,306 1,783
Interest expense, net 215 239
------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes $1,091 $1,544
======================================================================================================
</TABLE>
As a result of the recent merger involving the former Monsanto Company and
Pharmacia & Upjohn, management reporting methodologies will tend to evolve and
segment definition and related disclosures may change in future periods.
I - DISCONTINUED OPERATIONS
On July 1, 1999, the company announced its intention to sell the artificial
sweetener (bulk aspartame and tabletop sweeteners) and biogum businesses. In
addition, the company's Board of Directors approved, in 1998, the divestiture
of the alginates and ORTHO lawn-and-garden businesses.
Net sales and income from discontinued operations in the third quarter 2000
represent the biogums business whereas the third quarter 1999 included the
alginates, biogums, bulk aspartame and tabletop sweeteners business. The
principal cause for the third quarter and year-over-year decline in earnings
from discontinued operations is the divestiture of discontinued businesses,
reduction of proceeds from the sales of those businesses and a reversal of
restructuring reserves in third quarter 1999 related to lower actual severance
costs than originally estimated. Pharmacia completed the sale of the biogums
business on September 29, 2000. As a result there were no net assets from
discontinued operations for the period ended September 30, 2000 compared with
net assets from the alginates, biogums, bulk aspartame and tabletop sweeteners
business at the end of 1999. Net sales and income from discontinued operations
in the first nine months of 2000 include biogums, five months of bulk
asparatame and two months of the tabletop sweeteners business compared with the
first nine months of 1999 which included the alginates, biogums, bulk
asparatame, and tabletop sweeteners, and one month of the ORTHO lawn-and-garden
products business
Net sales, income and net assets from discontinued operations are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Three months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 74 $ 243 $ 350 $ 712
---------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
Income from discontinued operations,
before tax -- 42 -- 87
Loss on sale of discontinued
operations, before tax (38) 16 (70) 16
Discontinued operations income tax
expense (benefit) (12) 19 (43) 34
---------------------------------------------------------------------------
Income (loss) from discontinued
operations $ (26) $ 39 $ (27) $ 69
---------------------------------------------------------------------------
Diluted earnings (loss) per share:
Discontinued operations $ -- $.02 $ -- $ .05
Loss on sale of discontinued
operations (.02) .01 (.02) .01
---------------------------------------------------------------------------
Total discontinued operations
earnings (loss) per share $(.02) $.03 $(.02) $ .06
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Net assets of discontinued operations as of: December 31,
1999
--------------------------------------------------------------
<S> <C>
Current assets $ 545
Non-current assets 1,240
--------------------------------------------------------------
Total Assets $1,785
==============================================================
Current liabilities $ 213
Non-current liabilities 15
--------------------------------------------------------------
Total liabilities $ 228
==============================================================
Net assets of discontinued operations $1,557
==============================================================
</TABLE>
On September 29, 2000, Pharmacia completed the sale of the biogums business to a
joint venture formed between Hercules, Inc. and Lehman Brothers Merchant Banking
Partners II, L.P. for cash proceeds of $592. On March 17, 2000, Pharmacia
completed the sale of the tabletop sweeteners business to Merisant Company for
$570 cash. On May 30, 2000, Pharmacia completed the sale of its sweetener
ingredient business to J.W. Childs Equity Partners II, L.P., for $440 in cash
proceeds. Pharmacia also completed the sale of equity interests in two European
joint venture companies, NutraSweet A.G., and Euro-Aspartame S.A., to Ajinomoto
Co., Inc., for $67 in cash proceeds. Proceeds from these transactions were used
to pay down debt and for other corporate purposes.
J - MERGER, RESTRUCTURING AND OTHER CHARGES
Merger and restructuring charges associated with the merger transaction
involving Pharmacia & Upjohn and the former Monsanto and the restructuring of
operations in the agricultural product business for the first nine months of
2000 total $914. This amount is comprised of $798 on the merger and
restructuring line of the earnings statement in addition to $32 included in cost
of products sold relating to a second quarter write-off of inventory and an $84
adjustment to goodwill also recorded during the second quarter. During the third
quarter, the company recorded merger and restructuring charges of $226 on the
merger and restructuring line.
12
<PAGE> 13
During the third quarter, the company recorded an additional $52 of merger costs
on the merger and restructuring line and approximately $525 in merger-related
costs year-to-date. The third-quarter charges include costs to integrate the
Pharmacia & Upjohn and former Monsanto organizations such as consultant fees,
contract termination costs, moving and relocation costs and travel expenses. On
a year-to-date basis, these merger-related costs also include transaction costs
such as investment bankers, attorneys, registration and regulatory fees and
other professional services. In addition, these costs include various employee
incentive and change-of-control costs directly associated with the merger. The
latter includes a non-cash charge of $232 during the first quarter that was
related to certain employee stock options that were repriced in conjunction with
the merger pursuant to change of control provisions. Pursuant to the terms of
these "premium options," at consummation of the merger, the original
above-market exercise price was reduced to equal the fair market value on the
date of grant.
Restructuring charges of $174 were also recorded on the merger and restructuring
line of the earnings statement during the third quarter. These charges included
$138 associated with the separation of approximately 630 employees in the
pharmaceutical and corporate functions and 215 employees in the agricultural
subsidiary. The balance of the charges consisted of $26 relating to assets to be
disposed of and $10 associated with contract terminations and other exit costs.
The third quarter restructuring charges are comprised of $34 relating to
corporate functions, $114 for pharmaceutical operations and $26 for agricultural
products operations. The corporate component relates to the separation of 65
employees. Pharmaceutical operations restructuring activities include the
separation of approximately 565 employees, assets to be disposed of $23 and
contract terminations and other exit costs of $8. These charges are the result
of integrating the former Pharmacia & Upjohn and Monsanto companies into a
single organization and the resulting elimination of duplicate positions and
facilities.
On a year-to-date basis, pharmaceutical and corporate functions have incurred
total restructuring charges of $207, all of which has been recorded on the
merger and restructuring line of the earnings statement. These charges encompass
the separation costs for approximately 680 employees, assets to be disposed of
$23 and other exit costs of $8. As of September 30, 2000, 658 employees have
been separated from the company during 2000.
The third-quarter restructuring charge of the agricultural products operations
for $26 includes the separation of 215 employees, asset impairments of $3 and
contract termination and other exit costs of $2. These charges are part of a
strategy that includes the elimination of certain food and biotech research
programs. The strategy is a part of a plan that encompasses a decision to focus
more stringently on the four key crops of corn, soybeans, wheat and cotton and
included the elimination of human nutrition and certain food and biotech
research programs as well as the consolidation of seed operations.
On a year-to-date basis, agricultural products operations have incurred net
restructuring charges of $183. These charges are comprised of separation costs
for 590 employees, asset impairments of $132 and other exit costs of $3 and were
recorded on the earnings statement as cost of products sold of $32, amortization
and adjustment of goodwill of $84 and $67 to the merger and restructuring line.
As of September 30, 2000, 180 employees have been separated from the company
during 2000.
Total restructuring charges and spending associated with the current
restructuring plans relating to the integration of the former Pharmacia & Upjohn
and Monsanto companies and the restructuring of the agricultural products
operations are as follows:
13
<PAGE> 14
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Workforce Other Exit
Reductions Costs
-------------------------------------------------------------------
<S> <C> <C>
2000 Charges $228 $11
-------------------------------------------------------------------
2000 Spending 93 6
-------------------------------------------------------------------
Remaining balance
September 30, 2000 $135 $ 5
===================================================================
</TABLE>
During 1999, the company recorded $54 in expenses which was comprised of $57 of
restructuring charges related to the merger with SUGEN, Inc., net of a $3
adjustment to the 1998 turnaround restructuring. The charge included costs
pertaining to reorganizations that resulted in the elimination of certain
research and development (R&D) projects as well as the elimination of 375
employee positions impacting the pharmaceutical segment and corporate and
administrative functions. The objective of the restructuring was to eliminate
duplicate functions and investments in R&D as well as reorganize the sales force
based on anticipated future requirements of the company at the time of the
restructuring. During the first three quarters of 2000, $24 was paid and charged
against the liability. These amounts related to a portion of separation benefits
for the approximately 160 employees severed during the first nine months of 2000
as well as some terminated during 1999. The company anticipates all activities
associated with this restructuring will be substantially complete by the end of
2000. The remaining cash expenditures relating to this restructuring total $27
and are expected to be made during 2000 with some separation annuity payments
being completed in 2001.
At September 30, 2000, $24 remained of the $92 of restructuring accruals made
during the fourth quarter of 1998 by Pharmacia & Upjohn related to a
comprehensive turnaround program. The balance primarily represents annuity
payments for severance that will extend into 2001.
In the fourth quarter of 1998, the former Monsanto recorded net restructuring
charges of $327 as part of an approved plan to close facilities, reduce the
current workforce and exit non-strategic businesses. The activities that the
former Monsanto planned to exit in connection with this plan principally
comprised a tomato business and a business involved in the operation of
membership-based health and wellness centers. The charge of $327 was comprised
of facility shut-down charges of $99, workforce reduction costs of $103 and
asset impairments and other costs of $125.
As of September 30, 2000, all activities under this plan have been substantially
completed. Approximately 300 employees were severed during the first nine months
of 2000 at a cost of $36. Cash outflows associated with these separations were
charged against the 1998 restructuring liability. Additional spending and
adjustments of the 1998 accrual amounting to $11 were made during the year
reducing the accrual balance as of September 30 to less than $2. The company
expects to complete the remaining actions within the originally planned time
frame.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all
upper case letters. In the following discussion of consolidated results,
per-share amounts are presented on a diluted, after-tax basis.
On March 31, 2000, a subsidiary of the former Monsanto Company and Pharmacia &
Upjohn merged and the combined company was renamed Pharmacia Corporation
("Pharmacia" or "the company"). The merger was accounted for as a pooling of
interests. As such, all data presented herein are reflective of the combined
results of operations of the two predecessor companies, their statements of
financial position and their cash flows as though they had always been combined,
by applying consistent disclosures and classification practices.
The former Monsanto Company was made up principally of a pharmaceutical
business and an agricultural products business. As more fully discussed below,
subsequent to the merger forming Pharmacia Corporation, the agricultural
operations of the former Monsanto Company were placed into a subsidiary of the
company with the name Monsanto Company (Monsanto). On October 23, 2000,
Monsanto completed a partial initial public offering of 14.7% of its common
stock.
To avoid confusion throughout this document, "former Monsanto" will be used to
refer to the pre-merger operations of the former Monsanto Company and
"Monsanto" will refer to the agricultural subsidiary. Note that the animal
health business of the former Pharmacia & Upjohn is not a part of Monsanto.
FINANCIAL REVIEW
OVERVIEW
The table below provides a comparative overview of consolidated results for the
third quarter and first nine months of 2000 and 1999 in millions of U.S.
dollars, except per-share data.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
Percent Percent
2000 Change 1999 2000 Change 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 4,286 15% $3,738 $ 13,608 12% $ 12,197
Earnings from continuing
operations before interest
and income taxes 419 43 292 1,306 (27) 1,783
Earnings from continuing
operations 273 40 195 751 (28) 1,045
Discontinued operations (26) n.m. 39 (27) n.m. 69
Cumulative effect of an
accounting change -- n.m. -- -- n.m. (20)
Net earnings 247 6 234 724 (34) 1,094
Earnings per common share:
Continuing operations:
Basic $ .21 31 $ .16 $ .58 (30) $ .83
Diluted .21 40 .15 .57 (30) .81
Net earnings
Basic .19 -- .19 .56 (36) .87
Diluted $ .19 6 $ .18 $ .55 (35) $ .85
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
n.m. = not meaningful
15
<PAGE> 16
Year-to-year comparisons are complicated by a number of factors including
charges incurred throughout the first nine months of 2000. Specifically, there
are merger and restructuring charges which approximate $226 million and $914
million before tax for the quarter and year-to-date, respectively. Of these
total charges, $32 million was recorded within cost of products sold in the
second quarter ($20 million after tax or $0.02 per share), $84 million was
recorded as adjustments to goodwill in the second quarter ($83 million after
tax or $0.07 per share) and $226 million for the third quarter and $798 million
year-to-date was recorded in merger and restructuring ($154 million after tax
or $0.12 per share and $558 million after tax or $0.42 per share,
respectively). A charitable contribution of $100 million ($62 million after tax
or $0.05 per share) made during the first quarter may also have an effect
on comparability, as may the divestments of certain product lines which are not
included in discontinued operations.
Certain other charges also affect comparability. Third quarter 1999 charges for
the termination of existing research and development projects and in-process
research and development totaling $29 million ($26 million net of tax or $0.02
per share) were recorded in relation to the merger with SUGEN, Inc. (Sugen) and
the acquired partial interest in Sensus Drug Development Corporation. Also
recorded in the third quarter of 1999 were charges incurred in connection with
the restructuring associated with the integration of Sugen and the accelerated
integration of the former Monsanto's agricultural chemical and seed operations.
Of these charges, $20 million ($13 million net of tax or $0.01 per share) was
recorded in cost of products sold, $8 million ($5 million net of tax or $0.01
per share) was recorded as amortization and adjustment of goodwill and $42
million ($26 million net of tax or $0.02 per share) was recorded on the merger
and restructuring line of the earnings statement. The divestment of certain
product lines that are not recorded in discontinued operations may also affect
comparability.
NET SALES
Consolidated net sales for the third quarter of 2000 rose 15 percent to $4.3
billion as compared to the same quarter of 1999. Sales for the corresponding
year-to-date periods were $13.6 billion and $12.2 billion, resulting in a 12
percent increase over 1999. The impact of currency exchange rates on
consolidated sales was 3 percent and 2 percent unfavorable for both the quarter
and year-to-date periods, respectively, due to weak European currencies partly
offset by strength in the Japanese yen. Price increases were realized during the
quarter in the pharmaceutical business while the continued implementation of the
company's ROUNDUP pricing strategy in the agricultural business contributed an
adverse price impact. The resulting consolidated price effect for the quarter
and year-to-date periods was approximately a one-percent decrease versus 1999.
Volume gains were the main contributor for sales growth resulting in a 19
percent increase for the quarter and 15 percent increase for the year-to-date
period. The volume increase was led by sales of ROUNDUP, CELEBREX and other key
products.
16
<PAGE> 17
The company reports its operations within the two segments indicated in the
table below. Sales of divested businesses have been excluded from the analysis.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
Net Percent Net Percent
(U.S. dollars in millions) 2000 Change 1999 2000 Change 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Pharmaceuticals $ 3,283 20% $ 2,734 $ 9,309 16% $ 8,008
Agricultural products 1,003 2 980 4,293 5 4,087
--------------------------------------------------------------------------------------------------------------------------------
Total sales, excluding
divested businesses $ 4,286 15 $ 3,714 $ 13,602 12 $12,095
--------------------------------------------------------------------------------------------------------------------------------
Earnings:
Pharmaceuticals EBIT* $ 625 24 $ 506 $ 1,704 10 $ 1,547
Agricultural products EBIT* (48) 67 (145) 559 (2) 572
--------------------------------------------------------------------------------------------------------------------------------
EBIT from operations 577 361 2,263 2,119
Corporate and other (158) (69) (957) (336)
--------------------------------------------------------------------------------------------------------------------------------
Consolidated EBIT* 419 292 1,306 1,783
Interest expense, net (68) (68) (215) (239)
Income tax provision (78) (29) (340) (499)
--------------------------------------------------------------------------------------------------------------------------------
Net Earnings from continuing
operations $ 273 $ 195 $ 751 $ 1,045
================================================================================================================================
</TABLE>
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
As a result of the recent merger, management is still in the process of defining
the segments and the financial metric that will be used to measure segment
performance. Therefore, segment reporting will tend to evolve and may change in
future periods.
Pharmaceutical Segment -
Pharmaceutical sales for the company consist of the former Pharmacia & Upjohn
businesses and the pharmaceutical business of the former Monsanto's Searle unit.
Sales for the pharmaceutical segment (excluding divested businesses) were $3.3
billion for the third quarter resulting in year-to-date sales of $9.3 billion.
These results reflect quarter and year-to-date growth rates of 20 percent and 16
percent over 1999, respectively. The company believes that sales growth rates
for the remainder of the year will be reflective of those realized over the
nine-month period ending September 30, 2000. Sales dollars for the 1999 periods
on a comparable basis were $2.7 billion and $8.0 billion. The impact of
exchange rates on sales was 4 percent and 3 percent unfavorable for the quarter
and year-to-date, respectively. Divested businesses had no sales impact on the
third quarter and positive impact of $6 million year-to-date. In 1999, divested
businesses affected sales favorably by $21 million and $70 million for the
quarter and year-to-date, respectively. In the company's largest market, the
U.S., sales growth for the quarter and year-to-date periods was 34 percent and
25 percent, respectively. Japan, the company's second largest market, recorded
sales growth rates of 12 percent and 21 percent for the same periods. The
growth rate in Japan reflects, in part, favorable currency exchange movements.
Sales performance by country in the following table is based on location of
customer.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------ ----------------
%Chg. %Chg.
Net % Excl. Net % Excl.
(U.S. dollars in millions) 2000 Change Ex.* 1999 2000 Change Ex.* 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $1,911 34% 34% $1,429 $5,105 25% 25% $4,086
Japan 226 12 6 202 687 21 11 569
Italy 117 1 16 116 398 -- 14 397
Germany 111 -- 14 111 329 (5) 8 345
United Kingdom 99 (8) (1) 108 321 (2) 3 326
France 85 (11) 1 95 262 (11) 1 294
Rest of world 734 9 18 673 2,207 11 17 1,991
----------------------------------------------------------------------------------------------------------------
Total sales, excluding
divested businesses 3,283 20 24 2,734 9,309 16 19 8,008
Divested businesses -- n/a n/a 21 6 n/a n/a 70
----------------------------------------------------------------------------------------------------------------
Consolidated net sales $3,283 19% 23% $2,755 $9,315 15% 18% $8,078
================================================================================================================
</TABLE>
* Underlying growth reflects the percentage change excluding currency
exchange effects.
17
<PAGE> 18
A comparison of the period-to-period consolidated net sales of the company's
major pharmaceutical products (including generic equivalents where applicable)
is provided in the table below.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
Net Percent Net Percent
(U.S. dollars in millions) 2000 Change 1999 2000 Change 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CELEBREX $ 687 77% $ 389 $1,842 89% $ 974
AMBIEN 233 81 129 498 47 339
XALATAN 185 36 136 497 43 348
GENOTROPIN 104 (4) 108 345 6 326
CAMPTOSAR 134 65 81 325 55 210
DETROL/DETRUSITOL 125 45 86 319 35 236
CLEOCIN/DALACIN 79 (7) 85 254 -- 253
XANAX 82 (6) 87 247 -- 248
MEDROL 64 (12) 73 208 (5) 220
ARTHROTEC 79 (4) 82 207 (22) 265
DEPO-PROVERA 63 -- 63 188 -- 188
NICORETTE Line 50 -- 50 159 (8) 173
FRAGMIN 44 (14) 51 158 3 153
PHARMORUBICIN/ELLENCE 53 13 47 152 4 146
ALDACTONE/SPIRO Line 49 (11) 55 145 (10) 162
COVERA/CALAN/VERAPAMIL 55 38 40 135 7 126
DAYPRO 43 (19) 53 116 (36) 182
ROGAINE 32 (18) 39 100 (1) 101
HEALON 29 (3) 30 93 (5) 98
CABASER/DOSTINEX 29 26 23 85 44 59
MIRAPEX 17 6 16 77 40 55
--------------------------------------------------------------------------------------------------------------
Total $2,236 30% $1,723 $6,150 26% $4,862
==============================================================================================================
</TABLE>
CELEBREX, the company's leading product and the number-one selling prescription
arthritis medication worldwide, recorded sales of $687 million in the third
quarter and $1.8 billion for the first nine months, representing growth of 77
percent and 89 percent, respectively. There was a minor positive effect on
sales in the third quarter due to purchasing at the trade level in anticipation
of the transfer of the company's CELEBREX distribution.
The company continued to rollout CELEBREX in the major European countries with
third quarter launches in Italy and Spain. The launch in France is expected
18
<PAGE> 19
to occur by the end of the year. CELEBREX will be co-promoted (or, where
required by law, co-marketed) by Pfizer, Inc. in Europe as in the U.S.
During the quarter, results of the CELEBREX long-term safety trial were
published in the Journal of the American Medical Association (JAMA). This trial
of 8,000 arthritis patients evaluated the safety of CELEBREX compared to two
commonly prescribed non-steroidal anti-inflammatory drugs. Patients treated with
CELEBREX experienced significantly fewer gastrointestinal complications. These
data were submitted in a supplemental New Drug Application (sNDA) to the Food
and Drug Administration (FDA) for possible inclusion in the approved labeling of
CELEBREX during the second quarter.
Sales of AMBIEN, the market leading treatment for short-term insomnia in the
U.S., increased 81 percent in the third quarter and 47 percent for the first
nine months. Third quarter sales were positively influenced by wholesale
inventory levels, which were slightly higher than normal due to purchasing prior
to a September price increase. The company also initiated a direct-to-consumer
advertising campaign, which contributed to the growth of AMBIEN during the third
quarter.
XALATAN, the top-selling glaucoma medication in the U.S. and worldwide, posted
double-digit sales growth in the third quarter and first nine months of 2000 (36
percent and 43 percent, respectively). XALATAN continues to grow rapidly in all
key markets as it expands its market leadership position in the U.S. and other
major markets like Japan. In October, the company received a second approvable
letter from the U.S. FDA for XALCOM, a combination product containing XALATAN
and timolol in a single daily dose. It is likely that new brand-name competitors
to XALATAN will enter the market in the U.S. in the near future.
GENOTROPIN, the world's leading growth hormone, recorded sales of $104 million
in the third quarter and $345 million for the first nine months. Sales in the
third quarter decreased 4 percent as a result of an inventory adjustment at the
wholesale level for sales recorded during the first half of the year. Sales were
also negatively impacted by foreign exchange. During the third quarter, the
company launched GENOTROPIN in the U.S. and Europe for the treatment of patients
with Prader-Willi Syndrome, the most common genetic cause of obesity.
CAMPTOSAR, the leading treatment of colorectal cancer in the U.S., recorded
third quarter sales of $134 million, an increase of 65 percent. Sales were
positively impacted by inventory purchasing due to a price increase in August.
For the first nine months, CAMPTOSAR recorded sales of $325 million, a 55
percent increase over the prior year. As a result of its demonstrated ability to
prolong survival, a CAMPTOSAR-containing regimen is now the standard of care for
patients with metastatic colorectal cancer.
Sales of DETROL, the world's leading treatment for overactive bladder, increased
45 percent to $125 million in the third quarter. For the first nine months,
worldwide sales increased 35 percent to $319 million.
For the first nine months, sales of DEPO-PROVERA, XANAX, and CLEOCIN were in
line with their 1999 performance despite variations between quarters caused by
typical inventory patterns. The MEDROL line, which has experienced similar
quarterly fluctuations, declined 5 percent for the first nine months.
NICORETTE, for smoking cessation, was flat in the third quarter, but declined 8
percent for the first nine months due to inventory contractions and the presence
of a new generic competitor in the U.S. business.
During the quarter, many products formerly in the Searle catalogue (excluding
CELEBREX) were subject to price increases. As a result, U.S. wholesalers
19
<PAGE> 20
increased inventory levels of the COVERA line and ARTHROTEC. For the first nine
months, sales of the COVERA line were up 7 percent while ARTHROTEC sales were
down 22 percent. Sales of ARTHROTEC and DAYPRO, the company's older arthritis
medications, are significantly lower this year as the COX-2 inhibitors, led by
CELEBREX, continue to take a larger share of the U.S. market.
Sales of CABASER/DOSTINEX for Parkinson's disease/hyperprolactinemia grew 26
percent in the quarter and 44 percent for the first nine months. Sales of the
company's other drug for Parkinson's disease, MIRAPEX, increased 6 percent in
the third quarter and 40 percent for the first nine months.
ZYVOX, introduced in the U.S. during the second quarter, recorded sales of $30
million for the year-to-date period. ZYVOX is the first antibiotic from a
completely new class of antibiotics in over 30 years and is indicated for the
treatment of patients with severe Gram-positive infections including pneumonia,
skin and skin structure infections, and bacteremia.
Cost of products sold for the quarter and year-to-date periods ending September
30, 2000 and 1999 were $746 million and $687 million and $2.2 billion and $2.0
billion, respectively. A favorable shift in the product mix and selective price
increases resulted in a two-percentage point improvement in the cost of
products sold as a percent of sales for the quarter and year-to-date periods.
Research and development expenditures for the third quarter were $529 million or
a decrease of 4 percent over the comparable quarter of 1999. Conversely,
year-to-date spending increased 3 percent to $1.7 billion over 1999. Higher
overall research and development expenditures related to certain projects were
offset in the quarter by lower licensing fees and development spending for ZYVOX
which has now received FDA approval.
Selling, general and administrative expenses increased 17 percent and 21 percent
for the quarter and year-to-date periods ended September 30, 2000. Co-promotion
payments, promotion and marketing costs and sales force expansion were the
drivers behind the increases for the quarterly and year-to-date periods.
Amounts recorded in all other, net were $11 million gain and ($69) million loss
and ($48) million loss and ($140) million loss for the quarter and year-to-date
periods of 2000 and 1999, respectively. Reduced income from the AMBIEN
collaboration and the absence of gains on divestitures that were realized in
1999 are the main drivers of the change.
Merger and restructuring expenses included in pharmaceutical operations total
$114 million for the third quarter and nine months of 2000. These charges,
recorded on the merger and restructuring line of the earnings statement,
encompass the separation of approximately 565 employees for $83 million,
contract termination and other exit costs totaling $8 million, as well as $23
million of assets to be disposed. All of these charges are the result of
duplicate positions and facilities due to the integration of the former
Pharmacia & Upjohn and Searle organizations.
Agricultural Products Segment-
Net sales, as reported, increased 2 percent to $1.0 billion for the three-month
period ended September 30, 2000, compared to $983 million for the three-month
period ended September 30, 1999. Year-to-date net sales increased 4 percent to
$4.3 billion compared to $4.1 billion for the same period in 1999. The
quarter-to-quarter increase is mainly due to an increase in sales of ROUNDUP
lawn-and-garden products (mainly attributable to a change in 1999 to the
distribution method under which distribution channel inventory declined) and
selective chemistries business. For the nine-month period, sales growth is
largely attributable to an increase in glyphosate volumes. Offsetting these
gains were 11 percent and 8 percent declines for the quarter and nine months
ending September 30, 2000 in Monsanto's seeds
20
<PAGE> 21
business revenue, part of which was due to the divestiture of the Stoneville
Pedigreed Seed Business in December 1999. Excluding Stoneville sales from the
analysis, sales growth for the nine-month period was 5 percent. On September 20,
2000, the compound per se patent protection for the active ingredient in ROUNDUP
herbicide expired in the United States. Consistent with its global pricing
strategy, the company expects to continue to follow a pricing strategy which
selectively reduces prices to encourage new uses and increase sales volumes.
Cost of products sold decreased slightly to $549 million for the three-month
period ended September 30, 2000 from $557 million for the same period in 1999.
For the nine month period in 2000, cost of products sold increased 5 percent to
$2.0 billion from $1.9 billion for the same period in 1999. The primary reason
for this increase was an 18 percent increase in glyphosate sales volumes.
Start-up expenses associated with the new POSILAC manufacturing facility in
Augusta, Georgia also contributed to increased cost of products sold.
Research and development expenses for the quarterly and year-to-date periods
ending September 30, 2000 and 1999 were $140 million and $179 million and $431
million and $517 million, respectively. These decreases are primarily due to the
decision to realign the focus of research programs to core crops and a reduction
of spending on certain non-core programs.
Selling, general and administrative expenses decreased 7 percent to $300 million
for the third quarter of 2000, compared to $324 million for the same period in
1999. This decrease is primarily due to payments under certain agreements that
allow third party access to glyphosate registration data, as well as a decline
in spending related to the divestiture of the Stoneville Pedigreed Seed
business. Partially offsetting these reductions were increased spending on
biotechnology acceptance and education programs and agency fees related to the
ROUNDUP lawn and garden business. On a year-to-date basis, selling, general and
administrative expenses increased 7 percent, to $988 million compared to $926
million for the same period in 1999. Part of this increase was attributable to
increased spending on biotech acceptance and education programs in 2000. Also
contributing were increased agency fees related to the ROUNDUP lawn and garden
business.
Amortization and adjustments of goodwill expenses for the quarter were
relatively flat, and for the year-to-date periods ending September 30, 2000 and
1999 were $178 million and $91 million, respectively. The year-to-date increase
for the nine months ending September 30, 2000 is due to an $84 million
write-off related to the termination of certain nutrition programs at Calgene.
During the third quarter, the agricultural segment recorded restructuring
charges of $26 million, totaling a net charge of $183 million for the year.
These charges are part of a strategy that included the elimination of certain
food and biotech research programs. The strategy is part of a plan to focus
more stringently on the four key crops of corn, soybeans, wheat and cotton and
included the elimination of human nutrition and certain food and biotech
research programs as well as the consolidation of seed operations. The third
quarter charges, recorded on the merger and restructuring line of the earnings
statement, consisted of workforce reductions of 215 employees totaling $21
million, asset impairments of $3 million and other exit costs of $2 million.
On a year-to-date basis, the net charge of $183 million was comprised of asset
impairments of $132 million, workforce reductions of $52 million for 590
employees and other exit costs of $3 million, net of an adjustment to a prior
restructuring of $4 million. Of these charges, $32 million was recorded in cost
of products sold, $84 million was recorded in amortization and adjustment of
goodwill and the remaining amounts were recorded on the merger and restructuring
line of the earnings statement.
Corporate and Other-
Corporate expenses of $158 million in the third quarter include $52 million of
merger costs and $34 million of corporate restructuring charges. On a
year-to-date basis, corporate expenses totaled $957 million, consisting of
approximately $618 million of merger and corporate restructuring costs, a $100
million charitable contribution made in the first quarter and other items.
The merger-related costs include expenditures such as moving and relocation
costs, contract termination costs, investment bankers' fees, and consulting,
legal and accounting costs related to the merger transaction between the former
Monsanto
21
<PAGE> 22
and Pharmacia & Upjohn. In addition, there were a number of employee benefit
arrangements for which expense was recognized in direct connection with the
merger. These included premium stock option awards for which the exercise price
was reset coincident with the closing of the merger. Other employee benefit
expenses were similarly accelerated due to the merger. The restructuring
charges relate mainly to separation payments made to corporate employees of the
merged companies. The restructuring charges relating to the agricultural
segment and the pharmaceutical operations have been separately identified and
allocated to those segments.
The net interest position was unchanged for the third quarter of 2000 at $68
million. For the year-to-date period, net interest expense declined 10 percent
or $24 million. Declining debt balances slightly offset by increases in
interest rates are mainly responsible for this change.
The estimated annual effective tax rate for 2000 is 29 percent. This includes
the net effects of restructuring charges taxed in various jurisdictions,
including the U.S., partially offset by certain nondeductible charges related to
the merger and restructuring increasing the rate. Excluding such costs, the
estimated annual effective tax rate for 2000 is 30 percent. This represents a
lowering of the annual rate from the 31.5 percent reported in the second quarter
due to a revised mix of taxable income sources. This third-quarter change in the
effective rate caused the third-quarter rate to be approximately 22 percent.
DISCONTINUED OPERATIONS
The company recorded a net loss on sale of discontinued operations during the
quarter ended September 30, 2000 of $26 million compared to $12 million gain for
the comparative year quarter. The third quarter of 1999 also had net income from
discontinued operations of $27 million. On a year-to-date basis, the current
year resulted in a net loss on sale of discontinued operations of $27 million
whereas the prior year period amount was a $12 million gain. The 1999
year-to-date income from discontinued operations was $57 million.
For the quarter, the loss is attributable to the completed sale of the biogums
business. The company received proceeds related to the sale of $592 million and
retained certain liabilities. Included in the recorded year-to-date amounts for
2000 are income and expenses for the tabletop and artificial sweeteners
businesses. During the second quarter, the sale of the artificial sweeteners
businesses was completed resulting in gross proceeds of $507 million. These
events, combined with the sale of the company's tabletop sweetener business
($570 million) in the first quarter, result in total gross proceeds of $1.7
billion on a year-to-date basis. For the prior year, income from and gains on
sales of discontinued operations is attributable to the Ortho lawn-and-garden
and alginates business divestitures and for reversals of restructuring accruals.
RESTRUCTURINGS
Merger and restructuring charges associated with the merger transaction
involving Pharmacia & Upjohn and the former Monsanto and the restructuring of
operations in the agricultural product business for the first nine months of
2000 total $914 million. This amount is comprised of $798 million on the merger
and restructuring line of the earnings statement in addition to $32 million
included in cost of products sold relating to a second quarter write-off of
inventory and an $84 million adjustment to goodwill also recorded
22
<PAGE> 23
during the second quarter. During the third quarter, the company recorded
merger and restructuring charges of $226 million on the merger and
restructuring line.
During the third quarter, the company recorded an additional $52 million of
merger costs on the merger and restructuring line and approximately $525 million
in merger-related costs for the year-to-date. The third-quarter charges include
costs to integrate the Pharmacia & Upjohn and former Monsanto organizations such
as consultant fees, contract termination costs, moving and relocation costs and
travel expenses. On a year-to-date basis, these merger-related costs also
include transaction costs such as investment bankers, attorneys, registration
and regulatory fees and other professional services. In addition, these costs
include various employee incentive and change-of-control costs directly
associated with the merger. The latter includes a non-cash charge of $232
million during the first quarter that was related to certain employee stock
options that were repriced in conjunction with the merger pursuant to change of
control provisions. Pursuant to the terms of these "premium options," at
consummation of the merger, the original above-market exercise price was
reduced to equal the fair market value on the date of grant.
Restructuring charges of $174 million were also recorded on the merger and
restructuring line of the earnings statement during the third quarter. These
charges included $138 million associated with the separation of approximately
630 employees in the pharmaceutical and corporate functions and 215 employees in
the agricultural subsidiary. The balance of the charges consisted of $26 million
relating to assets to be disposed of and $10 million associated with contract
terminations and other exit costs.
The third quarter restructuring charges are comprised of $34 million relating to
corporate functions, $114 million for pharmaceutical operations and $26 million
for agricultural products operations. The corporate component relates to the
separation of 65 employees. Pharmaceutical operations restructuring activities
include the separation of approximately 565 employees, assets to be disposed of
$23 million and contract terminations and other exit costs of $8 million. These
charges are the result of integrating the former Pharmacia & Upjohn and Monsanto
companies into a single organization and the resulting elimination of duplicate
positions and facilities.
On a year-to-date basis, pharmaceutical and corporate functions have incurred
total restructuring charges of $207 million, all of which has been recorded on
the merger and restructuring line of the earnings statement. These charges
encompass the separation costs for approximately 680 employees, assets to be
disposed of $23 million and other exit costs of $8 million. As of September 30,
2000, 658 employees have been separated from the company during 2000.
The restructuring of the agricultural products operations includes the
separation of 215 employees, asset impairments of $3 million and contract
termination and other exit costs of $2 million. These charges are part of a
strategy that includes the elimination of certain food and biotech research
programs. The strategy is part of a plan that encompasses a decision to focus
more stringently on the four key crops of corn, soybeans, wheat and cotton and
included the elimination of human nutrition and certain food and biotech
research programs as well as the consolidation of seed operations.
On a year-to-date basis, agricultural products operations have incurred net
restructuring charges of $183 million. These charges are comprised of separation
costs for 590 employees, asset impairments of $132 million and other exit costs
of $3 million. The charges were recorded on the earnings statement as cost of
products sold of $32 million, amortization and adjustment of goodwill of $84
million and $67 million to the merger and restructuring line. As of September
30, 2000, 180 employees have been separated from the company during 2000.
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<PAGE> 24
Total restructuring charges and spending associated with the current
restructuring plans relating to the integration of the former Pharmacia & Upjohn
and Monsanto companies and the restructuring of the agricultural products
operations are as follows:
<TABLE>
<CAPTION>
Workforce Other Exit
Reductions Costs
---------------------------------------------------------------
<S> <C> <C>
2000 Charges $228 $11
--------------------------------------------------------------
2000 Spending 93 6
--------------------------------------------------------------
Remaining balance
September 30, 2000 $135 $ 5
==============================================================
</TABLE>
During 1999, the company recorded $54 million in expenses which was comprised of
$57 million of restructuring charges related to the merger with Sugen, net
of a $3 million adjustment to the 1998 turnaround restructuring. The charge
included costs pertaining to reorganizations that resulted in the elimination of
certain research and development (R&D) projects as well as the elimination of
375 employee positions impacting the pharmaceutical segment and corporate and
administrative functions. The objective of the restructuring is to eliminate
duplicate functions and investments in R&D as well as reorganize the sales force
based on anticipated future requirements of the company at the time of the
restructuring. During the first three quarters of 2000, $24 million was paid
and charged against the liability. These amounts related to a portion of
separation benefits for the approximately 160 employees severed during the
first nine months of 2000 as well as some terminated during 1999. The company
anticipates all activities associated with this restructuring to be
substantially complete by the end of 2000. The remaining cash expenditures
relating to this restructuring total $27 million and are expected to be made
during 2000 with some separation annuity payments being completed in 2001.
At September 30, 2000, $24 million remained of the $92 million of
restructuring accruals made during the fourth quarter of 1998 by Pharmacia &
Upjohn related to a comprehensive turnaround program. The balance primarily
represents annuity payments for severance that will extend into 2001.
In the fourth quarter of 1998, the former Monsanto recorded net restructuring
charges of $327 million as part of an approved plan to close facilities, reduce
the current workforce and exit non-strategic businesses. The activities that
the former Monsanto planned to exit in connection with this plan principally
comprised a tomato business and a business involved in the operation of
membership-based health and wellness centers. The charge of $327 million was
comprised of facility shut-down charges of $99 million, workforce reduction
costs of $103 million and asset impairments and other costs of $125 million.
As of September 30, 2000, all activities under this plan have been substantially
completed. Approximately 300 employees were severed during the first nine months
of 2000 at a cost of $36 million. Cash outflows associated with these
separations were charged against the 1998 restructuring liability. Additional
spending and adjustments of the 1998 accrual amounting to $11 million were made
during the year reducing the accrual balance as of September 30, to less than $2
million. The company expects to complete the remaining restructuring actions
within the originally planned time frame.
Additional restructuring charges are expected to be incurred as the combining
and restructuring of operations of the former Monsanto and Pharmacia & Upjohn
continues to take place. Total merger and restructuring charges are estimated to
be $2.0 billion to $2.5 billion over the next three years and yield estimated
annual savings of approximately $600 million.
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<PAGE> 25
COMPREHENSIVE INCOME
Comprehensive income equals net earnings plus other comprehensive income (OCI).
For Pharmacia Corporation, OCI includes currency translation adjustments,
unrealized gains and losses on available-for-sale (AFS) securities, and minimum
pension liability adjustments. Comprehensive income for the three months
ended September 30, 2000 and 1999, was $332 million and $258 million,
respectively. For the nine months ended September 30, 2000 and 1999
comprehensive income was $755 million and $545 million, respectively.
Unrealized gains in equity securities classified as AFS account for most of the
third-quarter 2000 difference between net earnings and comprehensive income.
The comparable 1999 period difference is comprised of favorable translation
adjustments and unrealized gains on AFS securities. Offsetting these favorable
amounts is an unfavorable balance in the minimum pension liability adjustment.
Unrealized gains offset by translation losses account for the net favorable
year-to-date difference at September 30, 2000. For the same year-to-date period
in 1999, the difference between net earnings and comprehensive income was
mainly due to fluctuations in currency translation adjustments reflecting
changes in the strength of the dollar against other currencies.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
Working capital (U.S. dollars in millions) $ 5,580 $ 3,508
Current ratio 1.94:1 1.49:1
Debt to total capitalization 34.6% 42.9%
-----------------------------------------------------------------------------------------
</TABLE>
Working capital has increased $2.1 billion or 59 percent over the year-to-date
period ending September 30, 2000. Increases in accounts receivable due to sales
volume, program changes for certain selling arrangements and seasonality
accounted for the increase in current assets. Additionally, a reduction in
short-term debt of approximately $1.0 billion has also contributed favorably to
the measurement.
The overall debt position has also shown favorable movement at the year-to-date
period ending September 30, 2000. In addition to the short-term debt reduction
of 50 percent, long-term debt has decreased by $726 million or 12 percent during
the same period. These reductions, in addition to favorable net earnings, have
reduced the debt to capitalization ratio by 8 percent over the year-to-date
period.
On October 23, 2000, Monsanto Company, Pharmacia's agricultural business
subsidiary, completed a partial initial public offering of its shares that
resulted in gross proceeds of approximately $761 million. A description of this
event is detailed in a separate section of this Item number.
The company's future cash provided by operations and borrowing capacity are
expected to cover normal operating cash flow needs, planned capital
acquisitions, and dividend payments as approved by the board of directors for
the foreseeable future.
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<PAGE> 26
CONTINGENT LIABILITIES AND LITIGATION
The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products, suits arising out of the
company's contractual arrangements or business activities, and administrative
and judicial proceedings at several "Superfund" sites.
The company's estimate of the ultimate cost to be incurred in connection with
environmental situations could change due to uncertainties at many sites with
respect to potential cleanup remedies, the estimated cost of cleanup, and the
company's share of a site's cost. With regard to the company's discontinued
industrial chemical facility in North Haven, Connecticut, the company will soon
be required to submit a corrective measures study report to the EPA. It now
appears likely that this report will need to be submitted for EPA review during
2001, at which time it may become appropriate to reevaluate the existing
reserves designated for remediation in light of changing circumstances. It is
reasonably possible that a material increase in accrued liabilities will be
required but it is not possible to determine what, if any, additional exposure
exists at this time.
In April 1999, a jury verdict was returned against the company in a lawsuit
filed in U.S. District Court in North Carolina. The lawsuit claims that a 1994
license agreement was induced by fraud stemming from nondisclosure of relevant
information and that company did not have the right to license, make or sell
products using the plaintiff's technology for glyphosate resistance under this
agreement. The jury awarded $15 million in actual damages for unjust enrichment
and $50 million in punitive damages. The company has appealed this verdict,
believes it has meritorious grounds to overturn the verdict and intends to
vigorously pursue all available means to have the verdict overturned. No
provision has been made in the company's consolidated financial statements with
respect to the award for punitive damages.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted
with certainty, management's belief is that any potential remaining liability
from such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the company's consolidated financial position,
profitability or liquidity.
OTHER
Partial Agricultural Business Initial Public Offering -
Monsanto Company, Pharmacia's agricultural business subsidiary, completed an
offering of shares in connection with a partial initial public offering (IPO) on
October 23, 2000. In connection with the offering, approximately 38 million
shares were sold at a price of twenty dollars per share resulting in gross
proceeds of approximately $761 million. Estimated costs and expenses associated
with the offering, including underwriting fees, are $46 million. Pharmacia
continues to own approximately eighty-five percent of the outstanding stock of
Monsanto. The portion of Monsanto that will not be owned by the company will be
accounted for as a minority interest in the financial statements. Proceeds
received in connection with the offering were used to reduce Monsanto debt.
New Biotech Venture -
The company announced its intention to create a new biotech venture. The key
elements of the plan, if implemented, include the creation of a separate,
research-based biotechnology enterprise and the transfer of certain Pharmacia
clinical development resources to an external clinical research organization
(CRO).
Under the plan, Pharmacia would establish a new biotech company as an
independent, entrepreneurial business together with outside investors. Pharmacia
would make a substantial investment in the new venture. The new company is
expected to consist primarily of Pharmacia's Sweden-based metabolic diseases
research group, its related biopharmaceutical development unit and the company's
Plasma business.
The terms and conditions of the plan have not yet been established. The
implementation of the plan is subject to, among other things, further
negotiations and market conditions.
New Accounting Standards -
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires companies to record derivatives on
the balance sheet as assets and liabilities measured at fair value. The
accounting treatment of gains and losses resulting from changes in the value of
derivatives depends on the use of the derivative and
26
<PAGE> 27
whether it qualifies for hedge accounting. The company will adopt SFAS 133 and
its amendments in the first quarter of 2001, and does not expect it to have a
material effect on the company's results of operations, cash flows or financial
position.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101) which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. SAB 101 allows companies to report any changes
in revenue recognition related to adopting its provisions as an accounting
change at the time of implementation in accordance with APB Opinion No. 20,
"Accounting Changes."
In response to a specific dialogue with the SEC, the company recorded a
cumulative effect of a change in accounting principle, effective January 1,
1999, for revenue recognized in 1998 related to the sale of certain marketing
rights. The effect on earnings in 1999 was an after-tax loss of $20 million
($0.02 per share), net of taxes of $12 million. The pre-tax amount of $32
million will be amortized to income over twenty years.
The company is currently in the process of assessing the impact of adopting SAB
101 on its revenue recognition policies and on prior revenue transactions. The
company currently anticipates that SAB 101 will not have a material impact on
financial position, cash flows or results of operations. However, due primarily
to certain up-front and milestone payments from co-promotion partners that were
recognized in earnings in prior years, implementation of SAB 101 is expected to
result in a cumulative effect adjustment. While the company has not yet
finalized its review, it is currently estimated that the pre-tax amount of the
cumulative adjustment will lie within a range from $250 million to $400
million. Any accounting changes that result from the adoption of SAB 101 must
be made no later than the fourth quarter of 2000, effective as of January 1,
2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
During the year-to-date period ended September 30, 2000, the company has reduced
its debt position by approximately $1.74 billion utilizing proceeds received
from divested businesses (see Note I to the consolidated financial statements).
The effect of this debt elimination will reduce the company's exposure to
interest rate fluctuation.
There are no other material changes related to market risk from the disclosures
in Pharmacia Corporation's Form 8-K filed on May 22, 2000 with the Securities
and Exchange Commission with respect to the year ended December 31, 1999.
27
<PAGE> 28
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and Agrigenetics
filed suit against former Monsanto in California State Superior Court in San
Diego alleging that we failed to license, under an option agreement, technology
relating to Bt corn and glyphosate-tolerant corn, cotton and canola. On October
20, 1997, the court construed the agreement as a license to receive genes rather
than a license to receive germplasm. Jury trial of the damage claim for lost
future profits from the alleged delay in performance ended March 20, 1998, with
a verdict against us awarding damages totaling $174.9 million. On June 28, 2000,
the California Court of Appeals for the Fourth Appellate District issued its
opinion reversing the jury verdict and related judgment of the trial court, and
directed that judgment should be entered in the company's favor. Mycogen's
subsequent motion for rehearing has been denied. Mycogen's petition with the
California Supreme Court requesting further review was granted on October 25,
2000, and their appeal of the reversal of judgment is continuing.
On May 19, 1995, Mycogen Plant Sciences, Inc. filed suit against former Monsanto
in the U.S. District Court in California alleging infringement of its patent
involving synthetic Bt genes, and seeking unspecified damages and injunctive
relief. On November 10, 1999, the court granted summary judgment in the
company's favor and dismissed all of Mycogen's patent claims, finding Mycogen's
patent invalid on the basis of the company's prior invention. Previously, the
court had also held that products containing Bt genes made prior to January 1995
did not infringe Mycogen's patent. Mycogen has filed an appeal with the Court of
Appeals for the Federal Circuit seeking to overturn the dismissal and oral
argument on the appeal is scheduled for November 16, 2000.
Former Monsanto is also a party in interference proceedings against Mycogen in
the U.S. Patent and Trademark Office to determine the first party to invent
certain inventions related to Bt technology, and has requested a stay of the
interference proceeding pending determination of Mycogen's appeal. Under U.S.
law, patents issue to the first to invent, not the first to file for a patent
on, a subject invention. If two or more parties seek patent protection on the
same invention, as is the case with the company's Bt technology, the U.S. Patent
and Trademark Office must hold interference proceedings to identify the party
who first invented the particular invention in dispute. On September 29, 2000,
the U.S. Patent and Trademark Office found in the company's favor and against
Mycogen regarding patent rights to tomato plants transformed to contain
full-length Bt gene technology. It is expected that Mycogen will contest this
outcome via judicial proceedings.
On November 20, 1997, Aventis filed suit in the U.S. District Court in North
Carolina against the former Monsanto and DEKALB Genetics alleging that because
DEKALB Genetics failed to disclose a research report involving the testing of
plants to determine glyphosate tolerance, Aventis was induced by fraud to enter
into a 1994 license agreement relating to technology incorporated into a
specific type of herbicide-tolerant corn. Aventis also alleged that DEKALB
Genetics did not have a right to license, make or sell products using Aventis'
technology for glyphosate resistance under the terms of the 1994 agreement. On
April 5, 1999, the trial court rejected Aventis's claim that the
28
<PAGE> 29
contract language did not convey a license. Jury trial of the fraud claims ended
April 22, 1999, with a verdict for Aventis and against DEKALB Genetics. The jury
awarded Aventis $15 million in actual damages and $50 million in punitive
damages. The trial was bifurcated to allow claims for patent infringement and
misappropriation of trade secrets to be tried before a different jury. Jury
trial on these claims ended June 3, 1999, with a verdict for Aventis and against
DEKALB Genetics. The district court had dismissed the former Monsanto from both
phases of the trial prior to verdict on the legal basis that it was a bona fide
licensee of the corn technology. On or about February 8, 2000, the district
court affirmed both jury verdicts against DEKALB Genetics, and enjoined DEKALB
Genetics from future sales of the specific type of herbicide-tolerant corn
involved in the agreement (other than materials held in DEKALB's inventory on
June 2, 1999). Judgment was entered March 10, 2000. On March 8, 2000, Aventis
filed with the Court of Appeals for the Federal Circuit its notice to appeal
certain district court rulings that denied claims for further equitable relief
against the company, including the court's ruling that Monsanto was a bona fide
licensee. If the company loses, it could be precluded from marketing its current
product. However, the company and DEKALB Genetics have announced their
intention, as of 2001, to replace this specific type of herbicide-tolerant corn
with new technology not associated with Aventis's claims in this litigation.
DEKALB Genetics has also filed an appeal of the jury verdict with the U.S. Court
of Appeals for the Federal Circuit, and submitted its initial appellate brief on
July 31, 2000. Pending the conclusion of this litigation, the company, its
licensees and DEKALB Genetics (to the extent permitted under the district
court's order and an agreement with Aventis) continue to sell the specific type
of herbicide-tolerant corn pursuant to a royalty-bearing agreement with Aventis.
Since the 1984 termination of the class action litigation against various
manufacturers, including former Monsanto, of the herbicide Agent Orange used in
the Vietnam war, former Monsanto has successfully defended against various
lawsuits associated with the herbicide's use. A few matters remain pending,
including three separate actions, now consolidated, filed against old Monsanto
and The Dow Chemical Company in Seoul, Korea in October 1999. Approximately
13,760 Korean veterans of the Vietnam war allege they were exposed to, and
suffered injuries from, herbicides manufactured by the defendants. The
complaints fail to assert any specific causes of action, but seek damages of 300
million won (approximately $250,000) per plaintiff. Pharmacia is also subject to
ancillary actions in Korea, including a request for provisional relief pending
resolution of the main lawsuit. On December 2, 1999, plaintiffs filed a class
action lawsuit against former Monsanto and five other herbicide manufacturers in
the U.S. District Court for the Eastern District of Pennsylvania. The plaintiffs
purport to represent a class of over 9,000 Korean and 1,000 U.S. service persons
allegedly exposed to the herbicide Agent Orange and other herbicides sprayed
from 1967 to 1970 in or near the demilitarized zone separating North Korea from
South Korea. The complaint does not assert any specific causes of action or
demand a specified amount in damages. The Judicial Panel on Multidistrict
Litigation has granted transfer of the case to the U.S. District Court for the
Eastern District of New York for coordinated pretrial proceedings as part of In
re "Agent Orange" Product Liability Litigation, which is the multidistrict
litigation proceeding established in 1977 to coordinate Agent Orange-related
litigation in the United States.
On March 7, 2000, the U.S. Department of Justice filed suit on behalf of the EPA
in U.S. District Court for the District of Wyoming against former Monsanto,
Solutia (the former Monsanto's chemical business spun-off in 1997) and P4
Production (a joint venture 99% owned by Monsanto), seeking civil penalties for
alleged violations of Wyoming's environmental laws and regulations, and of an
air permit issued in 1994 by the Wyoming Department of Environmental Quality.
The permit had been issued for a coal coking facility in Rock Springs, Wyoming
that is currently owned by P4 Production. The United States sought civil
penalties of up to $25,000 per day (or $27,500 per day for violations occurring
after January 30, 1997) for the air violations, and immediate compliance with
the air permit. In light of the government's lawsuit, the companies have
voluntarily dismissed a declaratory judgement action that they had previously
brought, and have raised the same issues as an affirmative defense to this
action, arguing that it is precluded by the doctrine of res judicata because the
companies have already paid a $200,000 fine covering the same Clean Air Act
violations pursuant to a consent decree entered in the First Judicial District
Court in Laramie County, Wyoming on June 25, 1999. On April 12, 2000, the
Department of Justice revised its settlement demand, from $2.5 million to $1.9
million plus injunctive relief to ensure P4 Production's compliance with the
Clean Air Act. On April 21, 2000, the companies filed a motion for dismissal or
summary judgement on the grounds of claim preclusion, including the doctrines of
res judicata and release.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, the company does not believe that the resolution of these
proceedings, either individually or taken as a whole, will have a material
adverse effect on its financial position, profitability or liquidity.
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<PAGE> 30
Item 5. OTHER INFORMATION
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the statements in this
Report are "forward-looking statements" that inherently involve risks and
uncertainties. Forward-looking statements include statements regarding
anticipated financial results, growth plans, product performance, research and
development, regulatory approval and public acceptance of new products, the
potential impact of currency fluctuations and other economic and business
developments. Forward-looking statements often include the words "believes,"
"expects," "will," "intends," "plans," "estimates," or similar expressions.
The company's forward-looking statements are based on current expectations,
currently available information and current assumptions that the company
believes to be reasonable. Actual results, however, may differ materially from
those expressed or implied by such forward-looking statements.
Factors that may cause or contribute to those differences include, among
others: management's ability to integrate the operations of the former Monsanto
Company with those of the former Pharmacia & Upjohn, Inc, and to implement
strategic and restructuring initiatives; the ability to fund research and
development, the success of research and development activities and the speed
with which regulatory authorizations and product roll-outs may be achieved; the
effect of new competition; the ability to bring new products to market ahead of
competition; the ability to successfully market new and existing products in
new and existing domestic and international markets; the ability to meet
generic and branded competition after the expiration of the company's patents,
including the expiration of Monsanto's ROUNDUP herbicide patent in the United
States which occurred in September 2000; domestic and foreign social, legal and
political developments, especially those relating to health care reform,
pricing controls, governmental and public acceptance of products developed
through biotechnology, and product liabilities; the ability to successfully
negotiate pricing of pharmaceutical products with managed care groups, health
care organizations and government agencies worldwide; the effect of seasonal
conditions and of commodity prices on agricultural markets worldwide; exposure
to product liability, antitrust and other lawsuits, and contingencies related
to actual or alleged environmental contamination; the company's ability to
protect its intellectual property, and its success in litigation involving its
intellectual property; fluctuations in foreign currency exchange rates; general
domestic and foreign economic and business conditions; the effects of the
company's accounting policies and general changes in generally accepted
accounting practices; the company's ability to attract and retain current
management and other employees of the company; and other factors that may be
described elsewhere in this Report or in other filings of either the company,
Pharmacia & Upjohn, Inc. or Monsanto Company with the United States Securities
and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any), and in
Monsanto Company's Registration Statement on Form S-1.
The company does not assume the obligation to update any forward-looking
statements. One should understand that it is not possible to predict or identify
all such factors. Consequently, the reader should not consider any such list to
be a complete statement of all potential risks or uncertainties.
30
<PAGE> 31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index
(b) Reports on Form 8-K
Report on Form 8-K dated November 1, 2000 was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements and Exhibits).
31
<PAGE> 32
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 1. Agreement and Plan of Merger, dated as of December 19,
1999, as amended by Amendment No. 1 dated as of February
18, 2000, among Monsanto Company, MP Sub, Incorporated
and Pharmacia & Upjohn, Inc. (incorporated herein by
reference to Exhibit 2.1 of the Registrant's Form S-4 filed
on February 22, 2000, File No. 333-30824)
2. Stock Option Agreement, dated as of December 19, 1999,
by and between Monsanto Company, as Issuer, and Pharmacia
& Upjohn, Inc., as Grantee (incorporated herein by
reference to Exhibit 2.2 of the Registrant's Form S-4 filed
on February 22, 2000, File No. 333-30824)
3. Stock Option Agreement, dated as of December 19, 1999,
by and between Pharmacia & Upjohn, Inc. and Monsanto
Company, as Grantee (incorporated herein by reference to
Exhibit 2.3 of the Registrant's Form S-4 filed on February
22, 2000, File No. 333-30824)
4. Form of Separation Agreement by and between Pharmacia
Corporation and Monsanto Company dated as of September 1,
2000 Grantee (incorporated herein by reference to
Exhibit 2.1 of Monsanto Company's Form S-1 filed on
September 22, 2000, File No. 333-36956)
3 1. Restated Certificate of Incorporation of the Company
as of October 28, 1997 (incorporated herein by reference
to Exhibit 3(i) of the Registrant's Form 10-Q for the
quarter ended September 30, 1997)
2. Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, effective March 31, 2000
(incorporated herein by reference to Exhibit 4.2 of the
Registrant's Form S-8 filed on April 5, 2000)
3. By-Laws of the Registrant, as amended and restated
effective March 31, 2000 (incorporated herein by reference
to Exhibit 3.2 of the Registrant's Form 10-Q for the
quarter ended March 31, 2000)
4 1. Form of Rights Agreement, dated as of December 19,
1999 between the Company and EquiServe Trust Company
N.A., First Chicago Trust Company as successor to The
First National Bank of Boston (incorporated herein by
reference to Exhibit 4.1 of the Registrant's Form 8-A
32
<PAGE> 33
filed on December 30, 1999)
2. Master Unit Agreement, dated as of November 30, 1998,
by and between the Company and The First National Bank of
Chicago, as Unit Agent (incorporated herein by reference
to Exhibit 4.2 of the Registrant's Form 8-K filed on
December 14, 1998)
3. Call Option Agreement, dated as of November 30, 1998,
by and between Goldman, Sachs & Co., as Call Option
Holder, and The First National Bank of Chicago, as Unit
Agent and as Attorney-In-Fact (incorporated herein by
reference to Exhibit 4.3 of the Registrant's Form 8-K filed
on December 14, 1998)
4. Pledge Agreement, dated as of November 30, 1998, by
and among the Company, Goldman, Sachs & Co., as Call
Option Holder, First Union National Bank, as Collateral
Agent and Securities Intermediary, and The First National
Bank of Chicago, as Unit Agent and as Attorney-In-Fact
(incorporated herein by reference to Exhibit 4.4 of the
Registrant's Form 8-K filed on December 14, 1998)
5. Indenture dated as of February 1, 1990, with respect to
debt securities issued by the Upjohn Employee Stock
Ownership Trust and 9.79% Amortizing Notes, Series A, Due
February 1, 2004, issued by the Upjohn Employee Stock
Ownership Trust and guaranteed by the Registrant (not filed
pursuant to Regulation S-K, Item 601(b)(4)(iii)(A); the
Registrant agrees to furnish a copy of these documents to
the Securities and Exchange Commission upon request)
6. Indenture dated as of August 1, 1991 between Pharmacia
& Upjohn, Inc. and The Bank of New York, as trustee, with
respect to Debt Securities issued thereunder from time to
time (not filed pursuant to Regulation S-K, Item
601(b)(4)(iii)(A); the Registrant agrees to furnish a copy
of these documents to the Securities and Exchange
Commission upon request)
10 1. The Pharmacia & Upjohn, Inc. Long-Term Incentive Plan
(as Amended and Restated as of June 1, 2000)
2. Pharmacia Corporation Management Incentive Plan
(as Amended and Restated as of June 1, 2000)
3. 2000 Operations Committee Incentive Plan (as amended
November 2000)
4. 2000 Operations Committee Incentive Plan
5. 1999 Operations Group Incentive Plan
6. Employment Agreement with Timothy G. Rothwell dated
July 31, 2000
7. Employment Agreement with Philip Needleman, Ph.D.
dated October 29, 2000
33
<PAGE> 34
8. Phantom Share Agreement with Hendrik Verfaillie dated
September 1, 2000
9. Form of Tax Sharing Agreement by and between Pharmacia
Corporation and Monsanto Company dated as of September 1,
2000 (incorporated herein by reference to
Exhibit 10.5 of Monsanto Company's Form S-1 filed on
September 22, 2000, File No. 333-36956)
10. Form of Employee Benefits and Compensation Allocation
Agreement between Pharmacia Corporation and Monsanto
Company dated as of September 1, 2000 (incorporated herein
by reference to Exhibit 10.6 of Monsanto Company's Form S-1
filed on September 22, 2000, File No. 333-36956)
11. Form of Intellectual Property Transfer Agreement by and
between Pharmacia Corporation and Monsanto Company dated as
of September 1, 2000 (incorporated herein by reference to
Exhibit 10.7 of Monsanto Company's Form S-1 filed on
September 22, 2000, File No. 333-36956)
12. Form of Services Agreement dated as of September 1,
2000, by and between Pharmacia Corporation and Monsanto
Company (incorporated herein by reference to Exhibit 10.8
Of Monsanto Company's Form S-1 filed on September 22, 2000,
File No. 333-36956)
13. Form of Corporate Agreement dated as of September 1,
2000 by and between Pharmacia Corporation and Monsanto
Company (incorporated herein by reference to Exhibit 10.9
of Monsanto Company's Form S-1 filed on September 22, 2000,
File No. 333-36956)
11 Omitted--Inapplicable; see "Note G of Notes to Financial
Statements"
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
27 Financial Data Schedule (part of electronic submission
only)
34
<PAGE> 35
SIGNATURE:
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.
PHARMACIA CORPORATION
---------------------
(Registrant)
DATE: November 14, 2000 /S/R. G. Thompson
R. G. Thompson
Senior Vice President
and Corporate Controller
35
