<PAGE> 1
Pursuant to Rule 424(b)(4)
Registration No. 333-06045
LOGO: PHARMACIA & UPJOHN
46,000,000 SHARES OF COMMON STOCK
------------------------
Of the 46,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Pharmacia & Upjohn, Inc., a Delaware corporation (the
"Company"), offered, 34,500,000 shares are being offered hereby in the United
States and Canada (the "U.S. Offering"), 9,200,000 shares are being offered
outside the United States and Canada and outside the Nordic countries (the
"International Offering"), and 2,300,000 shares are being offered in the Nordic
countries (the "Nordic Offering" and, together with the U.S. Offering and the
International Offering, the "Global Offering"). The public offering price and
the aggregate underwriting discount per share are identical for all offerings.
See "Underwriting". The numbers of shares offered in the U.S., International and
Nordic Offerings shown above are indicative amounts only. The number of shares
actually sold in each Offering may be more or less than such amounts. See
"Prospectus Summary -- The Global Offering".
All of the shares of Common Stock offered in the Global Offering are being
sold by AB Volvo, a Swedish limited liability company ("Volvo" or the "Selling
Stockholder"). See "Selling Stockholder". The Company will not receive any of
the proceeds from the sale of the shares of Common Stock offered in the Global
Offering.
The Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "PNU" and on the Stockholm Stock Exchange ("SSE") as Swedish
Depositary Shares under the symbol "PH&U" and is quoted on the SEAQ
International System operated by the London Stock Exchange Limited ("SEAQ
International"). On July 23, 1996, the last sale price for the Common Stock on
the NYSE was $40.00 per share. See "Market Price Information".
MORGAN STANLEY & CO. LIMITED is acting as financial adviser to the Company.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE UNDERWRITING SELLING
TO PUBLIC DISCOUNT(1) STOCKHOLDER
-------------------- -------------------- --------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock......................... $40.00 $0.80 $39.20
- --------------------------------------------------------------------------------------------------------------------
Total(2).......................................... $1,380,000,000 $27,600,000 $1,352,400,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each of the Company and the Selling Stockholder has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the Underwriters may
be required to make in respect thereof. See "Underwriting".
(2) The Selling Stockholder has granted to the Underwriters options exercisable
at the discretion of the Global Coordinators for 30 days after the date of
this Prospectus to purchase up to an aggregate of 6,900,000 additional
shares of Common Stock in the Global Offering at the public offering price
per share, less the underwriting discount, solely to cover over-allotments,
if any. If the option granted to the U.S. Underwriters to purchase up to
5,175,000 additional shares of Common Stock is exercised in full, the total
price to public, underwriting discount and proceeds to Selling Stockholder
of the U.S. Offering will be $1,587,000,000, $31,740,000 and
$1,555,260,000, respectively. See "Underwriting".
------------------------
The shares of Common Stock are offered severally by the U.S. Underwriters,
as specified herein, subject to prior sale, when, as and if delivered to and
accepted by them, subject to approval of certain legal matters by counsel for
the U.S. Underwriters and certain other conditions. The U.S. Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about July 29, 1996.
------------------------
Joint Global Coordinators and Joint Bookrunners
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO.
------------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
MORGAN STANLEY & CO.
INCORPORATED
------------------------
The date of this Prospectus is July 23, 1996.
<PAGE> 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the U.S. Securities and Exchange
Commission (the "Commission") by the Company (File No. 1-11557) pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act") are incorporated by
reference in this Prospectus:
1. The Company's Amended Annual Report on Form 10-K/A for the year ended
December 31, 1995;
2. The Company's Quarterly Report on Form 10-Q for the period ended March
31, 1996;
3. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on October 24, 1995; and
4. The Company's Current Report on Form 8-K/A filed on July 2, 1996 and
Current Report on Form 8-K filed on July 8, 1996.
All documents and reports filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the date of the termination of the Global Offering shall be deemed to
be incorporated by reference in this Prospectus and thereby deemed to be part of
this Prospectus from the date of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified shall not be deemed to constitute a part of the Prospectus except as so
modified and any statement so superseded shall not be deemed to constitute a
part of this Prospectus.
COPIES OF ANY DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS) MAY BE OBTAINED WITHOUT CHARGE BY ANY PERSON
(INCLUDING ANY BENEFICIAL OWNER) TO WHOM A PROSPECTUS IS DELIVERED BY CONTACTING
THE COMPANY AT KALAMAZOO, MICHIGAN 49001-0199, TELEPHONE: (616) 833-5918,
ATTENTION: INVESTOR RELATIONS.
------------------------
DEFINITIONS, TRADEMARKS
In this Prospectus, references to the "Company" are to Pharmacia & Upjohn,
Inc. and references to "Pharmacia & Upjohn" are to Pharmacia & Upjohn, Inc. and
its consolidated subsidiaries. In this Prospectus, references to "$" are to
United States dollars, to "SEK" are to Swedish kronor, to "U.S." are to the
United States of America and to "EU" are to countries in the European Union.
Product names appearing in this Prospectus with all letters capitalized are
trademarks of the Company or its subsidiaries or trademarks of other companies.
The first appearance of any such trademark in this Prospectus is marked by an
(R). LUVOX is a trademark of Solvay Duphar B.V. ZOVIRAX is a trademark of
Burroughs Wellcome Co.
------------------------
IN CONNECTION WITH THE GLOBAL OFFERING, CERTAIN MARKET MAKERS ON SEAQ
INTERNATIONAL THAT ARE UNDERWRITERS OR THAT ARE AFFILIATED WITH UNDERWRITERS MAY
ENGAGE IN "PASSIVE MARKET MAKING" TRANSACTIONS IN THE SHARES BEING OFFERED
HEREBY ON SEAQ INTERNATIONAL DURING THE PERIOD FROM THE CLOSE OF BUSINESS
(LONDON TIME) ON JULY 19, 1996 THROUGH COMPLETION OF THE GLOBAL OFFERING (THE
"RESTRICTED PERIOD") PURSUANT TO AN EXEMPTION FROM THE PROVISIONS OF RULE 10B-6
UNDER THE EXCHANGE ACT GRANTED BY THE COMMISSION. SEE "UNDERWRITING".
IN CONNECTION WITH THE GLOBAL OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SHARES
OFFERED HEREBY AND SWEDISH DEPOSITARY SHARES REPRESENTING SHARES AT LEVELS ABOVE
THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE, ON SEAQ INTERNATIONAL, ON THE STOCKHOLM
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following is a summary only and is qualified by the detailed
information appearing elsewhere in this Prospectus and the documents
incorporated herein by reference.
THE COMPANY
Pharmacia & Upjohn is a global pharmaceutical group engaged in the
research, development, manufacture and sale of pharmaceutical and healthcare
products. In 1995, Pharmacia & Upjohn had consolidated net sales of $6.95
billion and net earnings of $738.7 million. Pharmacia & Upjohn has a product
portfolio with sales in excess of $500 million in each of six therapeutic areas:
infectious disease, metabolic disease, critical care and thrombosis, central
nervous system ("CNS"), oncology and women's health. Pharmacia & Upjohn's total
research and development expenditures exceed $1 billion annually. Research is
being focused on five core areas: infectious disease, metabolic disease, CNS,
oncology and inflammation. Pharmacia & Upjohn sells its prescription
pharmaceuticals in over 100 countries.
The Company was incorporated under the laws of the State of Delaware in
1995 for the purpose of facilitating the combination (the "Combination") of
Pharmacia Aktiebolag ("Pharmacia") and The Upjohn Company ("Upjohn"). The
Combination sought to take advantage of certain synergies between Pharmacia and
Upjohn in fundamental research, product development, manufacturing and sales and
marketing, in order both to increase Pharmacia & Upjohn's combined revenues and
to reduce its costs. Management believes that the benefits that Pharmacia &
Upjohn has realized and expects to realize from the Combination should improve
its competitive position and profitability. These benefits include:
Substantial Reduction in Costs. In connection with the Combination,
management initiated a restructuring plan with a target of annual cost savings
by 1998 of $500 million (pre-tax), which included a workforce reduction of 4,100
employees by December 1998. The Company believes that achieving such cost
reductions should significantly improve operating margins. As of May 31, 1996,
management has achieved a net workforce reduction of 2,100 employees. Since the
Combination, management has identified other areas of potential cost savings,
such as manufacturing and supply, which it believes will enable it to further
reduce costs by the year 2000. Pharmacia & Upjohn intends to close 23 of its
existing 56 manufacturing plants by the year 2000.
Strong Product Portfolio. The Combination has provided Pharmacia & Upjohn
with a strong product portfolio. Pharmacia & Upjohn generates sales in excess of
$500 million in each of six therapeutic areas. In 1995, Pharmacia & Upjohn's top
nine products accounted for approximately 30 percent of net sales, with no
single product accounting for more than 6 percent of net sales. A majority of
these products either have not had patent protection for several years or
benefit from patent protection that does not expire in the near term. See
"Business -- Prescription Pharmaceutical Products".
Strong Product Pipeline. The integration of the product development
efforts and pipelines of pharmaceutical products of the predecessor companies
has resulted in significantly more prospects for new product introductions for
the Company. Currently, Pharmacia & Upjohn has approximately 25 products or
product line extensions which are in the late development stage or approval
process or have recently been approved. Recently approved products include
XALATAN(R) in the U.S. and Sweden for glaucoma, GENOTROPIN(R) in the U.S. for
growth disorders, CABASER(R) in the EU for Parkinson's disease, ESTRING(R) in
the U.S. and Germany for estrogen deficiency and CAMPTOSAR(R) in the U.S. for
refractory colorectal cancer. In August 1995, CAVERJECT(R) was launched in the
U.S. for erectile dysfunction. Products currently in the approval process
include RESCRIPTOR(R) for HIV/AIDS. Products currently in the late development
stage include REMISAR(R) for bladder cancer, DETRUSITOL(R) for urge incontinence
and pramipexole for Parkinson's disease. See "Business -- Research and
Development".
3
<PAGE> 4
Complementary Core Competencies in Research and Development. The
Combination has provided Pharmacia & Upjohn with critical mass to improve and
maintain its competitive position. As a result of the Combination, Pharmacia &
Upjohn has research and development ("R&D") resources which enhance its ability
to develop commercially attractive new products more efficiently. The
complementary research expertise of Pharmacia in molecular biology and Upjohn in
advanced chemistry is expected to strengthen research capabilities and
contribute to a reduction in overall development time for new products. As part
of Pharmacia & Upjohn's increased focus on high-priority projects, a thorough
review of R&D projects was undertaken. As a result, approximately 20 percent of
the number of projects then under development was targeted to be discontinued or
licensed out, enabling additional resources to be devoted to higher priority
projects. Despite the dedication of resources to effecting the Combination,
Pharmacia & Upjohn's product development efforts have met or exceeded the
original timetable.
Integrated Global Sales Force. Pharmacia & Upjohn believes that its ability
to cross-sell its combined range of products through its global sales force will
provide economies of scale in its sales and marketing activities as well as
expand market access for many current and expected products. Historically,
Pharmacia's major markets were in Europe and Asia, while Upjohn had a strong
selling presence in the U.S. and the Pacific Rim. The combination of a
complementary product range and an integrated sales force active in multiple
geographical markets has significantly strengthened Pharmacia & Upjohn's sales
and marketing capabilities.
New Management Structure. Pharmacia & Upjohn has adopted a management
structure based on centralized strategic steering and decentralized operational
responsibility, implemented through Pharmacia & Upjohn's pharmaceutical product
centers in the U.S., Sweden and Italy. Pharmacia & Upjohn is capitalizing on the
R&D, product development and sales and marketing expertise that it has developed
locally to expedite product commercialization in multiple markets.
Management's priority has been to complete the integration of the two
predecessor companies as rapidly as possible in order to realize the projected
cost savings and other synergies. Management is now also directing its focus
toward expanding Pharmacia & Upjohn's business by developing and solidifying
leadership positions in core therapeutic areas. Management is concentrating on
improving sales growth and operating margins.
In the near to medium term, management is focusing on the commercialization
of recently introduced products and products in late stage development. As a
foundation for long-term development, management is concentrating its research
activities in five core areas of significant unmet medical needs: infectious
disease, metabolic disease, CNS, oncology and inflammation. In addition,
management is evaluating strategic opportunities, including acquisitions,
alliances, licensing agreements and research collaborations, to supplement its
organic development, as well as divestitures of non-core businesses or product
lines.
4
<PAGE> 5
THE GLOBAL OFFERING
<TABLE>
<S> <C>
Shares of Common Stock offered by the Selling Stockholder:(1)
U.S. Offering............................ 34,500,000 shares
International Offering................... 9,200,000 shares
Nordic Offering.......................... 2,300,000 shares
------------
Total............................... 46,000,000 shares
Allocations.................................. The numbers of shares offered and sold in the
U.S., International and Nordic Offerings
(including upon exercise of the over-allotment
options) are subject to reallocation without
limitation.
Shares of Common Stock outstanding........... Immediately prior to the Global Offering,
508,322,191 shares of Common Stock were issued
and outstanding. No shares will be issued by
the Company in connection with the Global
Offering.
Listing and Trading.......................... Shares of Common Stock are traded on the NYSE
under the symbol "PNU" and are quoted on SEAQ
International. Swedish Depositary Shares, each
representing one share of Common Stock, are
traded on the SSE under the symbol "PH&U".
</TABLE>
- ---------------
(1) Does not include an aggregate of 6,900,000 shares of Common Stock that are
subject to the over-allotment options granted by the Selling Stockholder to
the Underwriters. See "Underwriting".
SELLING STOCKHOLDER
Volvo's operations are concentrated in the automotive and transport
equipment industries. Immediately prior to the Global Offering, the Selling
Stockholder owned 69,765,766 shares of Common Stock, or approximately 13.7
percent of the outstanding shares of Common Stock. The Selling Stockholder will
sell 46,000,000 shares in connection with the Global Offering and has also
granted the Underwriters options to purchase an additional 6,900,000 shares
solely to cover over-allotments, if any. Following the Global Offering, the
Selling Stockholder will own 23,765,766 shares, or approximately 4.7 percent of
the outstanding shares (16,865,766 shares, or approximately 3.3 percent of the
outstanding shares, if the over-allotment options are exercised in full). The
Selling Stockholder currently holds its shares through an indirect wholly-owned
subsidiary.
The Global Offering furthers the Selling Stockholder's objective to
concentrate resources on automotive and transport equipment operations.
5
<PAGE> 6
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The summary selected consolidated financial data set forth below for each
of the years in the three-year period ended December 31, 1995 and at December
31, 1995 and 1994 have been extracted or derived from, and are qualified by
reference to, the consolidated financial statements of the Company for such
periods and at such dates included elsewhere in this Prospectus (the "Audited
Consolidated Financial Statements"), which have been audited by Coopers &
Lybrand L.L.P. and KPMG Peat Marwick LLP. The summary selected consolidated
financial data set forth below for the three-month periods ended March 31, 1996
and March 31, 1995 and at March 31, 1996 have been extracted or derived from,
and are qualified by reference to, the unaudited interim consolidated financial
statements of the Company for such periods and at such date included elsewhere
in this Prospectus (the "Interim Consolidated Financial Statements" and,
together with the Audited Consolidated Financial Statements, the "Consolidated
Financial Statements"). In the opinion of management, the Interim Consolidated
Financial Statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for the interim periods presented.
The results of the three-month period ended March 31, 1996 are not necessarily
indicative of the results that ultimately may be achieved for the full year. The
summary selected consolidated financial data set forth below for the years ended
December 31, 1992 and 1991 and at December 31, 1993, 1992 and 1991 have been
extracted or derived from the consolidated financial statements of the Company
for such periods and at such dates, which have not been audited. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AND AT MARCH 31, YEAR ENDED AND AT DECEMBER 31,
--------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total operating revenue.................. $ 1,757.5 $ 1,739.3 $ 7,094.6 $ 6,822.8 $ 6,560.8 $ 5,938.4 $ 5,313.5
Net earnings per common share(1)......... $ 0.09 $ 0.46 $ 1.43 $ 1.63 $ 1.14 $ 0.67 $ 1.48
Dividends declared per share(2).......... 0.27 -- 0.27 -- -- -- --
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 890.7 $ 840.5 $ 651.7 $ 393.3 $ 373.2 $ 543.5
Total assets............................. 11,344.6 11,460.6 10,947.1 9,894.6 10,873.1 11,344.6
Long-term debt and ESOP debt(3).......... 804.3 870.3 953.0 950.0 738.5 918.5
Total shareholders' equity............... 6,321.9 6,387.2 5,610.4 4,764.3 6,399.5 7,688.7
</TABLE>
- ---------------
(1) See Note 2 to the Audited Consolidated Financial Statements included herein.
January 1, 1993 accounting changes resulted in a net charge of $18.9
million, or $0.04 per share, and January 1, 1992 accounting changes resulted
in a net charge of $222.9, or $0.44 per share.
(2) Represents dividends declared by the Board of Directors since December 1995.
Historical separate dividend information for Pharmacia and Upjohn has not
been presented because the information is not meaningful.
(3) See Note 11 to the Audited Consolidated Financial Statements included
herein.
6
<PAGE> 7
THE COMPANY
Pharmacia & Upjohn is a global pharmaceutical group engaged in the
research, development, manufacture and sale of pharmaceutical and healthcare
products. Pharmacia & Upjohn, Inc. was incorporated under the laws of the State
of Delaware in 1995 for the purpose of facilitating the Combination. Upjohn is a
wholly owned subsidiary of the Company and the Company owns approximately 99
percent of Pharmacia.
The Combination occurred pursuant to the Combination Agreement, dated as of
August 20, 1995, among Pharmacia, Upjohn, the Company and Pharmacia & Upjohn
Subsidiary, Inc., a Delaware corporation wholly owned by the Company into which
Upjohn merged. Outstanding Pharmacia shares were exchanged for shares of the
Company pursuant to an exchange offer whereby Pharmacia became a direct
subsidiary of the Company. The remaining Pharmacia shares are expected to be
acquired by the Company pursuant to a compulsory acquisition process under
Swedish law. The Combination was accounted for as a pooling of interests.
Both Pharmacia and Upjohn were research-based pharmaceutical companies
operating on a worldwide basis. The Combination combined two operations that
were complementary in both research and development expertise in certain
therapeutic areas and geographic presence to create a group with total operating
revenue of $7.1 billion in 1995 and $11.5 billion in total assets at December
31, 1995. See "Business".
The Company's various businesses operate through a number of offices,
research laboratories and production facilities throughout the world, with
principal locations in Kalamazoo, Michigan; Stockholm, Uppsala and Helsingborg,
Sweden; Milan, Italy; and Puurs, Belgium. Pharmacia & Upjohn has approximately
34,500 employees worldwide, although the current number is changing based on the
realignment of operations and related reductions in workforce.
7
<PAGE> 8
MARKET PRICE INFORMATION
As of July 23, 1996, there were 508,322,191 shares of Common Stock issued
and outstanding, of which 69,765,766 shares, or approximately 13.7 percent of
the outstanding shares, were held by the Selling Stockholder. Approximately 7
percent of the outstanding shares are held by Forvaltningsaktiebolaget Stattum
("Stattum"), a company wholly owned by the Kingdom of Sweden. The Common Stock
is traded on the NYSE and Swedish Depositary Shares, each representing one share
of Common Stock, are traded on the SSE. The table below sets forth, for the
calendar quarters indicated, the high and low sale prices of the Common Stock as
reported on the NYSE Composite Tape and on the SSE from the date of the
Combination.
<TABLE>
<CAPTION>
NYSE SSE
-------------------- ---------------
HIGH LOW HIGH LOW
------- ------- ---- ----
($ PER SHARE) (SEK PER SHARE)
<S> <C> <C> <C> <C>
1995
Fourth Quarter (from November 2, 1995).............. 40.250 32.375 265 213
1996
First Quarter....................................... 44.375 35.875 305 234
Second Quarter (through July 23, 1996).............. 44.625 36.625 302 249
</TABLE>
DIVIDENDS
The following table sets forth quarterly dividends declared in respect of
the Common Stock in each of the calendar quarters indicated from the date of the
Combination.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1995 (from November 2, 1995)..................... $ -- $ -- $ -- $0.27 $0.27
1996 (through July 23, 1996)..................... $0.27 $0.27 $ -- $ -- $ --
</TABLE>
It is the long-term objective of the Company's Board of Directors that the
aggregate dividends declared on the shares of Common Stock in each year will
range between 40 percent to 50 percent of the consolidated net income of the
Company in such year. However, the declaration and payment of future dividends
will be dependent on the Company's income, financial condition and capital and
cash requirements, restrictions on dividends under applicable laws governing the
Company, as well as other factors affecting the Company. Accordingly, there can
be no assurance that dividends will be paid in the future nor any assurance as
to the amount thereof.
8
<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
related notes thereto and the other financial information included elsewhere or
incorporated by reference in this Prospectus. The selected consolidated
financial data set forth below for each of the years in the three-year period
ended December 31, 1995 and at December 31, 1995 and 1994 have been extracted or
derived from, and are qualified by reference to, the Audited Consolidated
Financial Statements included elsewhere in this Prospectus, which have been
audited by Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP. The selected
consolidated financial data set forth below for the three-month periods ended
March 31, 1996 and March 31, 1995 and at March 31, 1996 have been extracted or
derived from, and are qualified by reference to, the unaudited Interim
Consolidated Financial Statements. In the opinion of management, the Interim
Consolidated Financial Statements reflect all adjustments of a normal recurring
nature necessary for a fair statement of the results for the interim periods
presented. The results of the three-month period ended March 31, 1996 are not
necessarily indicative of the results that ultimately may be achieved for the
full year. The selected consolidated financial data set forth below for the
years ended December 31, 1992 and 1991 and at December 31, 1993, 1992 and 1991
have been extracted or derived from the consolidated financial statements of the
Company for such periods and at such dates, which have not been audited.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED AND AT
MARCH 31, YEARS ENDED AND AT DECEMBER 31,
--------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Net sales................................ $ 1,740.1 $ 1,681.3 $ 6,949.1 $ 6,704.4 $ 6,507.5 $ 5,909.8 $ 5,291.7
Other revenue............................ 17.4 58.0 145.5 118.4 53.3 28.6 21.8
--------- --------- --------- --------- --------- --------- ---------
Total operating revenue................ 1,757.5 1,739.3 7,094.6 6,822.8 6,560.8 5,938.4 5,313.5
Cost of products sold.................... 503.1 507.5 1,980.0 1,889.9 1,822.3 1,623.3 1,414.5
Research and development................. 299.8 294.5 1,253.6 1,162.8 1,144.0 940.1 785.0
Marketing, administrative and other...... 629.7 607.9 2,616.6 2,586.6 2,596.3 2,392.3 2,183.8
Restructuring charges.................... 257.2 -- 103.4 19.8 268.7 46.3 57.7
Merger costs............................. 22.0 -- 138.2 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses..... 1,711.8 1,409.9 6,091.8 5,659.1 5,831.3 5,002.0 4,441.0
--------- --------- --------- --------- --------- --------- ---------
Operating income......................... 45.7 329.4 1,002.8 1,163.7 729.5 936.4 872.5
Net financial income (expense)(1)........ 28.7 25.5 133.6 107.6 48.3 11.0 37.2
--------- --------- --------- --------- --------- --------- ---------
Earnings from continuing operations
before income taxes.................... 74.4 354.9 1,136.4 1,271.3 777.8 947.4 909.7
Net earnings on common stock............. 46.7 234.8 726.2 822.8 575.6 339.4 755.2
Net earnings per common share(2)......... $ 0.09 $ 0.46 $ 1.43 $ 1.63 $ 1.14 $ 0.67 $ 1.48
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 890.7 $ 840.5 $ 651.7 $ 393.3 $ 373.2 $ 543.5
Short-term investments................... 793.8 973.7 1,134.1 446.8 1,176.1 669.6
Total assets............................. 11,344.6 11,460.6 10,947.1 9,894.6 10,873.1 11,344.6
Short-term debt(3)....................... 511.6 524.4 766.0 769.2 500.2 215.5
Long-term debt and ESOP debt(4).......... 804.3 870.3 953.0 950.0 738.5 918.5
Total shareholders' equity............... 6,321.9 6,387.2 5,610.4 4,764.3 6,399.5 7,688.7
Total liabilities and shareholders'
equity................................. 11,344.6 11,460.6 10,947.1 9,894.6 10,873.1 11,344.6
</TABLE>
- ---------------
(1) Net financial income (expense) includes interest income, interest expense,
currency exchange gains (losses) and all other, net.
(2) See Note 2 to the Audited Consolidated Financial Statements included herein.
January 1, 1993 accounting changes resulted in a net charge of $18.9
million, or $0.04 per share, and January 1, 1992 accounting changes resulted
in a net charge of $222.9, or $0.44 per share.
(3) Including current maturities of long-term debt.
(4) See Note 11 to the Audited Consolidated Financial Statements included
herein.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto, which are included elsewhere in this
Prospectus.
OVERVIEW
The Company was formed in November 1995 in connection with the combination
of Pharmacia AB with The Upjohn Company. Both Pharmacia and Upjohn were
research-based pharmaceutical companies operating on a worldwide basis. The
Combination combined two operations that were complementary in both research and
development expertise in certain therapeutic areas and geographic presence to
create a company with total operating revenue of $7.1 billion in 1995 and $11.5
billion in total assets at December 31, 1995.
In connection with the Combination, a major restructuring plan was
implemented to eliminate duplicate facilities and functions and to focus
resources on the strategic objectives of Pharmacia & Upjohn. See "Business --
Competitive Strengths and Strategy". The plan will lead to the reduction of
approximately 4,100 positions worldwide by December 1998 and the closing or
combining of numerous subsidiary locations and manufacturing facilities. The
Company announced in March 1996 that the number of production facilities
worldwide would be reduced from 56 to 33 plants. In addition, steps are being
taken to focus R&D activities on the most promising projects of the predecessor
companies to result in a reduction in the number of R&D projects of
approximately 20 percent. Although no assurances can be given, the Company
expects to achieve operating cost synergies of $500 million (pre-tax) annually
by 1998. Although no assurances can be given, management estimates that in
excess of 85 percent of the $500 million in operating cost synergies will be
realized in 1997. The matters discussed above and other statements in this
Prospectus regarding operating costs and synergies are forward looking
statements that involve risks and uncertainties that could cause the actual
results to differ materially from those in the forward looking statements. Such
risks and uncertainties include delays or unexpected costs incurred in
connection with achieving the planned personnel reductions, plant closings and
other cost synergies in the time frames noted.
The Combination has been accounted for as a pooling of interests.
Accordingly, all prior-year financial data included herein have been combined as
if the companies had been merged during all periods reported. The Company
reports its operations as a single industry segment -- pharmaceutical products.
In addition to prescription pharmaceutical products, Pharmacia & Upjohn also has
activities in the affiliated businesses of consumer and animal health
pharmaceuticals, pharmaceutical chemicals and contract manufacturing,
biotechnological products and diagnostic systems.
When comparing earnings with prior periods, the effect of restructuring
charges, merger costs and discontinued operations recorded should be considered.
Merger-related costs include the transaction costs to combine the two companies,
costs of developing the new organizational structure and costs related to
establishing the corporate identity of the new company. Restructuring costs
related to the Combination were principally related to the reductions in
workforce and were principally incurred in the fourth quarter of 1995 and the
first quarter of 1996. Further restructuring charges associated with the merger
will be recorded in 1996 and it is expected that further restructuring charges
associated with the merger and plant rationalizations will continue into 1997
and later years.
Divestitures and/or terminations of R&D projects leading to increased focus
on core areas are being considered and may also require significant write-downs
in 1996. On July 2, 1996, the Company terminated an agreement with Biopure
Corporation to jointly develop a hemoglobin-based oxygen transport product for
treatment of blood loss associated with surgery. The Company will take an
after-tax charge to earnings of $69.2 million (13 cents per share) in the second
quarter of 1996 related thereto.
10
<PAGE> 11
Pharmacia & Upjohn is subject to currency risks on its transactional cash
flows and on the translation of foreign subsidiary income statements and balance
sheets into its U.S. dollar-denominated consolidated financial statements. The
Company manages its currency exposure principally by hedging certain of its
transaction exposures through forward currency exchange contracts. See "--
Financial Condition" and Note 14 to the Audited Consolidated Financial
Statements.
While the net effect of currency fluctuations on sales was essentially
neutral in the first quarter of 1996, subsequent changes in foreign currency
rate comparisons will most likely have a negative effect on sales comparisons
for the remainder of 1996.
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
OVERVIEW OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH PERCENT ENDED MARCH
(IN MILLIONS, EXCEPT PER SHARE DATA) 31, 1996 CHANGE 31, 1995
------------ ------- ------------
<S> <C> <C> <C>
Total operating revenue......................... $1,757.5 1.0% $1,739.3
Operating income before restructuring charges... 324.9 (1.4) 329.4
Operating income................................ 45.7 (86.1) 329.4
Earnings before income taxes.................... 74.4 (79.0) 354.9
Net earnings.................................... 49.9 (79.0) 237.8
Fully diluted earnings per common share......... $0.09 (80.4) $0.46
</TABLE>
When comparing operating performance for the first quarter of 1996 to that
of the first quarter of 1995, restructuring expenses, merger costs and an
unusual item of 1995 income should be considered. Major restructuring costs
associated with the Combination, totaling $257.2 million ($160.9 million or
$0.31 per share after taxes), were incurred in the first quarter of 1996. The
majority of these costs was associated with workforce reductions that were
identified during the quarter. Also in the first quarter of 1996, additional
costs, totaling $22 million ($18 million or $0.04 per share after taxes), were
incurred to effect the merger.
In the first quarter of 1995, the sale of Pharmacia & Upjohn's rights under
a product co-marketing agreement increased other operating revenue by $42
million and net earnings by $26 million or $0.05 per share.
The Company's prior year results were derived from the separate financial
statements of Pharmacia and Upjohn. These statements were combined retroactively
to reflect the Combination. Certain reclassifications have been made to prior
year amounts to reflect the current year's presentation.
11
<PAGE> 12
PRODUCT SALES
The table below provides a year-to-year comparison of consolidated net
sales by major therapeutic product group:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED
31, PERCENT MARCH 31,
(IN MILLIONS) 1996 CHANGE 1995
------------ ------- ------------
<S> <C> <C> <C>
Infectious Disease......................... $ 163.2 (14.1)% $ 190.0
Metabolic Disease.......................... 148.4 (2.2) 151.8
Critical Care and Thrombosis............... 142.8 (0.3) 143.3
Central Nervous System..................... 131.0 (3.2) 135.4
Oncology................................... 131.6 (2.6) 135.1
Women's Health............................. 141.5 14.4 123.7
Nutrition.................................. 110.0 15.7 95.1
Ophthalmology.............................. 62.0 (13.2) 71.4
Other Prescription Pharmaceuticals......... 227.1 (2.1) 231.9
Consumer Healthcare........................ 157.0 53.0 102.6
Animal Health.............................. 85.7 2.3 83.8
Chemical and Contract Manufacturing........ 74.0 33.8 55.3
------------ ------------
Total Pharmaceuticals................. $1,574.3 3.6% $1,519.4
Biotech/Biosensor.......................... 106.8 16.7 91.5
Diagnostics................................ 59.0 (16.2) 70.4
------------ ------------
Consolidated Net Sales................ $1,740.1 3.5% $1,681.3
============ ============
</TABLE>
The growth in consolidated net sales was primarily attributable to
increased volume. The net effect of currency fluctuations on sales was
essentially neutral, as the negative effects of the weakened yen were offset by
favorable effects from the strengthening of various European currencies.
Consolidated net sales outside the U.S. for the first quarter of 1996 were
$1,195 million, up 2 percent from $1,167 million for the same period in 1995.
Sales outside the U.S. represented 69 percent of 1996 first quarter consolidated
sales, unchanged from the first quarter of 1995. Sales in the U.S. for the first
quarter of 1996 were $545 million, up 6 percent from $514 million for this
period in 1995.
The sales decline in Infectious Disease products was largely the result of
a decrease of sales in the CLEOCIN(R) (DALACIN(R) outside the U.S.) family of
antibiotic products in non-U.S. markets. Sales of VANTIN(R), the broad-spectrum
oral antibiotic sold primarily in the U.S., declined due to a comparatively
moderate cold and flu season.
Sales of products for the treatment of Metabolic Disease were led by
GENOTROPIN, the recombinant growth hormone. While GENOTROPIN sales were up in
Europe, customer inventory reductions in Japan in anticipation of a government
mandated biennial price decrease led to a moderate overall decline for the first
quarter. U.S. sales of GENOTROPIN began during the first quarter of 1996.
Continuing generic competition for MICRONASE(R) tablets (glyburide), an oral
anti-diabetes agent, led to a decline in sales for this product. In addition,
sales of GLYNASE(R), an oral anti-diabetes agent, declined as a result of the
loss of U.S. market exclusivity in March 1995.
Sales growth recorded by other Critical Care and Thrombosis products was
offset by declines in sales of SOLU-MEDROL(R), the injectable steroid, and other
MEDROL(R) products in non-U.S. markets. These declines were due to unfavorable
currency exchange fluctuations. FRAGMIN(R), the treatment for prevention of
blood clots in connection with surgery, demonstrated good growth in Germany,
Sweden and Austria but declined slightly in France. Approved late in 1995, the
first U.S. sales of FRAGMIN were made in the first quarter of 1996.
12
<PAGE> 13
Sales of Central Nervous System agents declined as a result of continuing
U.S. generic competition against XANAX(R), the anti-anxiety agent. In non-U.S.
markets, XANAX continued to record sales growth. Sales of HALCION(R) Tablets,
the sleep inducing agent, were up slightly in the U.S. but were down on a
worldwide basis. SERMION(R), used primarily to treat cognitive and behavioral
disorders related to senile dementia, declined in Japan as well as elsewhere.
CABASER (cabergoline), the anti-parkinsonian agent, has now been approved for
sale in Denmark, Switzerland and the United Kingdom.
The Oncology group of products continued to be led by sales of
FARMORUBICIN(R), the cytotoxic agent for the treatment of solid tumors and
leukemias. First quarter sales of FARMORUBICIN were up slightly outside the U.S.
Sales of ADRIAMYCIN(R), also a cytotoxic agent for treatment of cancer, were
down in the U.S. due to generic competition. Other branded and generic oncology
products recorded sales growth worldwide. A New Drug Application ("NDA") was
filed with the U.S. Food and Drug Administration (the "FDA") for irinotecan,
trade name CAMPTOSAR, for the treatment of refractory colorectal cancer and was
approved in June 1996. See "Business -- Research and Development -- Oncology".
Sales growth in the Women's Health product group was led by the performance
of DEPO-PROVERA(R), the injectable contraceptive that recorded strong increases
worldwide. FDA moratoriums on the approval of Abbreviated NDAs protecting
exclusivity for DEPO-PROVERA expired in November 1995. U.S. sales of OGEN(R),
the estrogen replacement therapy, were off slightly due to generic substitution.
Sales of PROVERA(R) products (medroxy progesterone), the progestational agents,
were down slightly. In the U.S. this was due to increasing generic competition.
The growth in sales of Nutrition products was led by non-U.S. sales of
INTRALIPID(R) (including related mixing products), a fat emulsion for
intravenous nutrient delivery. This growth benefited from the third quarter 1995
purchase of a majority interest of a joint venture in China, resulting in its
consolidation. All other nutritional products as a group also demonstrated
growth in non-U.S. markets.
The decline in sales of Ophthalmology products was the result of a
worldwide decline in sales of HEALON(R), for cataract surgery. The decline in
non-U.S. markets was largely attributable to increased competition and related
price reductions. In Japan, customer inventory reductions that were related to
the government mandated biennial price decrease also contributed to the sales
decline for this product. Sales of HEALON declined in the U.S. due to fewer
cataract operations and greater competition.
Solid growth by the majority of Other Prescription Pharmaceutical products
was led by the worldwide performance of CAVERJECT, a treatment for male
impotence, while U.S. sales of ANSAID(R) Tablets, the anti-inflammatory agent,
continued to decline as a result of generic competition. CAVERJECT first
recorded sales in the U.S. in late 1995 and is now sold in major markets
worldwide. Prescription sales of ROGAINE(R) (REGAINE(R) outside the U.S.), a
treatment for hair loss, were down in the U.S. in anticipation of
over-the-counter (nonprescription) sale late in the first quarter. An NDA was
submitted to the FDA for a ROGAINE 5% minoxidil formulation for the treatment of
hair loss in December 1995. Management believes that this new formula will be
more effective and will have a period of market exclusivity. Sales of
SALAZOPYRIN(R), the preparation used to treat inflammatory bowel disorder and
rheumatoid arthritis, were essentially unchanged.
Consumer Healthcare product sales were up significantly, largely due to
U.S. prestocking of ROGAINE and NICORETTE(R) gum in advance of second quarter
over-the-counter product launches. In February 1996, ROGAINE 2% solution was
approved for over-the-counter sales in the U.S. The FDA did not grant the
Company the possible statutory three-year period of exclusivity limiting generic
competition and the Company's motion for a preliminary injunction to prohibit
the FDA from approving generic competitors was denied. NICORETTE gum, a
treatment for smoking
13
<PAGE> 14
cessation, was also approved in the U.S. for over-the-counter sales during the
first quarter of 1996 and will be distributed by SmithKline Beecham under an
agreement reached prior to the Combination. Non-U.S. sales of all NICORETTE
products were up. Sales of MOTRIN IB(R), the non-steroidal analgesic agent, were
up slightly for the first quarter.
Sales for the Animal Health product group were up slightly in spite of
general weakness in the U.S. market. Sales of the antibiotic, NAXCEL(R)
(EXCENEL(R) outside the U.S.) were up in non-U.S. markets but declined in the
U.S. Non-U.S. sales benefited from increases in sales of all major products
other than LINCOMYCIN(R) antibiotic products.
Strong sales growth was recorded by the Chemical and Contract Manufacturing
group for the first quarter of 1996, led by strong volume increases from
specialty steroids, especially in Europe. Sales increases were also recorded for
antibiotic and commodity steroid products.
Good sales growth was recorded by the Biotech/Biosensor group, led by
performance in Japan and the U.S. This business develops, manufactures, and
markets systems, reagents and chemicals for pharmaceutical and biotechnology
companies and academic research laboratories.
Sales of the Diagnostics business were down significantly, especially in
Japan where lower sales of allergy diagnostic products resulted from an overall
milder pollen season. Sales in Europe were also down due to changes in
reimbursement policies and to a milder pollen season.
OTHER OPERATING REVENUE
The comparative decline in other operating revenue for the first quarter of
1996 was due to events occurring in the prior year. In 1995, the Company sold
rights under a product co-marketing agreement that added $26 million ($0.05 per
share) to 1995 net earnings. The fourth-quarter 1995 termination of an agreement
with Burroughs Wellcome Co. for the promotion of their product ZOVIRAX(R) also
contributed to the year-to-year decrease in this revenue classification.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of net sales, were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Cost of products sold............................... 28.9% 30.2%(1)
Research and development............................ 17.2 17.5
Marketing, administrative and other................. 36.2 36.2(1)
Restructuring charges............................... 14.8 --
Merger costs........................................ 1.3 --
Operating income.................................... 2.6 19.6(1)
</TABLE>
- ---------------
(1) Previously reported for 1995 as 28.6 percent (cost of products sold), 35.7
percent (marketing, administrative and other) and 21.7 percent (operating
income). Gains and losses from currency exchange forward contracts relating
to net transaction exposures are now classified with cost of products sold
to match more accurately the losses and gains on the transactions underlying
the hedges. Formerly, these gains and losses had been classified as an
element of nonoperating income (expense) or with administrative expense, in
addition to being classified with cost of products sold, depending on the
status of the contract.
The improvement in cost of products sold as a percent of sales reflects a
favorable period-to-period comparison of losses and gains from Pharmacia &
Upjohn's currency risk management program related to anticipated currency
transaction exposures.
Expenditures for R&D in the first quarter of 1996 were up slightly but
declined as a percent of sales. Savings from personnel reductions and other
actions to consolidate and focus the research
14
<PAGE> 15
activities of Pharmacia & Upjohn are expected to be realized at an increasing
rate in later quarters of this year. During the quarter, Pharmacia & Upjohn
announced NDA submissions to the FDA for pramipexole for Parkinson's disease,
REMISAR(R) for bladder cancer and DOSTINEX(R) (cabergoline) for
hyperprolactinemia.
Marketing, administrative and other expenses remained flat as a percent of
sales but were up in total dollars. Additional costs were incurred during the
first quarter of 1996 to reorganize certain sales, marketing and administrative
operations of the former companies into Pharmacia & Upjohn. These expenses more
than offset the initial benefits of the merger-related restructuring efforts.
While restructuring accruals have been recognized for a number of employees
performing marketing and administrative functions, the majority of those
individuals had not left Pharmacia & Upjohn during the first quarter.
Merger-related restructuring charges for the first quarter of 1996 totaled
$257.2 million. These charges primarily reflect the planned reduction of
approximately 1,750 positions. These costs were in addition to the $91.6 million
of merger-related restructuring charges, accrued during the fourth quarter of
1995. The costs in 1995 resulted from accruals for reduction of approximately
850 positions, elimination of duplicate office facilities and other exit costs.
At the end of the first quarter, approximately 1,200 employees had left
Pharmacia & Upjohn under the restructuring program. First quarter 1996 cash
spending related to the merger-related restructuring totaled approximately $75
million, with approximately $275 million remaining as other current and
noncurrent liabilities of the Company. Savings from the merger-related
restructuring activities are expected to be realized in all major expense
categories and are expected to have an increasing effect on earnings as elements
of the plan are fully implemented. It is estimated most elements of the
restructuring plan, exclusive of portions of the plant rationalizations, will be
implemented by 1997.
The merger expense recorded in 1996 consisted primarily of costs related to
certain nonrecurring organizational activities, establishing the corporate
identity for the new company, and various other costs of combining the
predecessor companies. It is anticipated that some additional merger expenses
will be incurred in 1996.
NONOPERATING INCOME AND EXPENSE
The favorable interest income to interest expense relationship continued to
contribute to first quarter 1996 earnings. Interest income was down from the
fourth quarter of 1995 due to the reduction of financial investments, discussed
below, and to lower interest rates in Sweden and Japan.
INCOME TAXES
The estimated annual effective tax rate for 1996 is 33 percent compared to
35 percent for the year 1995. The lower rate is attributable to the effect of a
greater portion of earnings taxed in jurisdictions with rates lower than the
U.S. The effective rate for the first quarter of 1995 was 33 percent.
15
<PAGE> 16
FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Working capital (in millions).......................... $2,396.9 $2,333.7
Ratio of current assets to current liabilities......... 1.96:1 1.88:1
Debt to total capitalization........................... 17.2 % 17.9%
</TABLE>
Working capital increased, with the corresponding increase in the current
ratio due to reductions in trade accounts payable. The improvement in the ratio
of debt to capitalization is the result of a decrease in combined short- and
long-term debt.
The Company's net financial asset position, presented below, declined
slightly due to a reduction in total short- and long-term investments.
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
(IN MILLIONS) 1996 1995
--------- ------------
<S> <C> <C>
Cash equivalents and investments....................... $2,380.7 $2,529.5
Short-term and long-term debt.......................... 1,315.9 1,394.7
--------- ------------
Net financial assets................................. $1,064.8 $1,134.8
======== ===========
</TABLE>
Net cash provided by first quarter 1996 operations declined to $90.6
million as compared to $150.7 million for the first quarter of 1995. This
decline was primarily due to the 1996 spending on restructuring, noted above,
which totaled approximately $75 million, and $22 million of merger costs.
The most significant use of cash for investing purposes was in the
acquisition of property, plant and equipment, while a net reduction in financial
investments resulted in the net cash provided by investing activities. The cash
provided by operations and by the reduction of investments was primarily
utilized for the payment of dividends to common shareholders and for the
repayment of debt. Cash proceeds from the issuance of Common Stock related to
the employee stock option program was partially utilized for the purchase of
treasury shares to be issued upon future exercise of options.
The Company's future cash provided by operations and borrowing capacity are
expected to cover normal operating cash flow needs and planned capital
acquisitions for the foreseeable future.
Pharmacia & Upjohn utilizes derivative financial instruments in conjunction
with its currency exchange risk management programs. These programs employ
over-the-counter forward currency exchange contracts and purchased currency
options to hedge existing net transaction exposures and certain existing
obligations in several subsidiary locations. These exposures arise both from
intercompany and third-party transactions. Additionally, currency options are
occasionally utilized to protect the cash flows of specific anticipated
transactions. All contracts used in these programs are marked-to-market each
period.
Pharmacia & Upjohn's transaction hedging activities seek to protect
operating results and cash flows from the potential adverse effects of currency
exchange rate fluctuations. This is done by offsetting the gains or losses on
the underlying exposures with losses and gains on the instruments utilized to
create the hedges. The hedging of anticipated transaction exposures is intended
to protect the cash flows of the Company by offsetting the gains or losses on
the instruments with the losses and gains of the underlying anticipated cash
flows. Because the instruments are marked-to-market each period, but the
anticipated transactions have not been recorded, the timing of recognition of
the related gains and losses will not match.
16
<PAGE> 17
Comparison of the Three Years Ended December 31, 1995, 1994 and 1993
OVERVIEW OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
PERCENT PERCENT
(IN MILLIONS, EXCEPT PER SHARE DATA) 1995 CHANGE 1994 CHANGE 1993
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total operating revenue.............. $7,094.6 4% $6,822.8 4% $6,560.8
Operating income..................... 1,002.9 (14) 1,163.7 60 729.5
Earnings from continuing operations
before income taxes................ 1,136.4 (11) 1,271.3 63 777.7
Earnings from continuing
operations......................... 738.7 (11) 833.5 49 560.6
Net earnings......................... 738.7 (12) 835.1 42 587.8
Net earnings per common share:
-- Primary......................... $ 1.43 (12) $ 1.63 43 $ 1.14
-- Fully diluted................... $ 1.41 (12) $ 1.60 42 $ 1.13
</TABLE>
When comparing year-to-year earnings, restructurings, merger charges and
discontinued operations recorded over the past three years should be considered.
Major restructuring charges were recorded in both 1995 and 1993. Restructuring
charges recorded in 1995 were almost entirely related to the Combination and
reduced earnings by $103.4 million ($67.7 million or $0.14 per share after tax).
Further restructuring costs associated with the Combination will be recognized
in future reporting periods. The 1993 restructuring that reduced earnings by
$268.7 million ($212.5 million or $0.42 per share after tax) was associated with
a workforce reduction, the write-down of certain assets and the reduction of
excess manufacturing capacity.
In 1995, costs incurred to effect the Combination totaled $138.2 million
($117.8 million or $0.23 per share after tax). These costs consisted primarily
of professional and registration fees and the cost of terminating two
third-party distribution agreements that conflicted with the merged operations.
Other merger costs were associated with planning and executing the Combination.
Additional costs associated with the execution of the Combination are expected
to be incurred in 1996.
In addition, several actions were taken over the past three years to
increase the Company's focus on its core pharmaceutical business, including the
1994 sale of the Asgrow Seed Company and the 1993 sale of Asgrow Florida
Company. Also in 1994, the Company sold Deltec, Inc. ("Deltec"). The gain on
this sale increased 1994 net earnings by $30 million ($0.06 per share). In 1993,
the shares of BCP Branded Consumer Products AB were distributed to the
shareholders of the former Procordia AB, the predecessor to Pharmacia. Except
for the sale of Deltec, these divestitures have been reported as discontinued
operations.
17
<PAGE> 18
PRODUCT SALES
The table below provides a year-to-year comparison of consolidated net
sales by major therapeutic product groups:
<TABLE>
<CAPTION>
PERCENT
(IN MILLIONS) 1995 CHANGE 1994
-------- ------- --------
<S> <C> <C> <C>
Infectious Disease..................................... $ 687.1 10.3% $ 622.9
Metabolic Disease...................................... 635.9 (2.1) 649.4
Critical Care and Thrombosis........................... 579.7 12.8 514.1
Central Nervous System................................. 571.8 0.3 570.3
Oncology............................................... 566.2 6.7 530.6
Women's Health......................................... 541.2 6.1 509.9
Nutrition.............................................. 399.0 8.1 369.0
Ophthalmology.......................................... 296.0 5.3 281.0
Other Prescription Pharmaceuticals..................... 957.7 (12.8) 1,098.1
Consumer Healthcare.................................... 441.5 (2.1) 451.2
Animal Health.......................................... 383.1 14.0 336.2
Chemical and Contract Manufacturing.................... 199.9 17.1 170.7
-------- --------
Total Pharmaceuticals............................. $6,259.1 2.6% $6,103.4
Biotech/Biosensor...................................... 437.0 13.5 385.0
Diagnostics............................................ 253.0 17.1 216.0
-------- --------
Consolidated Net Sales............................ $6,949.1 3.6% $6,704.4
======== ========
</TABLE>
Note: Sales data for 1993 by therapeutic group are not available for
comparison.
Sales outside the U.S. in 1995 were $4.8 billion, up 10 percent from $4.4
billion in 1994. Consolidated 1995 sales in the U.S. decreased 9 percent from
$2.3 billion in 1994 to $2.1 billion and represented 30 percent of 1995
consolidated sales, down from 35 percent. Of the 3.6 percent increase in
consolidated net sales during 1995, favorable changes in currency exchange rates
and increases in volume increased net sales by 5 percent and 1 percent,
respectively. These increases were partially offset by the 1994 divestment of
the Deltec operation, which resulted in a 2 percent decrease in net sales for
1995 when compared with 1994. Overall, declines in sales prices had a minimal
effect on 1995 sales.
Sales growth of Infectious Disease products was led by the CLEOCIN (DALACIN
outside the U.S.) family of antibiotic products, with strong sales growth in
non-U.S. markets and solid growth in the U.S. VANTIN, the broad-spectrum oral
antibiotic sold primarily in the U.S., also continued good sales growth.
Sales of Metabolic Disease products were led by GENOTROPIN, the growth
hormone, with increases in Japan, Germany and Sweden. GENOTROPIN has been
marketed under an agreement with Genentech, Inc., which provided the Company
with exclusive sales rights to the product outside of the U.S. and Canada. As a
result of the November 1995 expiration of this agreement, the Company is able to
market GENOTROPIN in the U.S. and Canada while Genentech may now market its
growth hormone products worldwide. Continuing generic competition for MICRONASE,
the oral antidiabetes agent that lost U.S. market exclusivity in 1994, led to a
decline in sales. Sales of GLYNASE, the oral antidiabetes agent, declined as a
result of the loss of U.S. market exclusivity in March 1995.
Sales growth recorded by Critical Care and Thrombosis products was led by
SOLU-MEDROL, the injectable steroid, and other MEDROL products in non-U.S.
markets. FRAGMIN, for prevention of blood clots in connection with surgery,
demonstrated good growth in Germany, Sweden and
18
<PAGE> 19
other non-U.S. markets. FRAGMIN was approved for sale in the U.S. late in 1995.
The first sales of FREEDOX (tirilazad mesylate), for subarachnoid hemorrhage in
males, were recorded in non-U.S. markets in mid-1995. In March 1996, the Company
announced that it was discontinuing research for tirilazad mesylate in head
injury. Clinical trials and evaluation for the U.S. approval of FREEDOX for the
treatment of subarachnoid hemorrhage in females at higher dose levels and for
both stroke and spinal cord injury are continuing.
Sales of Central Nervous System agents were flat for the year. Sales growth
outside the U.S. was offset by a decline in the U.S. The decline is the
continuing result of intense U.S. generic competition for XANAX, the
anti-anxiety agent, and HALCION, the sleep-inducing agent, both of which lost
U.S. patent protection in October 1993. In non-U.S. markets, XANAX continued to
record good growth while HALCION grew moderately. SERMION recorded good growth,
especially in Japan, Germany and Italy. In December 1995, an NDA was filed with
the FDA for pramipexole, a treatment for Parkinson's disease. Also in January
1996, CABASER (cabergoline), for Parkinson's disease, was approved for marketing
in Denmark and Switzerland.
Sales of Oncology products grew through good performance in non-U.S.
markets. This increase was led by non-U.S. sales of FARMORUBICIN, for solid
tumors and leukemias. Sales of ADRIAMYCIN, also for cancer, were down somewhat
in the U.S. due to generic competition. Sales of other branded and generic
oncology products also contributed to growth worldwide. In 1994, Pharmacia &
Upjohn completed a series of agreements with Yakult Honsha Co. Ltd. for the
rights to develop and market the anticancer compound irinotecan for several
indications in the U.S., Canada and Latin America.
Sales in the Women's Health product group were again led by DEPO-PROVERA,
the injectable contraceptive, which continued to record strong increases,
especially in the U.S. Partially offsetting this increase were declines in U.S.
sales of OGEN, for estrogen replacement, largely due to generic substitution.
Sales of PROVERA products, the progestational agents, were down in the U.S. due
to increasing generic competition but were up moderately in non-U.S. markets.
FDA moratoriums on the approval of Abbreviated NDA's protecting exclusivity for
DEPO-PROVERA expired in November 1995.
Sales growth of Nutrition products was led by the non-U.S. sales of
INTRALIPID (including related mixing products), a fat emulsion for intravenous
nutrient delivery. This growth was due largely to the July 1995 purchase of the
majority interest in a joint venture in China, resulting in its consolidation.
Previously, these sales were not included in consolidated sales because the
Company accounted for its investment under the cost method. China now represents
this business area's largest market. All other nutritional products as a group
also demonstrated growth in non-U.S. markets.
Growth in the Ophthalmology products group was led by sales of HEALON, for
cataract surgery, in Japan and other markets. Sales of HEALON declined in the
U.S. due to fewer cataract operations and greater competition.
Solid growth by the majority of Other Prescription Pharmaceutical products
was led by the worldwide sales of CAVERJECT, the treatment for erectile
dysfunction. Sales growth in this product group was offset by a decline in U.S.
sales of ANSAID, the nonsteroidal anti-inflammatory agent, which first
encountered significant generic competition late in 1994. ANSAID lost U.S.
patent protection in February 1993. CAVERJECT first recorded sales in the U.S.
in the third quarter of 1995 and is now approved in 44 markets worldwide. Sales
of ROGAINE (REGAINE), a treatment for hair loss, were slightly above 1994
levels. In February 1996, ROGAINE 2% minoxidil formulation was approved in the
U.S. for over-the-counter (non-prescription) sale, and will be sold by Pharmacia
& Upjohn's Consumer Healthcare business beginning in the first half of 1996. In
December 1995, an NDA was submitted to the FDA for a ROGAINE 5% minoxidil
formulation for the treatment of common hair loss. SALAZOPYRIN, the preparation
used to treat inflammatory bowel disorder and rheumatoid arthritis, recorded
good sales increases, primarily in Europe.
19
<PAGE> 20
Consumer Healthcare product sales were down as non-U.S. sales increases in
NICORETTE, for smoking cessation, were offset by a decline in U.S. sales of
MOTRIN IB, the non-steroidal analgesic agent. MOTRIN IB experienced intense
competition resulting from an effort by wholesalers to reduce inventories early
in 1995 and increased promotional activity within this market segment.
Strong sales growth in the Animal Health business was led by the
performance of Spectinomycin products in non-U.S. markets. Sales of the
antibiotic NAXCEL (EXCENEL) were up worldwide.
Chemical and Contract Manufacturing sales were up significantly in 1995 due
to strong volume increases in Europe and Asia pharmaceutical fine chemical sales
and U.S. sales of specialty steroid products.
Strong sales growth was recorded by the Biotech/Biosensor group. This
business develops, manufactures and markets systems, reagents and chemicals for
pharmaceutical and biotechnology companies and academic research labs.
Sales from the Diagnostics business continued to grow in 1995, driven by
increased sales of allergy diagnostics, especially in Japan and certain European
countries.
OTHER OPERATING REVENUE
The sale of the Company's rights under a product co-marketing agreement
increased other operating revenue and added $42 million ($26 million or $0.05
per share after tax) to 1995 operating earnings. An agreement with Burroughs
Wellcome Co. to provide promotional services for their product ZOVIRAX also
contributed to the increase in this revenue classification. The ZOVIRAX
agreement was terminated at the end of 1995.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of net sales, were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Cost of products sold....................... 28.5% 28.2% 28.0%
Research and development.................... 18.0 17.3 17.6
Marketing, administrative and other......... 37.7 38.6 39.9
Merger-related restructuring charges........ 1.3 -- --
Merger costs................................ 2.0 -- --
Other restructuring charges................. 0.2 0.3 4.1
Operating income............................ 14.4 17.4 11.2
</TABLE>
The increases in 1995 and 1994 cost of products sold, when compared to
1993, are the result of a change in product mix. The change is largely due to
U.S. generic competition encountered by several major products identified
earlier, most of which carried relatively high gross margins. The change in the
U.S. was offset somewhat by an improved product mix in certain European markets,
where sales of certain lower margin bulk products were replaced by higher margin
branded pharmaceuticals. The decline in gross margins is also due to a higher
percentage of total worldwide pharmaceutical product sales in non-U.S. markets
where the Company's products generally carry lower gross margins.
Expenditures for R&D in 1995 increased as a percent of sales from 1994. In
1995 the Company had a greater number of product candidates in the final stages
of clinical development, which required larger patient populations for testing.
R&D expenses in 1994 were down slightly as a percent of sales from the prior
year primarily due to the timing of expenses related to large clinical programs
and from the write-down of certain R&D assets upon the 1993 acquisition of the
pharmaceutical business of Erbamont N.V. (referred to herein as "FICE") from
Montedison S.p.A.
20
<PAGE> 21
Marketing, administrative and other expenses as a percent of sales in 1995
were down from both 1994 and 1993. When comparing the expenses measured in U.S.
dollars, this category has been essentially flat since 1993. This expense
category in 1995 included a $59 million write-down of an investment to fair
market value in the fourth quarter. Excluding the effect of this write-down,
these expenses declined from 1994 due to unusually high costs in 1994 associated
with various marketing programs and other expenses. The 1995 measure included
reductions in insurance and claims accruals and capital gains on certain sales
of fixed assets. Savings from the 1993 restructuring associated with the
rationalization of marketing activities following the FICE acquisition in mid-
1993 were realized in this expense category. In 1994, the restructuring savings
were partially offset by increases in other costs related to various marketing
programs and by additional marketing investments in certain emerging
international markets.
Merger costs recorded in 1995 consisted of transaction costs and expenses
to combine the operations of Pharmacia and Upjohn. Transaction costs ($68.8
million) consisted primarily of professional fees. Expenses to combine the two
companies included costs associated with terminating two marketing agreements
($53 million) that were in conflict with other aspects of the merged company.
Expenses associated with combining operations also were related to planning and
implementing the organizational structure of Pharmacia & Upjohn. It is
anticipated that some additional merger expenses will be incurred during 1996.
Merger-related restructuring charges, totalling $91.6 million, were
recorded in the fourth quarter of 1995. These charges covered costs associated
with the reduction of approximately 850 positions, elimination of duplicate
office facilities and other exit costs. Cash expenditures related to the 1995
merger-related restructuring were minimal, and essentially all of the accrual
for these charges is included in current liabilities.
Restructuring charges in 1995 that were not related to the Combination,
totalling $11.8 million, were incurred in conjunction with the closure of a
manufacturing facility in Sweden. Restructuring charges recorded in 1994 reflect
costs associated with a plant closing in the U.S. that was part of the
consolidation of manufacturing facilities in the ophthalmology operations.
Charges resulting from the write-down of intangibles related to a terminated
oncology venture were included in this expense category.
The restructuring plan announced in 1993 continued to be implemented in
1995. During 1995, the anticipated workforce reduction was completed. Certain
plant closings recognized in the original 1993 accruals have not yet been
completed; accordingly, approximately $29 million, primarily related to
manufacturing rationalization, remains as other current and noncurrent
liabilities. No adjustments to the original accruals have been made or are
anticipated to be required.
NONOPERATING INCOME AND EXPENSE
Favorable relationships of interest income to interest expense have
increased in each of the years 1993 through 1995. The decrease in net interest
income from 1993 to 1994 was due to the use of funds to purchase FICE. The
increase in interest income from 1994 to 1995 is largely due to investment of
proceeds from the sale of Deltec and certain other assets acquired with FICE and
the sale of the Asgrow Seed Company. Nonoperating income in 1994 included the
gains on the sale of Deltec and a joint venture. There were no such gains in
1993 or 1995.
INCOME TAXES
The effective tax rate for 1995 was 35.0 percent, compared to 34.4 percent
and 27.9 percent in 1994 and 1993, respectively. The increase in the rate for
1995 from that of 1994 was the result of a lower proportion of total earnings
from operations in Puerto Rico and greater goodwill amortization and other
nondeductible expenses. The increase in the rate for 1994, when compared to
1993, is the net result of changes in Swedish tax laws, a decrease in goodwill
and other nondeductible expense and a lower proportion of total earnings from
operations in Puerto Rico.
21
<PAGE> 22
The Company's earnings from manufacturing operations in Puerto Rico are
partially exempt from U.S. and Puerto Rico income taxes. The U.S. tax exemption
has been and will be steadily diminished due to changes in U.S. tax laws.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Working capital (in millions).............. $2,333.7 $1,928.6 $ 878.1
Ratio of current assets to current
liabilities.............................. 1.88:1 1.67:1 1.32:1
Debt to total capitalization............... 17.9% 23.4% 26.3%
</TABLE>
Significant increases in working capital and the corresponding improvements
in the current ratio were realized in 1994 and 1995. This was partially due to
the year-end 1994 receipt of the proceeds from the sale of the Asgrow Seed
Company and the proceeds from the sale of Deltec which had been invested in cash
equivalents at the end of 1994. Also contributing to the improvements in these
measures were the strong cash flows from operations.
Both the 1994 and 1995 percentages of debt compared to total capitalization
benefited from the increase in total shareholders' equity attributable to
earnings retained in the business as compared to declining levels of debt.
The Company's net financial asset position has improved substantially
during the last three years:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
(IN MILLIONS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash, equivalents and investments.......... $2,529.5 $2,553.9 $1,602.5
Short-term and long-term debt.............. 1,394.7 1,719.0 1,719.1
-------- -------- --------
Net financial assets.................. $1,134.8 $ 834.9 $ (116.6)
======== ======== ========
</TABLE>
Net cash provided by 1995 operations declined to $1,145.4 million as
compared to $1,286.3 million and $1,355.7 million in 1994 and 1993,
respectively. Payments for merger costs, totaling $138.2 million, were largely
responsible for this decline and reduced only the 1995 measure. Also in 1995, a
change in tax law required acceleration of U.S. estimated tax payments and led
to the large 1995 use of cash to reduce income taxes payable. Cash from
operations in 1994 was reduced by significant payments related to the 1993
restructurings. Spending on restructurings unrelated to the merger were not as
large in either of the two comparative periods. Cash required to fund the
merger-related restructurings and the remaining merger costs will be paid in
1996 and thereafter from cash generated from operations.
In 1995, the largest use of cash for investing purposes was in the
acquisition of properties (plant and equipment) for use in operations.
Significant cash was also used to reduce the total debt of the Company. In
addition to cash provided by 1995 operations, cash was made available through
the reduction of certain financial investments. In 1994, cash received from the
sale of the Deltec operations led to the increase in investments. In 1993, the
Company's acquisitions of FICE was in exchange for cash. In addition to cash
provided by operations, other funding was provided for the FICE acquisition from
reduction of certain financial investments and from proceeds from the
divestiture of BCP Branded Consumer Products AB. In all years, cash used to pay
dividends was generated from operating activities.
Pharmacia & Upjohn utilizes derivative financial instruments in conjunction
with its foreign currency risk management programs. These programs employ
over-the-counter forward currency exchange contracts and purchased currency
options to hedge existing net transaction exposures and
22
<PAGE> 23
certain existing obligations in several subsidiary locations. These exposures
arise both from intercompany and third-party transactions. The Company also
utilizes forward currency exchange contracts to hedge anticipated currency
exchange transaction exposures of certain significant international operations.
These contracts are marked to market monthly. Additionally, currency put or call
options are occasionally used to hedge specific anticipated transactions.
Transaction hedging activities seek to protect operating results and cash
flows from the potentially adverse effects of currency exchange fluctuations.
This is done by offsetting the gains or losses on the underlying exposures with
losses and gains on the instruments used to create the hedge. The hedging of
anticipated transaction exposures is intended to limit the fluctuation of
certain elements of income and expense by offsetting the gains or losses on the
instruments with other elements of operating income.
Pharmacia & Upjohn also utilized forward currency exchange contracts to
hedge the net investment in certain subsidiary operations. This practice was
suspended in the fourth quarter of 1995, and all related contracts have been
closed.
In consideration of the financial objectives of the newly merged
operations, Pharmacia & Upjohn is presently reviewing its policies and practices
related to all hedging activities and the use of related derivative financial
instruments.
23
<PAGE> 24
BUSINESS
OVERVIEW
Pharmacia & Upjohn is a global pharmaceutical group engaged in the
research, development, manufacture and sale of pharmaceutical and healthcare
products. In 1995, Pharmacia & Upjohn had consolidated net sales of $6.95
billion and net earnings of $738.7 million. Pharmacia & Upjohn has a product
portfolio with sales in excess of $500 million in each of six therapeutic areas:
infectious disease, metabolic disease, critical care and thrombosis, CNS,
oncology and women's health. Pharmacia & Upjohn's total research and development
expenditures exceed $1 billion annually. Research is being focused on five core
areas: infectious disease, metabolic disease, CNS, oncology and inflammation.
Pharmacia & Upjohn sells its prescription pharmaceuticals in over 100 countries.
Pharmacia & Upjohn also manufactures for distribution to the general public
certain nonprescription drugs and manufactures pharmaceutical chemicals and
intermediates for use in its own products and for sale to specialist doctors,
hospital purchasing groups, general practitioners, industry and academia. The
Company's over-the-counter products, such as NICORETTE (a smoking cessation
product) and ROGAINE/REGAINE (a treatment for hair loss) are supported by
consumer marketing. In addition, Pharmacia & Upjohn researches, develops,
manufactures and markets pharmaceutical and vaccine products for both food and
companion animals for sale to veterinarians, feed manufacturers and livestock
producers. Furthermore, Pharmacia & Upjohn markets specialty products in
hospital care, diagnostics and biotechnology equipment, nutritional supplements
and other products.
INDUSTRY BACKGROUND
The world market for pharmaceuticals and healthcare products is
concentrated in the U.S., Japan and Western Europe. Global sales of
pharmaceuticals increased steadily during the 1980s due to a combination of
factors, including an ageing population and the introduction of a number of
significant innovative products providing enhanced therapeutic benefits. While
the demand for pharmaceutical products has remained strong in the 1990s,
regulatory pressures and pricing constraints have intensified as governmental
and private healthcare providers strive to control the rapid growth in
healthcare expenditure. Pharmaceuticals are increasingly chosen according to the
therapeutic benefit in relation to cost, such that pharmaceuticals that minimize
hospital stays and reduce treatment costs are increasingly preferred. It is
therefore essential for pharmaceutical companies to develop new improved and
more efficient products that increase the total value both for buyers and
patients. The Company believes that these developments have also led to more
intense competition in the pharmaceutical industry worldwide. Innovation,
high-quality research and development focused on unmet medical needs, rapid
product introduction and cost efficiency are likely to be key competitive
factors in the pharmaceutical industry. Management believes that, as a result of
the Combination, the Company is well positioned to compete in this environment.
COMPETITIVE STRENGTHS AND STRATEGY
The Company was formed in November 1995 in connection with the combination
of Pharmacia and Upjohn. The Combination sought to take advantage of certain
synergies between Pharmacia and Upjohn in fundamental research, product
development, manufacturing and sales and marketing, in order both to increase
Pharmacia & Upjohn's combined revenues and to reduce its costs. Management
believes that the benefits that Pharmacia & Upjohn has realized and expects to
realize from the Combination should improve its competitive position and
profitability. These benefits include:
Substantial Reduction in Costs. In connection with the Combination,
management initiated a restructuring plan with a target of annual cost savings
by 1998 of $500 million (pre-tax), which included a workforce reduction of 4,100
employees by December 1998. The Company believes that achieving such cost
reductions should significantly improve operating margins. As of May 31, 1996,
24
<PAGE> 25
management has achieved a net workforce reduction of 2,100 employees. Since the
Combination, management has identified other areas of potential cost savings,
such as manufacturing and supply, which it believes will enable it to further
reduce costs by the year 2000. Pharmacia & Upjohn intends to close 23 of its
existing 56 manufacturing plants by the year 2000. The matters discussed above
and in the Prospectus Summary are forward looking statements that involve risks
and uncertainties that could cause the actual results to differ materially from
those in the forward looking statements. Such risks and uncertainties include
delays or unexpected costs incurred in connection with achieving the planned
personnel reductions, plant closings and other cost synergies in the time frames
noted as well as, in respect of operating margin improvements, unexpected delays
or difficulties in introducing new products to market, the effect of competition
from other products and pricing pressures.
Strong Product Portfolio. The Combination has provided Pharmacia & Upjohn
with a strong product portfolio. Pharmacia & Upjohn generates sales in excess of
$500 million in each of six therapeutic areas. In 1995, Pharmacia & Upjohn's top
nine products accounted for approximately 30 percent of net sales, with no
single product accounting for more than 6 percent of net sales. A majority of
these products either have not had patent protection for several years or
benefit from patent protection that does not expire in the near term. See "--
Prescription Pharmaceutical Products".
Strong Product Pipeline. The integration of the product development
efforts and pipelines of pharmaceutical products of the predecessor companies
has resulted in significantly more prospects for new product introductions.
Currently, Pharmacia & Upjohn has approximately 25 products or product line
extensions which are in the late development stage or approval process or have
recently been approved. Recently approved products include XALATAN in the U.S.
and Sweden for glaucoma, GENOTROPIN in the U.S. for growth disorders, CABASER in
the EU for Parkinson's disease, ESTRING in the U.S. and Germany for estrogen
deficiency and CAMPTOSAR in the U.S. for refractory colorectal cancer. In August
1995, CAVERJECT was launched in the U.S. for erectile dysfunction. Products
currently in the approval process include RESCRIPTOR for HIV/AIDS. Products
currently in the late development stage include REMISAR for bladder cancer,
DETRUSITOL for urge incontinence and pramipexole for Parkinson's disease. See
"-- Research and Development".
Complementary Core Competencies in Research and Development. The
Combination has provided Pharmacia & Upjohn with critical mass to improve and
maintain its competitive position. As a result of the Combination, Pharmacia &
Upjohn has R&D resources which enhance its ability to develop commercially
attractive new products more efficiently. The complementary research expertise
of Pharmacia in molecular biology and Upjohn in advanced chemistry is expected
to strengthen research capabilities and contribute to a reduction in overall
development time for new products. As part of Pharmacia & Upjohn's increased
focus on high-priority projects, a thorough review of R&D projects was
undertaken. As a result, approximately 20 percent of the number of projects then
under development was targeted to be discontinued or licensed out, enabling
additional resources to be devoted to higher priority projects. Despite the
dedication of resources to effecting the Combination, Pharmacia & Upjohn's
product development efforts have met or exceeded the original timetable.
Integrated Global Sales Force. Pharmacia & Upjohn believes that its ability
to cross-sell its combined range of products through its global sales force will
provide economies of scale in its sales and marketing activities as well as
expand market access for many current and expected products. Historically,
Pharmacia's major markets were in Europe and Asia, while Upjohn had a strong
selling presence in the U.S. and the Pacific Rim. The combination of a
complementary product range and an integrated sales force active in multiple
geographical markets has significantly strengthened Pharmacia & Upjohn's sales
and marketing capabilities.
25
<PAGE> 26
New Management Structure. Pharmacia & Upjohn has adopted a management
structure based on centralized strategic steering and decentralized operational
responsibility, implemented through Pharmacia & Upjohn's pharmaceutical product
centers in the U.S., Sweden and Italy. Pharmacia & Upjohn is capitalizing on the
research, product development and sales and marketing expertise that it has
developed locally to expedite product commercialization in multiple markets.
Management's priority has been to complete the integration of the two
predecessor companies as rapidly as possible in order to realize the projected
cost savings and other synergies. Management is now also directing its focus
toward expanding Pharmacia & Upjohn's business by developing and solidifying
leadership positions in core therapeutic areas. Management is concentrating on
improving sales growth and operating margins.
In the near to medium term, management is focusing on the commercialization
of recently introduced products and products in late stage development. As a
foundation for long-term development, management is concentrating its research
activities in five core areas of significant unmet medical needs: infectious
disease, metabolic disease, CNS, oncology and inflammation. In addition,
management is evaluating strategic opportunities, including acquisitions,
alliances, licensing agreements and research collaborations, to supplement its
organic development, as well as divestitures of non-core businesses or product
lines.
26
<PAGE> 27
PRESCRIPTION PHARMACEUTICAL PRODUCTS
Pharmacia & Upjohn researches, develops, manufactures and markets
high-value human pharmaceutical products to healthcare providers worldwide. The
following table sets forth Pharmacia & Upjohn's leading prescription
pharmaceutical products by sales.
<TABLE>
<CAPTION>
NET SALES
---------------
THERAPEUTIC AREA/PRODUCT NAME 1995 1994 CHEMICAL CLASS AND INDICATIONS PATENT EXPIRY(1)
- ------------------------------------- ------ ------ ----------------------------------------- ----------------
<S> <C> <C> <C> <C>
(IN MILLIONS)
INFECTIOUS DISEASE
CLEOCIN/DALACIN (clindamycin) $288.4 $248.4 Semi-synthetic Antibiotic 1986-89
- bacterial infections
METABOLIC DISEASE
GENOTROPIN 388.0 333.0 Recombinant Human Growth Hormone 2000-03(2)
(somatropin) - short stature from pituitary growth
hormone deficiency
- chronic renal insufficiency
- Turner's syndrome
MICRONASE/GLYNASE (glyburide) 195.0 271.2 Sulfonylurea 1992-94
- diabetes
CRITICAL CARE AND THROMBOSIS
SOLU-MEDROL 170.8 153.1 Corticosteroid 1976
(methyl prednisolone IM/IV) - endocrine disorders
- rheumatic disorders
- allergic states
- dermatologic diseases
CENTRAL NERVOUS SYSTEM
XANAX 319.8 341.6 Benzodiazepine 1989-93
(alprazolam) - severe depression
- panic disorder
ONCOLOGY
FARMORUBICIN 206.0 190.0 Cytotoxic Anti-cancer 1995-2000(3)
(epirubicin) - leukemia
- breast, ovarian and bladder cancers
- thyroid cancer
ADRIAMYCIN 134.0 139.0 Cytotoxic Anti-cancer 1984-89(3)
(doxorubicin) - leukemia
- breast, ovarian and bladder cancers
- thyroid cancer
WOMEN'S HEALTH
PROVERA/MPA 200.0 211.2 Progestagen 1983-85
(medroxy progesterone acetate) - endometriosis
- infertility
- cancer
- menorrhagia
OPHTHALMOLOGY
HEALON 212.0 206.0 Cataract Surgical Procedures February 1996
(sodium hyaluronate)
</TABLE>
- ---------------
(1) Year or range of years in which applicable patent(s) in major market(s)
expire(s).
(2) Process patents only.
(3) Patents for new formulations expire later.
27
<PAGE> 28
The following discusses the principal products within each therapeutic
area.
Infectious Disease
This therapeutic area accounted for $687.1 million in net sales or 9.9
percent of consolidated net sales in 1995. Pharmacia & Upjohn provides a broad
line of antibiotic products including CLEOCIN and LINCOCIN(R) products. CLEOCIN
PHOSPHATE(R) is an injectable form of clindamycin that is used in the treatment
of certain life-threatening anaerobic infections. CLEOCIN T(R) is a topical
formulation for treatment of acne. CLEOCIN VAGINAL CREAM(R) is used to treat
bacterial vaginosis. LINCOCIN is used in the treatment of serious infections
caused by many strains of gram-positive bacteria. Pharmacia & Upjohn has
exclusive U.S. marketing rights to VANTIN Tablets and Oral Suspension, an
advanced cephalosporin antibiotic, under patents licensed from Sankyo Company,
Ltd., which rights will become semi-exclusive in 1997.
In 1993, the Company launched a new product, MYCOBUTIN(R), for the
prevention of Mycobacterium Avium Complex, a fatal bacterial infection that is a
common cause of death for HIV-positive individuals and people with AIDS.
MYCOBUTIN is marketed to specialists in infectious diseases and to internists.
The relevant patent rights in the U.S. have recently been extended until 1999.
Such patent rights expire in Europe in 2001.
Management believes that opportunities for growth in this area will come
from new products under development. See "-- Research and
Development -- Infectious Disease".
Metabolic Disease
This therapeutic area accounted for $635.9 million in net sales or 9.2
percent of consolidated net sales in 1995. The Company's main activities in this
area are related to growth hormones and anti-diabetes agents. Pharmacia &
Upjohn's primary product in the area of growth hormones and growth factors is
GENOTROPIN, a recombinant human growth hormone identical to the body's own
hormone, which was recently launched in the U.S. GENOTROPIN was developed by
Pharmacia after initial molecular biological development by Genentech, Inc.
("Genentech"). GENOTROPIN, which promotes longitudinal bone growth, is used for
the treatment of children of short stature whose condition is due to
insufficient growth hormone secretion or to Turner's syndrome, an inherited
chromosomal defect in females. GENOTROPIN has also been approved in some
countries to treat adults who have growth hormone deficiency and patients with
renal insufficiency. Management believes that the indications for adult growth
hormone deficiency may represent a significant market opportunity, although the
patient and medical community would need to be educated as to the benefits of
this product for these indications.
Pursuant to an agreement entered into between Pharmacia and Genentech prior
to the Combination, Genentech had exclusive marketing rights for its comparable
growth hormone product in the U.S. and Canada, while Pharmacia had exclusive
marketing rights for GENOTROPIN in the rest of the world. In November 1995, the
mutually exclusive marketing periods ended, however, to date, this has not
caused a material negative impact on Pharmacia & Upjohn's sales of GENOTROPIN.
Pharmacia & Upjohn's major oral antidiabetes agents are MICRONASE Tablets,
containing glyburide, and GLYNASE PresTab Tablets, also containing glyburide,
for the treatment of non-insulin-dependent diabetes. As a result of the expiry
of patent protection for its two main diabetes products, the Company is
experiencing increased levels of competition from generic substitutes in this
area.
This therapeutic area is one of the long-term research areas for Pharmacia
& Upjohn. See "-- Research and Development -- Metabolic Disease".
28
<PAGE> 29
Critical Care and Thrombosis
This therapeutic area accounted for $579.7 million in net sales or 8.3
percent of consolidated net sales in 1995. Pharmacia & Upjohn produces various
forms of chemical modifications of hormones under the trademark MEDROL, which is
used to treat a number of inflammatory and allergic conditions. SOLU-CORTEF(R)
Sterile Powder and SOLU-MEDROL Sterile Powder are injectable corticosteroid
products. In the antithrombosis area, Pharmacia & Upjohn focuses on products for
the prevention and treatment of thrombosis (blood clots) and acute myocardial
infarction. FRAGMIN is a low molecular weight heparin for the prevention of
thrombosis in connection with surgery, during hemodialysis (the removal of waste
substances by circulating blood through a dialyzer that functions as an
artificial kidney) and in the treatment of acute deep vein thrombosis. Pharmacia
& Upjohn recently launched FRAGMIN in the U.S. and is currently seeking to
increase the number of countries where FRAGMIN is approved for sale.
Central Nervous System
This therapeutic area accounted for $571.8 million in net sales or 8.2
percent of consolidated net sales in 1995. Pharmacia & Upjohn produces major
drugs for CNS disorders, including XANAX, HALCION and SERMION. XANAX Tablets,
containing alprazolam, are used for symptomatic relief of anxiety with and
without depressive symptoms and for the treatment of panic disorder. The U.S.
compound patent for XANAX expired in late 1993, resulting in intense generic
competition that caused a significant decline in sales of XANAX, which was
partially offset by Pharmacia & Upjohn's sales of generic alprazolam. The use
patent for the panic disorder indication for XANAX expires in 2002. HALCION
Tablets, containing triazolam, are a hypnotic agent for the treatment of
insomnia. The U.S. compound patent on HALCION also expired in late 1993,
resulting in generic competition that reduced sales of the product. SERMION,
launched in the 1960s, is used primarily to treat cognitive and behavioral
disorders related to senile dementia. SERMION has no patent protection and
competes with peripheral vasodilators and nootropics.
This therapeutic area is one of the long-term research areas for Pharmacia
& Upjohn. See "-- Research and Development -- Central Nervous System".
Oncology
This therapeutic area accounted for $566.2 million in net sales or 8.1
percent of consolidated net sales in 1995. Pharmacia & Upjohn is one of the
world's leading producers of anticancer drugs. Its most important products in
the oncology area are FARMORUBICIN and ADRIAMYCIN for use in chemotherapy. Each
of these products is used in the treatment of breast cancer as well as other
solid tumors. Both are among the world's most frequently prescribed anticancer
drugs. ADRIAMYCIN was Pharmacia & Upjohn's first anthracycline preparation. The
related patent expired in 1990. Subsequent research efforts to reduce the
toxicity and increase the efficacy of ADRIAMYCIN led to the development of
FARMORUBICIN, a second generation anthracycline antibiotic used primarily to
treat solid tumors (primarily breast and bladder cancer) and lymphomas. Although
a number of product patents relating to FARMORUBICIN expire in the mid-to-late
1990s, patents on the best-selling formulation of FARMORUBICIN do not expire
until after the year 2000.
Pharmacia & Upjohn also produces ZAVEDOS(R)/IDAMYCIN(R) (idarubicin), an
anthracycline used to treat acute leukemia that can be administered both
intravenously and orally, as well as ESTRACYT(R), which is used for the
treatment of advanced prostate cancer. Based on clinical tests to date, ZAVEDOS
is superior to standard therapy in extending the survival of certain patients
who suffer from acute myeloblastic leukemia. Although a number of product
patents relating to ZAVEDOS expire in the mid-to-late 1990s, patents on what
Pharmacia & Upjohn believes to be its most valuable commercial formulations of
ZAVEDOS do not expire until 2002. ESTRACYT has no patent protection and is
subject to competition from other products and therapies. Following approval in
May 1995, ZINECARD(R) was launched in the U.S. and Canada. ZINECARD is a new
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preparation for reducing cardiac side effects in women with metastatic breast
cancer who are undergoing treatment with ADRIAMYCIN.
Oncology is a major research area for Pharmacia & Upjohn. Management
believes that Pharmacia & Upjohn has several attractive products which will be
launched in the near future. See "-- Research and Development -- Oncology".
Women's Health
This therapeutic area accounted for $541.2 million in net sales or 7.8
percent of consolidated net sales in 1995. Pharmacia & Upjohn markets several
steroid hormones having a variety of uses, including the treatment of allergic
reactions, inflammation, asthma and certain hormone deficiencies. The most
important synthetic hormone is PROVERA Tablets, which is a female sex hormone
replacement agent. Pharmacia & Upjohn also markets DEPO-PROVERA Contraceptive
Injection, which lost marketing exclusivity in the U.S. in late 1995, and OGEN
Tablets and Vaginal Cream, an estrogen replacement product, licensed from Abbott
Laboratories. The Company intends to increase its marketing in this area
directed towards the patient or ultimate consumer, who is increasingly
participating in the choice of product.
Pharmacia & Upjohn also markets certain prostaglandin products, including
PROSTIN E2(R) Vaginal Suppository, which is generally used for pregnancy
disorders, and PROSTIN VR PEDIATRIC(R) Sterile Solution, for cardiovascular use.
PREPIDIL(R) Gel, used for cervical ripening, is protected by U.S. patents until
2003.
In the second half of 1993, Pharmacia & Upjohn introduced ESTRING, a
product designed to reduce estrogen deficiency in women through low dose
substitution. The product is currently marketed to gynecologists in Sweden,
Finland and Denmark, and in the United Kingdom. ESTRING, a local hormone
replacement therapy for post-menopausal women, is a soft intravaginal plastic
ring that secretes a low dose of natural estrogen over a period of three months.
The product competes with ointments which are intended for local daily
application. Pharmacia & Upjohn has submitted applications to have ESTRING
approved throughout Europe, Canada and Australia. It was recently approved for
marketing in the U.S. and Germany. An application is being prepared in Japan as
well.
In the area of bleeding control, Pharmacia & Upjohn has marketed
CYKLOKAPRON(R), primarily in Europe, for over 25 years for the treatment of
menorrhagia (excessive menstruation).
Nutrition
This therapeutic area accounted for $399.0 million in net sales or 5.7
percent of consolidated net sales in 1995. It comprises a number of products for
intravenous nutrition, including products that meet the body's nutritional needs
for fats, amino acids, vitamins and trace elements. Pharmacia & Upjohn's largest
selling nutritional product is the fat emulsion INTRALIPID, launched in 1962.
INTRALIPID has no patent protection and competes with a limited number of other
fat emulsions in all its major markets. Although sales of INTRALIPID in recent
years have not shown significant growth, the compound is increasingly being used
in mixed products and as a vehicle for delivery of third-party products.
Management believes that there are limited opportunities for growth in this area
except in developing countries such as China, where there are developing
healthcare systems and large patient populations.
Ophthalmology
This therapeutic area accounts for $296.0 million in net sales or 4.3
percent of consolidated net sales in 1995. HEALON, Pharmacia & Upjohn's
principal ophthalmics product, is a viscoelastic substance which includes sodium
hyaluronate and is used primarily in cataract surgery to facilitate the
implantation of plastic intraocular lenses ("IOLs") without injuring the
sensitive cells lining the cornea and functions as a soft surgical instrument.
Pharmacia & Upjohn markets HEALON directly
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to ophthalmologists in Europe, the U.S. and Japan and through independent
distributors in certain other countries. Pharmacia & Upjohn believes that HEALON
is the global market leader of viscoelastic products used in ophthalmic surgery.
The U.S. patent for HEALON expired in February 1996. This may adversely affect
sales of HEALON.
Pharmacia & Upjohn also produces IOLs made of polymethylmethacrylate, which
are surgically implanted in the eye to replace the natural lens when it becomes
cloudy and partly opaque because of cataracts. The customer groups for HEALON
and IOLs are the same. Competition in the IOL market is intense, causing
pressure on prices and a slight decline in Pharmacia & Upjohn's sales volume and
market share. In June 1996, the Company received clearance in the U.S. to market
XALATAN, a new drug for the treatment of open-angle glaucoma and ocular
hypertension in patients who are either intolerant of, or insufficiently
responsive to, other intraocular pressure-lowering medications.
Other Prescription Pharmaceutical Products
Inflammation. Pharmacia & Upjohn markets ANSAID Tablets, a nonsteroidal
anti-inflammatory product containing flurbiprofen, for treatment of
osteoarthritis and rheumatoid arthritis, and MOTRIN Tablets, a nonsteroidal
anti-inflammatory product containing ibuprofen, used in the treatment of
rheumatoid arthritis and osteoarthritis and as a general analgesic for mild to
moderate pain, including dysmenorrhea. Neither product is subject to significant
patent protection.
Within the autoimmunity field, Pharmacia & Upjohn focuses on treatments for
rheumatoid arthritis and inflammatory bowel diseases ("IBD"), including
ulcerative colitis and Crohn's disease. SALAZOPYRIN (sulfasalazin), introduced
in 1941, is widely used in the treatment of IBD. SALAZOPYRIN is marketed by
Pharmacia & Upjohn in Europe and the U.S. and through independent distributors
in Japan and over 30 other countries, primarily to gastroenterologists and
colo-rectal surgeons. SALAZOPYRIN has had no patent protection since the 1960s
and is subject to competition from other products and therapies, as well as to
some generic competition.
In 1985, Pharmacia & Upjohn introduced SALAZOPYRIN in the form of
SALAZOPYRIN EN-tabs for the treatment of rheumatoid arthritis. SALAZOPYRIN
EN-tabs are marketed by Pharmacia & Upjohn in Europe, primarily to
rheumatologists. Pharmacia & Upjohn has applied for approval to market
SALAZOPYRIN EN-tabs in Japan and the U.S.
The development by Pharmacia & Upjohn of DIPENTUM(R), another product for
the treatment of persons with IBD, with fewer observed side effects than
SALAZOPYRIN, was based on experience gained from SALAZOPYRIN. DIPENTUM was
launched in 1988. It is currently marketed by Pharmacia & Upjohn in the U.S.
(only for maintenance treatment of remission in patients intolerant to
sulfasalazin) and Europe and through independent distributors in five other
countries. Although DIPENTUM has patent protection in the countries in which it
is marketed, it competes with other products.
Inflammation is one of the long-term research areas for Pharmacia & Upjohn.
Urology. Pharmacia & Upjohn's products for urinary incontinence are
DRIDASE/DITROPAN(R) and CETIPRIN NOVUM(R), and it has an additional new compound
in the area of urinary incontinence, tolterodine, in Phase III clinical trials.
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CONSUMER HEALTHCARE PRODUCTS
Pharmacia & Upjohn develops, manufactures and markets nonprescription
healthcare products to drug stores, food stores and mass merchandisers in the
U.S. and Europe.
Pharmacia & Upjohn developed and manufactures NICORETTE and NICOTROL(R) for
smokers who seek a medical product to aid in smoking cessation. NICORETTE
chewing gum was recently approved for over-the-counter sales in the U.S. and
will be marketed by SmithKline Beecham Consumer Pharmaceuticals. NICORETTE
chewing gum has also been approved for sale in France. Pharmacia & Upjohn's
NICORETTE chewing gum and transdermal patch administer nicotine to the body
through slow-release formulations in order to alleviate withdrawal symptoms.
Pharmacia & Upjohn's U.S. patent covering nicotine polacrilex, the active
ingredient in NICORETTE chewing gum, expired in August 1992. Pharmacia & Upjohn
has filed an application requesting additional market exclusivity for NICORETTE
chewing gum until 1999. In other countries, Pharmacia & Upjohn has no patent
protection for NICORETTE chewing gum; however, the NICORETTE transdermal patch
is patented in selected jurisdictions.
In addition, Pharmacia & Upjohn produces and sells ROGAINE Topical
Solution, a 2% solution of minoxidil applied topically to treat hair loss in men
with male pattern baldness and in women with androgenetic alopecia or hereditary
hair loss. The product is also sold in numerous foreign countries. The U.S.
patents covering ROGAINE expired in February 1996. ROGAINE was recently approved
for over-the-counter sale in the U.S., together with several generic products
not produced by Pharmacia & Upjohn.
Pharmacia & Upjohn also manufactures and distributes other products which
do not require a prescription, including MOTRIN IB Tablets, Caplets and Gelcaps,
an analgesic; KAOPECTATE(R) products, for diarrhea; CORTAID(R) products,
anti-inflammatory topical products; the family of UNICAP(R) vitamin products;
DRAMAMINE(R), anti-motion sickness medicines; and MYCITRACIN(R), an antibiotic
ointment for treatment of minor skin infections and burns. Pharmacia & Upjohn
also holds a license from Hoechst-Roussel Pharmaceuticals Inc. for exclusive
U.S. rights to the nonprescription laxative products DOXIDAN(R) and SURFAK(R).
Pharmacia & Upjohn also has a U.S. marketing arrangement with McNeil Consumer
Products Company whereby Pharmacia & Upjohn has certain rights to several
ibuprofen-based products and other products being developed by McNeil.
RESEARCH AND DEVELOPMENT
Pharmacia & Upjohn aims to direct its R&D efforts to develop new innovative
pharmaceuticals and other healthcare products offering high therapeutic benefits
in a number of therapeutic areas in which Pharmacia & Upjohn believes it has the
ability to establish a leading global position. Pharmacia & Upjohn also seeks to
expand the markets for its existing products by identifying new indications and
administrative forms as well as by expanding their international market
penetration and extending product life, including by converting suitable
patented products to over-the-counter products. Pharmacia & Upjohn concentrates
its R&D resources on selected areas both where it has in-house expertise and
where there are identified substantial unmet medical needs. Pharmacia & Upjohn's
research activities are being focused on five medically important therapeutic
areas, including infectious disease, metabolic disease, CNS, oncology and
inflammation, and are conducted principally in Pharmacia & Upjohn's three
regional centers in Kalamazoo, Michigan, Stockholm/Uppsala, Sweden and Milan,
Italy.
The R&D process has historically taken from 10 to 15 years from discovery
to initial product launch and is conducted in various stages. During each stage
of development, there is a substantial risk that the desired objectives will not
be achievable and that the product will therefore have to be abandoned or the
objectives modified. During the "preclinical" stage, generally the first two to
four years, research scientists search for the active substance in the
laboratory and perform pharmacology and toxicology studies of effects in various
animals. Before testing in humans, an
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application for the compound must be filed and processed by the requisite
regulatory authorities, which may take up to one year or longer. Testing in
humans is performed in different clinical phases to assure the safety and
efficacy of the new compound. In clinical Phase I, studies to establish the
tolerance, absorption, distribution, metabolism and excretion of the compound
are performed on healthy human subjects. Clinical Phase II studies are performed
on a limited number of patients and clinical Phase III comparative studies are
performed on a larger number of patients in order to establish efficacy and
safety. Together, Phases I, II and III typically take from three to five years
to complete. Thereafter, an application containing all data for the proposed
drug is sent to regulatory authorities for approval, which may take an
additional one to two years or longer. Further clinical trials, called Phase IV
trials, are generally carried out after product launch to continue to monitor
the efficacy and safety of a new drug.
As a result of the Combination, Pharmacia & Upjohn has R&D resources which
enable it competitively to develop commercially attractive new products. The
complementary research expertise of Pharmacia in molecular biology and Upjohn in
advanced chemistry is expected to strengthen research capabilities and
contribute to a reduction in overall development time for new products. As part
of Pharmacia & Upjohn's increased focus on high priority projects, a thorough
review of R&D projects was undertaken. As a result, approximately 20 percent of
the number of projects then under development was targeted to be discontinued or
licensed out, enabling additional resources to be devoted to higher priority
projects. Despite the dedication of resources to effecting the Combination,
Pharmacia & Upjohn's product development efforts have met or exceeded the
original timetable.
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The table below sets forth in summary form the Company's current principal
projects in Phase II clinical trials or later development. No assurance can be
given as to whether an NDA will be filed with respect to any project, as to the
timing of any such filing or as to whether any such application will be
approved.
<TABLE>
<CAPTION>
ESTIMATED FILING OF
DRUG APPLICATION
THERAPEUTIC AREA/PRODUCT DEVELOPMENT ------------------------------
NAME INDICATION(S) PHASE EU U.S. JAPAN
- -------------------------- ---------------------------------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
INFECTIOUS DISEASE
RESCRIPTOR(R) HIV/AIDS Filed 1997 Filed na
Oxazolidinones Gram-positive infections II 1998 1998 1998
CRITICAL CARE/THROMBOSIS
ATGAM TF(R) Aplastic anemia Filed tbd Filed Filed
CORVERT(R) Irregular heartbeat Marketed Filed Approved tbd
FREEDOX Subarachnoid hemorrhage Marketed Approved 1997 tbd
Spinal cord injury II tbd tbd tbd
Ischemic stroke II tbd tbd tbd
CNS
CABASER Parkinson's disease Marketed Approved tbd 1996
SERMION AD(R) Alzheimer's disease III 1996 tbd tbd
LINOMIDE, Multiple Sclerosis III 1999 1999 tbd
pramipexole Parkinson's disease Filed 1996 Filed na
Schizophrenia and depression II tbd tbd na
reboxetine Depression III 1996 tbd tbd
PNU101387G Schizophrenia II tbd tbd tbd
ONCOLOGY
CAMPTOSAR Colorectal cancer (refractory) Filed na Approved na
Lung cancer II/III na tbd na
Cervical cancer II/III na tbd na
exemestane Breast cancer in advanced stages III 1996/97 1997 tbd
REMISAR Bladder cancer Filed 1996 Filed Filed
SnET2 Skin cancer (basal cell carcinoma) III 1997 1997 tbd
Kaposi's sarcoma III 1997 1997 tbd
Cutaneous metastatic breast cancer III 1997 1997 tbd
triptorelin Advanced prostate cancer III -- 1996 --
adozelesin Solid tumors and leukemia II tbd tbd 1998
9-aminocamptothecin Solid tumors (NSCLC, PCa, Crca) II tbd tbd tbd
Lymphoma II tbd tbd tbd
TOMOSAR(R) Lymphoma II na na 1996
Breast cancers II na na tbd
WOMEN'S HEALTH
DOSTINEX Hyperprolactinemia Marketed Approved Filed 1998
CYCLOPROVERA(R) Injectable contraception II tbd tbd na
NUTRITION
GLAMIN Parenteral nutrition Filed Filed na na
STRUCTOLIPID Parenteral nutrition Filed Filed na na
OPHTHALMOLOGY
XALATAN Glaucoma Approved Approved Approved Filed
XALATAN COMB.(R) Glaucoma II 1998/99 1998/99 tbd
INFLAMMATION
FA31A Rheumatoid arthritis II tbd tbd tbd
ROGAINE 5% Hair loss Filed na Filed na
UROLOGY
DETRUSITOL(R) Urge incontinence III 1996 1997 tbd
</TABLE>
na = not applicable tbd = to be determined
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Infectious Disease
RESCRIPTOR (delavirdine mesylate), a non-nucleoside reverse transcriptase
inhibitor for the treatment of AIDS and HIV seropositive/asymptomatic patients,
was filed with the U.S. FDA on July 17, 1996. Pharmacia & Upjohn is also
pursuing new indications for the antimycobacterial agent MYCOBUTIN, the first
drug approved for the prevention of certain opportunistic infections in AIDS
patients.
Oxazolidinones are a potentially important new class of antibiotics that
have a novel mechanism of action: inhibition of mRNA translation. One agent is
in Phase I testing and one is in Phase II testing for evaluation of efficacy,
safety and human pharmacokinetics. In vitro studies show them to be effective
against gram-positive bacteria including antibiotic-resistant strains of
staphylococci, streptococci and enterococci. Management believes that
oxazolidinones have the potential to meet a significant unmet clinical need due
to the increasing incidence of resistant bacterial infections. Adequate plasma
levels have been obtained in normal healthy volunteers with both agents. A
patent application is pending in the U.S.
Metabolic Disease
The Company's primary research area in the field of metabolic disease
concerns growth disorders. In addition, research projects are currently in
process in the field of obesity, diabetes, arteriosclerosis and vascular
disease.
Research and development in the area of growth and growth factors is
concentrated on a broader spectrum of indications for GENOTROPIN including use
in adults as hormone replacement therapy (for which approval has already been
received in the major European countries, New Zealand and China), and for
uremia. In addition, Pharmacia & Upjohn is researching the further development
of convenience products to administer GENOTROPIN as well as studying other
indications.
Critical Care and Thrombosis
FREEDOX (tirilazad mesylate) is an antioxidant that limits ischemia in
animal models. Applications for severe subarachnoid hemorrhage ("SAH")
indications have been filed in 33 countries with 14 approvals received for the
indication in males. Several other European countries are actively reviewing the
file and meetings are scheduled to answer any outstanding questions. The Phase
II/III SAH studies demonstrated a gender difference in efficacy at the highest
dose tested. It has been shown that pre-menopausal women and patients on
anticonvulsants, particularly phenytoin, have a faster rate of metabolism and
thus are likely to need more drug to demonstrate efficacy. Accordingly, two
Phase III trials are ongoing (one in Europe and one in the U.S.) to evaluate
efficacy of a higher dose in women. A U.S. safety study using higher doses in
males is also being conducted.
Results of the U.S. and European head injury studies did not justify
continued pursuit of head injury as a possible indication for FREEDOX in the
U.S. or Europe.
Multi-year clinical studies for the stroke indication are continuing
utilizing higher doses of FREEDOX. A study for spinal cord injury sponsored by
the National Institute of Health has completed enrollment.
FRAGMIN, a low molecular weight heparin used mainly for prevention and
treatment of deep venous thrombosis, has recently been approved in the U.S. for
prevention of deep venous thrombosis in patients undergoing abdominal surgery.
An application for an extension of this indication has been submitted to the FDA
and applications for further indications are in preparation.
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Central Nervous System
In the CNS area, Pharmacia & Upjohn has three potential products in late
stage clinical development: CABASER (cabergoline), pramipexole and reboxetine.
CABASER (cabergoline) has preferential D(2) receptor agonist activity with
extremely long-lasting dopamine agonist effect. Cabergoline was recently
launched in certain European countries under the trade name DOSTINEX for the
treatment of hyperprolactinemia. The compound is also in late development
worldwide as a potential treatment for Parkinson's disease, a relatively
frequent and progressively disabling illness of the advanced age, where CABASER
may be particularly useful for its longer duration of action and more convenient
administration compared with other similar drugs. A registration dossier has
been filed in major European countries and Pharmacia & Upjohn has received
approval in the UK, Denmark and Switzerland for use in treatment of Parkinson's
disease. Phase III studies are in progress in Japan (for filing projected in
1996). Continued studies with CABASER aim at documenting the product as a first
line treatment for Parkinson's disease, especially for patients with early onset
of disease.
Pramipexole has preferential D(3) receptor agonist activity and is under
development for Parkinson's disease, depression and schizophrenia. The compound
was licensed from, and is being co-developed with, Boehringer-Ingelheim, with
plans for worldwide co-marketing. Pharmacia & Upjohn filed an NDA in the U.S. in
late 1995. The NDA includes three North American studies, which produced good
results at well-tolerated doses for both early and late stage Parkinson's
disease. The European filing will be dependent on finalization of a European
early disease study (enrollment completed) as well as a bromocriptine comparator
trial. Plans are for a centralized EU application by late 1996 for Parkinson's
disease. The pramipexole compound patent expires in 2005 in Europe and Japan,
and in 2006 in the U.S. The competition for Parkinson's disease drugs includes
L-dopa, cabergoline, bromocriptine, pergolide, lisuride and ropinirole. Phase II
studies for depression and schizophrenia are expected to be completed in 1996.
If activity is demonstrated, Phase III programs would then be initiated.
Reboxetine is an antidepressant agent which has a different side effect
profile compared with other drugs due to a different mechanism of action.
Clinical phase III studies have been completed in Europe and a European filing
is planned in 1996.
LINOMIDE is an oral immunomodulator which is currently being tested in
multiple sclerosis studies, following positive animal studies indicating
potential efficacy in autoimmune disorders. Phase II clinical studies have also
been encouraging and are now being expanded in a Phase III program.
Pharmacia & Upjohn is working to develop a chemical entity that would be
intended to have an improved efficacy/side-effect ratio in the treatment of
migraine.
In addition, Pharmacia & Upjohn has several other projects under
development. These include XANAX XR(R), a new formulation of the drug XANAX
which is indicated for the treatment of anxiety. XANAX XR is a sustained release
formulation expected to offer convenience/compliance benefits as well as obtain
separate patent protection.
Oncology
This area represents a major research commitment for Pharmacia & Upjohn
with discovery and development efforts directed and focused on finding effective
treatments for various forms of tumors, particularly those which respond poorly,
or are resistant, to currently available therapy.
This research is conducted primarily in Nerviano/Milan, Italy, Kalamazoo,
Michigan and in new laboratories in Lund, Sweden, designed and equipped
specifically for discovery research in tumor biology and immunotherapy. The
research programs cover chemotherapy, hormone therapy,
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immunotherapy of cancer as well as novel approaches and mechanisms of antitumor
action which are being pursued mainly in discovery phase.
CAMPTOSAR-CPT-11(R) (irinotecan hydrochloride), an injectable DNA
topoisomerase-I inhibitor pro-drug licensed from Yakult Honsha for the U.S. and
certain other territories, is in clinical development in the U.S. for refractory
colorectal cancer. Clinical data shows a positive dose-dependent response rate.
An NDA for refractory colorectal cancer was filed in the U.S. under an
accelerated approval process and approved in June 1996.
In the U.S. and Latin America, Phase II cervical and small cell lung cancer
studies have also been conducted. The Phase II non-small cell lung study is
closed, and Phase III planning has begun for colorectal and non-small cell lung
trials. Also, Phase I studies for oral CPT-11 are underway to determine the
maximal tolerated dose.
REMISAR (bropirimine) is an oral oncolytic and immunomodulator targeted for
treatment of bladder cancer in situ. An application has been filed in the U.S.
and Japan; European filings will be made in late 1996. The U.S. patent was
issued in 1995.
Exemestane is a hormonal anticancer agent that is being tested as a
potential treatment for advanced breast cancer. Phase III studies are being
activated in Europe and the U.S., and Phase II clinical trials are in progress
in Japan.
SnET2 (tin ethyletioporpuria) is a novel agent for photodynamic anticancer
therapy, licensed from the U.S. company PDT Inc. Phase III clinical trials have
begun for three dermatological tumors: basal cell carcinoma, cutaneous lesions
from metastatic breast cancer and Kaposi's sarcoma. Pharmacia & Upjohn is
targeting late 1997 or early 1998 for filing. The photoreactive drug is
activated by nonthermal light from a medical laser, which leads to the
production of free oxygen radicals and the destruction of cancer cells. For most
applications, only local anesthesia is required, indicating the potential for
outpatient use.
Adozelesin is a novel potent cancer agent targeted for treatment of
leukemia and solid tumors. Phase II studies are underway in Japan in
collaboration with Yakult Honsha. Early clinical results indicate activity in
acute myeloid leukemia, with severe, prolonged myelosuppression. The U.S. patent
was issued in 1990.
Ophthalmology
XALATAN (latanoprost), Pharmacia & Upjohn's compound for the treatment of
open-angle glaucoma, has been approved in the U.S. and Sweden and is awaiting
registration in the remaining European countries and Japan. Glaucoma is the
largest indication in ophthalmology. Pharmacia & Upjohn believes that XALATAN
represents a major advance in the treatment of glaucoma. XALATAN reduces
intraocular pressure by means of a new mechanism of action. The development
program for XALATAN will be further expanded with combination therapy and new
formulations.
Urology
A new chemical entity, DETRUSITOL (tolterodine), is in late Phase III
clinical testing for urinary urge and mixed incontinence. The compound has great
selectivity for the receptors in the urinary bladder, indicating a favorable
side effect profile, and is the first described antimuscarinic agent with
bladder selective effect. DETRUSITOL would treat a common disorder that is
currently inadequately treated. The Company has received a notice of arbitration
from Forest Laboratories ("Forest") under which Forest has alleged that pursuant
to an agreement with the Company, Forest is entitled to exclusive U.S. marketing
rights to DETRUSITOL. The Company intends vigorously to defend this action,
although it is not yet able to predict the outcome of this proceeding.
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Consumer Healthcare Products
Pharmacia & Upjohn is currently working on extending the range of products
for smoking cessation (NICORETTE) and a treatment for hair loss
(ROGAINE/REGAINE) to the over-the-counter market. NICOTROL Patch was recommended
for over-the-counter approval in the U.S. on April 19, 1996. Management believes
that these products will benefit from being available on a non-prescription
basis.
ANIMAL HEALTH
Pharmacia & Upjohn researches, develops, manufactures and markets a broad
range of pharmaceutical and vaccine products for both food and companion animals
to meet the market needs of veterinarians, feed manufacturers and livestock
producers. Pharmacia & Upjohn ranks approximately tenth in the world in terms of
market share of total animal health product sales. Approximately 55 percent of
the total animal health product sales are in the U.S.
Pharmacia & Upjohn develops, manufactures and sells animal pharmaceutical
products and animal feed additives, the sales of which fluctuate with changes in
the agricultural economy. These products are sold worldwide to veterinarians,
feed manufacturers, distributors and growers who choose Pharmacia & Upjohn's
products primarily because of their efficacy and suitability for particular
uses, as well as price and quality. Major products include NAXCEL(R) Sterile
Powder, an antibiotic for bovine and swine respiratory disease and early chick
mortality; LINCO-SPECTIN(R) Soluble Powder and Premix, a combination
lincomycin/spectinomycin antibiotic; LINCOMIX(R) 20 and LINCOMIX 50 Feed
Medication, which are feed-additive antibiotics; MGA(R) Premix, which is a
growth-promoting feed additive for feedlot heifers; various products for the
treatment of mastitis, including PIRSUE(R); DELTA ALBAPLEX(R) Tablets and
LINCOCIN(R), which are small-animal antibiotics; and LUTALYSE(R) Sterile
Solution, which is used to synchronize breeding performance in mares and cattle.
In addition, Pharmacia & Upjohn sells a line of animal health vaccines through
Oxford Veterinary Laboratories, Inc. (Bio-Vac Labs, Inc.).
CHEMICAL AND CONTRACT MANUFACTURING
Pharmacia & Upjohn researches, develops, manufactures and markets bulk
pharmaceutical chemicals and selected high-technology specialty
(nonpharmaceutical) chemicals. In addition, Pharmacia & Upjohn manufactures
finished dosage forms for sale to third parties.
BIOTECHNOLOGY
Pharmacia & Upjohn is one of the world's leading suppliers of biotechnology
equipment. It develops, manufactures and sells systems, reagents and chemicals
for pharmaceutical and biotechnology companies and for life science research in
the public and private sectors. The business area's traditional products are for
use in laboratory-scale chromatography and electrophoresis, two key separation
technologies for biomolecules. Pharmacia & Upjohn also produces reagents,
chemicals and systems used by researchers to perform experiments in the areas of
molecular and cell biology, and media and systems devoted to large-scale
purification of substances prepared by biotechnological methods in the
pharmaceutical industry. Pharmacia & Upjohn's business objective is to satisfy
the needs of biotech supply customers by providing them with value-added,
knowledge-based products and services for the development and commercialization
of applications in the biotechnology field.
In recent years, the market for biotechnology research instruments and
other products has been adversely affected by budgeting constraints in
universities and publicly funded research centers, resulting in increasing
competition and downward price pressure.
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DIAGNOSTICS
Pharmacia & Upjohn is the world leader in the area of in vitro allergy
diagnostics. Pharmacia & Upjohn's main allergy diagnostic product, the Pharmacia
CAP System(R), was introduced by Pharmacia in 1989. It is a highly automated
laboratory system that enables testing from patient blood samples for allergenic
sensitivity to nearly 500 substances. Pharmacia & Upjohn believes that no
competitor in the allergy diagnostic business markets a product that can test
allergenic sensitivity to as many different substances. Pharmacia & Upjohn
markets the Pharmacia CAP System to diagnostic laboratories worldwide. Patents
on the Pharmacia CAP System expire in 2003.
Pharmacia & Upjohn's largest market for allergy diagnostics is Japan, while
sales in the U.S. are relatively low because of the relatively high incidence of
more traditional in vivo (skin prick) diagnostic testing by medical
professionals in the U.S.
DISEASE MANAGEMENT
Pharmacia & Upjohn participates in the disease management business in the
U.S. through its Greenstone Healthcare Solutions subsidiary, providing services
in prevention, screening, diagnosis, treatment, case management, education and
outcome assessment. As a new business, Greenstone Healthcare Solutions makes a
very small contribution to Pharmacia & Upjohn's profits.
PRODUCTION
Pharmacia & Upjohn produces its products mainly in the U.S., Sweden, Italy,
Belgium, Ireland and Puerto Rico.
Pharmacia & Upjohn purchases a variety of raw materials for use in its
manufacturing processes. When available, Pharmacia & Upjohn has a policy of
maintaining multiple sources of supply for materials. Pharmacia & Upjohn obtains
its supplies of raw materials from a number of countries. Pharmacia & Upjohn has
not experienced any difficulty in obtaining a sufficient supply of raw materials
in recent years and believes that it will be able to obtain them in sufficient
quantities in the future. However, the price of its raw materials may vary from
year to year.
MARKETING AND DISTRIBUTION
Pharmacia & Upjohn's products are sold worldwide. Pharmacia & Upjohn
markets its products through its own marketing companies or through local
distributors and licensees. As part of its ongoing commitment to its customers,
Pharmacia & Upjohn periodically organizes educational programs to provide
specialist doctors with information on the most recent product innovations and
scientific advances.
Pharmacia & Upjohn's marketing companies are organized by geographical
markets to meet the requirements of the markets in which they operate.
Pharmacia & Upjohn has a joint marketing agreement with Solvay S.A. to
market in the U.S. and certain European countries Solvay's LUVOX (fluvoxamine),
a product for treatment of obsessive-compulsive disorder and depression (the
product is approved for depression in Europe and Canada but not yet in the
U.S.). Under the same agreement, Solvay S.A. jointly markets HALCION and XANAX
in the U.S. and certain European countries.
COMPETITION
The pharmaceutical industry is highly competitive. Pharmacia & Upjohn's
principal competitors consist of major international corporations with
substantial resources. A drug may be subject to competition from alternative
therapies during the period of patent protection and thereafter it will also be
open to competition from generic products. The manufacturers of generic products
typically do not bear the related research and development costs and
consequently are able
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<PAGE> 40
to offer generic products at considerably lower prices than the branded
equivalents. A research-based pharmaceutical company will therefore normally
seek to achieve a sufficiently high profit margin and sales volume during the
period of patent protection to justify the original investment and to fund
research for the future. There are, however, a number of factors which may
enable products to remain profitable once patent protection has ceased. These
include the establishment of a strong brand image with the prescriber or the
consumer, supported by an active trademark registration and enforcement policy,
and the development of a broader range of alternative formulations than the
generic manufacturer typically supplies.
As is the case for the pharmaceutical industry in general, the introduction
of new products and processes by competitors may affect pricing levels or result
in product replacement for existing products, and there can be no assurances
that any of Pharmacia & Upjohn's products may not become outmoded,
notwithstanding patent or trademark protection. In addition, increasing
governmental and other pressures towards the dispensing of generic products in
substitution for brand-name drugs may increase competition for products no
longer covered by patents.
Over the last few years, the pharmaceutical industry has experienced
increased vertical and horizontal consolidation, and the breadth of products
offered and distribution capabilities of a company may become a competitive
feature. Pharmacia & Upjohn competes with other pharmaceutical companies in
discovering or licensing new chemical entities useful in treating medical
conditions. In addition, significant changes in marketing conditions are
occurring in the U.S., Swedish and foreign pharmaceutical markets, including
decreased pricing flexibility, restrictions on promotional and marketing
practices and the impact of managed care, particularly with respect to product
selections and pricing concessions.
Pharmacia & Upjohn's competitive position depends in part upon its ability
to develop innovative, cost-effective new products, as well as new indications
for, and improvements in, existing products. Its competitive position also
depends upon, among other things, its ability to compete on the basis of price
as well as to maintain a reputation for quality, efficacy and cost-effectiveness
with the specialist doctors and hospital purchasing groups to which its products
are targeted, as well as with the wider group of customers which includes
pharmacies, wholesalers, hospitals and insurers.
In addition, Pharmacia & Upjohn's ability to maintain longstanding and
interactive relationships with specialist doctors and its ability to attract and
retain qualified scientific and other personnel, develop and implement
production and marketing plans, obtain and maintain patent protection for
selected products in its significant markets and secure adequate capital
resources are also important competitive factors.
PRICING
In addition to the normal competitive forces that affect the level of
prices, a further constraint exists in the form of price controls in most
countries in which Pharmacia & Upjohn sells its products. These controls arise
either by law or because the government or other healthcare providers in a
particular jurisdiction are the principal purchasers of the product or reimburse
purchasers for the cost of the product. Price control mechanisms operate
differently from jurisdiction to jurisdiction and can result in large price
differentials between markets, which may be aggravated by currency fluctuations.
These price differentials are exploited by traders (parallel importers) who
purchase branded products in lower-priced markets for resale in higher-priced
markets.
PRODUCT REGULATION
Like other pharmaceutical companies, Pharmacia & Upjohn is subject to
strict controls on the manufacture, labeling, distribution and marketing of its
products. Further controls exist on the non-clinical and clinical development of
pharmaceutical products. Of particular importance is the
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<PAGE> 41
requirement to obtain and maintain regulatory approval for a pharmaceutical
product from a country's national regulatory authority before such product may
be marketed in a particular country.
The submission of an application to a regulatory authority does not
guarantee that a license to market the product will be granted. Furthermore,
each regulatory authority may impose its own requirements and may refuse to
grant, or may require additional data before granting, an approval, even though
the relevant product has been approved in another country. Regulatory
authorities also have administrative powers that include product recalls,
seizure of products and other sanctions.
The U.S., Europe, Japan, Australia and Canada have very high standards for
technical appraisal and consequently, in most cases, a lengthy approval process.
The time taken to obtain approval varies by country, but generally takes from
six months to four years from the date of application, depending upon the
quality of the data produced, the degree of control exercised by the regulatory
authority, the efficiency of its review procedure and the nature of the product.
The trend in recent years has been towards lengthening regulatory reviews,
greater regulation and higher standards with higher levels of standardization
among jurisdictions.
In Europe, the European Agency for the Evaluation of Medicinal Products
(the "Medicinal Products Agency") was created in July 1993 and opened on January
1, 1995. Based in London, the Medicinal Products Agency will give opinions on
medicinal products by using two new procedures, a centralized community
procedure and a decentralized procedure, the latter being based on the principle
of mutual recognition of assessments.
In the U.S., most human and animal pharmaceutical products manufactured or
sold by Pharmacia & Upjohn are subject to regulation by the FDA as well as by
other federal and state agencies. The FDA regulates the introduction of new
drugs, advertising of prescription drug products, manufacturing, laboratory and
clinical practices, labeling, packaging and record-keeping with respect to drug
products. The FDA also reviews the safety and effectiveness of marketed drugs
and may require withdrawal of products from the market and modification of
labeling claims where necessary. In addition, the manufacturing, marketing and
use of Animal Health products are closely regulated in all major markets
including the U.S. Department of Agriculture, which regulates animal health
products within the U.S.
Government approval of new drugs under the federal Food, Drug and Cosmetic
Act requires substantial evidence of safety and efficacy. As a result of this
requirement, as interpreted by the FDA, the length of time and the laboratory
and clinical information required for approval of an NDA is considerable.
The FDA has adopted streamlined procedures for the approval of duplicate
drugs (drugs containing the same active ingredient as the originator's product),
including abbreviated NDAs. Approval of abbreviated NDAs may not be made
effective prior to expiration of valid patents. The FDA has established a
similar expedited approval process for antibiotics. The availability of the
abbreviated NDA and expedited antibiotic approval processes has reduced the time
period and expense required to obtain FDA approval of some competing products
and has facilitated generic competition.
At the state level, so-called "generic substitution" legislation permits
the dispensing pharmacist to substitute a different manufacturer's version of a
drug for the one prescribed. In a number of states, such substitution is
mandatory unless precluded by the prescribing physician.
U.S. pharmaceutical manufacturers are required to provide rebates to state
governments for prescriptions covered by Medicaid. The issue of further price
controls on sales of prescription drugs continues to be considered in Congress
and various states, and additional federal or state legislation to limit prices
of prescription drugs is possible.
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<PAGE> 42
It is difficult to predict the ultimate effect of streamlined approval of
duplicate or generic drugs, "generic substitution," the Medicaid reimbursement
and rebate programs and possible price limitations. However, Pharmacia & Upjohn
believes that its development of patented and exclusively licensed products may
moderate the impact of programs and legislation focusing mainly on products
available from multiple suppliers.
ENVIRONMENTAL MATTERS
The Company is subject to environmental legislation and regulation.
Environmental compliance costs, including capital expenditures related to future
production, have been increasing each year. Spending at the Kalamazoo, Michigan
production site is expected in the near future related to groundwater
remediation and improved control of surface water discharges. Other projects
related to the prevention, mitigation and elimination of environmental effects
are being planned and implemented worldwide.
Since several capital projects are undertaken for both environmental
control and other business purposes, such as production process improvements, it
is difficult to estimate the specific capital expenditures for environmental
control. However, including all such multi-purpose capital projects as
environmental expenditures, it is estimated that capital expenditures for
environmental protection will exceed $40 million in both 1996 and 1997.
Operating expenses for compliance with environmental protection laws and
regulations in 1995 are estimated to have been in excess of $60 million. It is
estimated that such operating expenses for 1996 will again be in excess of $60
million. Cash payments charged to environmental reserves in 1995 were
approximately $10 million and are estimated to be approximately $10 million for
1996.
LEGAL PROCEEDINGS
Various suits and claims arising in the ordinary course of business,
primarily for personal injury and property damage alleged to have been caused by
the use of Pharmacia & Upjohn's products, are pending against Pharmacia & Upjohn
and its subsidiaries. Product liability is a significant commercial risk for
Pharmacia & Upjohn. Substantial damage awards have been made in certain
jurisdictions against pharmaceutical companies based upon claims for injuries
allegedly caused by the use of their products.
Pharmacia & Upjohn is involved in several administrative and judicial
proceedings relating to environmental concerns, including actions brought by the
U.S. Environmental Protection Agency and state environmental agencies for
remedial cleanup at approximately 40 "Superfund" sites and including site
clean-up at Pharmacia & Upjohn's discontinued industrial chemical operations.
Pharmacia & Upjohn's estimate of the ultimate cost to be incurred in connection
with these environmental situations could change due to uncertainties at many
sites with respect to potential cleanup remedies, the estimated cost of cleanup
and Pharmacia & Upjohn's ultimate share of a site's cost.
Based on information currently available and Pharmacia & Upjohn's
experience with lawsuits of the nature of those currently filed or anticipated
to be filed which have resulted from business activities to date, the amounts
accrued for product and environmental liabilities are considered to be adequate.
Although the Company cannot predict and cannot make assurances with respect to
the outcome of individual lawsuits, the ultimate liability should not have a
material effect on its consolidated financial position; and unless there is a
significant deviation from the historical pattern of resolution of such issues,
the ultimate liability should not have a material adverse effect on Pharmacia &
Upjohn's results of operations or liquidity.
In May 1994, the FDA established a Task Force to review the FDA's prior
inspection report on HALCION, including an assessment of the conclusions of the
report, the approval of the drug, related FDA processes and procedures and the
violation of any laws. The U.S. Attorney's Office in Grand Rapids, Michigan,
assisted in this review. Several Upjohn employees have given testimony
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<PAGE> 43
before a grand jury sitting in the U.S. District Court for the Western District
of Michigan, and a number of current and former employees have been interviewed
by FDA and Justice Department investigators. The Task Force recently issued its
report, which found no evidence of criminal wrongdoing, but suggested that the
Justice Department is the appropriate entity to determine and evaluate the facts
and to determine whether criminal offenses had occurred and should be pursued.
The Task Force also concluded that the evidence supports the safety and efficacy
of HALCION tablets when used in accordance with its approved labelling. However,
the Task Force recommended that a wide spectrum of experts review the safety and
efficacy data on HALCION tablets, and report their findings to the FDA's
Psychopharmalogical Drugs Advisory Committee. The Task Force also recommended
several improvements in FDA practices and procedures. The Company cannot predict
the outcome of any continuing investigation by the Justice Department or the
FDA. A subcommittee of the House of Representatives has instituted a review of
some of the conclusions of the original inspection report and is reviewing the
Task Force report. The Company has furnished the subcommittee a large number of
documents in responding to the subcommittee's request. The Company cannot
predict the nature, scope or timing of any further review by the subcommittee.
Upjohn is a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits, some
of which have been or are in the process of being consolidated and transferred
to the Federal District Court for the Northern District of Illinois for purposes
of discovery. These suits, brought by independent pharmacies and chains,
generally allege unlawful conspiracy, price discrimination and price fixing and,
in some cases, unfair competition, and specifically allege that Upjohn and the
other named defendants violated: (1) the Robinson-Patman Act by giving
substantial discounts to hospitals, nursing homes, mail-order pharmacies and
health maintenance organizations ("HMOs") without offering the same discounts to
retail drugstores, and (2) Section I of the Sherman Antitrust Act by entering
into illegal vertical combination with other manufacturers and wholesalers to
restrict certain discounts and rebates so they benefitted only favored
customers. The Federal District Court for the Northern District of Illinois has
certified a class consisting of retail pharmacies, and the same court has
pending before it a suit with approximately 2,500 named retail pharmacies as
plaintiffs. The suits seek treble damages and an injunction prohibiting the
alleged illegal practices. A majority of the pharmaceutical company defendants
(not including Upjohn) have reached settlement agreements with the plaintiffs in
the class action pending in the Northern District of Illinois for amounts
ranging from $10 million to $60 million. See Note 13 to the Audited Consolidated
Financial Statements included in this Prospectus. These settlements were
recently approved by the court. Upjohn, together with the remaining settling and
non-settling defendants, are appealing to the United States Court of Appeals for
the Seventh Circuit from certain of the trial judge's orders. Actions raising
claims similar to the federal lawsuits have been brought on behalf of retail
drugstores and/or consumers in a number of state courts, including Alabama,
Arizona, California, Colorado, District of Columbia, Maine, Michigan, Minnesota,
New York, Washington and Wisconsin state courts. The California State court has
certified a class of consumers seeking damages resulting from the same alleged
conspiracy by the defendant pharmaceutical companies. The U.S. Federal Trade
Commission has instituted an inquiry into whether pharmaceutical companies,
including Upjohn, may have violated federal antitrust laws in connection with
establishing prices and rebates.
Lawsuits have been filed against Pharmacia in the U.S., Japan and Sweden
alleging that the manufacturing of GENOTROPIN infringes third-party patent
rights. At this preliminary stage of the proceedings, the outcome of the actions
cannot be determined.
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SELLING STOCKHOLDER
Volvo is a limited liability company organized under the laws of the
Kingdom of Sweden. It was established in 1915 and is among the largest
industrial groups, measured by sales, in the Nordic area (Sweden, Norway,
Denmark, Finland and Iceland). The Selling Stockholder's operations are
concentrated in the automotive and transport equipment industries.
Prior to the Global Offering, the Selling Stockholder owned 69,765,766
shares, or approximately 13.7 percent, of the Common Stock then outstanding. The
Selling Stockholder will sell 46,000,000 shares in connection with the Offering
and has also granted the Underwriters over-allotment options for an additional
6,900,000 shares. Following the Global Offering, the Selling Stockholder will
own 23,765,766 shares, or approximately 4.7 percent, of the shares of Common
Stock then outstanding, assuming no exercise of the over-allotment options, and
16,865,766 shares, or approximately 3.3 percent, of the shares then outstanding,
assuming full exercise of the over-allotment options. The Selling Stockholder
currently holds its shares through an indirect wholly owned subsidiary. Soren
Gyll, President and Chief Executive Officer of the Selling Stockholder, is a
member of the Board of Directors of the Company.
In connection with the Combination, the Selling Stockholder, the Company,
Upjohn and Pharmacia entered into a Registration Rights Agreement, dated as of
August 20, 1995 (the "Registration Rights Agreement"), pursuant to which the
Selling Stockholder has the right, among other things, to require the Company to
register for resale under the U.S. Securities Act of 1933, as amended (the
"Securities Act"), all or any part of the shares of Common Stock acquired by the
Selling Stockholder as a result of the Combination. The Registration Rights
Agreement provides that the Company will pay certain costs and expenses incurred
in connection with any such registration, including, without limitation, all
registration and filing fees, exchange listing fees, printing expenses and fees
and disbursements of counsel and accountants for the Company. The Selling
Stockholder has agreed to pay certain expenses in connection with the Global
Offering. See "Underwriting".
Pursuant to the Registration Rights Agreement, the Company filed the
Registration Statement of which this Prospectus forms a part and has undertaken
certain obligations in connection with such Registration Statement, including
the obligation to use its reasonable best efforts to keep such Registration
Statement effective for at least 180 days and to indemnify the Selling
Stockholder and the Underwriters against certain liabilities, including
liabilities under the Securities Act. In connection with the offering of shares
by this Prospectus, the Selling Stockholder has agreed to indemnify the Company
for certain liabilities, including liabilities under the Securities Act.
The Global Offering furthers Volvo's objective to concentrate resources on
automotive and transport equipment operations.
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UNDERWRITING
The Global Offering consists of a U.S. Offering of 34,500,000 shares of
Common Stock that is being underwritten severally, but not jointly, by a
syndicate of underwriters (the "U.S. Underwriters"), an International Offering
of 9,200,000 shares of Common Stock that is being underwritten severally, but
not jointly, by a syndicate of underwriters (the "International Underwriters"),
and a Nordic Offering of 2,300,000 shares of Common Stock that is being
underwritten severally, but not jointly, by a syndicate of underwriters (the
"Nordic Underwriters", and, together with the U.S. Underwriters and the
International Underwriters, the "Underwriters"). In the International Offering
and Nordic Offering, shares of Common Stock is being offered in the form of
shares of Common Stock or Swedish Depositary Shares ("SDSs"). Goldman, Sachs &
Co. and Merrill Lynch & Co. are acting as "Global Coordinators" for the Global
Offering.
Subject to the terms and conditions of the U.S. Underwriting Agreement
among the Company, the Selling Stockholder and the U.S. Underwriters (the "U.S.
Underwriting Agreement"), the Selling Stockholder has agreed to sell to each of
the U.S. Underwriters named below, and each of the U.S. Underwriters, for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., Bear,
Stearns & Co. Inc., J.P. Morgan Securities Inc. and Morgan Stanley & Co.
Incorporated are acting as representatives, has severally agreed to purchase
from the Selling Stockholder the respective number of shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
U.S. UNDERWRITER OF COMMON STOCK
----------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................. 7,559,502
Goldman, Sachs & Co........................................ 7,559,502
Bear, Stearns & Co. Inc. .................................. 3,700,332
J.P. Morgan Securities Inc. ............................... 3,700,332
Morgan Stanley & Co. Incorporated.......................... 3,700,332
Alex. Brown & Sons Incorporated............................ 552,000
CS First Boston Corporation................................ 552,000
Donaldson, Lufkin & Jenrette Securities Corporation........ 552,000
A.G. Edwards & Sons, Inc. ................................. 552,000
Lehman Brothers Inc. ...................................... 552,000
Oppenheimer & Co., Inc. ................................... 552,000
Prudential Securities Incorporated......................... 552,000
Salomon Brothers Inc ...................................... 552,000
Schroder Wertheim & Co. Incorporated....................... 552,000
Smith Barney Inc. ......................................... 552,000
Wasserstein Perella Securities, Inc. ...................... 552,000
Robert W. Baird & Co. Incorporated......................... 276,000
Sanford C. Bernstein & Co., Inc. .......................... 276,000
Cowen & Company............................................ 276,000
First Manhattan Co. ....................................... 276,000
Furman Selz LLC............................................ 276,000
Rodman & Renshaw, Inc. .................................... 276,000
Roney & Co. ............................................... 276,000
Wheat, First Securities, Inc. ............................. 276,000
----------------
Total....................................... 34,500,000
===============
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares of Common Stock
offered hereby, if any are taken.
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<PAGE> 46
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $0.48 per share. The U.S. Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company and the Selling Stockholder have also entered into an
underwriting agreement (the "International Underwriting Agreement") with the
International Underwriters providing for the concurrent offer and sale of
9,200,000 shares of Common Stock or SDSs outside the U.S. and Canada and outside
the Nordic countries in the International Offering and an underwriting agreement
(the "Nordic Underwriting Agreement") with the Nordic Underwriters providing for
the concurrent offer and sale of 2,300,000 shares of Common Stock or SDSs in the
Nordic countries in the Nordic Offering. The offering price and aggregate
underwriting discount per share for the U.S. Offering, the International
Offering and the Nordic Offering are identical. The number of shares of Common
Stock allocated to each offering may differ from the amount offered due to
reallocation among the offerings. The closing of each of the U.S. Offering, the
International Offering and the Nordic Offering is conditional upon the
simultaneous closing of all three offerings. The representatives of the
International Underwriters are Goldman Sachs International, Merrill Lynch
International, CS First Boston Limited, HSBC Investment Bank plc and UBS
Limited. The representatives of the Nordic Underwriters are Enskilda Securities
(a unit of Skandinaviska Enskilda Banken AB (publ)), Goldman Sachs International
and Merrill Lynch International.
The U.S. Underwriters, the International Underwriters and the Nordic
Underwriters have entered into an Agreement among the U.S., International and
Nordic Underwriting Syndicates (the "Intersyndicate Agreement") that provides
for the coordination of their activities. Pursuant to the Intersyndicate
Agreement, sales may be made among the U.S. Underwriters, the International
Underwriters and the Nordic Underwriters of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the Underwriters in each
geographic area have agreed not to offer for sale any shares of Common Stock or
SDSs in any other geographic area until the completion of the distribution of
the shares of Common Stock and SDSs in all of the offerings in the Global
Offering unless otherwise agreed by the Global Coordinators. The Intersyndicate
Agreement also provides, among other things, that the Global Coordinators shall
have the authority to manage the orderly distribution of the shares of Common
Stock and SDSs, which may include the transfer of shares of Common Stock or SDSs
among the Underwriters in response to market demand.
The Selling Stockholder has granted to the U.S. Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 5,175,000 additional shares of Common Stock to cover
over-allotments, if any, at the public offering price less the underwriting
discount. If the U.S. Underwriters exercise their over-allotment option, the
U.S. Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by each of them, as shown in the foregoing table,
bears to the 34,500,000 shares of Common Stock offered. The Selling Stockholder
has granted to the International Underwriters and the Nordic Underwriters
similar options to purchase up to an aggregate of 1,380,000 additional shares of
Common Stock (in the form of shares of Common Stock or SDSs) and 345,000
additional shares of Common Stock (in the form of shares of Common Stock or
SDSs), respectively, to cover over-allotments, if any, at the public offering
price less the underwriting discount. The over-allotment options granted to the
Underwriters are exercisable at the sole discretion of the Global Coordinators.
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<PAGE> 47
The Selling Stockholder has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or other securities of the
Company that are substantially similar to the shares of Common Stock, including
but not limited to any securities that are convertible into or exchangeable for,
or that represent the right to receive, shares of Common Stock or any such
substantially similar securities, for a period of 180 days after the date of
this Prospectus without the prior written consent of the Global Coordinators.
Stattum has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or other securities of the Company that
are substantially similar to the shares of Common Stock, including but not
limited to any securities that are convertible into or exchangeable for, or that
represent the right to receive, shares of Common Stock or any such substantially
similar securities, for a period of 12 months after the date of this Prospectus
without the prior written consent of the Global Coordinators.
The Company has agreed not to issue, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or other securities of the
Company that are substantially similar to the shares of Common Stock, including
but not limited to any securities that are convertible into or exchangeable for,
or that represent the right to receive, shares of Common Stock or any such
substantially similar securities, for a period of 180 days after the date of
this Prospectus without the prior written consent of the Global Coordinators;
provided, that this restriction will not apply to issuances or sales of shares
in connection with (i) employee stock option, savings or compensation plans or
dividend reinvestment plans or the conversion of convertible securities
outstanding on the date of this Prospectus or (ii) a merger or other combination
with, or exchange offer for shares of, another entity.
In connection with the Global Offering, certain Underwriters and their
affiliates are registered as market makers in the shares of Common Stock on SEAQ
International. Pursuant to an exemption from Rule 10b-6 under the Exchange Act
granted by the Commission, these market makers may engage in passive market
making during the period from the close of business on July 19, 1996 (London
time) through the completion of the Global Offering, subject to compliance with
certain conditions, including not trading for the purpose of creating actual or
apparent active trading in or raising the price of the shares and maintaining
records required by the London Stock Exchange.
The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters and others against certain liabilities, including
liabilities under the Securities Act and other applicable securities laws, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Selling Stockholder has agreed to bear the underwriting discount and
certain other expenses in connection with the offering of the shares of Common
Stock. Certain costs and expenses incident to the sale of the Common Stock
offered, including registration and filing fees, printing expenses, exchange
listing fees and fees and disbursements of counsel and accountants for the
Company, but excluding the fees and disbursements of counsel to the Selling
Stockholder, will be borne by the Company.
Certain of the Underwriters (or their respective affiliates) have performed
various investment banking services for the Company and/or the Selling
Stockholder.
VALIDITY OF SHARES
The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company by Sullivan & Cromwell, New York, New York, and
for the Underwriters by Shearman & Sterling, New York, New York. Shearman &
Sterling renders legal services to Pharmacia & Upjohn and Volvo from time to
time.
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EXPERTS
The consolidated balance sheets of Pharmacia & Upjohn as of December 31,
1995 and 1994, and the consolidated statement of earnings, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1995, which have been included and incorporated by reference in this Prospectus,
have been included and incorporated by reference herein in reliance on the
report of Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP, independent
accountants, given on the authority of those firms as experts in auditing and
accounting. With respect to the Pharmacia & Upjohn unaudited interim financial
information for the periods ended March 31, 1996 and 1995, included in this
Prospectus, the independent accountants have reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report included in the Pharmacia &
Upjohn quarterly report on Form 10-Q for the quarter ended March 31, 1996 and
included herein, states that they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. The accountants are not
subject to the liability provisions of Section 11 of the Securities Act for
their report on the Pharmacia & Upjohn unaudited interim financial information
because that report is not a "report" or a "part" of the registration statement
prepared or certified by the accountants within the meaning of Sections 7 and 11
of the Securities Act.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a
registration statement on Form S-3 (together with all amendments, exhibits and
schedules thereto, the "Registration Statement") under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Common Stock,
reference is hereby made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copies made at the public reference facilities
of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Commission's regional offices at Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661 and Thirteenth Floor, Seven World Trade
Center, New York, New York 10048, and copies of such materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The Common Stock is listed on the NYSE, and the periodic reports, proxy
statements and other information filed by the Company with the Commission are
available for inspection at the offices of the NYSE at 20 Broad Street, New
York, New York 10005.
The Company prepares annual reports which are distributed to its
stockholders. The Company's annual reports contain financial information
examined and reported upon, with opinions expressed, by the Company's auditors.
The consolidated financial statements of the Company included in such annual
reports are presented in United States dollars and are prepared in conformity
with United States generally accepted accounting principles. In addition, the
consolidated financial statements of the Company are translated into the Swedish
language.
48
<PAGE> 49
MISCELLANEOUS
In connection with the Combination, the Company appointed Coopers & Lybrand
L.L.P. and KPMG Peat Marwick LLP as joint independent public accountants for
purposes of certifying Pharmacia & Upjohn's consolidated financial statements.
This joint appointment was made on an interim basis to facilitate the
implementation of the Combination until a decision could be made on the
appointment of a single firm. On June 10, 1996, the Company's Board of
Directors, upon recommendation of its Audit Committee, determined to appoint
Coopers & Lybrand L.L.P. as its certifying accountants.
49
<PAGE> 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Review report of Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP dated April 30,
1996............................................................................ F-2
Condensed Consolidated Balance Sheets as of March 31, 1996 (unaudited) and December
31, 1995........................................................................ F-3
Condensed Consolidated Statements of Earnings for the three months ended March 31,
1996 (unaudited) and March 31, 1995 (unaudited)................................. F-4
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 1996 (unaudited) and March 31, 1995 (unaudited)............................. F-5
Notes to Consolidated Financial Statements......................................... F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP dated February 21,
1996............................................................................ F-8
Consolidated Balance Sheets as of December 31, 1995 and 1994....................... F-9
Consolidated Statements of Earnings for the years ended December 31, 1995, 1994 and
1993............................................................................ F-10
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1995, 1994 and 1993............................................................. F-11
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993........................................................................ F-12
Notes to Consolidated Financial Statements......................................... F-13
</TABLE>
F-1
<PAGE> 51
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
Pharmacia & Upjohn, Inc.
We have reviewed the consolidated balance sheet of Pharmacia & Upjohn, Inc. and
Subsidiaries as of March 31, 1996, and the related condensed consolidated
statements of earnings and cash flows for the three-month periods ended March
31, 1996 and 1995. These financial statements are the responsibility of
Pharmacia & Upjohn, Inc. management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above, for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for the year then ended; and in our report, dated February 21, 1996, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of March 31, 1996, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P. KPMG PEAT MARWICK LLP
Chicago, Illinois
April 30, 1996
F-2
<PAGE> 52
CONDENSED CONSOLIDATED BALANCE SHEETS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
UNAUDITED
<S> <C> <C>
(U.S. DOLLAR AMOUNTS
IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 890,691 $ 840,525
Short-term investments........................................ 793,805 973,656
Other current assets.......................................... 3,216,866 3,159,429
-------- --------
TOTAL CURRENT ASSETS..................................... 4,901,362 4,973,610
-------- --------
Long-term investments........................................... 696,230 715,348
Goodwill and other intangible assets, net....................... 1,654,038 1,722,157
Properties, net................................................. 3,401,072 3,393,225
Other noncurrent assets......................................... 691,886 656,261
-------- --------
TOTAL ASSETS............................................. $11,344,588 $11,460,601
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current maturities of long-term
debt....................................................... $ 511,610 $ 524,429
Other current liabilities..................................... 1,992,848 2,115,499
-------- --------
TOTAL CURRENT LIABILITIES................................ 2,504,458 2,639,928
-------- --------
Long-term debt and guarantee of ESOP debt....................... 804,319 870,308
Other noncurrent liabilities.................................... 1,713,939 1,563,158
-------- --------
Shareholders' equity:
Preferred stock, one cent par value; authorized 100,000,000
shares
issued Series A convertible 7,206 shares (1995: 7,220
shares)
at stated value............................................ 289,968 290,778
Common stock, one cent par value; authorized 1,500,000,000
shares, issued 508,678,572 shares (1995: 506,625,800
shares).................................................... 5,087 5,066
Capital in excess of par value................................ 1,513,994 1,457,240
Retained earnings............................................. 5,769,877 5,861,197
Currency translation adjustments.............................. (1,011,427) (986,278)
Other shareholders' equity.................................... (245,627) (240,796)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................... 6,321,872 6,387,207
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $11,344,588 $11,460,601
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 53
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
1996 1995
----------UNAUDITED----------
(U.S. DOLLAR AMOUNTS
IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales...................................................... $1,740,138 $1,681,265
Other revenue.................................................. 17,342 58,019
---------- ----------
TOTAL OPERATING REVENUE........................................ 1,757,480 1,739,284
Cost of products sold.......................................... 503,115 507,456
Research and development....................................... 299,756 294,577
Marketing, administrative and other............................ 629,699 607,862
Restructuring charges.......................................... 257,200 --
Merger costs................................................... 22,028 --
---------- ----------
OPERATING INCOME............................................... 45,682 329,389
Interest income................................................ 48,634 44,886
Interest expense............................................... (19,162) (22,077)
All other, net................................................. (786) 2,721
---------- ----------
EARNINGS BEFORE INCOME TAXES................................... 74,368 354,919
Provision for income taxes..................................... 24,500 117,100
---------- ----------
NET EARNINGS................................................... 49,868 237,819
Dividends on preferred stock (net of tax)...................... 3,139 3,068
---------- ----------
NET EARNINGS ON COMMON STOCK................................... $ 46,729 $ 234,751
========== ==========
Net earnings per common share:
Primary...................................................... $ 0.09 $ 0.46
Fully diluted................................................ $ 0.09 $ 0.46
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1996 1995
---------UNAUDITED---------
(U.S. DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATIONS................................. $ 90,568 $ 150,704
--------- ---------
Cash provided (required) by investment activities:
Acquisitions of subsidiaries.................................. -- (15,015)
Additions of properties....................................... (112,800) (81,427)
Proceeds from sales of properties............................. 3,314 10,891
Proceeds from sales of investments............................ 733,281 684,499
Purchase of investments....................................... (506,651) (594,781)
Other......................................................... (4,718) 18,641
--------- ---------
NET CASH PROVIDED BY INVESTMENT ACTIVITIES...................... 112,426 22,808
--------- ---------
Cash provided (required) by financing activities:
Proceeds from issuance of debt................................ 3,830 6,940
Repayment of debt............................................. (17,720) (41,758)
Payments of ESOP debt......................................... (7,600) --
Debt maturing in three months or less (net)................... (10,767) (85,468)
Dividends paid to shareholders................................ (141,341) (65,940)
Purchase of treasury stock.................................... (33,588) (21,158)
Proceeds from issuance of stock............................... 53,335 --
Other......................................................... (1,387) 413
--------- ---------
NET CASH REQUIRED BY FINANCING ACTIVITIES....................... (155,238) (206,971)
--------- ---------
Effect of exchange rate changes on cash....................... 2,410 10,126
--------- ---------
Net change in cash and cash equivalents....................... 50,166 (23,333)
Cash and cash equivalents, beginning of year.................. 840,525 651,660
--------- ---------
Cash and cash equivalents, end of period...................... $ 890,691 $ 628,327
========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
A -- INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial information presented herein is unaudited, other
than the condensed consolidated balance sheet at December 31, 1995, which is
derived from audited financial statements. 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 financial
statements and notes thereto included in the company's latest annual report on
Form 10-K.
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.
Certain 1995 amounts, as presented herein, differ from amounts presented in
the quarterly financial information section of the 1995 annual report. The
changes result from the reclassification of unrealized currency hedging gains
and losses to better relate the accounting for the hedges with the underlying
transactions. First quarter 1995 data were affected as follows: cost of products
sold increased $27,293; marketing, administrative and other increased $7,393;
nonoperating expense (currency exchange losses) decreased $34,686.
B -- INVENTORIES:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products............... $ 457,749 $ 487,955
Raw materials, supplies and work in process.............. 665,579 634,250
---------- ----------
1,123,328 1,122,205
Less reduction to LIFO cost.............................. (149,203) (146,651)
---------- ----------
$ 974,125 $ 975,554
========== ==========
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost
(FIFO basis) of $340,361 at March 31, 1996, and $358,216 at December 31, 1995.
C -- 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, including a number of cases
involving Halcion; administrative and judicial proceedings at approximately 40
"Superfund" sites; and site clean-up at the company's discontinued industrial
chemical operations.
While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the company believes that the nonaccrued costs and liabilities
associated with such matters will not have a material adverse effect on the
company's consolidated financial position; and unless there is a significant
deviation from the historical pattern of resolution of these issues, there
should not be a material adverse effect on the company's results of operations
or liquidity.
The company is a party, along with many other U.S. drug manufacturers and
wholesalers, in numerous related federal and state civil antitrust lawsuits
brought by U.S. independent and chain retail pharmacies and consumers. These
suits claim violations of antitrust and pricing laws as a result of the
defendants providing discounts and rebates to allegedly favored managed care
F-6
<PAGE> 56
customers that were not offered to the plaintiffs. Several of the suits are
class actions. The first trial, a class action pending in federal court in
Chicago, Illinois, is scheduled to begin later this year. The company believes
it has meritorious defenses. Although potential liability cannot presently be
estimated, a majority of the defendants in this class action (not including the
company) recently proposed individual settlements in the range of $10,000 to
$60,000. The court did not approve the settlements, but it is expected that
further settlement discussions will be conducted by such defendants.
D -- RESTRUCTURING CHARGES AND MERGER COSTS:
Restructuring charges of $257,200 in the first quarter of 1996 relate to
actions that resulted from the merger of Pharmacia AB and The Upjohn Company and
primarily reflect accruals for the planned reduction of approximately 1,750
positions. Similar charges amounting to $91,600, primarily resulting from the
reduction of approximately 850 positions, were recorded in the fourth quarter of
1995. As of March 31, approximately 1,200 employees had left the company under
this restructuring program. There have been no adjustments made to increase or
decrease amounts previously accrued for workforce reduction or other
restructuring activities.
Merger costs of $22,028 recorded in the first quarter of 1996 comprise
certain nonrecurring organizational costs, costs of establishing the corporate
identity, and various other expenses of a nonrecurring nature required to
combine the two companies.
F-7
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
Pharmacia & Upjohn, Inc.
We have audited the consolidated balance sheets of Pharmacia & Upjohn,
Inc., and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the years 1995, 1994 and 1993. These financial statements are the responsibility
of the management of Pharmacia & Upjohn, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
(pages F-9 to F-28) present fairly, in all material respects, the consolidated
financial position of Pharmacia & Upjohn, Inc., and subsidiaries as of December
31, 1995 and 1994, and the consolidated results of their operations and their
cash flows for the years 1995, 1994 and 1993, in conformity with accounting
principles that are generally accepted in the U.S.
As discussed in Note 2 to the consolidated financial statements, during
1993 the company changed its practice of reporting certain majority-owned
subsidiaries from fiscal years ending November 30 to years ending December 31
and its method of accounting for postemployment benefits.
Coopers & Lybrand L.L.P. KPMG Peat Marwick LLP
Chicago, Illinois
February 21, 1996
F-8
<PAGE> 58
CONSOLIDATED BALANCE SHEETS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
(U.S. DOLLAR AMOUNTS
IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 840,525 $ 651,660
Short-term investments.......................................... 973,656 1,134,130
Trade accounts receivable, less allowance of $100,299
(1994: $96,349).............................................. 1,535,409 1,480,251
Inventories..................................................... 975,554 887,467
Deferred income taxes........................................... 265,275 257,307
Other........................................................... 383,191 393,878
----------- -----------
TOTAL CURRENT ASSETS....................................... 4,973,610 4,804,693
Long-term investments........................................... 715,348 768,150
Goodwill and other intangible assets, net....................... 1,722,157 1,795,430
Properties, net................................................. 3,393,225 3,074,466
Other noncurrent assets......................................... 656,261 504,389
----------- -----------
TOTAL ASSETS............................................... $11,460,601 $10,947,128
=========== ===========
Current liabilities:
Short-term debt................................................. $ 524,429 $ 766,027
Accounts payable................................................ 746,498 692,959
Compensation and compensated absences........................... 331,346 288,268
Dividends payable............................................... 141,341 64,060
Income taxes payable............................................ 268,314 381,449
Other........................................................... 628,000 683,353
----------- -----------
TOTAL CURRENT LIABILITIES.................................. 2,639,928 2,876,116
Long-term debt.................................................. 603,108 678,193
Guarantee of ESOP debt.......................................... 267,200 274,800
Postretirement benefit cost..................................... 372,985 385,164
Other noncurrent liabilities.................................... 743,487 751,798
Deferred income taxes........................................... 446,686 370,681
----------- -----------
TOTAL LIABILITIES.......................................... 5,073,394 5,336,752
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value; authorized 100,000,000
shares, issued Series A convertible 7,220 shares at stated
value (1994:
7,322 shares)................................................ 290,778 295,079
Common stock, one cent par value; authorized 1,500,000,000
shares, issued 506,625,800 shares (1994: 504,707,825
shares)...................................................... 5,066 5,047
Capital in excess of par value.................................. 1,457,240 1,394,345
Retained earnings............................................... 5,861,197 5,602,270
Note receivable from ESOP Trust................................. (35,615) (33,520)
ESOP deferred compensation...................................... (236,058) (243,962)
Currency translation adjustments................................ (986,278) (1,394,286)
Other shareholders' equity...................................... 30,877 (14,597)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY................................. 6,387,207 5,610,376
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $11,460,601 $10,947,128
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE> 59
CONSOLIDATED STATEMENTS OF EARNINGS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(U.S. DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................... $6,949,069 $6,704,360 $6,507,487
Other revenue........................................... 145,550 118,422 53,271
---------- ---------- ----------
TOTAL OPERATING REVENUE................................. 7,094,619 6,822,782 6,560,758
Operating costs and expenses:
Cost of products sold................................. 1,980,038 1,889,854 1,822,255
Research and development.............................. 1,253,566 1,162,752 1,144,043
Marketing, administrative and other................... 2,616,557 2,586,635 2,596,287
Restructuring charges................................. 103,404 19,837 268,658
Merger costs.......................................... 138,193 -- --
---------- ---------- ----------
OPERATING INCOME........................................ 1,002,861 1,163,704 729,515
Interest income......................................... 216,651 157,254 227,318
Interest expense........................................ (94,139) (112,117) (182,514)
Currency exchange gains (losses)........................ 13,071 22,121 (2,248)
All other, net.......................................... (2,051) 40,314 5,665
---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES................................................. 1,136,393 1,271,276 777,736
Provision for income taxes.............................. 397,700 437,825 217,143
---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS..................... 738,693 833,451 560,593
Earnings from discontinued operations................... -- 2,672 41,158
(Loss) gain on disposal of discontinued operations...... -- (997) 4,926
Cumulative effect of accounting changes................. -- -- (18,906)
---------- ---------- ----------
NET EARNINGS............................................ 738,693 835,126 587,771
Dividends on preferred stock (net of tax)............... 12,541 12,291 12,125
---------- ---------- ----------
NET EARNINGS ON COMMON STOCK............................ $ 726,152 $ 822,835 $ 575,646
========== ========== ==========
EARNINGS PER COMMON SHARE:
Primary
Earnings from continuing operations................ $1.43 $1.63 $1.09
Net earnings....................................... $1.43 $1.63 $1.14
Fully diluted
Earnings from continuing operations................ $1.41 $1.60 $1.08
Net earnings....................................... $1.41 $1.60 $1.13
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE> 60
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
(U.S. DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year....................... $ 295,079 $ 297,387 $ 298,224
Redemptions and conversions........................ (4,301) (2,308) (837)
----------- ----------- -----------
Balance at end of year............................. 290,778 295,079 297,387
----------- ----------- -----------
COMMON STOCK:
Balance at beginning of year....................... 5,047 5,051 5,067
Stock option, incentive and dividend reinvestment
plans........................................... 15 -- --
Retirements, conversions and other................. 4 (4) (16)
----------- ----------- -----------
Balance at end of year............................. 5,066 5,047 5,051
----------- ----------- -----------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year....................... 1,394,345 1,394,363 1,394,019
Stock option, incentive and dividend reinvestment
plans........................................... 32,072 (1,770) (262)
Retirements, conversions and other................. 30,823 1,752 606
----------- ----------- -----------
Balance at end of year............................. 1,457,240 1,394,345 1,394,363
----------- ----------- -----------
RETAINED EARNINGS:
Balance at beginning of year....................... 5,602,270 5,117,058 6,147,873
Net earnings....................................... 738,693 835,126 587,771
Dividends declared................................. (421,680) (328,431) (380,578)
Dividends on preferred stock (net of tax).......... (12,541) (12,291) (12,125)
Retirement of common stock......................... (45,545) (9,192) (30,938)
Distribution of BCP................................ -- -- (1,194,945)
----------- ----------- -----------
Balance at end of year............................. 5,861,197 5,602,270 5,117,058
----------- ----------- -----------
NOTE RECEIVABLE FROM ESOP TRUST:
Balance at beginning of year....................... (33,520) (31,548) (29,697)
Rollover of accumulated interest................... (2,095) (1,972) (1,851)
----------- ----------- -----------
Balance at end of year............................. (35,615) (33,520) (31,548)
----------- ----------- -----------
ESOP DEFERRED COMPENSATION:
Balance at beginning of year....................... (243,962) (251,301) (258,254)
ESOP expense recognized in excess of cash
contributions................................... 7,904 7,339 6,953
----------- ----------- -----------
Balance at end of year............................. (236,058) (243,962) (251,301)
----------- ----------- -----------
CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year....................... (1,394,286) (1,766,711) (1,157,766)
Translation adjustments............................ 408,008 372,425 (608,945)
----------- ----------- -----------
Balance at end of year............................. (986,278) (1,394,286) (1,766,711)
----------- ----------- -----------
OTHER SHAREHOLDERS' EQUITY:
Balance at beginning of year....................... (14,597) -- --
Stock option, incentive and dividend reinvestment
plans........................................... 57,673 24,133 22,264
Purchases of treasury stock........................ (101,394) (31,845) (54,089)
Retirement of common stock......................... 43,703 7,712 31,825
Net unrealized investment gains (losses)........... 45,492 (14,597) --
----------- ----------- -----------
Balance at end of year............................. 30,877 (14,597) --
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................... $ 6,387,207 $ 5,610,376 $ 4,764,299
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE> 61
CONSOLIDATED STATEMENTS OF CASH FLOWS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
----------- ----------- ----------
(U.S. DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operations:
Net earnings........................................ $ 738,693 $ 835,126 $ 587,771
Adjustments to reconcile net earnings to net cash
provided (required) by operations:
Depreciation..................................... 326,939 329,328 318,833
Amortization of intangibles...................... 153,009 145,728 127,473
Restructuring charges............................ 103,404 19,837 268,658
Cash expended on restructurings.................. (48,322) (117,512) (60,755)
Net (gains) losses on sales of noncurrent
assets......................................... (12,368) (97,269) 165
Write downs of properties and intangibles........ 40,624 32,506 90,769
Deferred income taxes............................ 74,093 86,450 (100,996)
Other............................................ (26,833) (9,277) 34,756
Changes in:
Accounts receivable, net......................... 12,264 3,022 (8,703)
Inventory........................................ (18,159) (4,083) (44,370)
Accounts payable................................. (70,779) 84,180 (64,442)
Income taxes payable............................. (121,418) 17,251 63,455
Other current and noncurrent assets and
liabilities.................................... (5,728) (38,957) 143,060
----------- ----------- ----------
NET CASH PROVIDED BY OPERATIONS....................... 1,145,419 1,286,330 1,355,674
----------- ----------- ----------
Cash flows (required) provided by investment
activities:
Acquisitions of subsidiaries........................ (57,589) (90,244) (855,597)
Additions of properties............................. (591,630) (491,307) (739,258)
Proceeds from sales of properties................... 53,498 142,414 82,088
Proceeds from sales of investments.................. 2,634,340 1,719,569 1,153,848
Purchases of investments............................ (2,407,323) (2,371,024) (769,765)
Proceeds from BCP divestiture....................... -- -- 357,312
Proceeds from sales of discontinued operations and
subsidiaries..................................... 12,127 452,882 31,000
Other............................................... 144,765 41,701 (43,866)
----------- ----------- ----------
NET CASH REQUIRED BY INVESTMENT ACTIVITIES............ (211,812) (596,009) (784,238)
----------- ----------- ----------
Cash flows provided (required) by financing
activities:
Proceeds from issuance of debt...................... 14,434 14,946 340,166
Repayment of debt................................... (106,875) (53,444) (317,381)
Net (decrease) in debt with initial maturity of 90
days or less..................................... (317,254) (87,450) (112,909)
Dividends and rights payments....................... (353,562) (335,870) (388,625)
Purchases of common stock........................... (101,394) (31,845) (54,089)
Other............................................... 74,953 27,183 8,440
----------- ----------- ----------
NET CASH REQUIRED BY FINANCING ACTIVITIES............. (789,698) (466,480) (524,398)
----------- ----------- ----------
Effect of exchange rate changes on cash............. 44,956 34,543 (26,967)
Net change in cash and cash equivalents............. 188,865 258,384 20,071
Cash and cash equivalents, beginning of year........ 651,660 393,276 373,205
----------- ----------- ----------
Cash and cash equivalents, end of year.............. $ 840,525 $ 651,660 $ 393,276
=========== =========== ==========
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized)............... $ 77,697 $ 106,411 $ 194,166
Income taxes........................................ $ 405,323 $ 338,057 $ 266,004
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
1. MERGER
In November 1995, Pharmacia AB (Pharmacia) and The Upjohn Company (Upjohn)
completed a combination (the merger) that resulted in the formation of Pharmacia
& Upjohn, Inc. (the company).
Effective upon the consummation of the merger, each share of the
outstanding common stock of Upjohn was converted into 1.45 shares of common
stock of the company. Outstanding Upjohn employee stock options were similarly
converted into options to purchase company common stock. In addition, each share
of Upjohn Series B Convertible Perpetual Preferred Stock has been converted into
one share of Series A Convertible Perpetual Preferred Stock of the company.
Shareholders of Pharmacia were extended an offer to exchange each
outstanding common share (or an American Depository Share representing a Class A
common share) and each outstanding Pharmacia Class B common share for one share
of company common stock (or a Swedish Depository Share representing one share of
company common stock).
As of December 31, 1995, over 99 percent of the outstanding Class A and
Class B common shares had been exchanged for shares of company common stock. The
company has recorded a liability for the estimated cost of acquiring the
remaining Pharmacia common shares.
The merger constituted a tax-free reorganization and has been treated as a
pooling of interests. The assets and liabilities of Upjohn and Pharmacia were
carried forward to the company at historical values after restatement of the
Pharmacia statements to conform to accounting principles that are generally
accepted in the U.S. The accompanying financial statements contain information
for periods prior to the merger. All such information was derived from the
separate financial statements of Pharmacia and Upjohn, which were reclassified
and combined to conform to the presentation adopted by the company. Operating
revenue and net earnings for the individual Pharmacia and Upjohn entities for
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
COMBINING
UPJOHN PHARMACIA ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
Operating revenue........................... $1,717,569 $1,829,242 $ -- $3,546,811
Net earnings................................ 267,477 192,230 9,840 469,547
YEAR ENDED DECEMBER 31, 1994
Operating revenue........................... $3,344,538 $3,478,244 $ -- $6,822,782
Net earnings................................ 490,763 344,363 -- 835,126
YEAR ENDED DECEMBER 31, 1993
Operating revenue........................... $3,380,536 $3,180,222 $ -- $6,560,758
Net earnings................................ 392,397 195,374 -- 587,771
</TABLE>
Combining adjustments also were recorded to classify various earnings
statement and balance sheet items consistently upon combination. Intercompany
transactions prior to the merger were not material, therefore, no elimination
entries were required to develop the accompanying combined financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The consolidated financial statements are presented
on the basis of accounting principles that are generally accepted in the U.S.
All professional accounting standards
F-13
<PAGE> 63
that are effective as of December 31, 1995, have been taken into consideration
in preparing the financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions which affect the reported earnings, financial position and various
disclosures. Actual results could differ from those estimates.
Principles of consolidation. The consolidated financial statements include
the accounts of the company and all majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
Currency translation. The results of operations for non-U.S. subsidiaries,
other than those located in highly inflationary countries, are translated into
U.S. dollars using the average exchange rates during the period, while assets
and liabilities are translated using period-end rates. Resulting translation
adjustments are recorded as currency translation adjustments in shareholders'
equity. For subsidiaries in highly inflationary countries, currency gains and
losses resulting from translation and transactions are determined using a
combination of current and historical rates and are reported directly in the
consolidated statements of earnings.
Cash equivalents. With the exception of restricted bank deposits that are
classified as short-term investments, the company considers all highly liquid
debt instruments with an original maturity of 91 days or less to be cash
equivalents.
Investments. In addition to cash equivalents, the company has investments
in debt securities that are classified in the consolidated balance sheet as
short-term (restricted bank deposits and securities that mature in more than 91
days but no more than one year) or long-term (maturities beyond one year). The
company also has investments in equity securities, all of which are classified
as long-term investments. All such investments are further categorized as being
available-for-sale or are expected to be held-to-maturity. Investments
categorized as available-for-sale are marked to market based on fluctuations in
the market values of the securities, with the resulting adjustments, net of
deferred taxes, reported as a component of other shareholders' equity until
realized (see Note 17). Investments categorized as held-to-maturity are carried
at amortized cost, without recognition of gains or losses that are deemed to be
temporary, because the company has both the intent and the ability to hold these
investments until they mature.
Inventories are valued at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for substantially all U.S. inventories
and the first-in, first-out (FIFO) method for substantially all non-U.S.
inventories.
Properties. Property, plant and equipment are recorded at acquisition cost.
Depreciation is computed principally on the straight-line method for financial
reporting, while accelerated methods are used for income tax purposes where
permitted. Maintenance and repair costs are charged to earnings as incurred.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
Goodwill and other intangibles. Goodwill represents the excess of the
purchase cost over the fair value of net assets acquired in a business or
product acquisition and is presented net of accumulated amortization.
Amortization of goodwill is recorded on a straight-line basis over periods
ranging primarily from 5 to 20 years. Rights acquired under patent are reported
at acquisition cost. Amortization is calculated on a straight-line basis over
the remaining legal lives of the patents. Other intangible assets are amortized
over the useful lives of those assets.
Income taxes. The company applies an asset and liability approach to
accounting for income taxes. Deferred tax liabilities and assets are recognized
for the expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
F-14
<PAGE> 64
The company provides deferred income taxes on subsidiaries' earnings that
are not considered to be permanently invested in those subsidiaries.
Forward currency exchange contracts. Forward currency exchange contracts
are used for trading and hedging purposes. Contracts are marked to market each
month with resulting trading gains and losses recognized in earnings. The
carrying values of these derivative financial instruments are generally reported
with other current assets or other current liabilities.
Accounting changes in 1993. Effective January 1, 1993, a new accounting
standard was adopted on accounting for postemployment benefits. The cumulative
effect of this change was $11,115 after tax ($.02 per share). Also, at the same
time, the fiscal year of certain subsidiaries was changed from November 30 to
December 31. This change reduced 1993 aftertax earnings by $7,791 ($.02 per
share).
Other. Employee stock options are accounted for pursuant to Accounting
Principles Board Opinion No. 25. Statement of Financial Accounting Standards No.
121 relating to the impairment of long-lived assets becomes effective in 1996.
The effect on the company of adoption of this statement cannot be determined at
this time.
3. RESTRUCTURING CHARGES
In association with the merger, the company recorded restructuring charges
of $91,600 in the fourth quarter of 1995. The majority of these pertained to
elimination of approximately 850 positions ($82,700). Expenditures related to
these restructuring charges are expected to be substantially completed by the
end of 1996. Additional restructuring charges will be recognized in subsequent
reporting periods as additional actions are taken to restructure the company
following the merger and decisions are made with respect to rationalization of
facilities. Restructuring charges of $11,804 were recorded in the second quarter
of 1995 related to a plant closure in Sweden.
In 1994, restructuring charges were recorded to write down certain
intangible assets ($6,900) and for the closure of an ophthalmology operation
($12,937).
In 1993, restructuring charges of $268,658 were recorded to reflect the
costs associated with a worldwide workforce reduction of approximately 1,500
employees ($136,109); elimination or reduction of excess manufacturing capacity
($31,631); write-downs of certain intangibles ($72,460) and facilities and
equipment ($23,504); and other ($4,954). During 1995, the anticipated workforce
reduction was completed. Certain plant closures recognized in the original 1993
accruals have not yet been completed and approximately $29,000 remains accrued.
4. MERGER COSTS
The company recorded merger costs of $138,193 through the fourth quarter of
1995. Included in the charges are transaction costs of $68,751 and costs to
combine operations of $69,442. Transaction costs include professional and
registration fees. Costs to combine operations include expenses incurred for
termination of two marketing agreements that conflicted with the merged
operations and other nonrecurring costs associated with planning and executing
the merger of operations. Additional charges are expected to recognized in
subsequent reporting periods as the merger is implemented.
F-15
<PAGE> 65
5. INCOME TAXES
Income taxes on continuing operations consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Currently payable:
U.S. ...................................................... $ 82,241 $106,298 $123,711
Non-U.S. .................................................. 224,266 230,000 162,086
-------- -------- --------
306,507 336,298 285,797
-------- -------- --------
Deferred:
U.S........................................................ 19,538 2,500 (58,779)
Non-U.S.................................................... 71,655 99,027 (9,875)
-------- -------- --------
91,193 101,527 (68,654)
-------- -------- --------
$397,700 $437,825 $217,143
======== ======== ========
</TABLE>
Components of net deferred taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets attributable to:
Taxed profit on intercompany transfers............................... $ 116,729 $ 107,754
Postretirement and postemployment benefits........................... 140,889 148,685
Environmental and product liabilities................................ 100,950 105,034
Employee benefit plans............................................... 60,159 59,947
Restructuring accruals............................................... 82,380 102,663
Alternative minimum tax carryforwards................................ 41,072 41,645
Tax loss carryforwards............................................... 51,507 41,245
All other............................................................ 181,201 156,643
--------- ---------
Total deferred tax assets............................................ 774,887 763,616
Valuation allowances................................................. (154,483) (150,792)
Net deferred tax assets.............................................. 620,404 612,824
========= =========
Deferred tax liabilities attributable to:
Property, plant and equipment........................................ (321,366) (292,314)
Swedish tax equalization and allocation reserves..................... (159,927) (123,201)
Taxes to be withheld when earnings are remitted...................... (73,889) (73,189)
Pension plans........................................................ (78,128) (64,613)
All other............................................................ (83,261) (52,218)
--------- ---------
Total deferred tax liabilities....................................... (716,571) (605,535)
--------- ---------
Net deferred taxes................................................... $ (96,167) $ 7,289
========= =========
</TABLE>
Deferred income taxes are included in the Consolidated Balance Sheets as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
<S> <C> <C>
Current assets....................................................... $ 265,275 $ 257,307
Other noncurrent assets.............................................. 120,080 153,204
Current liabilities.................................................. (34,836) (32,541)
Other noncurrent liabilities......................................... (446,686) (370,681)
--------- ---------
Net deferred taxes................................................... $ (96,167) $ 7,289
========= =========
</TABLE>
F-16
<PAGE> 66
Valuation allowances have been provided for deferred tax assets that are
not likely to be realized, primarily those attributable to net operating loss
carryforwards and restructuring accruals.
Tax laws in Sweden permit limited amounts of earnings to be retained in
businesses without being subject to immediate taxation. Deferred income tax
liabilities have been recorded with respect to the accumulated amounts of the
untaxed earnings.
Earnings that have accumulated in Puerto Rico are subject to withholding
taxes ranging from 3.5 percent to 10 percent that will be paid when the earnings
are remitted. The amounts to be withheld have been recorded as deferred income
tax liabilities.
At December 31, 1995, undistributed earnings of foreign subsidiaries
considered permanently invested, for which deferred income taxes have not been
provided, were $2,476,300. Of the subsidiary net operating loss carryforwards of
$138,400, $35,100 have various expiration dates through 2000, while the
remaining $103,300 have 15-year to indefinite expiration dates.
Differences between the effective income tax rate and the U.S. statutory
tax rate were as follows:
<TABLE>
<CAPTION>
PERCENT OF
PRETAX INCOME
---------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Statutory tax rate...................................................... 35.0% 35.0% 35.0%
Benefit of tax exemptions in Puerto Rico................................ (5.5) (6.6) (13.9)
Goodwill amortization and other non-deductible expenses................. 6.9 5.0 14.8
Utilization of net operating loss carryforwards......................... (1.2) (2.3) (2.8)
Changes in Swedish tax laws............................................. -- 3.4 (8.5)
All other, net.......................................................... (0.2) (0.1) 3.3
---- ---- -----
35.0% 34.4% 27.9%
==== ==== =====
</TABLE>
A manufacturing subsidiary operates in Puerto Rico under a tax exemption
grant, expiring in 2009, which provides for partial exemption from Puerto Rico
income and property taxes. The grant, together with a tax exemption available
for U.S. federal income tax purposes, reduced income taxes by approximately
$62,500 ($.12 per share) in 1995; $83,900 ($.17 per share) in 1994; and $108,100
($.21 per share) in 1993.
6. DISCONTINUED OPERATIONS
In December 1994, the company sold Asgrow Seed Company. The sale
represented the complete divestiture of all operations in the agronomic and
vegetable seed businesses. A loss of $997, after provisions for tax, was
realized on the sale, including accruals for certain retained liabilities.
In December 1993, the company sold the assets of Asgrow Florida Company.
The sale represented the complete divestiture of the company's operations in the
agricultural chemical business. The gain on the sale, amounting to $4,926 after
provisions for tax, included accruals for certain retained liabilities.
In November 1993, the company divested its entire interest in BCP Branded
Consumer Products AB (BCP) by distributing a share of BCP stock for each share
of the stock held by former Pharmacia shareholders.
F-17
<PAGE> 67
Operating revenue and earnings of the discontinued businesses were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- ----------
<S> <C> <C>
OPERATING REVENUE:
Agronomic and vegetable seeds........................................ $221,393 $ 274,215
Agricultural chemical................................................ -- 84,517
BCP.................................................................. -- 1,396,467
-------- ----------
Total................................................................ $221,393 $1,755,199
======== ==========
EARNINGS OF DISCONTINUED OPERATIONS:
Agronomic and vegetable seeds........................................ $ 2,672 $ 6,112
Agricultural chemical................................................ -- 3,894
BCP.................................................................. -- 31,152
-------- ----------
Total................................................................ $ 2,672 $ 41,158
======== ==========
Earnings per common share -- primary................................. $0.01 $0.08
</TABLE>
7. EARNINGS PER COMMON SHARE
Primary earnings per share are computed by dividing net earnings available
to holders of common stock by the sum of the weighted average number of shares
of common stock outstanding plus common share equivalents, principally in the
form of employee stock option awards. Fully diluted earnings per share have been
computed assuming that all of the convertible preferred stock is converted into
common shares. Under this assumption, the weighted average number of common
shares outstanding is increased and net earnings is reduced by the amount of an
incremental Employee Stock Ownership Plan (ESOP) contribution. This incremental
contribution is the net-of-tax difference between the income the ESOP would have
received on the preferred stock and the assumed dividend yield to be earned on
the common shares.
The number of shares used for computing primary and fully diluted earnings
per share for years prior to the merger was based on weighted averages of the
common shares deemed to be outstanding (see Note 17) plus the above-mentioned
adjustments. The amounts were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Primary...................................................... 507,124 505,164 506,150
Fully diluted................................................ 521,091 518,106 518,463
</TABLE>
8. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products........................ $ 487,955 $ 404,983
Raw materials, supplies and work in process....................... 634,250 622,474
---------- ----------
1,122,205 1,027,457
Less reduction to LIFO cost......................................... (146,651) (139,990)
---------- ----------
Inventories......................................................... $ 975,554 $ 887,467
========== ==========
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost
(FIFO basis) of $358,216 at December 31, 1995, and $360,124 at December 31,
1994.
F-18
<PAGE> 68
9. INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
-------- ----------
<S> <C> <C>
Short-term investments:
Obligations of the Kingdom of Sweden................................ $426,471 $ 286,173
Restricted bank deposits............................................ 309,041 529,361
Bank certificates of deposit........................................ 82,687 122,500
Obligations of the Commonwealth of Puerto Rico...................... 53,466 56,475
Obligations of the Government of Italy.............................. -- 62,939
Other............................................................... 101,991 76,682
-------- ----------
$973,656 $1,134,130
======== ==========
</TABLE>
Restricted bank deposits are held by banks that require such deposits be
maintained in support of loans made to certain of the company's subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS
------------------------------------------------
UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Available-for-sale (marked-to-market):
Equity securities................................ $102,525 $ 37,297 $ 18 $139,804
Mortgage-backed securities guaranteed by the U.S.
Government..................................... 239,756 8,092 -- 247,848
-------- -------- -------- --------
$342,281 $ 45,389 $ 18 387,652
Held-to-maturity (amortized cost)................ 327,696
--------
$715,348
--------
DECEMBER 31, 1994:
Available-for-sale (marked-to-market)
Equity securities................................ $141,546 $ 803 $ 21,291 $121,058
Held-to-maturity (amortized cost)................ 647,092
--------
$768,150
--------
</TABLE>
Long-term investments held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
FAIR VALUE AMORTIZED COST FAIR VALUE AMORTIZED COST
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Guaranteed by the U.S. Government....... $ 91,578 $ 91,484 $308,992 $328,777
Obligations of the Commonwealth of
Puerto Rico........................... 90,383 88,612 90,961 93,028
Bank obligations:
Certificates of deposit............... 89,489 87,600 157,256 160,287
Other................................. 61,557 60,000 62,514 65,000
-------- -------- -------- --------
$333,007 $327,696 $619,723 $647,092
-------- -------- -------- --------
</TABLE>
F-19
<PAGE> 69
At December 31, 1995, scheduled maturities of long-term securities to be
held to maturity were as follows:
<TABLE>
<CAPTION>
FAIR VALUE COST
---------- --------
<S> <C> <C>
One to five years.................................................. $196,863 $192,200
Six to ten years................................................... 100,031 99,727
After ten years.................................................... 36,113 35,769
-------- --------
$333,007 $327,696
-------- --------
</TABLE>
Unrealized net gains (net of deferred taxes) included in other
shareholders' equity amounted to $30,859 at December 31, 1995, compared to
unrecognized losses (net of deferred taxes) of $14,597 at December 31, 1994.
At December 31, 1995, the company wrote down to fair market value certain
equity security investments. The write down amounted to $58,570 and was due to a
decline in fair value considered to be other than temporary. The write down is
included in marketing, administrative and other expense.
The proceeds realized from the sale of available-for-sale equity securities
amounted to $9,108 and $5,445 during 1995 and 1994, respectively. Based on cost,
gains of $4,204 and $2,982 were realized on these sales.
At December 31, 1995, mortgage-backed securities previously categorized as
being held-to-maturity were recategorized as available-for-sale. Accordingly,
this group of securities has been marked to market with the resulting adjustment
reported with other shareholders' equity (see Note 17). Election of this option
does not affect the classification of the balance of the securities in the
portfolio as the company retains the intent and ability to hold those securities
until they mature.
10. PROPERTIES, NET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land............................................................ $ 133,036 $ 123,223
Buildings and leasehold improvements............................ 1,940,398 1,816,530
Equipment....................................................... 3,147,319 2,887,584
Construction in process......................................... 657,877 449,856
Less allowance for depreciation................................. (2,485,405) (2,202,727)
----------- -----------
$ 3,393,225 $ 3,074,466
=========== ===========
</TABLE>
11. LINES OF CREDIT AND LONG-TERM DEBT
The company has lines of credit amounting to $650,000 that are available to
support commercial paper borrowings and for other corporate purposes, with
$150,000 available through 1997 and $500,000 available through 1999. These lines
of credit do not require compensating balances but are subject to various fees.
F-20
<PAGE> 70
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
4.6-5.06% Industrial Revenue Bonds due 2007-2009.................. $ 16,420 $ 13,500
7.5% Industrial Revenue Bonds due 2023............................ 40,000 40,000
5.35-7.95% Medium-Term Notes due 1997-1999........................ 266,000 266,000
5.875% Notes due 2000............................................. 200,000 200,000
2.052-11.85% Italian Government Loans due 1996-2004............... 82,330 89,866
3.34% Export finance due 1996..................................... 32,642 52,720
Convertible debenture loan........................................ -- 29,059
Other............................................................. 22,684 28,211
-------- --------
Current maturities................................................ (56,968) (41,163)
-------- --------
Total long-term debt.............................................. $603,108 $678,193
======== ========
</TABLE>
Current maturities of long-term debt are included with short-term debt in
the consolidated balance sheets. Annual aggregate maturities of long-term debt
during the four years subsequent to 1996 are: 1997 - $50,156; 1998 - $173,800;
1999 - $91,250; and 2000 - $209,575.
The company has guaranteed $275,000 original principal amount of ESOP 9.79%
notes due in 2004. Principal payments that began in 1995 constitute compensation
expense (see Note 18). Annual aggregate maturities of guaranteed debt during the
five years subsequent to 1995 are 1996 - $7,600; 1997 - $11,500; 1998 - $16,000;
1999 - $22,000: and 2000 - $28,000.
Information regarding interest expense and weighted average interest rates
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest cost incurred.................................. $121,663 $137,445 $206,798
Less capitalized on construction........................ (27,524) (25,328) (24,284)
-------- -------- --------
Interest expense........................................ $ 94,139 $112,117 $182,514
======== ======== ========
Weighted average interest rate on short-term borrowings
at end of period...................................... 9.63% 10.49% 8.68%
</TABLE>
12. COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December
31, 1995, approximately 57 percent real estate and 43 percent equipment, are:
1996 - $99,040; 1997 - $65,540; 1998 - $40,970; 1999 - $23,573; 2000 - $20,973;
and later years - $39,716.
Capital asset spending approved for construction and equipment but
unexpended at December 31, 1995, was approximately $390,000.
The company has committed to make a series of investments, as certain
progress goals are met, in a company that intends to manufacture a
hemoglobin-based oxygen carrier. These investments could aggregate $179,000 over
a period of years. As of December 31, 1995, the company has invested
approximately $101,000. Also, pursuant to the agreement, the company has
committed to conduct clinical development.
The consolidated balance sheets also include accruals for estimated product
and environmental liabilities. The latter includes exposures related to
discontinued operations, including the industrial chemical facility and several
"Superfund" sites (see Note 13).
F-21
<PAGE> 71
13. 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, including a number of cases
involving Halcion; administrative and judicial proceedings at approximately 40
"Superfund" sites; and site cleanup at the company's discontinued industrial
chemical operations.
While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the company believes that the unaccrued costs and liabilities
associated with such matters will not have a material adverse effect on the
company's consolidated financial position; and unless there is a significant
deviation from the historical pattern of resolution of these issues, there
should not be a material adverse effect on the company's results of operations
or liquidity. The company is a party, along with many other U.S. drug
manufacturers and wholesalers, in numerous related federal and state civil
antitrust lawsuits brought by U.S. independent and chain retail pharmacies and
consumers. These suits claim violations of antitrust and pricing laws as a
result of the defendants providing discounts and rebates to allegedly favored
managed care customers that were not offered to the plaintiffs. Several of the
suits are class actions. The first trial, a class action pending in federal
court in Chicago, Illinois, is scheduled to begin in May 1996. The company
believes it has meritorious defenses, and although potential liability cannot
presently be estimated, a majority of the defendants in this class action (not
including the company) have recently agreed to $10,000 to $60,000 settlements of
claims against them in this action, and are awaiting court approval of the
settlements.
14. CURRENCY RISK MANAGEMENT
The company utilizes forward currency exchange contracts in conjunction
with its currency risk management programs. These programs include the creation
of designated hedges of net recorded currency transaction exposures and the
trading of contracts based on anticipated currency transaction exposures of
certain significant U.S. and non-U.S. subsidiary operations.
The company's program to hedge net currency transaction exposures is
designed to protect operating results and cash flows from potentially adverse
effects of currency exchange rate fluctuations related to intercompany and
selected third-party transactions. The hedging activities seek to limit this
risk by offsetting gains and losses on underlying exposures with losses and
gains on the instruments utilized to create the hedges.
At December 31, 1995, the notional amount of the company's outstanding
forward currency exchange contracts held for the balance sheet financial
exposure hedge program was $1,304,678. Of these contracts, 53 percent were
denominated in European currencies, 31 percent denominated in U.S. dollars and 6
percent in Japanese yen, all against Swedish kronor; 6 percent denominated in
European currencies against U.S. dollars; and 4 percent denominated in European
currencies against Japanese yen.
At December 31, 1995, the notional amount of the company's outstanding
forward currency exchange contracts held for the trading program was $463,275.
Of these contracts, 48 percent were denominated in Japanese yen, 12 percent were
denominated in U.S. dollars, 37 percent were denominated in European currencies,
and 3 percent were denominated in Australian dollars, all against Swedish kronor
and Italian lira. The average fair value of contracts held during 1995 was a net
of $9,729. The fair value at December 31, 1995, was a net asset of $27,451 and
the net gain realized from the trading program in 1995 was $57,866.
These contracts generally have maturities that do not exceed 12 months and
require the company to exchange currencies at agreed-upon rates at maturity. The
counterparties to the contracts consist of a limited number of major
international financial institutions. The company does not expect any losses
from credit exposure.
F-22
<PAGE> 72
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Short-term investments........................ $973,656 $973,656 $1,134,130 $1,134,130
Long-term investments......................... 715,348 720,659 768,150 740,781
Forward currency exchange contracts
Designated hedges.......................... 27,929 27,929 15,888 15,888
Trading.................................... 27,451 27,451 11,518 11,518
Financial liabilities:
Short-term debt............................... 524,429 524,429 766,027 766,027
Long-term debt................................ 603,108 618,499 678,193 647,216
Guaranteed ESOP debt.......................... 267,200 319,138 274,800 293,000
</TABLE>
Because maturities are short-term, fair values approximate carrying amounts
for cash and cash equivalents, short-term investments, accounts receivable,
short-term debt, and accounts payable. Fair values of forward currency exchange
contracts, long-term investments, long-term debt, and guaranteed ESOP debt were
estimated based on quoted market prices for the same or similar instruments or
discounted cash flows.
16. CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high-quality short-term liquid instruments. Such investments are
made only in instruments issued or enhanced by high-quality financial
institutions (investment grade or better). Amounts invested in a single
institution are limited to minimize risk. The company has not incurred losses
related to these investments.
The company sells a broad range of pharmaceutical products to a diverse
group of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
17. SHAREHOLDERS' EQUITY
Preferred Stock -- The Series A Convertible Perpetual Preferred Stock is
held by the Employee Stock Ownership Trust (ESOP Trust). The terms of the Series
A Preferred Stock are equivalent to the terms of the Series B Convertible
Perpetual Preferred Stock that had been issued by Upjohn, which was exchanged
for the new preferred stock on a one-for-one basis in connection with the
merger. The per-share stated value is $40,300, and the preferred stock ranks
senior to the company's common stock as to dividends and liquidation rights.
Each share is convertible, at the holder's option, into 1,450 shares of the
company's common stock and has voting rights equal to 1,450 shares of common
stock. The company may redeem the preferred stock at any time after July 20,
1999, or upon termination of the ESOP at a minimum price of $40,300 per share.
Dividends, at the rate of 6.25 percent, are cumulative, paid quarterly and
charged against retained earnings.
Common Stock -- The number of common shares outstanding at December 31,
1995, was 506,625,800. The number of common shares deemed to be outstanding, for
purposes of these financial statements at December 31, 1994 and 1993, was
504,707,825 and 505,114,503, respectively.
F-23
<PAGE> 73
A dividend of $.27 per share was declared on common stock in December 1995,
payable in February 1996.
Capital in Excess of Par Value -- Amounts of paid-in capital that exceed
the par value ($.01 per share) of the company's common stock are recorded in
this account, including all such amounts that were attributed to previously
outstanding Pharmacia common shares and Upjohn common stock. This method was
followed for all periods covered by the financial statements, because the new
common stock is assumed to have been outstanding for all periods preceding the
merger.
Note Receivable from ESOP Trust -- The note matures on February 1, 2005;
bears interest at 6.25 percent; and may be repaid, in whole or in part, at any
time. Accrued interest at the end of any calendar year shall be added to the
note principal.
ESOP Deferred Compensation -- Upon recognition of the company's guarantee
of the debt of the ESOP Trust, an offsetting charge was made to shareholders'
equity. To the extent the company recognizes expense more rapidly than the
corresponding cash contributions are made, this account is reduced. The account
has diminished because the company's ESOP Trust debt guarantee commitment
declined beginning in 1995 (see Notes 11 and 18).
Currency Translation Adjustments -- This account includes all adjustments
that arise from translating the financial statements of non-U.S. subsidiaries
from local currencies into U.S. dollars (see Note 2).
Other Shareholders' Equity -- At December 31, 1995, other shareholders'
equity is comprised of net unrealized gains (net of deferred taxes) relating to
investments categorized as available-for-sale and marked-to-market of $30,859
and treasury stock of $18.
Shareholder Rights Plan -- Each share of the former Upjohn common stock
included one-third of a right, which entitled the holder to purchase additional
shares of Upjohn stock under specified limited circumstances. In connection with
the merger, the rights were redeemed for $.05 per right, pursuant to the rights
plan. A total of $2,869 was paid to former Upjohn shareholders and has been
included in dividends declared and charged against retained earnings.
18. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP is a funding vehicle for the Employee Savings Plan covering
certain U.S. employees. As the ESOP Trust makes debt principal and interest
payments, a proportionate amount of preferred stock is released for allocation
to plan participants. The preferred shares are allocated to participants'
accounts based upon their respective savings plan contributions and the
dividends earned on their previously allocated preferred shares. As of December
31, 1995, 1,204.8 preferred shares had been released and allocated; 255.0 shares
were released but unallocated; and 5,760.1 shares remained unreleased, of which
76.4 shares are committed to be released.
Under the agreement whereby the company guaranteed third-party debt of the
ESOP Trust, the company is obligated to contribute sufficient cash annually to
the Trust to enable it to make required principal and interest payments. The
company satisfies this annual cash flow requirement through payment of dividends
on all preferred shares outstanding plus cash contributions. The company has
fully and unconditionally guaranteed the ESOP Trust's payment obligations
whether at maturity, upon redemption, upon declaration of acceleration, or
otherwise. The holders of the debt securities have no recourse against the
assets of the ESOP Trust except in the event that the Trust defaults on payments
due and the company also fails to make such payments. In that event, the holders
may have recourse against unallocated funds held by the Trust. At December 31,
1995, assets of the ESOP Trust consisted primarily of $290,778 of Pharmacia &
Upjohn, Inc., Series A Convertible Perpetual Preferred Stock.
ESOP expense is determined as follows: A portion of future debt principal
payments is attributed to each year of the plan based on the number of shares
allocated during the period. This
F-24
<PAGE> 74
accelerated principal amount is combined with debt interest and factored by 80
percent. From this formula-driven amount, the company deducts interest earned on
the note receivable from the ESOP Trust and dividends paid on all preferred
stock held by the Trust to arrive at net ESOP expense.
Key measures of the ESOP were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Interest expenses of ESOP Trust................................. $29,018 $28,895 $28,779
Dividend income of ESOP Trust................................... 18,268 18,489 18,606
Company contribution to ESOP Trust.............................. 8,114 8,001 7,870
Company ESOP expense (net)...................................... 13,705 13,368 12,344
</TABLE>
19. EMPLOYEE STOCK OPTIONS
Employee stock options have a 10-year duration and are exercisable after
one year of employment, following the grant date. At December 31, 1995, 789
current and former employees held options for 12,570,699 shares, of which
11,844,223 were exercisable. Options for 2,730,225 shares, 5,078,167 shares and
7,747,801 shares were available for future grants at December 31, 1995, 1994 and
1993, respectively. A new provision, effective in 1996, changes the number of
shares authorized and available for granting each year to equal 1.25% of the
outstanding common shares.
Under the plan, upon the stock-for-stock exercise of any nonqualified or
incentive stock options, an active employee will receive a new, nonqualified
"reloaded" stock option at the then-current market price for the number of
shares surrendered to exercise an option. The "reloaded" stock option will have
an exercise term equal to the time remaining of the original exercised option.
Changes in outstanding options were as follows:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER
PER SHARE OF SHARES
------------ ----------
<S> <C> <C>
Balance outstanding, January 1, 1993............................... $ 6.15-31.81 10,379,334
Granted............................................................ 19.44-22.24 3,084,792
Exercised.......................................................... 6.15-21.90 (69,920)
Canceled........................................................... 6.51-31.81 (706,085)
------------ ----------
Balance outstanding, December 31, 1993............................. $ 6.51-31.81 12,688,121
Granted............................................................ 19.74-24.78 2,795,195
Exercised.......................................................... 6.51-24.23 (399,755)
Canceled........................................................... 6.51-31.81 (785,120)
------------ ----------
Balance outstanding, December 31, 1994............................. $ 8.50-31.81 14,298,441
Granted............................................................ 20.60-39.69 2,558,295
Exercised.......................................................... 8.50-39.69 (4,075,684)
Canceled........................................................... 17.07-39.69 (210,353)
------------ ----------
Balance outstanding, December 31, 1995............................. $ 8.50-39.69 12,570,699
==========
</TABLE>
In accordance with the terms of the merger, the numbers of shares and
option prices for options outstanding prior to the merger were adjusted to give
effect to the exchange ratio of one Upjohn share for 1.45 shares of the
company's common stock.
20. RETIREMENT BENEFITS
The company has various pension plans covering substantially all employees.
Benefits provided under the defined benefit pension plans are primarily based on
years of service and the employee's
F-25
<PAGE> 75
compensation. The following table summarizes the funded status of the material
defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation.......... $ 736,302 $ 170,828 $ 594,258 $ 146,572
---------- --------- --------- ---------
Projected benefit obligation............ $ 957,898 $ 241,127 $ 823,433 $ 185,356
Plan assets at fair value............... 1,178,026 13,987 986,909 14,013
---------- --------- --------- ---------
Plan assets in excess of (less than)
projected benefit obligation.......... 220,128 (227,140) 163,476 (171,343)
Unrecognized net losses................. 20,124 14,744 58,539 1,016
Unamortized net transition amount....... (85,113 ) 5,279 (96,638) 5,355
Unrecognized prior service cost......... 37,256 174 40,084 3,284
---------- --------- --------- ---------
Prepaid (accrued) pension cost.......... $ 192,395 $(206,943) $ 165,461 $(161,688)
========== ========= ========= =========
Actuarial assumptions:
U.S.
Discount rate......................... 7.5% 8.5 - 9.0%
Salary growth rate.................... 4.0 - 6.5% 4.25- 6.5%
Return on plan assets................. 8.5 - 9.5% 8.0 - 9.5%
Non-U.S.
Discount rate......................... 5.5 - 9.5% 6.0 - 9.5%
Salary growth rate.................... 3.5 - 7.5% 3.3 - 7.5%
Return on plan assets................. 4.75-10.0% 4.75-10.0%
</TABLE>
The assets of the U.S. plans, which comprise the majority of the combined
plan assets, are invested approximately two-thirds in equity securities. Fair
value is determined principally by reference to publicly quoted year-end prices.
The lowering of the discount rate in 1995 for U.S. plans to 7.5 percent will not
have a material effect on future years' expense.
The principal pension obligations outside the U.S. are the defined benefit
plans which cover essentially all employees in the company's Swedish operations.
These plans (Swedish FPG/PRI pensions) form part of a Swedish secured
multi-employer pension plan which is centrally administered. The level of
benefits and actuarial assumptions are established jointly for all plans, and
cannot unilaterally be changed by the company.
The consolidated net pension expense amounts reflected below are exclusive
of the added costs associated with early retirement inducements offered in 1993.
These incremental charges of $15,000 before tax in 1993 were included in
restructuring costs.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............ $ 42,640 $ 53,234 $ 46,543
Interest cost on projected benefit obligation.............. 79,967 77,349 75,595
Actual return on plan assets............................... (231,194) 5,932 (137,825)
Net amortization and deferral.............................. 133,590 (93,461) 56,092
--------- -------- ---------
Net pension expense........................................ $ 25,003 $ 43,054 $ 40,405
========= ======== =========
</TABLE>
F-26
<PAGE> 76
21. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The company provides nonpension benefits to eligible retirees and their
dependents, primarily in the form of medical and dental benefits.
The following table summarizes the funded status of these plans operating
principally in the U.S.:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees............................................................... $190,637 $147,566
Fully eligible active participants..................................... 9,629 11,045
Other active participants.............................................. 178,510 161,487
-------- --------
Accumulated postretirement benefit obligation.......................... 378,776 320,098
Plan assets at fair value.............................................. 111,116 73,312
-------- --------
Accumulated postretirement benefit obligation in excess of plan
assets............................................................... 267,660 246,786
Unrecognized net gains................................................. 54,393 86,162
Unrecognized prior service cost........................................ 50,932 52,216
-------- --------
Accrued postretirement benefit cost.................................... $372,985 $385,164
======== ========
Actuarial assumptions:
Discount rate.......................................................... 7.5% 8.5%
Return on plan assets.................................................. 9.5% 9.5%
Weighted average healthcare cost trend rates:
Initially............................................................ 7.0% 7.5%
Trending down to..................................................... 5.25% 5.5%
</TABLE>
The plan assets are presently invested in long-term securities. The fair
value was established by the trustee of the fund.
The composition of expense for the postretirement benefit plan is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Service cost............................................. $ 9,105 $ 11,969 $14,764
Interest cost............................................ 26,908 25,438 31,933
Actual return on plan assets............................. (18,439) 766 (2,914)
Net amortization and deferral............................ 5,786 (10,137) (324)
-------- -------- -------
23,360 28,036 43,459
Portion attributable to discontinued operations.......... -- (1,435) (2,294)
-------- -------- -------
Net postretirement benefit cost, continuing operations... $ 23,360 $ 26,601 $41,165
======== ======== =======
</TABLE>
The assumption concerning healthcare cost trend rate has a significant
effect on the amounts reported. For example, increasing the rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1995, by approximately $45,000 and the
total of service and interest cost components of net postretirement benefit cost
for the year then ended by approximately $5,200. The lowering of the discount
rate in 1995 will not have a material effect on future years' expense.
22. SEGMENT AND GEOGRAPHIC INFORMATION
The company operates in one industry, pharmaceutical products, which
includes prescription and nonprescription products for both humans and animals.
The company's products are sold throughout the world to a wide range of
customers including pharmacies, hospitals, chain
F-27
<PAGE> 77
warehouses, governments, physicians, and wholesalers and other distributors. No
single customer accounts for 10 percent or more of the company's consolidated
sales.
The table below shows the company's operations by geographic area. All the
sales are presented by originating area. U.S. exports to third-party customers
are less than 10 percent of U.S. sales. Sales between geographic areas are
priced to reflect consideration of economic circumstances and the regulations of
countries in which the transferring entities are located. These transfers are
eliminated in consolidation.
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS FOR YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Sales to customers (includes exports):
U.S........................................... $ 2,205,208 $ 2,428,585 $ 2,576,782
Sweden........................................ 643,706 603,283 655,351
Other Europe.................................. 2,655,852 2,378,568 2,150,390
Japan and Pacific............................. 1,047,689 903,567 758,953
Other......................................... 396,614 390,357 366,011
Interarea transfers from:
U.S........................................... 569,170 494,501 452,600
Sweden........................................ 1,011,938 856,239 755,474
Other Europe.................................. 635,106 565,784 498,404
Japan and Pacific............................. 21,161 11,062 6,790
Other......................................... 20,721 22,180 23,319
Eliminations.................................... (2,258,096) (1,949,766) (1,736,587)
----------- ----------- -----------
$ 6,949,069 $ 6,704,360 $ 6,507,487
=========== =========== ===========
Earnings from continuing operations before
income taxes:
U.S........................................... $ 398,623 $ 563,435 $ 508,487
Sweden........................................ 300,763 290,335 310,477
Other Europe.................................. 308,091 296,493 (107,280)
Japan and Pacific............................. 89,265 49,116 56,627
Other......................................... 39,651 71,897 9,425
----------- ----------- -----------
$ 1,136,393 $ 1,271,276 $ 777,736
=========== =========== ===========
Identifiable assets, December 31:
U.S........................................... $ 4,291,947 $ 4,227,195 $ 3,801,893
Sweden........................................ 3,315,370 2,875,230 2,513,289
Other Europe.................................. 2,808,482 2,901,311 2,378,874
Japan and Pacific............................. 800,559 736,405 714,411
Other......................................... 244,243 206,987 207,809
Discontinued operations (net)................... -- -- 278,344
----------- ----------- -----------
$11,460,601 $10,947,128 $ 9,894,620
=========== =========== ===========
</TABLE>
F-28
<PAGE> 78
QUARTERLY DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 (UNAUDITED) QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales......................................................... $1,681,265 $1,770,306 $1,692,726 $1,804,772
Other revenue..................................................... 58,019 37,221 28,799 21,511
---------- ---------- ---------- ----------
TOTAL OPERATING REVENUE........................................... 1,739,284 1,807,527 1,721,525 1,826,283
Operating costs and expenses:
Cost of products sold........................................... 480,163 492,400 494,336 513,139
Research and development........................................ 294,577 323,666 303,503 331,820
Marketing, administrative & other............................... 600,469 670,659 648,087 697,342
Restructuring charges........................................... -- 11,804 -- 91,600
Merger costs.................................................... -- 49 1,870 136,274
---------- ---------- ---------- ----------
OPERATING INCOME.................................................. 364,075 308,949 273,729 56,108
Interest income................................................... 44,886 53,704 57,631 60,430
Interest expense.................................................. (22,077) (22,926) (24,929) (24,207)
Currency exchange gains (losses).................................. (31,703) 7,396 39,038 (1,660)
All other, net.................................................... (262) (1,295) (771) 277
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES...................................... 354,919 345,828 344,698 90,948
Provision for income taxes........................................ 117,100 114,100 113,800 52,700
---------- ---------- ---------- ----------
NET EARNINGS...................................................... 237,819 231,728 230,898 38,248
Dividends on preferred stock (net of tax)......................... 3,068 3,118 3,109 3,246
---------- ---------- ---------- ----------
NET EARNINGS ON COMMON STOCK...................................... $ 234,751 $ 228,610 $ 227,789 $ 35,002
========== ========== ========== ==========
NET EARNINGS PER COMMON SHARE:
Primary......................................................... $0.46 $0.45 $0.45 $0.07
Fully diluted................................................... $0.46 $0.44 $0.44 $0.07
1994 (UNAUDITED)
Net sales......................................................... $1,648,732 $1,700,976 $1,618,083 $1,736,569
Other revenue..................................................... 33,137 14,646 37,028 33,611
---------- ---------- ---------- ----------
TOTAL OPERATING REVENUE........................................... 1,681,869 1,715,622 1,655,111 1,770,180
Operating costs and expenses:
Cost of products sold........................................... 448,420 479,140 483,758 478,536
Research and development........................................ 285,391 280,114 280,633 316,614
Marketing, administrative & other............................... 639,156 642,879 588,616 715,984
Restructuring charges........................................... -- -- 6,900 12,937
---------- ---------- ---------- ----------
OPERATING INCOME.................................................. 308,902 313,489 295,204 246,109
Interest income................................................... 33,750 38,892 39,183 45,429
Interest expense.................................................. (28,534) (30,182) (28,937) (24,464)
Currency exchange gains (losses).................................. 9,891 (7,037) 10,364 8,903
All other, net.................................................... 2,188 (2,688) 38,016 2,798
---------- ---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........... 326,197 312,474 353,830 278,775
Provision for income taxes........................................ 112,342 107,616 121,859 96,008
---------- ---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS............................... 213,855 204,858 231,971 182,767
Discontinued operations, net...................................... 10,864 2,016 (5,694) (5,511)
---------- ---------- ---------- ----------
NET EARNINGS...................................................... 224,719 206,874 226,277 177,256
Dividends on preferred stock (net of tax)......................... 3,037 3,089 3,005 3,160
---------- ---------- ---------- ----------
NET EARNINGS ON COMMON STOCK...................................... $ 221,682 $ 203,785 $ 223,272 $ 174,096
========== ========== ========== ==========
NET EARNINGS PER COMMON SHARE:
Primary
Earnings from continuing operations............................. $0.42 $0.40 $0.45 $0.36
Net earnings.................................................... $0.44 $0.40 $0.44 $0.35
Fully diluted
Earnings from continuing operations............................. $0.41 $0.40 $0.44 $0.35
Net earnings.................................................... $0.43 $0.40 $0.43 $0.34
</TABLE>
F-29
<PAGE> 79
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF PHARMACIA & UPJOHN SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN
IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference........................... 2
Definitions, Trademarks............... 2
Prospectus Summary.................... 3
The Company........................... 7
Market Price Information.............. 8
Dividends............................. 8
Selected Consolidated Financial
Data................................ 9
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 10
Business.............................. 24
Selling Stockholder................... 44
Underwriting.......................... 45
Validity of Shares.................... 47
Experts............................... 48
Available Information................. 48
Miscellaneous......................... 49
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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46,000,000
SHARES OF COMMON STOCK
LOGO: PHARMACIA & UPJOHN
---------------------
PROSPECTUS
---------------------
Joint Global Coordinators
and Joint Bookrunners
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
---------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
MORGAN STANLEY & CO.
INCORPORATED
July 23, 1996
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