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 June 30, 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, $.01 Par Value, outstanding as of
August 7, 1996
was 508,353,208.
Page 1 of 21 pages.
The exhibit index is set forth on page 16.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(All U.S. Dollar Amounts in Thousands, Except Per-Share Data)
<CAPTION>
Unaudited
---------------------------------------------------
For Three Months For Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net sales $1,775,288 $1,770,306 $3,515,426 $3,451,571
Other revenue 28,663 37,221 46,005 95,240
---------- ---------- ---------- ----------
Operating revenue 1,803,951 1,807,527 3,561,431 3,546,811
Cost of products sold 495,061 483,766 1,003,212 991,222
Research & development 302,772 323,666 602,528 618,243
Marketing, administrative and other 720,651 669,674 1,347,533 1,277,536
Restructuring charges 163,700 11,804 420,900 11,804
Merger costs 29,375 49 51,403 49
---------- ---------- ---------- ----------
Operating income 92,392 318,568 135,855 647,957
Interest income 46,972 53,704 95,606 98,590
Interest expense (22,671) (22,926) (41,833) (45,003)
All other, net 6,354 (3,518) 7,787 (797)
---------- ---------- ---------- ----------
Earnings before income taxes 123,047 345,828 197,415 700,747
Provision for income taxes 40,600 114,100 65,100 231,200
---------- ---------- ---------- ----------
Net earnings 82,447 231,728 132,315 469,547
Dividends on preferred stock
(net of tax) 3,175 3,118 6,314 6,186
---------- ---------- ---------- ----------
Net earnings on common stock $ 79,272 $ 228,610 $ 126,001 $ 463,361
========== ========== ========== ==========
Earnings per common share:
Primary $.16 $.45 $.25 $.91
Fully diluted $.16 $.44 $.25 $.90
</TABLE>
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
(All U.S. dollar amounts in thousands)
Unaudited
----------------------
1996 1995
-------- ----------
Net cash provided by operations $188,456 $ 554,966
-------- ----------
Cash provided (required) by investment activities:
Payments for acquisitions - (40,939)
Additions of properties (223,757) (228,528)
Proceeds from sales of properties 11,609 26,210
Proceeds from sales of investments 867,686 911,047
Purchase of investments (762,777) (1,002,570)
Other (4,718) 44,677
-------- ----------
Net cash required by investment activities (111,957) (290,103)
-------- ----------
Cash provided (required) by financing activities:
Proceeds from issuance of debt 19,516 11,693
Repayment of debt (123,922) (64,399)
Payments of ESOP debt (7,600) -
Net (decrease) in debt with initial maturity of
of 90 days or less 85,337 (66,627)
Dividends paid to shareholders (283,441) (223,003)
Purchase of common stock (51,003) (102,599)
Sales of treasury stock 61,528 17,504
Other (1,387) (8,593)
-------- ----------
Net cash required by financing activities (300,972) (436,024)
-------- ----------
Effect of exchange rate changes on cash (11,330) 21,556
-------- ----------
Net change in cash and cash equivalents (235,803) (149,605)
-------- ----------
Cash and cash equivalents, beginning of year 840,525 651,660
-------- ----------
Cash and cash equivalents, end of period $604,722 $ 502,055
======== ==========
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All U.S. dollar amounts in thousands)
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 604,722 $ 840,525
Short-term investments 937,837 973,656
Other current assets 3,469,778 3,159,429
----------- -----------
Total current assets 5,012,337 4,973,610
----------- -----------
Long-term investments 628,410 715,348
----------- -----------
Goodwill and other intangible assets, net 1,626,680 1,722 157
----------- -----------
Properties, net 3,426,999 3,393,225
----------- -----------
Other noncurrent assets 565,967 656,261
----------- -----------
Total assets $11,260,393 $11,460,601
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 538,404 $ 524,429
Other current liabilities 2,136,969 2,115,499
----------- -----------
Total current liabilities 2,675,373 2,639,928
----------- -----------
Long-term debt and guarantee of ESOP debt 816,591 870,308
----------- -----------
Other noncurrent liabilities 1,582,844 1,563,158
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value;
authorized 100,000,000 shares; issued
Series A convertible 7,179 shares
(1995: 7,220 shares) at stated value 288,602 290,778
Common stock, one cent par value;
authorized 1,500,000,000 shares, issued
508,781,859 shares (1995: 506,625,800 shares) 5,088 5,066
Capital in excess of par value 1,483,292 1,457,240
Retained earnings 5,711,499 5,861,197
Currency translation adjustments (1,072,863) (986,278)
Other shareholders' equity (230,033) (240,796)
----------- -----------
Total shareholders' equity 6,185,585 6,387,207
----------- -----------
Total liabilities and shareholders' equity $11,260,393 $11,460,601
=========== ===========
See accompanying notes.
<PAGE>
NOTES TO CONDENSED 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. Second quarter 1995 data were affected as follows: cost of
products sold decreased $8,634; marketing, administrative and other decreased
$985; other nonoperating expense (currency exchange losses) increased $9,619.
June 30 1995 year-to-date reclassification amounts were: cost of products
sold increased $18,659; marketing, administrative and other increased $6,408;
nonoperating expense decreased $25,067.
B - INVENTORIES:
June 30, December 31,
1996 1995
--------- ------------
Estimated replacement cost
(FIFO basis):
Pharmaceutical and other finished products $ 446,342 $ 487,955
Raw materials, supplies and work in process 696,155 634,250
---------- ----------
1,142,497 1,122,205
Less reduction to LIFO cost (148,882) (146,651)
---------- ----------
$ 993,615 $ 975,554
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $369,275 at June 30, 1996, and $358,216 at December 31, 1995.
C - LITIGATION:
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 the company's products, are pending against the company and its
subsidiaries. The company is also 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 50 sites and including site
clean-up at the company's discontinued industrial chemical operations. The
Company'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
the company's ultimate share of a site's cost.
Based on information currently available and the company'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
the company's results of operations or liquidity.
In May 1994, the U.S. Food and Drug Administration (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
company employees have given testimony 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 labeling. 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.
The company 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 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
the company 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 the company) have reached
settlement agreements with the plaintiffs in the class action pending in the
Northern District of Illinois for amounts ranging from $10,000 to $60,000.
These settlements were recently approved by the court. The company 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 the company, may have
violated federal antitrust laws in connection with establishing prices and
rebates.
Lawsuits have been filed against the company in the U.S., Japan, and Sweden
alleging that the manufacturing of Genotropin infringes third-party patent
rights. At this stage of the proceedings, the final outcome of the actions
cannot be determined.
D - RESTRUCTURING CHARGES AND MERGER COSTS:
Restructuring charges of $163,700 and $420,900 in the second quarter and first
six months of 1996, respectively, relate to actions that resulted from the
merger of Pharmacia AB and The Upjohn Company and primarily reflect accruals
for planned personnel reduction. Since the merger, accruals for the reduction
of 3,650 positions have been made. There have been no adjustments made to
increase or decrease amounts previously accrued for workforce reduction or
other restructuring activities.
Merger costs of $29,375 and $51,403 recorded in the second quarter and first
six months of 1996, respectively, 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 that is stated on a fully
diluted basis:
Second Quarter Six Months
-------------------------- --------------------------
Percent Percent
1996 Change 1995 1996 Change 1995
-------- ------- -------- -------- ------- --------
Total revenue $1,804.0 (0.2%) $1,807.5 $3,561.4 0.4 $3,546.8
Operating income 92.4 (71.0) 318.6 135.9 (79.0) 648.0
Net earnings 82.4 (64.4) 231.7 132.3 (71.8) 469.5
Fully diluted earnings
per common share $0.16 (63.6) $0.44 $0.25 (72.2) $0.90
When comparing operating performance for the second quarter and first six
months of 1996 to those periods in 1995, restructuring expenses, merger costs,
and an unusual expense item should be considered. Major restructuring and
merger costs associated with the November 1995 merger, totaling $193.1 million
($117.9 million or $.22 per share after tax), were incurred in the second
quarter of 1996. Restructuring and merger costs for the first six months of
1996 were $472.3 million ($297.0 million or $.57 per share after tax).
Restructuring and merger costs were $11.9 million ($8.5 million or $.02 per
share after tax) for the second quarter and first six months of 1995. Also in
the second quarter of 1996, the company announced the termination of an
agreement to develop the hemoglobin-based oxygen transport product, Hemopure.
Dissolution of this agreement led to the impairment of an investment resulting
in a charge of $106.2 million ($69.1 million or $.13 per share after tax) that
was reported with marketing, administrative and other expense.
In the first quarter of 1995, the sale of the company's rights under a product
co-marketing agreement increased other operating revenue for that six-month
period by $42.0 million ($26.0 million or $.05 per share after tax).
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
Second Quarter Six Months
------------------------ --------------------------
Percent Percent
1996 Change 1995 1996 Change 1995
-------- ------- -------- -------- ------- --------
Infectious disease $ 128.3 (21.3)% $ 163.1 $ 291.5 (17.4)% $ 353.1
Metabolic disease 158.7 (7.2) 171.0 307.1 (4.9) 322.8
Critical care and
thrombosis 169.0 14.6 147.5 311.8 7.2 290.8
Central nervous system 143.1 (0.1) 143.2 274.1 (1.6) 278.6
Oncology 143.3 (6.0) 152.5 274.9 (4.4) 287.6
Women's health 123.8 (11.3) 139.6 265.3 0.8 263.3
Nutrition 108.1 5.7 102.3 218.1 10.5 197.4
Ophthalmology 69.8 (14.3) 81.4 131.8 (13.7) 152.8
Other prescription
pharmaceutical 204.5 (15.5) 242.1 431.6 (8.9) 474.0
Consumer Healthcare 206.8 77.4 116.6 363.8 66.0 219.2
Animal Health 89.7 2.4 87.6 175.4 2.3 171.4
Chemical and Contract
Manufacturing 64.7 23.2 52.5 138.7 28.7 107.8
-------- ----- -------- -------- ----- --------
Total pharmaceutical 1,609.8 0.7 1,599.4 3,184.4 2.1 3,118.8
Diagnostics 58.2 (16.4) 69.6 117.2 (16.3) 140.0
Biotech/Biosensor 107.3 5.9 101.3 214.1 11.0 192.8
-------- ----- -------- -------- ----- --------
Consolidated net sales $1,775.3 0.3 $1,770.3 $3,515.4 1.9% $3,451.6
======== ===== ======== ======== ===== ========
Consolidated sales outside the U.S. for the second quarter of 1996 were
$1,214.4 million, down 1.9 percent from $1,237.5 million for the same period
in 1995. Sales outside the U.S. represented 68.4 percent of second quarter
1996 consolidated sales, down from 69.9 percent for the second quarter of
1995. Sales in the United States for the second quarter of 1996 were $560.9
million, up 5.3 percent from $532.8 million for this period in 1995 while for
the first six months, sales of $1,106.1 for 1996 compared to $1,047.3 for
1995, an increase of 5.6 percent. For the six months year-to-date,
consolidated sales outside the U.S. of $2,409.3 were up 0.2 percent from
$2,404.3 for the same period in 1995. This represented 68.5 percent and 69.7
percent of consolidated sales for these six-month periods, respectively.
The relatively flat sales comparison for the second quarter of 1996 occurred
in spite of 4% adverse effect from foreign exchange, a biennial price decrease
in Japan and continued generic competition in the U.S.
The second-quarter sales decline in Infectious Disease products resulted from
declines in all major product groups. Sales of the Cleocin (Dalacin outside
the U.S.) family of antibiotic products were off in non-U.S. markets. Sales
of Vantin, the broad-spectrum oral antibiotic sold primarily in the U.S.,
declined significantly due to competition from new products. For the first six
months of 1996, sales of Vantin were also affected adversely by a relatively
moderate cold and flu season.
Second-quarter sales of products for the treatment of Metabolic Disease were
led by Genotropin, the growth hormone that recorded good growth in non-
U.S.markets. Sales of Genotropin were up significantly in Europe, especially
in Italy and Germany, due to activity increases. In spite of volume
increases, sales of Genotropin in Japan were down due to government mandated
biennial price decreases. U.S. sales of Genotropin are now permitted and
patient enrollment is increasing. Continuing U.S. generic competition for
Micronase tablets (glyburide), the oral anti-diabetes agent, led to a
significant decline in sales of this product. Sales of Glynase, the oral
anti-diabetes agent were up in the U.S., partially offsetting the decline in
Micronase.
Sales growth in the second quarter in Critical Care and Thrombosis products
was led by Fragmin, the treatment for prevention of blood clots in connection
with surgery. Fragmin demonstrated good growth throughout Europe, especially
Germany, Sweden, and Austria. Sales of Solu-Medrol and other Medrol products
were down, largely due to price decreases in Japan.
Sales of Central Nervous System agents for the second quarter were flat.
Second quarter 1996 sales of Xanax, the anti-anxiety agent, were up slightly
in the U.S. where this product has suffered substantially from generic
competition. Xanax recorded strong sales growth in Europe, especially Italy
and Spain. Sales of Halcion Tablets, the sleep inducing agent, were down
slightly in all world markets. Sermion, the agent for the treatment of senile
dementia, declined substantially in Japan but were up in other non-U.S.
locations. Cabergoline, the anti-parkinsonian agent, has now been approved
for sale in several European markets and a New Drug Application (NDA) has been
filed with the U.S. Food and Drug Administration (FDA) requesting approval for
sale in the U.S.
The Oncology group of products continued to be led by sales of Farmorubicin,
the cytostatic agent for the treatment of solid tumors and leukemia. Second
quarter sales of Farmorubicin were down somewhat largely due to unfavorable
pricing pressure in Japan. Sales of Adriamycin, also a cytostatic agent for
treatment of solid tumors and leukemia, were down in the U.S. due to generic
competition. Other branded and generic oncology products recorded moderate
sales growth outside the U.S. During the second quarter, the FDA approved
Camptosar (irinotecan), for the treatment of refractory colorectal cancer, for
sale in the U.S.
Sales growth in the Women's Health product group continued to be led by the
U.S. performance of Depo-Provera, the injectable contraceptive. Sales of Depo-
Provera in non-U.S. markets were down for the quarter. U.S. sales of Ogen,
the estrogen replacement therapy, were off due to continued generic
substitution. Sales of Provera products (medroxyprogesterone), the
progestational agents, were down in the U.S. due to increasing generic
competition.
The growth in sales of Nutrition products was led by 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, the government mandated biennial price decrease
contributed to the sales decline for this product.
Other Prescription Pharmaceutical products sales were led by Caverject, the
treatment for male impotence. The first U.S. Caverject sales were recorded in
late 1995 and now the product is sold in major markets worldwide. Late in the
first quarter of 1996, Rogaine 2% solution, the treatment for hair loss, was
approved for over-the-counter (non-prescription) sales. (See discussion
regarding Rogaine in the Consumer Healthcare analysis below). An NDA was
submitted to the 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 up
slightly in non-U.S. markets. 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 due to the addition of
U.S. over-the-counter (OTC) sales of Rogaine and Nicorette gum to this group
late in the first quarter of 1996. The strong second quarter sales of Rogaine
2% solution followed initial sales to establish retail inventories late in the
first quarter. The increase in the OTC sales of Rogaine 2% solution have
greatly exceeded the prior year prescription sales. Strong sales of Nicorette
gum, the treatment for smoking cessation, were recorded in the second quarter.
Nicorette Gum is marketed by SmithKline Beecham.
Non-U.S. sales of Nicorette products were also up. Sales of Motrin IB, the
non-steroidal analgesic agent, were flat for the second quarter.
Sales for the Animal Health product group were up in the quarter due to strong
sales in non-U.S. markets. Sales in the U.S. were depressed somewhat by
reductions in herds due to supply surpluses. The reduction in U.S. sales is
reflective of all major product groups.
Sales growth recorded by the Chemical and Contract Manufacturing group in the
second quarter of 1996 was primarily due to the transfer of certain European
products into this sales classification for 1996 (reported in other
prescription pharmaceutical groupings in 1995). Sales of Specialty and
Commodity Steroid products were down slightly for the quarter.
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 also were down due to changes in
reimbursement policies in Germany, France and Switzerland.
The Biotech/Biosensor group recorded good sales growth in the U.S. while sales
outside the U.S. were off slightly. This business develops, manufactures, and
markets systems, reagents, and chemicals for pharmaceutical and biotechnology
companies and academic research laboratories.
OTHER OPERATING REVENUE
In the second quarter of 1995, the sale of certain distribution rights added
$21.1 million to this revenue category. Exclusive of that item, other revenue
from co-marketing agreements is up for the second quarter of 1996. In the
first quarter of 1995, the company sold rights under a product co-marketing
agreement that added $42 million to this revenue classification, adding to the
comparative decline for the first six months of 1996.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of net sales, were as
follows:
Second Quarter Six Months
--------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Cost of products sold 27.9% 27.3%(1) 28.5% 28.7%(1)
Research and development 17.1 18.3 17.1 17.9
Marketing, administrative
and other 40.6 37.8 (1) 38.3 37.0 (1)
Restructuring charges 9.2 0.7 12.0 0.3
Merger costs 1.7 - 1.5 -
Operating income 5.2 18.0 (1) 3.9 18.8 (1)
(1) Previously reported for the second quarter (first six months of 1995) as:
Cost of products sold - 27.8% (28.2%); Marketing, administrative and
other - 37.9% (36.8%); and Operating income - 17.5% (19.5%). Gains and
losses from currency exchange forward contracts relating to certain net
transaction and anticipated currency exchange exposures are now
classified with cost of products sold to more accurately match the losses
and gains on the instruments underlying the exposures. Formerly, these
gains and losses had been classified as either an element of nonoperating
income (expense) or with administrative expense, depending on the status
of the contract.
The second quarter 1996 increase in cost of products sold as a percent of
sales reflects an unfavorable period-to-period comparison in product mix.
Generic competition has continued to reduce sales of the company's higher
margin products. Those sales have generally been replaced by products
carrying lower gross profit. Favorable comparisons, both for the second
quarter and the first six months of 1996, of losses and gains from the
company's currency risk management program related to anticipated currency
transaction exposures have mitigated this decline somewhat.
Expenditures for research and development (R&D) in the second quarter of 1996
declined somewhat in both dollars and as a percent of sales. Savings from
personnel reductions and other actions to consolidate and focus the research
activities of the combined company are beginning to be realized in this
expense category. During the quarter, the company announced regulatory
filings for Rescriptor (U.S.), the company's antiviral treatment for AIDS and
Remisar Tablets (U.S. and Japan), for bladder cancer.
The significant increase in marketing, administrative and other expense (M&A),
both in total dollars and as a percent of sales, resulted principally from the
termination of an agreement with Biopure Corporation. A charge of $106.2
million was incurred to recognize the impairment of an investment in this
company that arose because of the termination of this co-development
agreement. Excluding the effect of this charge from the second quarter
comparison, M&A expense declined as a percent of sales both for the quarter
and on a year-to-year basis, because savings from the merger-related
restructuring are beginning to be realized. Additional costs that have been
incurred to reorganize certain sales, marketing and administrative operations
have been offset somewhat by certain administrative credits.
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 second quarter of 1996
totaled $163.7 million and were $420.9 million for the six months ended June
30, 1996. These costs were in addition to the $91.6 million of merger-related
restructuring charges accrued during the fourth quarter of 1995. These
charges primarily reflect the planned and actual reduction of approximately
3,650 positions through June 30, 1996. The costs in 1995 resulted from
accruals for reduction of approximately 850 of these positions, elimination of
duplicate office facilities, and other exit costs. At the end of the second
quarter of 1996, approximately 2,600 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.
Cash spending in 1996 related to the merger-related restructuring totaled
approximately $175 million, with approximately $340 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 that most
elements of the restructuring plan, exclusive of portions of the plant
rationalizations, will be implemented by 1997.
The merger costs recorded in 1996 consisted primarily of expenses related to
certain nonrecurring organizational activities, establishing the corporate
identity for the new company, and various other costs of combining the two
companies. Future merger costs are anticipated to decline substantially from
those recorded in prior periods.
NONOPERATING INCOME AND EXPENSE
The favorable interest income to interest expense relationship continued to
contribute to second quarter 1996 earnings. The comparative decline in
interest income resulted from lower levels of both short- and long-term
investments.
INCOME TAXES
The estimated annual effective tax rate for 1996 is 33 percent compared to 35
percent for the year 1995. Excluding nonrecurring charges, the effective tax
rate for 1996 is estimated to be 35 percent, unchanged from the prior year.
FINANCIAL CONDITION
June 30, December 31,
1996 1995
-------- -----------
Working capital (U.S. dollars in millions) $2,337.0 $2,333.7
Current ratio 1.87 1.88
Debt to total capitalization 18.0% 17.9%
Working capital and the current ratio are essentially unchanged from December
31, 1995. Decreases in cash and short-term investments, partially due to cash
payments for restructuring, were offset by increases in other current assets.
Current liabilities remained at similar levels between these two measurement
periods. The ratio of debt to capitalization is also essentially unchanged
from the prior year end. A current year decline in total debt is
proportionately offset by the change in shareholders' equity.
The company's net financial asset position, presented below, declined due to a
reduction in total short- and long-term investments, in addition to a decline
in cash from operations (discussed below).
June 30, December 31,
1996 1995
-------- -----------
Cash, equivalents and investments $2,171.0 $2,529.5
Short-term and long-term debt 1,355.0 1,394.7
-------- --------
Net financial assets $ 816.0 $1,134.8
======== ========
Net cash provided by operations for the first six months of 1996 declined to
$188.5 million compared to $555.0 million for the first six months of 1995.
This decline was primarily due to the large cash expenditures required by the
merger-related restructuring and by other merger costs. In addition, the
company's investments in receivables, inventories, deferred taxes and other
current assets all increased since the end of the prior year. A portion of
this increase resulted from the combination of operations and the change in
methods of operation.
For investing purposes, the most significant use of cash resulted from the
acquisition of property, plant and equipment. Operating cash utilized for
this capital spending and for dividends to shareholders was supplemented by
reducing short- and long-term financial investments. When compared to the
prior year, dividends to common shareholders rose due to the greater number of
outstanding shares issued to effect the merger and an effective increase in
combined dividend rate per share. Cash proceeds from the issuance of treasury
stock related to the employee option program and was primarily utilized for
the purchase of common shares to be issued upon future exercise of stock
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
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 the company's products, are pending against the company and its
subsidiaries. The company is also 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 50 sites and including site
clean-up at the company's discontinued industrial chemical operations. The
Company'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
the company's ultimate share of a site's cost.
Based on information currently available and the company'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
the company's results of operations or liquidity.
In May 1994, the U.S. Food and Drug Administration (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 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 labeling. 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 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.
The company 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 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
the company and the other named defendants violated: (1) the Robinson-Patman
Act and (2) Section I of the Sherman Antitrust Act. 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 the company)
have reached settlement agreements with the plaintiffs in the class action
pending in the Norther District of Illinois for amounts ranging from $10
million to $60 million. These settlements were recently approved by the
court. The company 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. 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 the company, may have violated federal antitrust laws in
connection with establishing prices and rebates.
Lawsuits have been filed against the company in the U.S., Japan, and Sweden
alleging that the manufacturing of Genotropin infringes third-party patent
rights. At this stage of the proceedings, the final outcome of the actions
cannot be determined. (Refer to Note C - Litigation for more information.)
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
One shareholder proposal was voted on and 5 directors were elected by
security holders at the company's Annual Meeting of Shareholders
which convened on May 6, 1996.
The shareholder proposal requested that the Board form a committee to
formulate an educational plan that would inform women of the possible
abortifacient action of any of the company's products.
Affirmative votes 15,605,985
Negative votes 393,445,964
Abstentions 53,773,532
The following directors were elected at the meeting:
Richard H. Brown Votes for 457,846,237
Votes withheld 4,979,244
M. Kathryn Eickhoff Votes for 457,756,657
Votes withheld 5,068,824
Jan E. Ekberg Votes for 457,847,658
Votes withheld 4,977,823
R.L. Berthold Lindqvist Votes for 457,526,814
Votes withheld 5,298,667
Bengt L. Samuelsson Votes for 457,765,938
Votes withheld 5,059,543
Members of the Board of Directors whose term of office continued
after the meeting include:
Richard H. Brown
Frank C. Carlucci
Gustaf A.S. Douglas
M. Kathryn Eickhoff
Jan E. Ekberg
Daryl F. Grisham
J. Soren Gyll
William E. LaMothe
Goren A. Linden
R.L. Berthold Lindqvist
Olof G. Lund
William D. Mulholland
William U. Parfet
Ulla B. Reinius
Bengt I. Samuelsson
John L. Zabriskie
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page 18).
(a)(ii) Exhibit 11 - Statement regarding computation of earnings per
share (page 19).
(a)(iii) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 20).
(a)(iv) Exhibit 15 - Awareness of Coopers & Lybrand L.L.P. (page
21).
(a)(v) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) Form 8-K - A current report on Form 8-K dated June 18, 1996
was filed during the quarter announcing the action of the
Board of Directors to appoint Coopers & Lybrand L.L.P. as
the company's certifying accountant. On July 2, 1996, Form
8-K/A was filed amending the June 18, 1996 filing by adding
a letter from KPMG Peat Marwick LLP wherein KPMG Peat
Marwick LLP affirmed the statements made in the June 18
filing.
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: 8/14/96 /S/R. C. SALISBURY
----------------------------
R. C. Salisbury
Executive Vice President,
Finance and Administration
and Chief Financial Officer
DATE: 8/14/96 /S/K. M. Cyrus
----------------------------
K. M. Cyrus
Senior Vice President,
General Counsel and Secretary
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE - PRIMARY
(In millions, except per-share data)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings $ 82.4 $231.7 $132.3 $469.5
Dividends on preferred stock, net of tax 3.1 3.1 6.3 6.2
------ ------ ------ ------
Net earnings on common shares - primary $ 79.3 $228.6 $126.0 $463.3
====== ====== ====== ======
Average number of common shares outstanding 509.1 504.6 508.3 504.5
Number of common shares issuable assuming
exercise of stock options 4.1 1.5 4.1 1.2
Contingently issuable incentive common shares .5 .4 .5 .4
----- ----- ----- -----
Total shares - primary 513.7 506.5 512.9 506.1
===== ===== ===== =====
Primary earnings per common share $.16 $.45 $.25 $.91
==== ==== ==== ====
COMPUTATION OF EARNINGS PER COMMON SHARE - FULLY DILUTED(1)
Net earnings $ 82.4 $231.7 $132.3 $469.5
Less ESOP contribution assumed to be required
if preferred shares are converted into common
shares 1.0 1.1 2.1 2.3
Less tax benefit of preferred stock dividend on
allocated shares .3 .3 .7 .5
Plus tax benefit assumed on common stock
dividend .2 .2 .4 .3
------ ------ ------ ------
Net earnings on common shares - fully diluted $ 81.3 $230.5 $129.9 $467.0
====== ====== ====== ======
Average number of common shares outstanding 509.1 504.6 508.3 504.5
Number of common shares issuable assuming
exercise of stock options 4.7 1.9 4.8 1.9
Contingently issuable incentive common shares .5 .4 .5 1.3
Number of common shares issuable assuming
conversion of preferred shares 10.4 10.5 10.4 10.6
----- ----- ----- -----
Total shares - fully diluted 524.7 517.4 524.0 518.3
===== ===== ===== =====
Fully diluted earnings per common share $.16 $.44 $.25 $.90
==== ==== ==== ====
(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>
<TABLE>
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(U.S. dollar amounts in thousands)
<CAPTION>
Six Months Year Ended December 31,
Ended
June 30, 1996 1995 1994 1993 1992 1991
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $197,415 $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% 1,686 7,389 8,156 8,037 6,464 5,062
-------- ---------- ---------- ---------- ---------- ----------
195,729 1,129,004 1,263,120 769,699 940,931 904,597
Add: Amortization of previously
capitalized interest 2,856 10,079 7,695 5,419 4,486 3,109
Fixed charges included in the above:
Interest and amortization of debt
expense 54,922 121,018 139,013 209,399 162,425 145,655
Rental expense representative
of an interest factor 17,665 35,330 35,290 32,348 34,743 36,834
-------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
fixed charges $271,172 $1,295,431 $1,445,118 $1,016,865 $1,142,585 $1,090,195
======== ========== ========== ========== ========== ==========
Interest incurred and amortization
of debt expense $ 60,744 $ 148,542 $ 164,341 $ 233,683 $ 178,677 $ 158,724
Rental expense representative of an
interest factor 17,665 35,330 35,290 32,348 34,743 36,834
-------- ---------- ---------- ---------- ---------- ----------
Total fixed charges $ 78,409 $ 183,872 $ 199,631 $ 266,031 $ 213,420 $ 195,558
======== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 3.46 7.05 7.24 3.82 5.35 5.57
==== ==== ==== ==== ==== ====
</TABLE>
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 June 30, 1996, and the related condensed consolidated
statements of earnings for the three-month and six-month period ended June 30,
1996 and 1995, and cash flows for the six-month periods ended June 30, 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 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 (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 June 30, 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.
Chicago, Illinois
July 29, 1996
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 July 29, 1996 on our review of interim
financial information of Pharmacia & Upjohn, Inc. and Subsidiaries for the
three-month and the six-month periods ended June 30, 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) and the prospectus in Form S-3
Registration Statement (No. 33-06045). 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.
Chicago, Illinois
August 14, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 604,722
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 993,615
<CURRENT-ASSETS> 5,012,337
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,260,393
<CURRENT-LIABILITIES> 2,675,373
<BONDS> 816,591
0
288,602
<COMMON> 5,088
<OTHER-SE> 5,891,895
<TOTAL-LIABILITY-AND-EQUITY> 11,260,393
<SALES> 3,515,426
<TOTAL-REVENUES> 3,561,431
<CGS> 1,003,212
<TOTAL-COSTS> 1,003,212
<OTHER-EXPENSES> 602,528<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,833
<INCOME-PRETAX> 197,415
<INCOME-TAX> 65,100
<INCOME-CONTINUING> 132,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,315
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<FN>
<F1>INCLUDES R&D ONLY
</FN>
</TABLE>
