FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
_______________________________________________________
Commission File Number 1-4147
PHARMACIA & UPJOHN, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0155411
(State of incorporation) (I. R. S. Employer
Identification No.)
Knyvett House, The Causeway, Staines, Middlesex TW18 3BA England
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 44 181 956 0043
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months, and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $1 Par Value, outstanding as of
was 509,417,683.
Page 1 of 18 pages
The exhibit index is set forth on page 13.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31
(All U.S. dollar amounts in thousands, except per-share data)
Unaudited
----------------------
1996 1995
---------- ----------
Net sales $1,740,138 $1,681,265
Other revenue 17,342 58,019
---------- ----------
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 $.09 $.46
==== ====
Fully diluted $.09 $.46
==== ====
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
(All U.S. dollar amounts in thousands)
Unaudited
----------------------
1996 1995
-------- --------
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
======== ========
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All U.S. dollar amounts in thousands)
March 31, December 31,
1996 1995
----------- ------------
(unaudited)
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
=========== ===========
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(All 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:
March 31, December 31,
1996 1995
--------- ------------
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
========== ==========
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 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 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
FINANCIAL REVIEW
Overview of Consolidated Results
U.S. dollars in millions, except per-share data
Percent
1996 Change 1995
-------- ------- --------
Total revenue $1,757.5 1.0% $1,739.3
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 $.09 (80.4) $.46
When comparing operating performance for the first quarter of 1996 to that of
1995, restructuring expenses, merger costs, and an unusual item of 1995 income
should be considered. Major restructuring costs associated with the November
1995 merger, totaling $257.2 million ($160.9 million or $.31 per share after
tax), were incurred in the first quarter of 1996. The majority of these costs
were 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 $.04 per share after tax) were incurred to effect the
merger.
In the first quarter of 1995, the sale of the company's rights under a product
co-marketing agreement increased other operating revenue by $42 million and
net earnings by $26 million or $.05 per share.
The company's prior year results were derived from the separate financial
statements of Pharmacia AB and The Upjohn Company. These statements were
combined retroactively to reflect the merger that was consummated on November
2, 1995. Certain reclassifications have been made to prior-year amounts to
reflect the current year's presentation.
PRODUCT SALES
The table below provides a year-to-year comparison of consolidated net sales
by major therapeutic product group:
U.S. dollars in millions
Percent
Three months ended March 31, 1996 Change 1995
-------- ------- --------
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
Diagnostics 59.0 (16.2) 70.4
Biotech/Biosensor 106.8 16.7 91.5
-------- --------
Consolidated net sales $1,740.1 3.5% $1,681.3
======== ========
Consolidated 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 United States
for the first quarter of 1996 were $545 million, up 6 percent from $514
million for this period in 1995. The growth in 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 in Europe.
The sales decline in Infectious Disease products was largely the result of a
decrease of sales in the Cleocin (Dalacin outside the U.S.) family of
antibiotic products in non-U.S. markets. Sales of Vantin, the broad-spectrum
oral antibiotic sold primarily in the U.S., declined due to a comparatively
moderate cold and flu season. Sales of Mycobutin were down in the U.S. First
quarter 1995 sales of Mycobutin benefited from purchases in anticipation of a
price increase.
Sales of products for the treatment of Metabolic Disease were led by
Genotropin, the 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 are now permitted and initial
shipments were made during the first quarter of 1996. Continuing generic
competition for Micronase tablets (glyburide), the oral anti-diabetes agent,
led to a decline in sales for this product. In addition, sales of Glynase,
the 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, the injectable steroid, and other
Medrol products in non-U.S. markets. These declines were due to unfavorable
currency exchange fluctuations. Fragmin, the treatment for prevention of
blood clots in connection with surgery, demonstrated good growth in Germany,
Sweden, and Austria but was off slightly in France. Approved late in 1995,
first U.S. sales of Fragmin were made in the first quarter of 1996.
Sales of Central Nervous System agents declined as a result of continuing U.S.
generic competition against Xanax, the anti-anxiety agent. In non-U.S.
markets, Xanax continued to record sales growth. Sales of Halcion Tablets,
the sleep inducing agent, were up slightly in the U.S. but were down on a
worldwide basis. Sermion, the agent for the treatment of senile dementia,
declined in Japan as well as in other non-U.S. locations. 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,
the cytostatic agent for the treatment of solid tumors and leukemias. First
quarter sales of Farmorubicin were up slightly outside the U.S. Sales of
Adriamycin, also a cytostatic 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) has been filed
with the U.S. Food and Drug Administration (FDA) for irinotecan for the
treatment of refractory colorectal cancer.
Sales growth in the Women's Health product group was led by the performance of
Depo-Provera, the injectable contraceptive that recorded strong increases
worldwide. FDA moratoriums on the approval of Abbreviated New Drug
Applications protecting exclusivity for Depo-provera expired in November 1995.
U.S. sales of Ogen, the estrogen replacement therapy, were off slightly due to
generic substitution. Sales of Provera products (medroxyprogesterone), the
progestational agents, were down slightly in the U.S. due to increasing
generic competition.
The growth in sales of Nutrition products was led by non-U.S. sales of
Intralipid (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, 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, the treatment for male
impotence. Caverject first recorded sales in the U.S. in late 1995 and is now
sold in major markets worldwide. Prescription sales of Rogaine, the treatment
for hair loss, were down in the U.S in anticipation of over-the-counter (non-
prescription) sale late in the first quarter. An NDA was submitted to the
U.S. FDA for a Rogaine 5% Minoxidil formulation for the treatment of common
hair loss in December 1995. Sales of Salazopyrin, the preparation used to
treat inflammatory bowel disorder and rheumatoid arthritis, were essentially
unchanged. U.S. sales of Ansaid Tablets (flurbiprofen), the anti-inflammatory
agent, continued to decline as a result of generic competition.
Consumer Healthcare product sales were up significantly, largely due to U.S.
prestocking of Rogaine and Nicorette gum in advance of second quarter over-
the-counter product launches. In February 1996, Rogaine 2% solution was
approved for over-the-counter sales. The FDA did not grant the company the
possible statutory three-year period of exclusivity limiting generic
competition. The company's motion for a preliminary injunction to prohibit
the FDA from approving generic competitors was denied. Nicorette gum, a
treatment for smoking 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 merger of Pharmacia
with Upjohn. Non-U.S. sales of all Nicorette products were up. Sales of
Motrin IB, 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 (Excenel 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 Lincomycin 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.
Sales of the Diagnostics business were down significantly, especially in Japan
where lower sales of allergy diagnostic products suffered from an overall
milder pollen season. Sales in Europe were also down due to changes in
reimbursement policies and to a milder pollen season.
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.
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 $26 million ($.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, 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:
First quarter ended March 31, 1996 1995
---- ----
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)
(1) Previously reported for 1995 as 28.6% (cost of products sold), 35.7%
(marketing, administrative and other), and 21.7% (operating income).
Gains and losses from currency exchange forward contracts relating to
net transaction exposures are now classified with cost of products sold
to more accurately match 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 the company's
currency risk management program related to anticipated currency transaction
exposures.
Expenditures for research and development (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 activities
of the combined company will be realized at an increasing rate in later
quarters of this year. During the quarter, the company announced NDA
submissions to the FDA for Pramipexole for Parkinson's Disease, Remisar for
bladder cancer, and Dostinex (cabergoline) for Hyperprolactinemia.
Marketing, administrative and other (M&A) expense remained flat as a percent
of sales but was 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 the new organization of
Pharmacia & Upjohn, Inc. 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 the
company during the first quarter.
In December 1995, a major merger-related restructuring plan was announced to
eliminate duplicate facilities and functions and to focus resources on the
objectives of the newly merged company. This plan will ultimately lead to the
reduction of approximately 4,100 positions worldwide and the closing or
combining of numerous subsidiary locations and manufacturing facilities (plant
rationalizations). In addition, steps are being taken to focus research and
development activities on the most promising projects of the two companies.
This should result in the reduction of total R&D projects by approximately 20
percent. 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 the company under this restructuring program. It is
expected that further restructuring charges associated with the merger and
plant rationalizations will continue into 1997. 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 will 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 two
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 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.
FINANCIAL CONDITION
March 31, December 31,
1996 1995
--------- ------------
Working capital (U.S. dollars in millions) $2,396.9 $2,333.7
Current ratio 1.96 1.88
Debt to total capitalization 17.2% 17.9%
Working capital is up, 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.
March 31, December 31,
1996 1995
--------- ------------
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
======== ========
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, that totaled
approximately $75 million and the $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 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.
The company 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.
The 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.
OTHER ITEMS
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 continues to believe 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 such issues, the
ultimate liability should not have 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 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 million to $60 million. The court did not approve the settlements, but
it is expected that further settlement discussions will be conducted by such
defendants.
PART II - OTHER INFORMATION
Item 5. In the company's 1995 Form 10-K, Part I, Item 1, Employees, it was
indicated there were approximately 35,000 employees worldwide.
Subsequent analysis has revealed that the number is more
appropriately stated as being approximately 36,000.
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page 15).
(a)(ii) Exhibit 11 - Statement regarding computation of earnings per
share (page 16).
(a)(iii) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 17).
(a)(iv) Exhibit 15 - Awareness of Coopers & Lybrand L.L.P. and KPMG
Peat Marwick LLP (page 18).
(a)(v) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) There were no reports on Form 8-K during the quarter ended
March 31, 1996.
SIGNATURE:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACIA & UPJOHN, INC.
(Registrant)
DATE: May 15, 1996 /S/R. C. SALISBURY
R. C. Salisbury
Executive Vice President,
Finance and Administration
and Chief Financial Officer
DATE: May 15, 1996 /S/D. W. SCHMITZ
D. W. Schmitz
Vice President, Corporate Law and
Assistant Corporate Secretary
EXHIBIT A
INDEPENDENT ACCOUNTANT'S REPORT
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.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope that 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 (not presented herein); 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
EXHIBIT 11
PHARMACIA & UPJOHN, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE - PRIMARY
(U.S. dollars in millions, except per-share data)
Three Months Ended
March 31,
---------------------
1996 1995
---- ----
Net earnings $49.9 $237.8
Dividends on preferred stock, net of tax 3.2 3.0
----- ------
Net earnings on common shares - primary $46.7 $234.8
===== ======
Average number of common shares outstanding 508.0 504.9
Number of common shares issuable assuming
exercise of stock options 4.3 .9
Contingently issuable incentive common shares .5 .4
----- -----
Total shares - primary 512.8 506.2
===== =====
Primary earnings per common share $.09 $.46
==== ====
COMPUTATION OF EARNINGS PER COMMON SHARE - FULLY DILUTED(1)
Net earnings $49.9 $237.8
Less ESOP contribution assumed to be required if
preferred shares are converted into common shares 1.1 1.1
Less tax benefit of preferred stock dividend on
allocated shares .3 .2
Plus tax benefit assumed on common stock dividend .2 .1
----- ------
Net earnings on common shares - fully diluted $48.7 $236.6
===== ======
Average number of common shares outstanding 508.0 504.9
Number of common shares issuable assuming
exercise of stock options 4.3 1.4
Contingently issuable incentive common shares .5 2.0
Number of common shares issuable assuming
conversion of preferred shares 10.5 10.6
----- -----
Total shares - fully diluted 523.3 518.9
===== =====
Fully diluted earnings per common share $.09 $.46
==== ====
(1) This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3%.
<TABLE>
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(U.S. dollar amounts in thousands)
<CAPTION>
Three Months Year Ended December 31,
Ended
March 31, 1996 1995 1994 1993 1992 1991
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $ 74,368 $1,136,393 $1,271,276 $ 777,736 $ 947,395 $ 909,659
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 860 7,389 8,156 8,037 6,464 5,062
-------- ---------- ---------- ---------- ---------- ----------
73,508 1,129,004 1,263,120 769,699 940,931 904,597
Add: Amortization of previously
capitalized interest 1,874 10,079 7,695 5,419 4,486 3,109
Fixed charges included in the above:
Interest and amortization of debt
expense 25,733 121,018 139,013 209,399 162,425 145,655
Rental expense representative
of an interest factor 8,832 35,330 35,290 32,348 34,743 36,834
-------- ---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before income taxes and fixed
charges $109,947 $1,295,431 $1,445,118 $1,016,865 $1,142,585 $1,090,195
======== ========== ========== ========== ========== ==========
Interest incurred and amortization
of debt expense $ 29,808 $ 148,542 $ 164,341 $ 233,683 $ 178,677 $ 158,724
Rental expense representative of an
interest factor 8,832 35,330 35,290 32,348 34,743 36,834
-------- ---------- ---------- ---------- ---------- ----------
Total fixed charges $ 38,640 $ 183,872 $ 199,631 $ 266,031 $ 213,420 $ 195,558
======== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 2.85 7.05 7.24 3.82 5.35 5.57
==== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Pharmacia & Upjohn, Inc.
Registration on Form 10-Q
We are aware that our report dated April 30, 1996 on our review of interim
financial information of Pharmacia & Upjohn, Inc. and Subsidiaries for the
three-month periods ended March 31, 1996 and 1995, included in this Form 10-Q
is incorporated by reference in the Company's prospectus in Form S-8
Registration Statement (No. 33-63903) and the prospectus in Form S-8
Registration Statement (No. 33-03109). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of the Act.
COOPERS & LYBRAND L.L.P.
KPMG PEAT MARWICK LLP
Chicago, Illinois
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE EARNINGS STATEMENT AND THE CONDENSED BALANCE SHEET AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 890,691
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 974,125
<CURRENT-ASSETS> 4,901,362
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,344,588
<CURRENT-LIABILITIES> 2,504,458
<BONDS> 0
0
289,968
<COMMON> 5,087
<OTHER-SE> 6,026,817
<TOTAL-LIABILITY-AND-EQUITY> 11,344,588
<SALES> 1,740,138
<TOTAL-REVENUES> 1,757,480
<CGS> 503,115
<TOTAL-COSTS> 503,115
<OTHER-EXPENSES> 299,756<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,162
<INCOME-PRETAX> 74,368
<INCOME-TAX> 24,500
<INCOME-CONTINUING> 49,868
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,868
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1>ONLY INCLUDES R&D EXPENSE.
</FN>
</TABLE>
