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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 1-11557
PHARMACIA & UPJOHN, INC.
(Exact name of Registrant as specified in its charter)
Delaware 98-0155411
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 Portage Road, Kalamazoo, Michigan 49001 U.S.A.
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 616/833-4000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $.01) New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The registrant estimates the aggregate market value of the voting stock held by
non-affiliates of the registrant (based upon the NYSE-- Composite Transactions
closing price on January 31, 1997 as reported in The Wall Street Journal and
treating all executive officers and directors of the Company and all beneficial
owners of 5% or more of the Registrant's voting stock as affiliates) was
approximately $18,896,356,006.
The number of shares of Common Stock, $.01 par value, outstanding as of January
31, 1997 is 508,673,725 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Proxy Statement are incorporated into Parts III and IV of
this report.
Portions of the 1997 Annual Report to Shareholders are incorporated into Parts
II and IV of this report.
Certain statements contained in this report, such as statements concerning the
Company's anticipated financial or product performance and other non-historical
facts, are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Since these statements are based on
factors that involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Such factors include, among others: management's ability to make further
progress under the Company's merger integration plan; the Company's ability to
successfully market new and existing products in new and existing domestic and
international markets; the success of the Company's research and development
activities and the speed with which regulatory authorizations and product
rollouts may be achieved; fluctuations in foreign currency exchange rates; the
effects of the Company's accounting policies and general changes in generally
accepted accounting practices; the Company's exposure to product liability
lawsuits and contingencies related to actual or alleged environmental
contamination; domestic and foreign social, legal and political developments,
especially those relating to healthcare reform and product liabilities; general
economic and business conditions; the Company's ability to attract and retain
current management and other employees of the Company; and other risks and
factors detailed in the Company's other Securities and Exchange Commission
filings.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Pharmacia & Upjohn, Inc. ("the Company"), is a global
pharmaceutical group engaged in the research, development, manufacture and sale
of pharmaceutical and healthcare products. The Company was formed in November
1995 in connection with the combination (the "Combination") of Pharmacia
Aktiebolag ("Pharmacia") and The Upjohn Company ("Upjohn"). The Combination
sought to take advantage of certain synergies between Pharmacia and Upjohn in
fundamental research, product development, manufacturing, sales and marketing,
in order both to increase the Company's combined revenues and to reduce its
costs. In 1996, the Company had a product portfolio with sales in excess of
$500 million in each of six therapeutic areas: infectious disease, metabolic
disease, central nervous system disorders ("CNS"), oncology, women's health and
inflammation. The Company's total research and development expenditures
exceeded $1 billion in 1996. Discovery research is being focused on five core
areas: infectious disease, metabolic disease, CNS, oncology and inflammation.
In addition to prescription human pharmaceuticals, the Company
manufactures and sells certain nonprescription drugs; manufactures
pharmaceutical chemicals and intermediates for use in its own products and for
sale to others; researches, develops, manufactures and markets pharmaceutical
and vaccine products for both food and companion animals; and markets specialty
products in hospital care, diagnostics and biotechnology supply and nutritional
supplements.
INDUSTRY BACKGROUND
The world market for advanced human pharmaceuticals is
concentrated in the U.S., Western Europe and Japan. Regulatory pressures and
pricing constraints have intensified as governmental and private healthcare
providers strive to control the rapid growth in healthcare expenditure.
Pharmaceuticals are increasingly chosen according to the therapeutic benefit in
relation to cost, such that pharmaceuticals that minimize hospital stays and
reduce treatment costs are increasingly preferred. It is therefore essential
for pharmaceutical companies to develop new improved and more efficient
products that increase the total value both for buyers and patients. The
Company believes that these developments have also led to more intense
competition in the pharmaceutical industry worldwide. Innovation, high-
quality research and development focused on unmet medical needs, rapid product
introduction, wide geographical distribution and cost efficiency are likely to
be key competitive factors in the pharmaceutical industry.
PRESCRIPTION PHARMACEUTICAL PRODUCTS
The Company researches, develops, manufactures and markets
high-value human pharmaceutical products to healthcare providers worldwide.
The following summary discusses the principal products within each therapeutic
area:
Infectious Disease
The Company provides a broad line of antibiotic products
including CLEOCIN(R) (or DALACIN(R)) and LINCOCIN(R) products. CLEOCIN
PHOSPHATE(R) is an injectable form of clindamycin that is used in the treatment
of certain life-threatening anaerobic infections. CLEOCIN T(R) is a topical
formulation for treatment of acne. CLEOCIN VAGINAL CREAM(R) is used to treat
bacterial vaginosis. LINCOCIN is used in the treatment of serious infections
caused by
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many strains of gram-positive bacteria. The Company has exclusive U.S.
marketing rights to VANTIN(R) Tablets and Oral Suspension, an advanced
cephalosporin antibiotic, under patents licensed from Sankyo Company, Ltd.,
which rights will become semi-exclusive in 1997.
The Company markets MYCOBUTIN(R), for the prevention of
Mycobacterium Avium Complex, a fatal bacterial infection that is a common cause
of death in HIV-positive individuals and people with AIDS. MYCOBUTIN is
marketed to specialists in infectious diseases and to internists. The relevant
patent rights in the U.S. have recently been extended until 1999. Such patent
rights expire in Europe in 2001.
Metabolic Disease
The Company's main activities in this area are related to
growth hormones, growth factors and anti-diabetes agents. The Company's
primary product in the area of growth hormones and growth factors is
GENOTROPIN(R), a recombinant human growth hormone identical to the body's own
hormone. GENOTROPIN has been marketed for several years in Europe and Japan,
and was recently launched in the U.S., including in a form called the
GENOTROPIN Pen, a self-administered injection form. GENOTROPIN, which promotes
longitudinal bone growth, is used for the treatment of children of short
stature whose condition is due to growth hormone deficiency and patients with
renal insufficiency. Management believes that the indications for adult growth
hormone deficiency may represent a significant market opportunity if the
patient and medical community can be convinced of the benefits of this product
for these indications.
The Company's major oral antidiabetes agents are MICRONASE(R)
Tablets, containing glyburide, and GLYNASE(R) PresTab Tablets, also containing
glyburide, for the treatment of non-insulin-dependent diabetes. The Company is
experiencing increased levels of competition from generic substitutes in this
area with respect to MICRONASE Tablets and challenges to its formulation patent
position with respect to GLYNASE PresTab Tablets.
FRAGMIN(R) is a low molecular weight heparin for the
prevention of thrombosis (blood clots) in connection with surgery, during
hemodialysis (the removal of waste substances by circulating blood through a
dialyzer that functions as an artificial kidney), in the treatment of acute
deep vein thrombosis and (in the U.K.) in the treatment of unstable angina.
Central Nervous System
The Company produces major drugs for CNS disorders, including
XANAX(R), HALCION(R) and SERMION(R), none of which have significant patent
protection and are subject to intense generic competition. XANAX Tablets,
containing alprazolam, are used for symptomatic relief of anxiety with and
without depressive symptoms and for the treatment of panic disorder. The use
patent for the panic disorder indication for XANAX expires in 2002. HALCION
Tablets, containing triazolam, are a hypnotic agent used for the treatment of
insomnia. SERMION Tablets are used primarily to treat cognitive and behavioral
disorders related to senile dementia.
The Company has a joint marketing agreement with Solvay & Cie
to market in the U.S. and certain European countries Solvay's LUVOX
(fluvoxamine), a product for treatment of obsessive-compulsive disorder and
depression (the product is approved for depression in Europe and Canada but not
yet in the U.S.). Under the same agreement, Solvay jointly markets HALCION and
XANAX in the U.S. and certain European countries.
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Oncology
The Company is one of the world's leading producers of
anticancer drugs. Its most important products in the oncology area are
FARMORUBICIN(R) (or PHARMORUBICIN) and ADRIAMYCIN(R) for use in chemotherapy.
Each of these products is used in the treatment of breast cancer as well as
other solid tumors. Both are among the world's most frequently prescribed
anticancer drugs. ADRIAMYCIN was the Company's first anthracycline
preparation. The related patent expired in 1990. Subsequent research efforts
to reduce the toxicity and increase the efficacy of ADRIAMYCIN led to the
development of FARMORUBICIN, a second generation anthracycline used primarily
to treat solid tumors (primarily breast and bladder cancer) and lymphomas.
Although a number of product patents relating to FARMORUBICIN expire in the
late 1990s, patents on the best-selling formulation of FARMORUBICIN do not
expire until after the year 2000.
CAMPTOSAR(R) (irinotecan hydrochloride), a recently approved
injectable DNA topoisomerase-I inhibitor pro-drug licensed from Yakult Honsha
for the U.S. and certain other territories, is marketed in the U.S. for
refractory colorectal cancer.
The Company also produces ZAVEDOS(R)/IDAMYCIN(R) (idarubicin),
an anthracycline used to treat acute leukemia that can be administered both
intravenously and orally, as well as ESTRACYT(R), which is used for the
treatment of advanced prostate cancer. Based on clinical tests to date,
ZAVEDOS is superior to standard therapy in extending the survival of certain
patients who suffer from acute myeloblastic leukemia. Although a number of
product patents relating to ZAVEDOS expire in the late 1990s, patents on its
most valuable commercial formulations do not expire until 2002. ESTRACYT has
no patent protection and is subject to competition from other products and
therapies. ZINECARD(R), sold in the U.S. and Canada, is a preparation for
reducing cardiac side effects in women with metastatic breast cancer who are
undergoing treatment with ADRIAMYCIN.
Women's Health
The Company markets several steroid hormones having a variety
of uses, including the treatment of allergic reactions, inflammation, asthma
and certain hormone deficiencies. The Company's most important synthetic
hormone is PROVERA(R) Tablets, which is a female sex hormone replacement agent.
The Company also markets DEPO-PROVERA(R) Contraceptive Injection and OGEN(R)
Tablets and Vaginal Cream, an estrogen replacement product, licensed from
Abbott Laboratories. The Company intends to increase its marketing in this
area directed towards the patient or ultimate consumer, who is increasingly
participating in the choice of product.
The Company also markets certain prostaglandin products,
including PROSTIN E2(R) Vaginal Suppository, which is generally used for
pregnancy disorders, and PROSTIN VR PEDIATRIC(R) Sterile Solution, for
cardiovascular use. PREPIDIL(R) Gel, used for cervical ripening, is protected
by U.S. patents until 2003.
ESTRING(R), a local hormone replacement therapy for
post-menopausal women, is a soft intravaginal plastic ring that secretes a low
dose of natural estrogen over a period of three months. The product was
recently introduced in the U.S. and in several European countries.
During 1996, DOSTINEX(R) Tablets, an oral medication for
hyperprolactinemia, a condition that can cause absence of menstruation
(amenorrhea) and excessive breast milk discharge (galactorrhea), was granted
market clearance in the United States and completed the regulatory approval
process in Europe. DOSTINEX is effective and better tolerated than
bromocriptine, the only other product indicated for hyperprolactinemia.
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In the area of bleeding control, the Company has marketed
CYKLOKAPRON(R), primarily in Europe, for over 25 years for the treatment of
menorrhagia (excessive menstruation).
Inflammation
The Company markets ANSAID(R) Tablets, a nonsteroidal
anti-inflammatory product containing flurbiprofen, for treatment of
osteoarthritis and rheumatoid arthritis, and MOTRIN(R) Tablets, a nonsteroidal
anti-inflammatory product containing ibuprofen, used in the treatment of
rheumatoid arthritis and osteoarthritis and as a general analgesic for mild to
moderate pain, including dysmenorrhea. Neither product is subject to
significant patent protection.
Within the autoimmunity field, the Company focuses on
treatments for rheumatoid arthritis and inflammatory bowel diseases ("IBD"),
including ulcerative colitis and Crohn's disease. SALAZOPYRIN(R)
(sulfasalazin) or AZULFIDINE(R), introduced in 1942 and widely used in the
treatment of IBD, has had no patent protection since the 1960s and is subject
to competition from other products and therapies, as well as to some generic
competition. SALAZOPYRIN, in the form of SALAZOPYRIN EN-tabs, is used for the
treatment of rheumatoid arthritis. SALAZOPYRIN is marketed in Europe, the U.S.
and Japan, primarily to rheumatologists.
DIPENTUM(R), another product for the treatment of patients
with IBD, with fewer observed side effects than SALAZOPYRIN, is currently
marketed by the Company in the U.S. (only for maintenance treatment of patients
in remission intolerant to sulfasalazin) and Europe and through independent
distributors in five other countries. Although DIPENTUM has patent protection
in the countries in which it is marketed, it competes with other products.
The Company produces various forms of chemical modifications
of hormones under the trademark MEDROL(R) or DEPO-MEDROL(R), which are used to
treat a number of inflammatory and allergic conditions. SOLU-CORTEF(R) Sterile
Powder and SOLU-MEDROL(R) Sterile Powder are injectable corticosteroid
products.
Nutrition
This therapeutic area comprises a number of products for
intravenous nutrition, including products that meet the body's nutritional
needs for fats, amino acids, vitamins and trace elements. The Company's
largest selling nutritional product is the fat emulsion INTRALIPID(R), launched
in 1962. INTRALIPID has no patent protection and competes with a limited
number of other fat emulsions in all its major markets. Although sales of
INTRALIPID in recent years have not shown significant growth, the emulsion is
increasingly being used in mixed products and as a vehicle for delivery of
third-party products. The Company also markets KABIMIX(R) and VITRIMIX(R),
pre-mixed nutritional supplements, and GLAMIN(R) and VAMIN(R), amino acid
solutions. Management believes that there are limited opportunities for growth
in this area except in developing countries such as China, where there are
developing healthcare systems and large patient populations.
Ophthalmology
In 1996, the Company received approval in the U.S., Sweden,
Switzerland and the U.K. to market XALATAN(R), a new drug for the treatment of
open-angle glaucoma and ocular hypertension in patients who are either
intolerant of, or insufficiently responsive to, other intraocular
pressure-lowering medications.
HEALON(R) is a viscoelastic substance which includes sodium
hyaluronate and is used primarily in cataract surgery to facilitate the
implantation of plastic intraocular lenses ("IOLs")
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without injuring the sensitive cells lining the cornea and functions as a soft
surgical instrument. The Company markets HEALON and HEALON GV(R), a more
viscous fluid form, directly to ophthalmologists in Europe, the U.S. and Japan
and through independent distributors in certain other countries. The Company
believes that HEALON is the global market leader of viscoelastic products used
in ophthalmic surgery. The U.S. patent for HEALON expired in February 1996,
which adversely affected sales of HEALON.
The Company also produces IOLs made of polymethylmethacrylate,
which are surgically implanted in the eye to replace the natural lens when it
becomes cloudy and partly opaque because of cataracts. Competition in the IOL
market is intense, causing pressure on prices and a slight decline in the
Company's sales volume and market share. The Company's right to continue
marketing its CeeOn(R) Foldable Lenses in the U.S. is subject to the outcome of
a patent lawsuit.
Urology
DETRUSITOL(R) (tolterodine), for which a centralized European
Union regulatory application was filed in Sweden in late 1996 and a New Drug
Application was filed in the U.S. in early 1997, offers a remedy for urinary
incontinence by reducing overactivity in the bladder, thus reducing symptoms,
such as increased frequency and urge to urinate, as well as incontinence
episodes. The Company is engaged in arbitration with Forest Laboratories
("Forest") in which Forest alleges that pursuant to an agreement with the
Company, Forest is entitled to exclusive U.S. marketing rights to DETRUSITOL.
The Company intends to vigorously defend this action, although it is not yet
able to predict the outcome of this proceeding.
The Company also markets DRIDASE(R)/DITROPAN(R) and CETRIPRIN
NOVUM(R) for urinary incontinence.
CAVERJECT(R), a treatment for erectile dysfunction due, among
other reasons, to diabetes, cardiovascular problems, injuries and aging, is
self-administered by intracavernosal injection and is sold in 59 countries.
CONSUMER HEALTH CARE PRODUCTS
The Company develops, manufactures and markets nonprescription
healthcare products to drug stores, food stores and mass merchandisers in the
U.S. and Europe.
The Company developed and manufactures NICORETTE(R) and
NICOTROL(R) for smokers who seek a medical product to aid in smoking cessation.
NICORETTE chewing gum is sold over-the-counter in the U.S. by SmithKline
Beecham Consumer Pharmaceuticals. NICORETTE chewing gum has also been approved
for sale in France. The Company's NICORETTE chewing gum and transdermal patch
administer nicotine to the body through slow-release formulations in order to
alleviate withdrawal symptoms. Although the Company's U.S. patent covering
nicotine polacrilex, the active ingredient in NICORETTE chewing gum, expired in
August 1992, the Company has market exclusivity for NICORETTE chewing gum in
the U.S. until 1999, during which time no abbreviated new drug applications
(ANDAs) for the product can be approved by the U.S. Food and Drug
Administration. In other countries, the Company has no patent protection for
NICORETTE chewing gum; however, the NICORETTE transdermal patch is patented in
certain jurisdictions, and is sold in the U.S. by McNeil Consumer Products
Company.
In addition, the Company produces and sells ROGAINE(R) Topical
Solution, a 2% solution of minoxidil applied topically to treat hair loss in
men with male pattern baldness and in women with androgenetic alopecia or
hereditary hair loss. The product is also sold in numerous
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foreign countries. The U.S. patents covering ROGAINE expired in February 1996.
ROGAINE is sold over-the-counter in the U.S. and competes with several generic
products not produced by the Company.
The Company also manufactures and distributes other
non-prescription products including MOTRIN IB(R) Tablets, Caplets and Gelcaps,
an analgesic; KAOPECTATE(R) products, for diarrhea; MICROLAX(R), for
constipation; CORTAID(R) products, anti-inflammatory topical products; the
family of UNICAP(R) vitamin products; DRAMAMINE(R), anti-motion sickness
medicines; and MYCITRACIN(R), an antibiotic ointment for treatment of minor
skin infections and burns. The Company also holds a license from
Hoechst-Roussel Pharmaceuticals Inc. for exclusive U.S. rights to the
nonprescription laxative products DOXIDAN(R) and SURFAK(R). The Company also
has a U.S. marketing arrangement with McNeil Consumer Products Company whereby
the Company has certain rights to several ibuprofen-based products and other
products being developed by McNeil.
RESEARCH AND DEVELOPMENT
The Company aims to direct its R&D efforts to develop new
innovative pharmaceuticals and other healthcare products offering high
therapeutic benefits in a number of therapeutic areas in which the Company
believes it has the ability to establish a leading global position. The
Company also seeks to expand the markets for its existing products by
identifying new indications and administrative forms as well as by expanding
their international market penetration and extending product life, including by
converting suitable patented products to over-the-counter products. The
Company concentrates its R&D resources on selected areas both where it has
in-house expertise and where there are identified substantial unmet medical
needs. The Company's research activities are being focused on five medically
important therapeutic areas, including infectious disease, metabolic disease,
CNS, oncology and inflammation, and are conducted principally in the Company's
three regional centers in Kalamazoo, Michigan, Stockholm/Uppsala, Sweden and
Milan, Italy.
The R&D process has historically taken from 10 to 15 years
from discovery to initial product launch and is conducted in various stages.
During each stage of development, there is a substantial risk that the desired
objectives will not be achievable and that the product will therefore have to
be abandoned or the objectives modified. During the "preclinical" stage,
generally the first two to four years, research is carried out in order to
identify an active substance in the laboratory and then perform pharmacology
and toxicology studies of its effects in various animals. Before testing in
humans, an application for the compound must be filed and processed by the
requisite regulatory authorities. Testing in humans is performed in different
clinical phases to assure the safety and efficacy of the new compound. In
clinical Phase I, studies to establish the tolerance, absorption, distribution,
metabolism and excretion of the compound are performed on healthy human
subjects. Clinical Phase II studies are performed on a limited number of
patients to determine efficacy and to define an effective dose. Clinical Phase
III comparative studies are then performed on a larger number of patients in
order to further establish efficacy and safety. Together, Phases I, II and III
typically take from three to five years to complete. Thereafter, an
application containing all data for the proposed drug is sent to regulatory
authorities for approval, which may take an additional one to two years.
Further clinical trials, called Phase IV trials, are generally carried out
after product launch to continue to monitor the efficacy and safety of a new
drug.
As a result of the Combination, the Company has R&D resources
which enable it competitively to develop commercially attractive new products.
The research expertise of Pharmacia in molecular biology and Upjohn in advanced
chemistry strengthened research capabilities and will contribute to a reduction
in overall development time for new products. As part of the Company's
increased focus on high priority projects, a thorough review of R&D projects
was undertaken. As
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a result, several projects then under development have been discontinued or
licensed out, enabling additional resources to be devoted to higher priority
projects.
Infectious Disease
A New Drug Application for RESCRIPTOR(R) (delavirdine
mesylate), a non-nucleoside reverse transcriptase inhibitor for the treatment
of AIDS and HIV seropositive/asymptomatic patients, was filed with the U.S. FDA
in 1996.
Oxazolidinones are a potentially important new class of
antibiotics that have a novel mechanism of action: inhibition of mRNA
translation. A compound (linezolide) is in Phase II clinical studies for
evaluation of efficacy, safety and human pharmacokinetics. In vitro studies
show the oxazolidinones to be effective against gram-positive bacteria
including antibiotic-resistant strains of staphylococci, streptococci and
enterococci. Management believes that oxazolidinones have the potential to
meet a significant unmet need due to the increasing incidence of resistant
bacterial infections. A patent application is pending in the U.S.
Metabolic Disease
The Company's primary research area in the field of metabolic
disease concerns growth disorders. In addition, research projects are
currently in process in the field of obesity, diabetes, arteriosclerosis and
vascular disease.
Research and development in the area of growth and growth
factors is concentrated on a broader spectrum of indications for GENOTROPIN
including use in adults as hormone replacement therapy (for which approval has
already been received in the major European countries, New Zealand and China),
and for uremia. In addition, the Company is pursuing further development of
convenience products to administer GENOTROPIN as well as studying other
indications.
Central Nervous System
In the CNS area, the Company has three potential products in
late stage clinical development: cabergoline, pramipexole and reboxetine.
Cabergoline has preferential D2 receptor agonist activity with
extremely long-lasting dopamine agonist effect. Cabergoline has been approved
for marketing in the U.S. and several European countries under the trade name
DOSTINEX for the treatment of hyperprolactinemia. The compound is also in late
development worldwide as a potential treatment for Parkinson's disease, a
relatively frequent and progressively disabling illness of the advanced age,
where the product, to be named CABASER(R), may be particularly useful for its
longer duration of action and more convenient administration compared with
other similar drugs. A registration dossier has been filed in major European
countries and Japan, and the Company has received approval in the UK, Denmark
and Switzerland for use in treatment of Parkinson's disease. Continued studies
with CABASER aim at documenting the product as a first line treatment for
Parkinson's disease, especially for patients with early onset of disease.
Pramipexole has preferential D3 receptor agonist activity and
is under development for Parkinson's disease and depression. To date, studies
in depression have shown questionable efficacy and the schizophrenia indication
has been discontinued for the same reason. The compound was licensed from, and
is being co-developed with, Boehringer-Ingelheim, with plans for worldwide
co-marketing. The Company filed an NDA for Parkinson's disease in the U.S. in
late 1995. The NDA includes three North American studies, which produced good
results at well- tolerated doses for
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both early and late stage Parkinson's disease. The European filing will be
dependent on finalization of a European early disease study (enrollment
completed) as well as a bromocriptine comparator trial. A centralized EU
application was filed in late 1996 for Parkinson's disease. The pramipexole
compound patent expires in 2005 in Europe and Japan, and in 2006 in the U.S.
Reboxetine is an antidepressant agent which has a different
mode of action compared with other drugs due to a different mechanism of
action. Clinical Phase III studies have been completed in Europe and
regulatory submission in Europe took place in August 1996.
LINOMIDE(R) is an oral immunomodulator which is currently
being tested in multiple sclerosis studies, following positive animal studies
indicating potential efficacy in autoimmune disorders. Phase II clinical
studies have also been encouraging and Phase III clinical studies are ongoing.
The Company is working to develop a chemical entity that would
be intended to have an improved efficacy/side-effect ratio in the treatment of
migraine.
In addition, the Company has several other projects under
development. These include XANAX XR(R), a new formulation of the drug XANAX
which is indicated for the treatment of anxiety. XANAX XR is a sustained
release formulation expected to offer convenience/compliance benefits and, in
addition, separate patent protection has been applied for this product.
Oncology
This area represents a major research commitment for the
Company with discovery and development efforts directed and focused on finding
effective treatments for various forms of tumors, particularly those which
respond poorly, or are resistant, to currently available therapy. The research
programs cover chemotherapy, hormone therapy, immunotherapy of cancer as well
as novel approaches and mechanisms of antitumor action which are being pursued
mainly in discovery phase.
CAMPTOSAR(R) (irinotecan hydrochloride), an injectable DNA
topoisonmerase-I inhibitor pro-drug, was approved in the U.S. for treatment of
refractory colorectal cancer. In the U.S. and Latin America, Phase II cervical
and non-small cell lung cancer studies have been conducted. Phase III planning
is underway for colorectal and non-small cell lung trials. Also, Phase I
studies for oral irinotecan are underway to determine the maximal tolerated
dose.
Exemestane is a hormonal anticancer agent that is being tested
as a potential treatment for advanced breast cancer. Phase III studies are
being performed in Europe and the U.S, and Phase II clinical trials are in
progress in Japan.
SnET2 (tin ethyl etiopurpurin) is a novel agent for
photodynamic anticancer therapy, licensed from the U.S. company PDT Inc. Phase
III clinical trials have begun in skin malignancies. The photoreactive drug is
activated by nonthermal light from a medical laser, which leads to the
production of free oxygen radicals and the destruction of cancer cells. For
most applications, only local anesthesia is required, indicating the potential
for outpatient use.
Ophthalmology
XALATAN (latanoprost), the Company's compound for the
treatment of open-angle glaucoma, has been approved in the U.S., U.K.,
Switzerland and Sweden and is awaiting registration in the remaining European
countries and Japan. Glaucoma is the largest indication in ophthalmology. The
Company believes that XALATAN represents a major advance in the treatment of
glaucoma.
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XALATAN reduces intraocular pressure by means of a new mechanism of action.
The development program for XALATAN will be further expanded with combination
therapy and new formulations.
Other Prescription Pharmaceutical Products
FREEDOX(R) (tirilazad mesylate) is an antioxidant that limits
ischemia in animal models. The product has been approved for severe
subarachnoid hemorrhage ("SAH") in males in several countries. It has been
shown that pre-menopausal women and patients on anticonvulsants, particularly
phenytoin, have a faster rate of metabolism and thus are likely to need more
drug to demonstrate efficacy. Accordingly, two Phase III trials are ongoing
(one in Europe and one in the U.S.) to evaluate efficacy of a higher dose in
women. A U.S. safety study using higher doses in males is also being
conducted. Clinical studies for the stroke indication have been discontinued
due to questionable efficacy of FREEDOX. A study for spinal cord injury
sponsored by the National Institute of Health has completed enrollment and
results have indicated positive outcomes.
Consumer Health Care Products
The Company is currently working on extending the range of
products for smoking cessation (NICORETTE) and a treatment for hair loss
(ROGAINE/REGAINE) to the over-the-counter market.
ANIMAL HEALTH
The Company researches, develops, manufactures and markets a
broad range of pharmaceutical and vaccine products for both food and companion
animals. These products are sold worldwide to veterinarians, feed
manufacturers, distributors and growers who choose the Company's products
primarily because of their efficacy and suitability for particular uses, as
well as price and quality. Major products include NAXCEL(R) Sterile Powder, an
antibiotic for bovine and swine respiratory disease and early chick mortality;
LINCO-SPECTIN(R) Soluble Powder and Premix, a combination
lincomycin/spectinomycin antibiotic; LINCOMIX(R) 20 and LINCOMIX 50 Feed
Medication, which are feed-additive antibiotics; MGA(R) Premix, which is a
growth-promoting feed additive for feedlot heifers; various products for the
treatment of mastitis, including PIRSUE(R); DELTA ALBAPLEX(R) Tablets and
LINCOCIN(R), which are small-animal antibiotics; and LUTALYSE(R) Sterile
Solution, which is used to synchronize breeding performance in mares and
cattle.
CHEMICAL AND CONTRACT MANUFACTURING
The Company researches, develops, manufactures and markets
bulk pharmaceutical chemicals and selected high-technology specialty
(nonpharmaceutical) chemicals. In addition, the Company manufactures finished
dosage forms for sale to third parties.
BIOTECHNOLOGY
The Company is one of the world's leading suppliers of
biotechnology equipment, systems, reagents and chemicals for pharmaceutical and
biotechnology companies and for life science research in the public and private
sectors. The business area's traditional products are for use in
laboratory-scale chromatography and electrophoresis, two key separation
technologies for biomolecules. The Company also produces reagents, chemicals
and systems used by researchers to perform experiments in the areas of
molecular and cell biology, and media and systems devoted to large-scale
purification of substances prepared by biotechnological methods in the
pharmaceutical industry. In recent years, the market for biotechnology
research instruments and other products has
-9-
<PAGE> 12
been adversely affected by budgeting constraints in universities and publicly
funded research centers, resulting in increasing competition and downward price
pressure.
DIAGNOSTICS
The Company is the world leader in the area of in vitro
allergy diagnostics. The Company's main allergy diagnostic product, the
Pharmacia CAP System(R), was introduced by Pharmacia in 1989. It is a highly
automated laboratory system that enables testing from patient blood samples for
allergenic sensitivity to nearly 500 substances. The Company believes that no
competitor in the allergy diagnostic business markets a product that can test
allergenic sensitivity to as many different substances. The Company markets
the Pharmacia CAP System to diagnostic laboratories worldwide. Patents on the
Pharmacia CAP System expire in 2003. During 1996, a new easy-to-use,
low-volume test instrument, UniCAP 100(R), was introduced for use by small to
medium size laboratories and family physicians.
The Company's largest market for allergy diagnostics is Japan,
while sales in the U.S. are relatively low because of the relatively high
incidence of more traditional in vivo (skin prick) diagnostic testing by
medical professionals in the U.S.
DISEASE MANAGEMENT
The Company participates in the disease management business in
the U.S. through its Greenstone Healthcare Solutions subsidiary, providing
services in prevention, screening, diagnosis, treatment, case management,
education and outcome assessment.
PRODUCTION
The Company produces its products mainly in the U.S., Sweden,
Italy, Belgium, Ireland and Puerto Rico.
The Company purchases a variety of raw materials for use in
its manufacturing processes. When available, the Company has a policy of
maintaining multiple sources of supply for materials. The Company obtains its
supplies of raw materials from several companies in a number of countries. The
Company has not experienced any difficulty in obtaining a sufficient supply of
raw materials in recent years and believes that it will be able to obtain them
in sufficient quantities in the future. However, the price of its raw
materials may vary from year to year.
MARKETING AND DISTRIBUTION
The Company's products are sold worldwide. The Company
markets its products through its own marketing companies or through local
distributors and licensees. As part of its ongoing commitment to its
customers, the Company periodically organizes educational programs to provide
specialist doctors with information on the most recent product innovations and
scientific advances.
The Company's marketing companies are organized by
geographical markets to meet the requirements of the markets in which they
operate.
COMPETITION
The pharmaceutical industry is highly competitive. The
Company's principal competitors consist of major international corporations
with substantial resources. A drug may be
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<PAGE> 13
subject to competition from alternative therapies during the period of patent
protection and thereafter it will be subject to further competition from
generic products. The manufacturers of generic products typically do not bear
the related research and development costs and consequently are able to offer
generic products at considerably lower prices than the branded equivalents. A
research-based pharmaceutical company will therefore normally seek to achieve a
sufficiently high profit margin and sales volume during the period of patent
protection to justify the original investment and to fund research for the
future. There are, however, a number of factors which may enable products to
remain profitable once patent protection has ceased. These include the
establishment of a strong brand image with the prescriber or the consumer,
supported by an active trademark registration and enforcement policy, and the
development of a broader range of alternative formulations than the generic
manufacturer typically supplies.
As is the case for the pharmaceutical industry in general, the
introduction of new products and processes by competitors may affect pricing
levels or result in product replacement for existing products, and there can be
no assurances that any of the Company's products may not become outmoded,
notwithstanding patent or trademark protection. In addition, increasing
governmental and other pressures towards the dispensing of generic products in
substitution for brand-name drugs may increase competition for products no
longer covered by patents.
Over the last few years, the pharmaceutical industry has
experienced increased vertical and horizontal consolidation, and the breadth of
products offered and distribution capabilities of a company may become a
competitive feature. The Company competes with other pharmaceutical companies
in discovering or licensing new chemical entities useful in treating medical
conditions. In addition, significant changes in marketing conditions are
occurring in the U.S., Swedish and foreign pharmaceutical markets, including
decreased pricing flexibility, restrictions on promotional and marketing
practices and the impact of managed care, particularly with respect to product
selections and pricing concessions.
The Company's competitive position depends in part upon its
ability to develop innovative, cost-effective new products, as well as new
indications for, and improvements in, existing products. Its competitive
position also depends upon, among other things, its ability to compete on the
basis of price as well as to maintain a reputation for quality, efficacy and
cost-effectiveness with the specialist doctors and hospital purchasing groups
to which its products are targeted, as well as with the wider group of
customers which includes pharmacies, wholesalers, hospitals and insurers.
In addition, the Company's ability to maintain longstanding
and interactive relationships with specialist doctors and its ability to
attract and retain qualified scientific and other personnel, develop and
implement production and marketing plans, obtain and maintain patent protection
for selected products in its significant markets and secure adequate capital
resources are also important competitive factors.
PRICING
In addition to the normal competitive forces that affect the
level of prices, a further constraint exists in the form of price controls in
most countries in which the Company sells its products. These controls arise
either by law or because the government or other healthcare providers in a
particular jurisdiction are the principal purchasers of the product or
reimburse purchasers for the cost of the product. Price control mechanisms
operate differently from jurisdiction to jurisdiction and can result in large
price differentials between markets, which may be aggravated by currency
fluctuations. These price differentials are exploited by traders (parallel
importers) who purchase branded products in lower-priced markets for resale in
higher-priced markets.
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<PAGE> 14
PRODUCT REGULATION
Like other pharmaceutical companies, the Company is subject to
strict controls on the manufacture, labeling, distribution and marketing of its
products. Further controls exist on the non-clinical and clinical development
of pharmaceutical products. Of particular importance is the requirement to
obtain and maintain regulatory approval for a pharmaceutical product from a
country's national regulatory authority before such product may be marketed in
a particular country.
The submission of an application to a regulatory authority
does not guarantee that a license to market the product will be granted.
Furthermore, each regulatory authority may impose its own requirements and may
delay or refuse to grant, or may require additional data before granting, an
approval, even though the relevant product has been approved in another
country. Regulatory authorities also have administrative powers that include
product recalls, seizure of products and other sanctions.
The U.S., Europe, Japan, Australia and Canada have very high
standards for technical appraisal and consequently, in most cases, a lengthy
approval process. The time taken to obtain approval varies by country, but
generally takes from six months to four years from the date of application,
depending upon the quality of the data produced, the degree of control
exercised by the regulatory authority, the efficiency of its review procedure
and the nature of the product. The trend in recent years has been toward
greater regulation and higher standards with higher levels of standardization
among jurisdictions.
In Europe, the European Agency for the Evaluation of Medicinal
Products (the "Medicinal Products Agency") was created in July 1993 and opened
on January 1, 1995. Based in London, the Medicinal Products Agency will give
opinions on medicinal products by using two new procedures, a centralized
community procedure and a decentralized procedure, the latter being based on
the principle of mutual recognition of assessments.
In the U.S., most human and animal pharmaceutical products
manufactured or sold by the Company are subject to regulation by the FDA as
well as by other federal and state agencies. The FDA regulates the
introduction of new drugs, advertising of prescription drug products,
manufacturing, laboratory and clinical practices, labeling, packaging and
record-keeping with respect to drug products. The FDA also reviews the safety
and effectiveness of marketed drugs and may require withdrawal of products from
the market and modification of labeling claims where necessary. In addition,
the manufacturing, marketing and use of Animal Health products are closely
regulated in all major markets including the U.S. Department of Agriculture,
which regulates animal health products within the U.S.
Government approval of new drugs under the federal Food, Drug
and Cosmetic Act requires substantial evidence of safety and efficacy. As a
result of this requirement, as interpreted by the FDA, the length of time and
the laboratory and clinical information required for approval of an NDA is
considerable.
The FDA has adopted streamlined procedures for the approval of
duplicate drugs (drugs containing the same active ingredient as the
originator's product), including abbreviated NDAs. Approval of abbreviated
NDAs may not be made effective prior to expiration of valid patents. The FDA
has established a similar expedited approval process for antibiotics. The
availability of the abbreviated NDA and expedited antibiotic approval processes
has reduced the time required to obtain FDA approval of some competing products
and has facilitated generic competition.
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<PAGE> 15
At the state level, so-called "generic substitution"
legislation permits the dispensing pharmacist to substitute a different
manufacturer's version of a drug for the one prescribed. In a number of
states, such substitution is mandatory unless precluded by the prescribing
physician.
U.S. pharmaceutical manufacturers are required to provide
rebates to state governments for prescriptions covered by Medicaid. The issue
of further price controls on sales of prescription drugs continues to be
considered in Congress and various states, and additional federal or state
legislation to limit prices of prescription drugs is possible.
It is difficult to predict the ultimate effect of streamlined
approval of duplicate or generic drugs, "generic substitution," the Medicaid
reimbursement and rebate programs and possible price limitations. However, the
Company believes that its development of patented and exclusively licensed
products may moderate the impact of programs and legislation focusing mainly on
products available from multiple suppliers.
Financial information about industry segments and financial
information about foreign and domestic operations and export sales is contained
in the Company's financial statements.
EMPLOYEES
The Company has approximately 31,700 employees worldwide,
although the number is changing based on realignment of operations and related
reductions in force.
The Company believes that it has good relations with its
employees. Employees at several non-U.S. locations are represented either by
freely elected unions or by legally mandated workers' councils or similar
organizations.
ENVIRONMENTAL MATTERS
The Company is subject to extensive environmental legislation
and regulation, requiring substantial environmental compliance costs, including
capital expenditures related to future production. Projects related to the
prevention, mitigation and elimination of environmental effects are implemented
worldwide.
Since several capital projects are undertaken for both
environmental control and other business purposes, such as production process
improvements, it is difficult to estimate the specific capital expenditures for
environmental control. However, it is estimated that capital expenditures for
environmental protection will exceed $30 million in both 1997 and 1998.
Operating expenses for compliance with environmental protection laws and
regulations in 1996 are estimated to have been in excess of $60 million. It is
estimated that such operating expenses for 1997 will be in excess of $55
million. Cash payments charged to environmental reserves in 1996 were
approximately $17 million and are estimated to be approximately $15 million for
1997.
ITEM 2. PROPERTIES
The Company's various businesses operate through a number of
offices, research laboratories and production facilities throughout the world
with principal locations in Kalamazoo, Michigan; Stockholm, Uppsala and
Helsingborg, Sweden; Milan, Italy; and Puurs, Belgium. The Company also has
production and research facilities in Japan and Puerto Rico and leases its
primary
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<PAGE> 16
business offices in Windsor, England. The Company believes its properties to
be adequately maintained and suitable for their intended use and its production
facilities to have a capacity adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Various suits and claims arising in the ordinary course of
business, primarily for personal injury alleged to have been caused by the use
of the Company's products, are pending against the Company and its
subsidiaries. Product liability is a significant commercial risk for the
Company. Substantial damage awards have been made in certain jurisdictions
against pharmaceutical companies based upon claims for injuries allegedly
caused by the use of their products.
The Company is involved in several administrative and judicial
proceedings relating to environmental concerns, including actions brought by
the U.S. EPA and state environmental agencies for remedial cleanup at
approximately 50 sites, including site clean-up at the Company's discontinued
industrial chemical operations in the state of Connecticut. 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 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. The Task Force found no evidence of
criminal wrongdoing, but suggested that the Justice Department is the
appropriate entity to determine and evaluate the facts and to determine whether
criminal offenses had occurred and should be pursued. The Task Force also
concluded that the evidence supports the safety and efficacy of HALCION tablets
when used in accordance with its approved labelling. However, the Task Force
recommended that a wide spectrum of experts review the safety and efficacy data
on HALCION tablets, and report their findings to the FDA's Psychopharmalogical
Drugs Advisory Committee. The Task Force also recommended several improvements
in FDA practices and procedures. Three current employees and one former
employee recently testified before a Grand Jury in Grand Rapids, Michigan, on
the subject of the Company's record keeping and tracking of capital assets and
computer disks and tapes, with the principal focus on tapes and disks
containing HALCION clinical data and analyses. The Company cannot predict the
outcome of any continuing investigation by the Justice Department, the FDA or
the Grand Jury. 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.
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<PAGE> 17
The Company has been named along with at least 30 other
defendants (both manufacturers and wholesalers) in a number of federal civil
antitrust lawsuits which have been consolidated and transferred to the Federal
District Court for the Northern District of Illinois. These suits allege that
the Company and the other named defendants violated (1) the Robinson-Patman Act
by giving substantial discounts and rebates to mail-order pharmacies and
managed health care organizations without according the same discounts to
retail pharmacies, and (2) Section 1 of the Sherman Antitrust Act by entering
into illegal agreements to deny such discounts and rebates to retailers. The
federal court certified a national class of retail pharmacies in November 1994.
Similar actions by proposed retailer classes have been filed in the state
courts of Alabama, California, Minnesota and Wisconsin, and actions by proposed
consumer classes seeking damages based on the same alleged conduct are pending
in the state courts of Alabama, Arizona, California, Colorado, the District of
Columbia, Maine, Michigan, Minnesota, New York, Washington and Wisconsin. The
California and Washington, D.C. courts have certified a retailer class.
Motions to certify the proposed classes are pending in several other states.
In April 1996, the Federal District Court denied motions by the Company and 12
other manufacturer defendants for summary judgment. Appeals from the denial
are pending. In July 1996, the Federal District Court approved a settlement
between 14 defendant manufacturers and the federal retailer class which
includes a release of the federal and state claims of class members against the
settling manufacturers. The Company is not a party to this settlement.
However, due to the existence of a Judgment Sharing Agreement among the
defendant manufacturers, the settlement should not materially increase the
Company's liability exposure.
In March 1996, the Federal Trade Commission ("FTC") issued a
resolution authorizing an investigation to determine whether 22 prescription
drug manufacturers, including the Company, are engaging in unlawful concerted
activities to raise, fix, maintain or stabilize the prices of pharmaceutical
drugs in the United States. In July 1996, the FTC issued document subpoenas to
each of the manufacturers, requesting pricing and marketing documents. The
Company has produced documents to the FTC in response to the subpoena.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company
The Common Stock is listed and traded on the New York Stock
Exchange (the "NYSE") under the symbol PNU. As of January 31, 1997, there were
36,327 holders of record of the Common Stock. Swedish Depositary Shares,
each representing one share of Common Stock, are traded on the Stockholm Stock
Exchange under the symbol PH&U.
Information regarding the market prices and dividends for the
Company's Common Stock and related stockholder matters appearing under the
caption "Quarterly Data" in the 1996 Annual Report to Shareholders (Exhibit 13)
is hereby incorporated by reference.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Background information for the Board of Directors, including Jan
Ekberg, the Company's President and Chief Executive Officer, is
incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of shareholders to be held on April
29, 1997.
In addition to J. Ekberg, the following are the Company's executive
officers:
Goran A. Ando, M.D., age 47, Executive Vice President,
Worldwide Science and Technology. He had been Executive Vice
President and Deputy Chief Executive Officer of Pharmacia since
February 1995, and before that had been at Glaxo Holdings p.l.c.,
where he was director of research and development activities.
Kenneth M. Cyrus, age 58, Senior Vice President, General
Counsel and Secretary. He had been Executive Vice President,
Secretary and General Counsel for Upjohn since 1994 and before that
had been Senior Vice President, Secretary and General Counsel.
Robert C. Salisbury, age 53, Executive Vice President, Finance
and Administration, and Chief Financial Officer. He had been
Executive Vice President and Chief Financial Officer for Upjohn since
1994, and before that had been Senior Vice President for Finance and
Chief Financial Officer.
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<PAGE> 19
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be
held on April 29, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be
held on April 29, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be
held on April 29, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following are included in the 1996 Annual Report to
Shareholders (Exhibit 13) and are incorporated by reference into this
Form 10-K pursuant to Item 8.
Report of Independent Accountants - Coopers & Lybrand, L.L.P.
Consolidated Statements of Earnings, Years ended December 31, 1996,
1995 and 1994.
Consolidated Balance Sheets, December 31, 1996 and 1995.
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows, Years ended December 31,
1996, 1995 and 1994.
Note 22. Segment and Geographic Information, Years ended December
31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(A)2. FINANCIAL STATEMENT SCHEDULES
NOTES:
(1) Schedules are omitted because they are either not required, are not
applicable or because equivalent information has been
included in the financial statements, the notes thereto or
elsewhere herein.
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<PAGE> 20
(2) Financial statements of 50 percent-or-less-owned affiliated persons are
omitted because such persons, in the aggregate, do not
constitute a significant subsidiary.
(A)3. EXHIBITS
<TABLE>
<S> <C>
(3)(i) Restated Certificate of Incorporation of the Registrant (filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-03109), and incorporated herein by reference).
(3)(ii) By-laws of the Registrant (filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 (Reg. No.
333-03109), and incorporated herein by reference).
(4)(a) Loan Agreement between Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities Financing
Authority and The Upjohn Company, dated as of December 1, 1983, and Trust Agreement between Puerto Rico Industrial,
Medical and Environmental Pollution Control Facilities Financing Authority and The Chase Manhattan Bank (National
Association), Trustee, dated as of December 1, 1983 (not filed pursuant to Regulation S-K, Item 601 (b)(4)(iii)(A);
the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request).
(4)(b) Indenture dated as of February 1, 1990, with respect to debt securities issued by the Upjohn Employee Stock
Ownership Trust and 9.79% Amortizing Notes, Series A, Due February 1, 2004, issued by the Upjohn Employee Stock
Ownership Trust and guaranteed by the Registrant (not filed pursuant to Regulation S-K, Item 601 (b)(4)(iii)(A); the
Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request).
(4)(c) Indenture dated as of August 1, 1991 between the Company and The Bank of New York, as trustee, with respect to Debt
Securities to be issued thereunder form time to time (not filed pursuant to Regulation S-K, Item 601(b)(4)(iii)(A);
the Registrant agrees to furnish a copy of these documents to the Securities and Exchange Commission upon request.
(10)(a) Form of Indemnification Agreement entered into with each Officer and Director (incorporated by reference to Exhibit
(10)(a) to the Registrant's Form 10-K for the year ending December 31, 1995).
(10)(b) Employment Agreement with J.L. Zabriskie dated March 7, 1996 (incorporated by reference to Exhibit (10)(b) to the
Registrant's Form 10-K for the year ending December 31, 1995).
(10)(c) Employment Agreement with G.A. Ando dated January 4, 1996 (incorporated by reference to Exhibit (10)(c) to the
Registrant's Form 10-K for the year ending December 31, 1995).
(10)(d) Employment Agreement with R.C. Salisbury dated January 4, 1996 (incorporated by reference to Exhibit (10)(d) to the
Registrant's Form 10-K for the year ending December 31, 1995).
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C>
(10)(e) Consulting Agreement with J. Ekberg dated March 11, 1996 (incorporated by reference to Exhibit (10)(e) to the
Registrant's Form 10-K for the year ending December 31, 1995).
(10)(f) Employment Agreement with L.S. Smith dated February 25, 1997.
(10)(g) Employment Agreement with K.M. Cyrus dated March 8, 1996.
(10)(h) Registration Rights Agreement dated as of August 20, 1995, among Pharmacia & Upjohn, Inc., The Upjohn Company,
Pharmacia Aktiebolag and AB Volvo (filed as Exhibit 10(b) to the Registrant's Registration Statement on Form S-4
(Reg. No. 33-61969), and incorporated herein by reference).
(10)(i) Long-Term Incentive Plan (incorporated by reference to Exhibit (10)(g) to the Registrant's Form 10-K for the year
ending December 31, 1995).
(10)(j) Annual Incentive Plan (incorporated by reference to Exhibit (10)(h) to the Registrant's Form 10-K for the year
ending December 31, 1995).
(11)(a) Computation of Earnings Per Share - Primary.
(11)(b) Computation of Earnings Per Share - Fully Diluted.
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Annual Report to Shareholders.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
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<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
By: /s/ Jan Ekberg
------------------------------------
Jan Ekberg
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this Registration Report has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard H. Brown Chairman of the Board and February 25, 1997
--------------------------------- Director
Richard H. Brown
/s/ Jan Ekberg President and Chief Executive February 25, 1997
---------------------------------
Jan Ekberg Officer and Director
/s/ Goran Ando Executive Vice President February 25, 1997
---------------------------------
Goran Ando
/s/ Robert C. Salisbury Executive Vice President (Chief February 25, 1997
--------------------------------- Financial Officer)
Robert C. Salisbury
/s/ Frank C. Carlucci Director February 25, 1997
---------------------------------
Frank C. Carlucci
/s/ Gustaf Douglas Director February 25, 1997
---------------------------------
Gustaf Douglas
/s/ M. Kathryn Eickhoff Director February 25, 1997
---------------------------------
M. Kathryn Eickhoff
/s/ Daryl F. Grisham Director February 25, 1997
---------------------------------
Daryl F. Grisham
/s/ Soren Gyll Director February 25, 1997
---------------------------------
Soren Gyll
/s/ William E. La Mothe Director February 25, 1997
---------------------------------
William E. La Mothe
/s/ Goran Linden Director February 25, 1997
---------------------------------
Goran Linden
</TABLE>
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<PAGE> 23
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Berthold Lindquist Director February 25, 1997
---------------------------------
Berthold Lindquist
/s/ Olof Lund Director February 25, 1997
---------------------------------
Olof Lund
Director February 25, 1997
---------------------------------
William D. Mulholland
/s/ William U. Parfet Director February 25, 1997
---------------------------------
William U. Parfet
/s/ Ulla Reinius Director February 25, 1997
---------------------------------
Ulla Reinius
/s/ Bengt Samuelsson Director February 25, 1997
---------------------------------
Bengt Samuelsson
</TABLE>
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<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
(10)(f) Employment Agreement with L.S. Smith dated February 25, 1997
(10)(g) Employment Agreement with K.M. Cyrus dated March 8, 1996
(11)(a) Computation of Earnings Per Share - Primary
(11)(b) Computation of Earnings Per Share - Fully Diluted
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(27) Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT (10)(F)
February 25, 1997
Ley S. Smith
Pharmacia & Upjohn
7000 Portage Road
Kalamazoo, MI 49001
U S A
Dear Ley:
To confirm our understanding in order to induce you to continue your employment
with the Company beyond the date you might otherwise have retired, your
Severance Agreement with the Company dated March 15, 1995 (the "Severance
Agreement"), will be amended to provide that you (or your beneficiary or
estate) will receive the severance pay and other benefits provided in the
Severance Agreement if you terminate employment, or if you die or become
permanently disabled (while employed by the Company or one of its affiliates),
on or prior to the later of the date of November 2, 1997 or the date 90 days
after the Company's new President and Chief Executive Officer assumes office.
In addition, upon termination of your employment, you shall be eligible to
receive benefits equivalent to those provided under the Company's
Pre-Retirement Terminal Leave of Absence Program for U.S. based employees.
If you agree to this amendment to your Severance Agreement, please sign and
date below, upon which such amendment will be effective.
Very truly yours
JAN EKBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AGREED AND ACCEPTED AS OF THIS ____________ DAY OF FEBRUARY, 1997.
____________________________________
LEY SMITH
<PAGE> 1
EXHIBIT (10)(G)
March 8, 1996
Mr. Ken Cyrus
Pharmacia & Upjohn Management Co. Ltd.
Knyvett House
The Causeway
Staines, U.K.
Dear Ken:
To confirm our prior understanding, you will not enter into a new
employment agreement with either Pharmacia & Upjohn, Inc. (the "Company") or
Pharmacia & Upjohn Management Company, Ltd. However, under your Severance
Agreement with The Upjohn Company, dated March 15, 1995 (the "Severance
Agreement"), you will be entitled to receive the severance pay and other
benefits provided in the Severance Agreement if you satisfy the terms of that
Agreement. Your moving to London to assume your current position shall not be
deemed to be a waiver by you of any rights you may have under your Severance
Agreement. Further, whenever your employment with the Company and its
affiliates terminates, you shall be entitled to be repatriated to the United
States and receive the benefits then provided to repatriated U.S. employees,
including receiving retirement benefits and retiree medical benefits then
provided to similarly situated U.S. employees. Finally, in order to induce you
to continue your employment with the Company, in the event you should die or
become permanently disabled on or prior to November 2, 1997 while employed by
the Company or one of its affiliates, you or your beneficiary or estate shall
receive the severance pay and other benefits provided in the Severance
Agreement as if you had terminated your employment immediately preceding your
death or disability.
Very truly yours,
John L. Zabriskie
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 11(A)
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Earnings from continuing operations $561.6 $738.7 $833.4
Earnings from discontinued operations, net 1.7
------ ------ ------
Net earnings 561.6 738.7 835.1
Dividends on preferred stock, net of tax 12.6 12.5 12.3
------ ------ ------
Net earnings on common stock - primary $549.0 $726.2 $822.8
------ ------ ------
Average number of common shares outstanding 508.4 504.7 504.4
Number of common shares issuable assuming
exercise of stock options 3.5 1.9 .3
Contingently issuable shares .5 .5 .5
------ ------ ------
512.4 507.1 505.2
------ ------ ------
Earnings per share - primary
Continuing operations $1.07 $1.43 $1.63
Discontinued operations
------ ------ ------
Net earnings $1.07 $1.43 $1.63
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 11(B)
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Earnings from continuing operations $561.6 $738.7 $833.4
Earnings from discontinued operations, net 1.7
------ ------ ------
Net earnings $561.6 $738.7 $835.1
Less ESOP contribution assumed to be
required if preferred shares are
converted into common shares 4.2 4.5 4.7
Plus interest on convertible debentures 1.3
Less adjustment of tax benefit on
allocated shares .5 .5 .3
------ ------ ------
Net earnings on common shares - fully
diluted $556.9 $733.7 $831.4
====== ====== ======
Average number of common shares
outstanding 508.4 504.7 504.4
Number of common shares issuable assuming
exercise of stock options 3.5 4.9 .4
Contingently issuable shares .5 1.0 2.6
Number of common shares issuable assuming
conversion of preferred shares 10.4 10.5 10.7
------ ------ ------
522.8 521.1 518.1
====== ====== ======
Earnings per share - fully diluted
Continuing operations $1.07 $1.41 $1.60
Discontinued operations
------ ------ ------
Net earnings $1.07 $1.41 $1.60
====== ====== ======
</TABLE>
NOTE:
This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3%.
<PAGE> 1
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------
<S> <C>
Earnings from continuing operations before
income taxes $838 $1,136 $1,271 $778 $947
Less: Equity in undistributed net income
(loss) of companies owned less than 50% 5 7 8 8 6
------ ------ ------ ------ ------
833 1,129 1,263 770 941
Add: Amortization of previously capitalized
interest 11 10 8 6 4
Fixed charges included in the above:
Interest and amortization of debt expense 82 121 139 209 162
Rental expense representative of an
interest factor 37 35 35 32 35
------ ------ ------ ------ ------
Earnings from continuing operations before
income taxes and fixed charges $963 $1,295 $1,445 $1,017 $1,142
------ ------ ------ ------ ------
Interest incurred and amortization of debt
expense 115 149 164 234 178
Rental expense representative of an
interest factor 37 35 35 32 35
------ ------ ------ ------ ------
Total fixed charges $152 $184 $199 $266 $213
------ ------ ------ ------ ------
Ratio of earnings to fixed charges 6.33 7.05 7.24 3.82 5.35
====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 13
Financial review
Pharmacia & Upjohn, Inc. (the company) was formed through the merger of
Pharmacia AB and The Upjohn Company and began operating in November 1995. The
merger combined two operations that were complementary in both therapeutic
expertise and geographic presence, creating a company that in 1996 achieved
total sales of $7.2 billion and $11.2 billion in total assets. The global
company has a corporate management center in Windsor, England and major
research and manufacturing centers in Italy, Sweden and the
United States.
The 1995 merger was accounted for as a pooling of interests under U.S.
generally accepted accounting principles. All data prior to the November 2,
1995, merger date have been combined as if the companies had been merged during
the prior periods. Accordingly, 1996 results may be more reflective of the
company's newly integrated operations and organizational structure than prior
year information. The company reports its operations as a single industry
segment - pharmaceutical products. In addition to prescription pharmaceutical
products, this industry designation includes activities in consumer health care
and the affiliated businesses of animal health, pharmaceutical chemicals and
contract manufacturing, diagnostic systems and biotechnology supply products.
Pharmacia & Upjohn's products are available in virtually every country in the
world with major markets in Western Europe, the United States and Japan.
Pursuant to the merger, during 1995 and 1996, the company began extensive
restructuring programs to fully integrate the combined worldwide operations,
eliminate duplicate facilities and functions, and focus resources on the
objectives of the newly merged company. This plan is expected to achieve a net
reduction of approximately 4,100 positions worldwide and the closing or
combining of numerous subsidiary locations and facilities. Savings from the
merger-related restructuring activities are expected to be realized in all
major expense categories and to have an effect on earnings as elements of the
restructuring plan continue to be implemented in 1997. Steps are also being
taken to focus research and development (R&D) activities on the most promising
projects of the two companies. Management estimates that this has resulted in a
reduction in pharmaceutical R&D projects of approximately 30 percent. This
effort, combined with the company's commitment to investing in excess of $1
billion annually in research and development, should support sales growth in
future years. In 1996 the company announced its intention to reduce the number
of worldwide pharmaceutical production facilities by approximately 40 percent.
Restructuring charges associated with such plant rationalizations will continue
into future periods when management's plans are finalized.
Other strategic activities in 1996 included the initial public offering of
stock for Biacore International AB (previously named Biosensor), a business
that develops, manufactures and markets analytical instruments based on
patented biosensor technology. In addition, the company is committed to
focusing and developing the animal health business. In the second half of 1996,
the company acquired Pherrovet AB, a leading animal health company in the
Nordic region, acquired the veterinary product line of Paines & Byrne, and sold
certain animal health biological assets to Bayer AG. The company also acquired
human pharmaceutical products from The Procter & Gamble Company in Australia
and New Zealand in November 1996.
In addition to a focus on cost savings and strategic growth, at December
31, 1996, the company retains a strong financial position which, combined with
substantial borrowing capacity, provides the means to pursue the company's
future strategic objectives.
All per-share amounts in the following discussion
OVERVIEW OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
1996 1995 1994
U.S. dollars in millions, except per-share data $M % change $m % change $m
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue 7,286 3% 7,095 4% 6,823
Operating income 677 (33) 1,015 (14) 1,180
Earnings from continuing
operations before income taxes 838 (26) 1,136 (11) 1,271
Net earnings 562 (24) 739 (12) 835
Net earnings per common share:
- Primary $1.07 (25) $1.43 (12) $1.63
- Fully diluted $1.07 (24) $1.41 (12) $1.60
- -------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 2
are presented on a fully diluted after-tax basis.
When comparing year-to-year earnings, restructurings, merger costs and
discontinued operations recorded over the past three years should be
considered. Merger-related restructuring charges recorded in 1996 were $518
million ($.62 per share). Restructuring charges were $104 million ($.13 per
share) in 1995 and $20 million in 1994. Merger costs reported in 1996 and 1995
were $67 million ($.09 per share) and $138 million ($.22 per share),
respectively. These costs consisted primarily of transaction costs and expenses
related to certain nonrecurring organizational activities, establishing the
corporate identity for the new company and various other costs of combining the
two companies. In 1994, the company divested the Asgrow Seed Company. This sale
was reported as a discontinued operation.
Other significant items recorded in 1996 affecting comparability include:
the termination of an agreement with the Biopure Corporation for development of
the hemoglobin-based oxygen carrier, Hemopure; gain on the sale of majority
interest in Biacore; gain on the sale of an equity interest and related
dissolution of a joint venture; and accrual for certain legal and environmental
matters. Dissolution of the Biopure agreement led to the impairment of an
investment, resulting in a charge of $106 million ($.13 per share) that was
reported with marketing, administrative and other expense (MA&O). The gain on
the sale of Biacore stock of $55 million ($.08 per share) is included in
nonoperating income. Both the gain on the sale of the joint venture equity
interest of $46 million ($.06 per share) and the accrual for legal and
environmental matters of $73 million ($.10 per share) are included in MA&O.
In 1995 and 1994 other significant items affecting comparability include:
the write-down of an equity investment to fair value in 1995; the 1995 sale of
the company's rights under a product co-marketing agreement; and the sale of
Deltec, Inc., a medical technology company, in 1994. The write-down of the
equity interest by $59 million ($.08 per share) in 1995 was reported in MA&O.
The sale of co-marketing rights increased 1995 other operating revenue by $42
million ($.05 per share). The 1994 sale of Deltec contributed $30 million to
nonoperating income.
NET SALES
Worldwide sales rose 3 percent in 1996 to $7.2 billion, compared to increases
of 4 percent and 3 percent in 1995 and 1994, respectively. Combined volume and
price in 1996 added 5 percent while foreign exchange rate changes had an
unfavorable impact of 2 percent. In 1996, volume growth attributable to
expanded market reach as a result of the merger was partially offset by price
competition, increased effects of generics in both the U.S. and Europe, and a
mandatory price decrease in Japan. Shifts in the strength of the U.S. dollar,
primarily versus a weakened Japanese yen, also contributed to reduced sales
growth.
The markets in which the company conducts business are highly competitive
and, in many cases, highly regulated. Price reductions and product
substitutions may result from the introduction of new, technologically
innovative products and processes by competitors, even for products protected
by patents. Pricing pressures are exerted both from government bodies and the
private sector in an effort to contain worldwide health care costs. Loss of
patent protection results in increased competition and generic substitution.
This is evidenced by a gradual decline in sales of the affected product as new
competition enters the marketplace, usually at a lower price to gain market
share. The company can not predict the outcome nor timing of any future U.S. or
international government or other health care initiatives and can not
reasonably estimate the effect on operations or cash flows.
In 1996, sales in the U.S. represented 32 percent of consolidated sales
compared to 30 percent and 35 percent in 1995 and 1994, respectively. As
evidenced below, since 1994 the geographic composition of sales has remained
fairly consistent between the U.S. and the rest of the world. This mix results
in significant exposure to the fluctuations of foreign currency exchange rates
in both translation of financial results and the underlying transactions that
comprise the results.
[BAR GRAPH]
<TABLE>
<CAPTION>
1996 % Change 1995 % Change 1994
$M $m $m
----- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
U. S. Sales 2,322 9.7 2,116 (9.0) 2,326
Rest of World 4,854 -- 4,833 10.0 4,379
----- ----- ------
Consolidated Sales 7,176 3.3 6,949 3.6 6,704
----- ----- -----
</TABLE>
35
<PAGE> 3
PRODUCT SALES
The company has 13 major product groups, each contributing in excess of $200
million in sales in 1996. The table below provides a year-to-year comparison
of consolidated net sales by major product group:
<TABLE>
<CAPTION>
1996 1995 1994
U.S. dollars in millions $M % Change $m % Change $m
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Metabolic disease 766 2.9 745 (0.5) 748
Oncology 630 11.2 566 6.7 531
Inflammation 625 0.2 623 0.3 621
Infectious disease 587 (14.5) 687 10.3 623
Central nervous system 568 (0.6) 572 0.3 570
Women's health 554 2.3 541 7.0 506
Nutrition 381 (4.5) 399 8.1 369
Ophthalmology 295 (0.4) 296 5.3 281
Other prescription pharmaceuticals 673 (1.2) 681 (12.0) 774
Consumer health care 710 25.4 566 (1.3) 573
Animal health 413 7.9 383 14.0 336
Chemical & contract manufacturing 316 58.3 200 17.1 171
---------------------------------------------------------------------------
Total pharmaceuticals 6,518 4.1 6,259 2.6 6,103
Biotech/Biacore 439 0.4 437 13.5 385
Diagnostics 219 (13.4) 253 17.1 216
---------------------------------------------------------------------------
Consolidated net sales 7,176 3.3 6,949 3.6 6,704
---------------------------------------------------------------------------
</TABLE>
Worldwide sales growth in 1996 was enhanced by the launch of eleven new
products or product line extensions during 1996 as highlighted below.
1996 PRODUCT LAUNCHES
- - Camptosar (irinotecan) for the treatment of refractory colorectal cancer
(Oncology - U.S.)
- - Xalatan (latanoprost), an intraocular pressure-lowering medication for the
treatment of glaucoma (Ophthalmology - U.S., Sweden, Switzerland)
- - Corvert for atrial fibrillation and flutter (Other prescription
pharmaceuticals - U.S.)
- - Rogaine 2% treatment for hair loss launched over the counter (OTC)
(Consumer health care - U.S.)
- - Nicorette gum for smoking cessation launched OTC and marketed by SmithKline
Beecham (Consumer health care - U.S., France)
- - Nicotrol patch for smoking cessation launched OTC and marketed by McNeil
Consumer Products Company (Consumer health care - U.S.)
- - Nicorette nasal spray treatment for smoking cessation launched for
prescription sales and marketed by McNeil (Consumer health care - U.S.)
- - Nicorette Inhaler launched OTC (Consumer health care - Denmark)
- - Kao Lectrolyte, an electrolyte replenishment product for children (Consumer
health care - U.S.)
- - Estring for post-menopausal women suffering from urogenital atrophy (Women's
health - Germany)
- - Pantoprazole for gastric hyperacidity disorders (Other prescription
pharmaceuticals - Italy, Spain, Norway, Finland)
Existing product lines continue to contribute significant sales dollars led by
Genotropin and Xanax, reported in Metabolic disease and Central nervous system
(CNS) categories, respectively. Genotropin, a growth hormone, contributed
worldwide sales of $397 million but experienced only slight growth for the year
due to lower sales in Japan, a significant market for this product. The decline
in sales in Japan resulted partially from reduced volume early in the year in
anticipation of the mandatory price decrease, followed by the effects of the
reduction in price for the remainder of the year. The sales dollars presented
for Genotropin were also adversely affected by the weakened yen in Japan. Xanax,
the anti-anxiety agent, showed moderate growth for the year due to strength in
Europe, and special promotions in the U.S. Xanax sales were $353 million despite
prior year declines due to strong generic competition in the U.S.
36
<PAGE> 4
Loss of patent protection on several products over the past few years has
had a significant effect on the sales of those products. Xanax and Halcion, a
sleep-inducing agent also in the CNS category, have experienced this trend
since 1993. Glynase and Micronase, both oral anti-diabetes agents reported in
the Metabolic disease group, lost patent protection in the U.S. in 1995 and
1994, respectively. Provera, the progestational agent reported in Women's
health, has also been facing competition from generics in the U.S. throughout
the past few years, contributing to decreased sales. Additionally, in 1996 two
Infectious disease products, Vantin and Mycobutin, both broad-spectrum oral
antibiotics, faced competition from a new class of antibiotics called
macrolides. Mycobutin has also been adversely affected because the product can
not be used in HIV/AIDS patients in association with some of the recently
introduced protease inhibitors.
The mandatory price decrease in Japan and a weakened yen had a negative
effect on the company's 1996 performance due to the importance of this market
to certain products. These products include Genotropin, Solu-Medrol and other
Medrol products, Sermion, Pharmorubicin, and Healon. Sermion is a treatment for
senile dementia reported in the CNS category. Pharmorubicin, a cytostatic agent
for the treatment of solid tumors and leukemias, is included in the Oncology
product group, and Healon, a visco-elastic used for cataract surgery, is
reported in the Ophthalmology group.
Despite the factors exerting downward pressure on sales growth mentioned
above, several products contributed sound performance for the year.
Depo-Provera, the injectable contraceptive reported in Women's health,
continues to provide strong volume growth in both the U.S. and international
markets. Fragmin, a treatment for the prevention of blood clots in connection
with surgery, contributed good growth, specifically in Europe. Fragmin sales in
Japan also increased due to the restructuring of an existing distributor
relationship which has no impact on earnings. Fragmin is reported in the
Metabolic disease product group. Caverject, the treatment for male impotence,
first recorded U.S. sales in the third quarter of 1995 and provided strong
sales growth for l996. Reported in Other prescription pharmaceuticals,
Caverject is sold in 59 markets worldwide. The launches of Camptosar and
Xalatan in 1996 also contributed strong sales growth. Camptosar is reported in
the Oncology category and reported year-to-date sales of $59 million since
August. Xalatan, in the Ophthalmology product group, contributed $30 million
since late September.
Consumer health care was an arena of significant growth for the company in
1996, led by the U.S. OTC launches of three consumer health care products:
Rogaine 2% solution, the Nicotrol patch, and Nicorette gum. Several other
products in the Nicorette line, such as Nicorette nasal spray and the Nicorette
Inhaler, have been introduced in various markets world-
wide and are expected to contribute to future period sales. Combined sales for
Rogaine and the Nicorette line contributed $396 million in 1996, partially due
to initial sales to establish retail inventories. Sales of Rogaine (Regaine
outside the U.S.) are classified under Consumer health care for all comparative
periods with year-to-year OTC sales of Rogaine 2% greatly exceeding the prior
year prescription sales. Competition from generics may affect future sales of
these products.
Other affiliated businesses continue to provide a solid base of sales to
the company. The sales growth recorded by the Chemical and contract
manufacturing group in 1996 was due primarily to the transfer of certain
European products into this sales classification for 1996 (reported in Other
prescription pharmaceutical groupings in 1995 and 1994). The Diagnostics
business showed a decline in sales from 1995 to 1996 due to poor climatic
conditions for allergies in Europe and Japan and the weakened Japanese yen.
OTHER OPERATING REVENUE
In the first quarter of 1995 the company sold rights under a product
co-marketing agreement. This sale added $42 million to this revenue
classification, contributing to the comparative decline for 1996. Additionally,
1995 included revenue from promotional services provided by the company for
Zovirax, a product of Glaxo Wellcome Company. This agreement was terminated at
the end of 1995. Exclusive of these items, other revenue from co-marketing
agreements has increased in 1996, primarily from the joint marketing of Luvox,
a treatment for obsessive compulsive disorder (OCD), with Solvay & Cie.
37
<PAGE> 5
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of net sales, were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Cost of products sold 29.5% 28.3% 28.0%
Research and development 17.6 18.0 17.3
Marketing, administrative and other 36.8 37.7 38.5
Restructuring charges 7.2 1.5 0.3
Merger costs 0.9 2.0 -
Operating income 9.4 14.6 17.6
- --------------------------------------------------------------------
</TABLE>
An increase in cost of products sold as a percent of sales reflects
unfavorable period-to-period comparisons in product and geographic mix and the
effects of foreign exchange movements. Increased price competition and generic
substitution encountered by several major products reduced gross margin.
Geographic shifts in sales growth to markets with higher costs as a percent of
sales have also occurred from 1995 to 1996. Also in 1996, fluctuations in
foreign currency exchange rates, specifically the strengthening of the Swedish
krona and Italian lira and the weakening in the Japanese yen, increased cost as
a percentage of sales as the company has significant manufacturing operations
in Sweden and Italy and significant product sales in Japan.
As evidenced below, the company has continued to make significant
investments in R&D over the past six years. This commitment, along with
continual refocusing of spending to the most promising projects, is necessary
to provide sales growth for future years.
[BAR GRAPH]
<TABLE>
<CAPTION>
U.S. dollars in millions 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
R&D Expenditures 1,266 1,254 1,163 1,144 940 785
</TABLE>
From 1995 to 1996, R&D spending increased 1 percent, partially due to a
one-time accumulated payment of $26 million in the third quarter of 1996 under
a contractual obligation for co-development of a product. Otherwise, R&D
spending decreased slightly. Spending reductions from narrowing the company's
research focus were largely offset by 1996 spending to support 11 significant
product filings.
From 1994 to 1995, R&D expenses increased 8 percent due partially to the
greater number of product candidates in the final stages of clinical
development in 1995, which required higher patient populations for testing.
Marketing, administrative and other expenses continue a downward trend as a
percent of sales from 1994 to 1996. Mitigating the effect of this trend for
1996 is a charge of $106 million related to the impairment of an investment in
Biopure and the accrual for certain legal and environmental matters of $73
million, both mentioned previously. Conversely, expenses recorded in 1996 were
offset by a gain on the sale of an equity interest and related dissolution of a
joint venture of $46 million. This same investment had previously been written
down by $59 million in the fourth quarter of 1995 to reflect the fair market
value at December 31, 1995. Excluding the effect of these items, 1996 results
reflect a net decrease in expenses as cost reductions are being realized under
the company's merger-related restructuring plan, partially offset by additional
advertising and promotion costs incurred by the Consumer health care business
to support OTC launches of Rogaine and Nicorette products. Additionally, the
company experienced unusually high costs in 1994 for increased marketing
investments in certain emerging international markets.
38
<PAGE> 6
MERGER COSTS AND RESTRUCTURING CHARGES
Merger costs recorded in 1995 included both transaction costs ($69 million) and
expenses to combine the operations of the two companies ($69 million).
Transaction costs consisted primarily of professional fees. Merger costs
recorded in 1996 of $67 million, as described earlier, related primarily to the
combination of operations.
Merger-related restructuring charges of $518 and $92 million recorded in
1996 and 1995, respectively, primarily reflect the planned reduction of
approximately 4,350 positions. At December 31, 1996, approximately 4,280
employees had left the company under this program. Cash spending in 1996 for
this program totaled approximately $344 million, with approximately $201
million remaining as other current and noncurrent liabilities of the company.
These remaining reserves include certain accruals for pensions and other
employee benefits that will be expended over the next several years. The costs
in 1995 resulted from accruals for reduction of approximately 850 of these
positions, elimination of duplicate office facilities, and other exit costs.
Cash spending for merger-related restructuring in 1995 was nominal.
Other nonmerger restructuring charges recorded in 1995 totaled $12 million
related to the closure of a manufacturing facility in Sweden. Restructuring
charges recorded in 1994 reflect costs associated with a plant closing in the
U.S. related to the consolidation of manufacturing facilities for ophthalmology
operations. Also in 1994, this expense category included charges resulting from
the write-down of intangibles related to a terminated oncology venture.
NONOPERATING INCOME AND EXPENSE
The company has experienced a favorable interest income to interest expense
relationship in each year from 1994 to 1996. Declines in both interest income
and interest expense from 1995 to 1996 are primarily due to the termination of
certain borrowing arrangements in Europe in the third quarter of 1996 and lower
interest rates, mainly in Europe. Additionally, interest expense in 1996 was
further reduced due to net repayments of short-term debt. Reductions in both
short-term and long-term investments in 1996 also decreased interest income.
From 1994 to 1995 the increase in interest income was largely due to investment
of proceeds from the sales of Deltec and certain other Pharmacia AB assets and
the sale of the Asgrow Seed Company.
The gain on the initial public offering of stock for Biacore of $55
million is recorded as nonoperating income for 1996, of which $8 million
represents the gain on the issuance of new shares. Further information is
presented in Note 5 to the consolidated financial statements.
INCOME TAXES
The effective tax rate for 1996 was 33 percent, compared to 35 percent and 34.4
percent in 1995 and 1994, respectively. The decrease in the rate from 1995 to
1996 was the result of increased earnings in jurisdictions with lower tax rates
and nonrecurring charges which are deductible at tax rates greater than the
average effective rate.
39
<PAGE> 7
FINANCIAL CONDITION
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Working capital (U.S. $ in millions) 2,392 2,334 1,929
Current ratio 1.96:1 1.88:1 1.67:1
Debt to total capitalization 14.5% 17.9% 23.4%
- -----------------------------------------------------------------------
</TABLE>
The company's working capital increased slightly from 1995 to 1996 due to net
reductions in short-term borrowings largely offset by decreases in short-term
investments. In both 1995 and 1996, the percentage of debt to total
capitalization benefited from declining levels of debt. As indicated below, in
1996, net financial assets decreased from 1995 and 1994 due principally to the
net borrowing and investment activities influenced by cash needs to fund
operations, dividend payments to shareholders, and restructuring and merger
costs.
[BAR GRAPH]
<TABLE>
<CAPTION>
1996 1995 1994
$M $m $m
------ ------ ------
<S> <C> <C> <C>
Cash, equivalents and investments 1,849 2,530 2,554
Short-term and long-term debt 1,058 1,394 1,719
----- ----- -----
Net financial assets 791 1,136 835
</TABLE>
Net cash provided by operations is considered a major source of funds to
finance working capital, shareholder dividends, and capital expenditures. Cash
from operations totaled $805 million in 1996, $1,145 million in 1995, and
$1,286 million in 1994. The decline in 1996 results from payments for
merger-related restructuring of $344 million and merger costs of $67 million
during the year. Payments for merger costs of $138 million in 1995 account for
the slight decrease from 1994.
Expenditures for property, plant and equipment were $656 million in 1996,
$592 million in 1995 and $491 million in 1994. Anticipated capital spending for
1997 of approximately $675 million includes continued spending to create
manufacturing centers of excellence in the U.S., Belgium, Sweden and Puerto
Rico, and for additional expansion of bulk chemical production facilities in
Ireland. Plans also have been announced in 1996 to start development of a
state-of-the-art research campus in Stockholm, Sweden. Other investing
activities included the net reductions in both short-term and long-term
investments which provided the cash flow to fund repayments of short-term debt.
Financing activities continue to be a significant use of cash, primarily
for payment of dividends to shareholders. 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. During 1996, the company terminated certain borrowing
arrangements in Europe for a net decrease in short-term debt of $289 million.
Cash proceeds from the issuance of treasury stock were related to the employee
option program and were primarily utilized for the purchase of common shares to
be issued upon future exercise of stock options.
The company utilizes forward exchange contracts to mitigate the effect of
currency exchange rate fluctuations on certain intercompany and third-party
transactions. The company hedges net recorded currency transaction exposures on
certain existing assets and liabilities as well as net anticipated currency
transactions. The anticipated transaction hedging activities seek to protect
operating margins and cash flows from the potential adverse effects of currency
exchange rate fluctuations by offsetting the gains and losses on the
instruments with the losses and gains of the underlying anticipated cash flows.
Because forward contracts used to hedge anticipated transaction exposures 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. Further information is presented in Note 14 to the consolidated
financial statements.
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. As of December 31, 1996, unused lines
of credit available for company use totaled $828 million. The company had A-1+
and P-1 ratings for its commercial paper, and AA- and A1 general bond ratings
from Standard & Poor's and Moody's, respectively, as of December 31, 1996.
40
<PAGE> 8
OTHER INFORMATION
Various suits and claims arising in the ordinary course of business, primarily
for personal injury 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 cleanup 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 can not predict and can not 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.
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 federal cases have been consolidated in federal court in
Chicago, Illinois. The company believes it has meritorious defenses, and
although potential liability can not be presently estimated, a majority of the
defendants in this class action (not including the company) have recently
agreed to $10 million to $60 million settlements of claims per defendant in
this action. The company believes that any potential liability above amounts
accrued will not have a material adverse effect on the company's consolidated
financial position or the company's results of operations or liquidity.
Further discussion of current litigation matters is provided in Note 13 to
the consolidated financial statements.
The company currently is performing a detailed assessment of the expected
impact of the Year 2000 date recognition problem on existing automated systems
worldwide. Preliminary assessment indicates that resulting solutions will
involve a mix of purchasing new systems and modifying existing systems. A
reasonable estimate of potential costs can not presently be determined.
The American Institute of Certified Public Accountants has issued
Statement of Position 96-1, Environmental Remediation Liabilities. It becomes
effective in 1997. The impact on the company of adoption of this statement is
not expected to be material.
Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements that involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the company's operations,
markets, products, services and prices, and other factors more specifically
discussed in the company's filings with the Securities and Exchange Commission.
41
<PAGE> 9
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994 1993 1992
U.S. dollar amounts in millions, except per-share data $M $m $m $m $m
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue 7,286 7,095 6,823 6,561 5,938
Earnings from continuing operations 562 739 833 561 704
Fully diluted earnings per share from
continuing operations $ 1.07 $ 1.41 $ 1.60 $ 1.08 $ 1.35
Dividends declared per share (a) $ 1.08 $ .27 - - -
Total assets 11,173 11,461 10,947 9,895 10,873
Long-term debt 567 603 678 675 464
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Separate dividend information for Pharmacia AB and The Upjohn Company prior
to the merger has not been presented because the information would not be
meaningful.
42
<PAGE> 10
Reports of management and independent accountants
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements and the
other financial information included in this Annual Report. The Board of
Directors, acting through its Audit Committee which is composed solely of
directors who are not employees of the company, oversees the financial
reporting process. The financial statements have been prepared in accordance
with U.S. generally accepted accounting principles and include amounts based on
judgments and estimates made by management. Actual results could differ from
amounts estimated.
Management has established systems of internal controls over financial
reporting designed to provide reasonable assurance that the financial records
used for preparing financial statements are reliable and that assets are
safeguarded from unauthorized use or disposition. Internal auditors review
accounting and control systems. The systems are also reviewed by the
independent accountants to the extent deemed necessary to express the opinion
set forth in their report.
Management takes corrective actions to improve reporting and control
systems in response to recommendations by the internal auditors and
independent accountants. The appointment of the independent accountants is
recommended by the Audit Committee to the Board of Directors.
Jan Ekberg
President and Chief Executive Officer
Robert C. Salisbury
Executive Vice President,
Finance and Administration and
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
PHARMACIA & UPJOHN, INC.
We have audited the consolidated balance sheets
of Pharmacia & Upjohn, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for the years 1996, 1995 and 1994. These financial statements are
the responsibility of the management of Pharmacia & Upjohn, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
(pages 44 to 63) present fairly, in all material respects, the consolidated
financial position of Pharmacia & Upjohn, Inc. and subsidiaries as of December
31, 1996 and 1995, and the consolidated results of their operations and their
cash flows for the years 1996, 1995 and 1994, in conformity with generally
accepted accounting principles in the U.S.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 26, 1997
43
<PAGE> 11
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
U.S. dollar amounts in millions, except per-share data 1996 1995 1994
For the years ended December 31 $M $m $m
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue:
Net sales 7,176 6,949 6,704
Other revenue 110 146 119
- --------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 7,286 7,095 6,823
Operating costs and expenses:
Cost of products sold 2,116 1,967 1,877
Research and development 1,266 1,254 1,163
Marketing, administrative and other 2,642 2,617 2,583
Restructuring charges 518 104 20
Merger costs 67 138 -
- --------------------------------------------------------------------------------
OPERATING INCOME 677 1,015 1,180
Interest income 159 216 157
Interest expense (56) (94) (112)
Gain on sale and issuance of subsidiary stock 55 - -
All other, net 3 (1) 46
- --------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 838 1,136 1,271
Provision for income taxes 276 397 438
- --------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 562 739 833
Discontinued operations, net - - 2
- --------------------------------------------------------------------------------
NET EARNINGS 562 739 835
Dividends on preferred stock (net of tax) 13 13 12
- --------------------------------------------------------------------------------
NET EARNINGS ON COMMON STOCK 549 726 823
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Primary $ 1.07 $ 1.43 $ 1.63
Fully diluted $ 1.07 $ 1.41 $ 1.60
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE> 12
Consolidated balance sheets
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
U.S. dollar amounts in millions 1996 1995
December 31 $M $m
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents 641 841
Short-term investments 696 974
Trade accounts receivable, less allowance of $95 (1995:$93) 1,705 1,535
Inventories 1,012 976
Deferred income taxes 326 265
Other 515 383
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,895 4,974
Long-term investments 512 715
Goodwill and other intangible assets, net 1,522 1,722
Properties, net 3,602 3,393
Other noncurrent assets 642 657
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 11,173 11,461
- -------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt 235 524
Accounts payable 449 483
Compensation and compensated absences 218 234
Dividends payable 142 141
Income taxes payable 318 268
Other 1,141 990
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,503 2,640
Long-term debt 567 603
Guarantee of ESOP debt 256 267
Postretirement benefit cost 337 373
Other noncurrent liabilities 775 744
Deferred income taxes 494 447
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,932 5,074
- -------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, one cent par value; authorized 100,000,000 shares,
issued Series A convertible 7,125 shares at stated value
(1995: 7,220 shares) 287 291
Common stock, one cent par value; authorized 1,500,000,000 shares,
issued 508,500,633 shares (1995: 506,625,800 shares) 5 5
Capital in excess of par value 1,457 1,457
Retained earnings 5,603 5,603
Note receivable from ESOP Trust (38) (36)
ESOP deferred compensation (228) (236)
Currency translation adjustments (855) (728)
Other shareholders' equity 10 31
- -------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,241 6,387
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 11,173 11,461
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
45
<PAGE> 13
Consolidated statements of shareholders' equity
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
U.S. dollar amounts in millions 1996 1995 1994
For the years ended December 31 $M $m $m
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year 291 295 297
Redemptions and conversions (4) (4) (2)
- -------------------------------------------------------------------------------------
Balance at end of year 287 291 295
- -------------------------------------------------------------------------------------
COMMON STOCK:
Balance at end of year 5 5 5
- -------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 1,457 1,394 1,394
Stock option, incentive and dividend reinvestment plans 10 32 (2)
Retirements, conversions and other (10) 31 2
- -------------------------------------------------------------------------------------
Balance at end of year 1,457 1,457 1,394
- -------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 5,603 5,602 5,117
Net earnings 562 739 835
Dividends declared (549) (422) (329)
Dividends on preferred stock (net of tax) (13) (13) (12)
Retirement of common stock - (45) (9)
Reclassification to currency translation adjustments - (258) -
- -------------------------------------------------------------------------------------
Balance at end of year 5,603 5,603 5,602
- -------------------------------------------------------------------------------------
NOTE RECEIVABLE FROM ESOP TRUST:
Balance at beginning of year (36) (34) (32)
Rollover of accumulated interest (2) (2) (2)
- -------------------------------------------------------------------------------------
Balance at end of year (38) (36) (34)
- -------------------------------------------------------------------------------------
ESOP DEFERRED COMPENSATION:
Balance at beginning of year (236) (244) (251)
ESOP expense recognized in excess of cash contributions 8 8 7
- -------------------------------------------------------------------------------------
Balance at end of year (228) (236) (244)
- -------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year (728) (1,394) (1,767)
Translation adjustments (127) 408 373
Reclassification from retained earnings - 258 -
- -------------------------------------------------------------------------------------
Balance at end of year (855) (728) (1,394)
- -------------------------------------------------------------------------------------
OTHER SHAREHOLDERS' EQUITY:
Balance at beginning of year 31 (14) -
Stock option, incentive and dividend reinvestment plans 85 57 24
Purchases of treasury stock (93) (101) (32)
Retirement of common stock - 44 8
Change in unrealized investment gains and losses, net of tax (13) 45 (14)
- -------------------------------------------------------------------------------------
Balance at end of year 10 31 (14)
- -------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,241 6,387 5,610
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 14
Consolidated statements of cash flows
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
U.S. dollar amounts in millions 1996 1995 1994
For the years ended December 31 $M $m $m
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operations:
NET EARNINGS 562 739 835
Adjustments to net earnings:
Depreciation 343 327 329
Amortization of intangibles 130 153 146
Restructuring charges 518 104 20
Cash expended on restructurings (344) (48) (118)
Net (gains) losses on sales of noncurrent assets (79) (12) (97)
Write-downs of investments, properties and intangibles 106 40 33
Deferred income taxes (94) 74 86
Other 2 (27) (9)
Changes in:
Accounts receivable (net) (218) 12 3
Inventories (69) (18) (4)
Accounts payable (25) (71) 84
Income taxes payable 52 (122) 17
Other current and noncurrent assets and liabilities (79) (6) (39)
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATIONS 805 1,145 1,286
- -------------------------------------------------------------------------------------------------------------
Cash flows (required) provided by investment activities:
Acquisitions of subsidiaries (26) (57) (90)
Additions of properties (656) (592) (491)
Proceeds from sales of properties 50 53 142
Purchases of investments (1,551) (2,407) (2,371)
Proceeds from sales of investments 2,105 2,634 1,719
Proceeds from sales of discontinued operations - 12 453
Other 20 145 42
- -------------------------------------------------------------------------------------------------------------
NET CASH REQUIRED BY INVESTMENT ACTIVITIES (58) (212) (596)
- -------------------------------------------------------------------------------------------------------------
Cash flows (required) provided by financing activities:
Proceeds from issuance of debt 38 14 15
Repayment of debt (410) (107) (53)
Net increase (decrease) in debt with initial maturity of 90 days or less 33 (317) (87)
Dividends and rights payments (567) (353) (336)
Purchases of common stock (93) (101) (32)
Sales of common stock 83 51 -
Other (4) 24 27
- -------------------------------------------------------------------------------------------------------------
NET CASH REQUIRED BY FINANCING ACTIVITIES (920) (789) (466)
- -------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (27) 45 35
- -------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (200) 189 259
Cash and cash equivalents, beginning of year 841 652 393
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 641 841 652
- -------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest (net of amounts capitalized) 60 78 106
Income taxes 287 405 338
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE> 15
Notes to consolidated financial statements
U.S. dollar amounts in millions, except per-share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements are presented on
the basis of accounting principles that are generally accepted in the U.S. All
professional accounting standards that are effective as of December 31, 1996,
have been taken into consideration in preparing the financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions which affect the reported earnings, financial position and
various disclosures. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the company and all majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
Investments in affiliates which are not majority owned are reported using the
equity method and are recorded in other noncurrent assets. Gains and losses
resulting from the issuance of subsidiaries' stock are recognized
in consolidated earnings.
CURRENCY TRANSLATION The results of operations for non-U.S. subsidiaries, other
than those located in highly inflationary countries, are translated into U.S.
dollars using the average exchange rates during the year, while assets and
liabilities are translated using period-end rates. Resulting translation
adjustments are recorded as currency translation adjustments in shareholders'
equity. For subsidiaries in highly inflationary countries, currency gains and
losses resulting from translation and transactions are determined using a
combination of current and historical rates and are reported directly in the
consolidated statements of earnings.
CASH EQUIVALENTS The company considers all highly liquid debt instruments with
an original maturity of 91 days or less to be cash equivalents.
INVESTMENTS In addition to cash equivalents, the company has investments in
debt securities that are classified in the consolidated balance sheet as
short-term (restricted bank deposits and securities that mature in more than
91 days but not more than one year and securities with maturities beyond one
year which management intends to sell within one year) or long-term
(maturities beyond one year). The company also has investments in equity
securities, all of which are classified as long-term investments.
Investments are further categorized as being available for sale or are
expected to be held to maturity. Investments categorized as available-for-sale
are marked to market based on fluctuations in the market values of the
securities, with the resulting adjustments, net of deferred taxes, reported as
a component of other shareholders' equity until realized (see Note 17).
Investments categorized as held-to-maturity are carried at amortized cost,
without recognition of gains or losses that are deemed to be temporary, because
the company has both the intent and the ability to hold these investments until
they mature.
INVENTORIES Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for substantially all U.S.
inventories and the first-in, first-out (FIFO) method for substantially
all non-U.S. inventories.
PROPERTIES Property, plant and equipment are recorded at acquisition cost.
Depreciation is computed principally on the straight-line method for financial
reporting, while accelerated methods are used for income tax purposes where
permitted. Maintenance and repair costs are charged to earnings as incurred.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
GOODWILL AND OTHER INTANGIBLES Goodwill represents the excess of the purchase
cost over the fair value of net assets acquired in a business or product
acquisition and is presented net of accumulated amortization. Amortization of
goodwill is recorded on a straight-line basis over periods ranging primarily
from 5 to 20 years. Rights acquired under patent are reported at acquisition
cost. Amortization is calculated on a straight-line basis over the remaining
legal lives of the patents. Other intangible assets are amortized over the
useful lives of those assets.
INCOME TAXES The company applies an asset and liability approach to accounting
for income taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the years in which the differences are expected to reverse.
48
<PAGE> 16
The company provides deferred income taxes on subsidiaries' earnings that
are not considered to be permanently invested in those subsidiaries.
FOREIGN CURRENCY EXCHANGE CONTRACTS Forward currency exchange contracts are
held for purposes other than trading. Contracts held to hedge anticipated
transactions are marked to market at each balance sheet date with resulting
gains and losses recognized in earnings. Contracts that hedge recorded assets
and liabilities are valued at the month end exchange rate with resulting
exchange gains and losses recognized in earnings, offsetting the respective
losses and gains recognized on the underlying recorded exposure. Any premium or
discount is amortized over the life of the contract. The carrying values of all
contracts are generally reported with other current assets or other current
liabilities.
RECLASSIFICATIONS Certain reclassifications have been made in the 1995 and 1994
financial statements to conform to the 1996 presentation.
The company adjusted the components of shareholders' equity for the year
ended December 31, 1995, and for the nine months ended September 30, 1996, to
reflect reclassifications from retained earnings to currency translation
adjustments. These reclassifications were made to conform the translation
practices of the former Pharmacia AB group to those of the former Upjohn
Company.
OTHER Employee stock options are accounted for pursuant to Accounting
Principles Board Opinion (APB) No. 25. Statement of Position 96-1,
Environmental Remediation Liabilities, becomes effective in 1997; the impact on
the company of adoption of this statement is not expected to be material.
2. MERGER
In November 1995, Pharmacia AB (Pharmacia) and The Upjohn Company (Upjohn)
completed a business combination (the merger) that resulted in the formation of
Pharmacia & Upjohn, Inc.
Effective upon the consummation of the merger, each share of outstanding
common stock of Upjohn was converted into 1.45 shares of common stock of the
company. Outstanding Upjohn employee stock options were similarly converted
into options to purchase common stock of the company. In addition, each share
of Upjohn Series B Convertible Perpetual Preferred Stock was converted into one
share of Series A Convertible Perpetual Preferred Stock of the company.
Shareholders of Pharmacia were extended an offer to exchange each
outstanding Pharmacia Class A common share (or an American Depository Share
representing a Class A common share) and each outstanding Pharmacia Class B
common share for one share of company common stock (or a Swedish Depository
Share representing one share of company common stock).
The merger constituted a tax-free reorganization and, for accounting
purposes, has been treated as a pooling of interests. Under this accounting
method, the assets and liabilities of Upjohn and Pharmacia were carried forward
to the company at historical values after restatement of the Pharmacia
financial statements to conform to accounting principles that are generally
accepted in the U.S. The accompanying financial statements contain information
for periods prior to the merger. All such information was derived from the
separate financial statements of Pharmacia and Upjohn, which were reclassified
and combined to conform to the basis of presentation adopted by the company.
Operating revenue and net earnings for Pharmacia and for Upjohn for the periods
preceding the merger were as follows:
<TABLE>
<CAPTION>
Combining
Upjohn Pharmacia adjustment Combined
$m $m $m $m
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1995
(Unaudited)
Operating revenue 1,718 1,829 - 3,547
Net earnings 267 192 10 469
- --------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
Operating revenue 3,345 3,478 - 6,823
Net earnings 491 344 - 835
- --------------------------------------------------------------------------
</TABLE>
49
<PAGE> 17
A combining adjustment was made to reflect the effects of the consolidated
1995 tax provision on net earnings for the six months ended June 30, 1995.
Transactions between Pharmacia and Upjohn prior to the merger were not material
and, therefore, have not been eliminated in the consolidated financial
statements for periods prior to the merger.
3. RESTRUCTURING CHARGES AND MERGER COSTS
In 1996, the company recorded restructuring charges of $518 primarily
associated with the merger. The charges include the elimination of
approximately 2,640 marketing and administration ($363), 500 research and
development ($59), and 360 manufacturing ($31) positions; elimination of
duplicate facilities ($43); and other exit costs resulting from the merger
($22). Expenditures related to these restructuring charges are expected to be
substantially completed by the end of 1997. At December 31, 1996, the remaining
accrual amounted to $201. There have been no adjustments to previously reported
accruals. Accruals for restructuring charges associated with the merger have
been completed; however, additional charges will be recognized in future
periods as the company's manufacturing facility rationalization decisions are
finalized.
In association with the merger, the company recorded restructuring charges
of $92 in the fourth quarter of 1995. The majority of these pertained
to elimination of approximately 850 positions ($83). Expenditures for these
restructuring charges were materially completed by the end of 1996.
Restructuring charges of $12 were recorded in the second quarter of 1995
related to a plant closure in Sweden.
In 1994, restructuring charges were recorded to write down certain
intangible assets ($7) and for the closure of an ophthalmology operation ($13).
Of the restructuring charges recognized in 1993 with respect to
elimination or reduction of excess manufacturing capacity, approximately
$25 remains accrued.
The company incurred merger costs of $67 in 1996, largely consisting of
costs to combine operations. In 1995, the company recorded merger costs of
$138, including transaction costs of $69 and costs to combine operations of
$69. Transaction costs include investment banker, professional, and
registration fees. Costs to combine operations include expenses incurred for
termination of two marketing agreements which conflicted with the merged
operations, and other nonrecurring costs associated with planning and executing
the merger of operations.
4. INCOME TAXES
Income taxes consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
Years ended December 31 $M $m $m
- -------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
U.S. 68 82 106
Non-U.S. 317 224 230
- -------------------------------------------------------------
385 306 336
- -------------------------------------------------------------
Deferred:
U.S. 3 19 3
Non-U.S. (112) 72 99
- -------------------------------------------------------------
(109) 91 102
- -------------------------------------------------------------
276 397 438
- -------------------------------------------------------------
</TABLE>
50
<PAGE> 18
Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Percent of pretax income % % %
---------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0 35.0 35.0
Benefit of tax exemptions in Puerto Rico (4.1) (5.5) (6.6)
Goodwill amortization and other non-deductible expenses 4.2 6.9 5.0
Changes in Swedish tax laws - - 3.4
All other, net (2.1) (1.4) (2.4)
---------------------------------------------------------------------------
33.0 35.0 34.4
---------------------------------------------------------------------------
</TABLE>
A manufacturing subsidiary operates in Puerto Rico under a tax exemption
grant, expiring in 2013, which provides for partial exemption from Puerto Rico
income and property taxes. The grant, together with a tax exemption available
for U.S. federal income tax purposes, reduced income taxes by approximately $34
($.07 per share) in 1996; $63 ($.12 per share) in 1995; $84 ($.17 per share) in
1994.
Components of net deferred taxes were as follows:
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets attributable to:
Taxed profit on intercompany transfers 138 117
Postretirement and postemployment benefits 144 141
Environmental and product liabilities 102 101
Employee benefit plans 45 60
Restructuring accruals 74 82
Alternative minimum tax carryforwards 55 41
Tax loss carryforwards 26 51
All other 186 181
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 770 774
Valuation allowances (70) (154)
- -------------------------------------------------------------------------------------------------
Net deferred tax assets 700 620
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities attributable to:
Property, plant and equipment (261) (321)
Swedish tax equalization and allocation reserves (162) (160)
Taxes to be withheld when earnings are remitted (77) (74)
Pension plans (79) (78)
All other (87) (83)
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities (666) (716)
- -------------------------------------------------------------------------------------------------
Net deferred taxes 34 (96)
- -------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes are included in the consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets 326 265
Other noncurrent assets 232 120
Current liabilities (30) (34)
Other noncurrent liabilities (494) (447)
- -------------------------------------------------------------------------------------------------
Net deferred taxes 34 (96)
- -------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 19
Valuation allowances have been provided for certain deferred tax assets
that are not likely to be realized. During 1996, the valuation allowances
decreased due to merger activities in various countries which improved the
likelihood of realizing the benefit of the deferred tax assets.
Tax laws in Sweden permit limited amounts of earnings to be retained in
businesses without being subject to immediate taxation. Deferred income tax
liabilities have been recorded with respect to the accumulated amounts of the
untaxed earnings.
Deferred income taxes have also been provided on earnings of subsidiaries
which are intended to be remitted to the parent company. At December 31, 1996,
undistributed earnings of subsidiaries considered permanently invested, for
which deferred income taxes have not been provided, were $2,921. Of the
subsidiary net operating loss carryforwards of $90, $81 have various expiration
dates through 2011, while the remaining have indefinite expiration dates.
5. GAIN ON SALE OF MAJORITY INTEREST IN SUBSIDIARY
In December 1996, the company completed the sale of a portion of its holdings
in its wholly-owned subsidiary Biacore International AB (formerly Biosensor)
through an initial public offering reducing the company's ownership to 41
percent. The investment in Biacore, previously consolidated, is now accounted
for using the equity method. Biacore develops, manufactures, and markets
advanced scientific instruments employing affinity-based biosensor technology.
The global offering included 5.75 million total shares in the form of
shares or American Depository Shares at $16 per share. Of the total shares, 1.5
million were newly issued shares and 4.25 million were sold by the company. The
sale generated net proceeds to the company of $57 and a gain of $55 ($40, net
of tax). The gain is composed of an $8 gain on the issuance of new shares and
a $47 gain on the sale of existing shares.
6. DISCONTINUED OPERATIONS
In December 1994, the company sold the Asgrow Seed Company. The sale
represented the complete divestiture of all operations in the agronomic and
vegetable seed businesses. A loss of approximately $1, after provisions for
tax, was realized on the sale, including accruals for certain retained
liabilities. Asgrow's earnings during 1994 were $3, net of tax. There was no
net effect on earnings per share.
7. EARNINGS PER COMMON SHARE
Primary earnings per share are computed by dividing net earnings available to
holders of common stock by the sum of the weighted average number of shares of
common stock outstanding plus common share equivalents, principally in the form
of employee stock option awards. Fully diluted earnings per share have been
computed assuming that all of the convertible preferred stock is converted into
common shares. Under this assumption, the weighted average number of common
shares outstanding is increased accordingly, and net earnings is reduced by the
amount of an incremental Employee Stock Ownership Plan (ESOP) contribution.
This incremental contribution is the after-tax difference between the income
the ESOP would have received on the preferred stock and the assumed dividend
yield to be earned on the common shares.
The number of shares used for computing primary and fully diluted earnings
per share for 1994 was based on weighted averages of the common shares deemed
to be outstanding (see Note 17) plus the above-mentioned adjustments. The share
amounts were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Primary 512,425 507,124 505,164
Fully diluted 522,827 521,091 518,106
- -----------------------------------------------------------------
</TABLE>
52
<PAGE> 20
8. INVENTORIES
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- --------------------------------------------------------------------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products 437 488
Raw materials, supplies and work in process 726 634
- --------------------------------------------------------------------
1,163 1,122
Less reduction to LIFO cost (151) (146)
- --------------------------------------------------------------------
Inventories 1,012 976
- --------------------------------------------------------------------
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost
(FIFO basis) of $410 at December 31, 1996, and $358 at December 31, 1995.
9. INVESTMENTS
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- -----------------------------------------------
<S> <C> <C>
Short-term investments:
Available-for-sale:
Kingdom of Sweden debt instruments 503 426
Republic of Italy debt instruments 47 -
Restricted bank deposits - 309
Mortgage certificates of deposit 39 60
Corporate commercial paper 34 18
Other 16 5
- -----------------------------------------------
639 818
Held-to-maturity 57 156
- -----------------------------------------------
696 974
- -----------------------------------------------
</TABLE>
At December 31, 1996 and 1995, unrealized holding gains of $6 and $2,
respectively, were recorded in shareholders' equity related to short-term
investment securities classified above as Kingdom of Sweden debt instruments.
Short-term investments classified as held-to-maturity consist primarily of bank
certificates of deposit with amortized cost approximating fair market value.
At December 31, 1995, restricted bank deposits were held by banks that
required such deposits be maintained in support of loans made to certain of the
company's subsidiaries.
53
<PAGE> 21
<TABLE>
<CAPTION>
Unrealized Unrealized Carrying
Long-term investments Cost gains losses value
$m $m $m $m
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
Available-for-sale:
Equity securities 31 16 - 47
Mortgage-backed securities -
guaranteed by the U.S. Government 210 2 - 212
Other 3 - - 3
- --------------------------------------------------------------------------------
244 18 - 262
Held-to-maturity 250
- --------------------------------------------------------------------------------
512
- --------------------------------------------------------------------------------
DECEMBER 31, 1995:
Available-for-sale:
Equity securities 103 37 - 140
Mortgage-backed securities -
guaranteed by the U.S. Government 240 8 - 248
- --------------------------------------------------------------------------------
343 45 - 388
Held-to-maturity 327
- --------------------------------------------------------------------------------
715
- --------------------------------------------------------------------------------
</TABLE>
Unrealized gains (net of deferred taxes) included in other shareholders'
equity amounted to $18 at December 31, 1996, compared to $31 and $15 at December
31, 1995 and 1994, respectively.
At December 31, 1995, the company wrote down to fair market value certain
equity security investments. The write-down amounted to $59 and was due to a
decline in fair value considered to be other than temporary. The write-down is
included in marketing and administrative expense.
During 1996, the company sold debt securities in the held-to-maturity
category for the amortized cost of $70. Because these sales were initiated
through the call option of the issuer, which effectively accelerates the
maturity date of the security, no gain or loss was realized. No sales of
held-to-maturity securities occurred in 1995.
The proceeds realized from the sale of available-for-sale short-term debt
securities for 1996 were $1,128. Profits realized on these sales are recorded
as interest income and amounted to $3 in 1996.
The proceeds realized from the sale of available-for-sale equity
securities amounted to $123, $9 and $5 during 1996, 1995 and 1994,
respectively. Based on original cost, gains of $49, $4 and $3 were realized on
these sales, respectively.
Long-term investments held to maturity are summarized as follows:
<TABLE>
<CAPTION>
1996 1996 1995 1995
FAIR AMORTIZED Fair Amortized
VALUE COST value cost
December 31 $M $M $m $m
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guaranteed by the U.S. Government 91 88 92 91
Commonwealth of Puerto Rico debt instruments 84 82 90 89
Bank obligations:
Certificates of deposit 30 30 89 87
Other 51 50 62 60
- -------------------------------------------------------------------------------
256 250 333 327
- -------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 22
At December 31, 1996, long-term mortgage-backed securities available for
sale had scheduled maturities ranging from 2001 to 2024. Scheduled maturities
of long-term securities to be held to maturity were as follows:
<TABLE>
<CAPTION>
FAIR AMORTIZED
VALUE COST
$M $M
- ------------------------------------------------------------------------------
<S> <C> <C>
One to five years 149 148
Six to ten years 95 92
After ten years 12 10
- ------------------------------------------------------------------------------
256 250
- ------------------------------------------------------------------------------
</TABLE>
10. PROPERTIES, NET
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- ------------------------------------------------------------------------------
<S> <C> <C>
Land 118 133
Buildings and improvements 2,043 1,940
Equipment 3,375 3,147
Construction in process 725 658
Less allowance for depreciation (2,659) (2,485)
- ------------------------------------------------------------------------------
Properties, net 3,602 3,393
- ------------------------------------------------------------------------------
</TABLE>
11. LINES OF CREDIT AND LONG-TERM DEBT
The company has lines of credit amounting to $650 that are available to support
commercial paper borrowings and for other corporate purposes, with $150
available through 1997 and $500 available through 1999. These lines of credit
do not require compensating balances but are subject to various fees. The
company also has uncommitted lines of credit amounting to $178 available to the
corporate treasury group with various international banks. All lines of credit
were unused at December 31, 1996. Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- -----------------------------------------------------------------------
<S> <C> <C>
3.6-6.6% Industrial Revenue Bonds due 2007-2009 16 16
7.5% Industrial Revenue Bonds due 2023 40 40
5.35-7.95% Medium-Term Notes due 1997-1999 266 266
5.875% Notes due 2000 200 200
2.05-11.85% Italian Government Loans due 1997-2004 75 82
3.34% Export finance due 1996 - 33
Other 14 23
Current maturities (44) (57)
- -----------------------------------------------------------------------
Total long-term debt 567 603
- -----------------------------------------------------------------------
</TABLE>
Current maturities of long-term debt are included with short-term debt in the
consolidated balance sheets. Annual aggregate maturities of long-term debt
during the next five years are: 1997 - $44; 1998 - $175; 1999 - $96; 2000 -
$211; and 2001 - $11.
The company has guaranteed $275 original principal amount of ESOP 9.79%
notes due in 2004. Principal payments that began in 1995 cause the recognition
of compensation expense (see note 18). Annual aggregate maturities of
guaranteed debt during the five years subsequent to 1996 are 1997 - $12; 1998 -
$16; 1999 - $22; 2000 - $28; and 2001 - $35.
55
<PAGE> 23
Information regarding interest expense and weighted average interest rates
follows:
<TABLE>
<CAPTION>
1996 1995 1994
Years ended December 31 $M $m $m
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost incurred 89 122 137
Less: Capitalized on construction (33) (28) (25)
- ------------------------------------------------------------------------
Interest expense 56 94 112
- ------------------------------------------------------------------------
Weighted average interest rate on short-term
borrowings at end of period 5.99% 9.63% 10.49%
- ------------------------------------------------------------------------
</TABLE>
12. COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December 31,
1996, approximately 65 percent real estate and 35 percent equipment, are as
follows: 1997 - $71; 1998 - $48; 1999 - $30; 2000 - $22; 2001 - $14; and later
years - $44.
Capital asset spending approved for construction and equipment but
unexpended at December 31, 1996, was approximately $394.
Pursuant to the terms of the company's agreement with Gilead Sciences,
Inc., upon receipt of a European marketing authorization for Vistide, an AIDS
related drug, the company will make a milestone payment and acquire preferred
shares of Gilead. Authorization is expected in the first half of 1997 and will
result in a payment of $50.
The consolidated balance sheets also include accruals for estimated
product and environmental liabilities. The latter includes exposures related
to discontinued operations, including the industrial chemical facility and
several sites which, under the Comprehensive Environmental Response,
Compensation, and Liability Act, are commonly known as Superfund sites (see
Note 13).
13. LITIGATION
The company is involved in a number of legal and environmental proceedings.
These include: a substantial number of product liability suits claiming damages
as a result of the use of the company's products, including a number of cases
involving Halcion; administrative and judicial proceedings at approximately 50
"Superfund" sites; and site cleanup at the company's discontinued industrial
chemical operations.
While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the company 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 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 a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits,
some of which have been or are in the process of being consolidated and
transferred to the Federal District Court for the Northern District of Illinois
for purposes of discovery. These suits, brought by independent pharmacies
and chains, generally allege unlawful conspiracy, price discrimination and
price fixing and, in some cases, unfair competition, and specifically allege
that 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 benefited 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 to $60. These
settlements were approved by the court in 1996. 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,
56
<PAGE> 24
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.
The company believes that any potential liability above amounts accrued will
not have a material adverse effect on the company's consolidated financial
position or the company's results of operations or liquidity.
14. CURRENCY RISK MANAGEMENT
The company is exposed to currency exchange rate fluctuations related to
certain intercompany and third-party transactions, primarily intercompany sales
from Sweden and Italy to other European countries, the U.S. and Japan.
The company's exposure and related hedging program are managed centrally by the
corporate treasury group, using forward exchange contracts to hedge a portion
of both net recorded currency transaction exposures on the balance sheet as
well as net anticipated currency transactions. The company does not hold or
issue financial instruments for trading purposes.
The company's program to hedge net anticipated currency transaction
exposures is designed to protect operating margins and cash flows from
potentially adverse effects of exchange rate fluctuations. At December 31,
1996, the contract amount of the company's outstanding forward exchange
contracts used to hedge net transaction exposure was $503. Of these contracts,
28 percent were denominated in Japanese yen, 3 percent were denominated in
U.S. dollars and 40 percent were denominated in European currencies all against
Swedish kronor; 15 percent were denominated in various currencies, mainly
Japanese yen and U.S. dollars, against Italian lira and 14 percent in various,
mainly European, currencies against U.S. dollars.
Gains and losses on hedges of intercompany loans and deposits offset the
currency exchange losses and gains of the underlying loans and deposits. At
December 31, 1996, the contract amount of forward exchange contracts held for
the balance sheet financial exposure hedging program was $1,626. Of these
contracts, 57 percent were denominated in U.S. dollars and 22 percent were
denominated in European currencies against Swedish kronor; 9 percent were
denominated in European currencies and 4 percent in Japanese yen against U.S.
dollars; 4 percent in European crosses and 4 percent in European currencies
against Asia/Pacific currencies.
Because the contract amounts are stated as notional amounts, the amount of
forward exchange contracts disclosed above is not a direct measure of the
exposure of the company through its use of derivatives. These contracts
generally have maturities that do not exceed twelve months and require the
company to exchange currencies at agreed-upon rates at maturity. The
counterparties to the contracts consist of a limited number of major
international financial institutions. The company does not expect any losses
from credit exposure.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
1996 1996 1995 1995
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
December 31 $M $M $m $m
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Short-term investments 696 696 974 974
Long-term investments 512 518 715 721
Forward currency exchange contracts
Hedges of loans and deposits 7 6 5 5
Hedges of anticipated transactions 10 10 50 50
Financial liabilities:
Short-term debt 235 235 524 524
Long-term debt 567 568 603 618
Guaranteed ESOP debt 256 295 267 311
- -----------------------------------------------------------------------------
</TABLE>
57
<PAGE> 25
Because maturities are short-term, fair value approximates carrying amount
for cash and cash equivalents, short-term investments, accounts receivable,
short-term debt, and accounts payable. Fair values of forward currency exchange
contracts, long-term investments, long-term debt, and guaranteed ESOP debt were
estimated based on quoted market prices for the same or similar instruments or
on discounted cash flows.
16. CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid debt instruments. Such investments
are made only in instruments issued or enhanced by high quality institutions.
Financial instruments which potentially subject the company to concentrations
of credit risk consist principally of short-term investments in instruments
issued by the Kingdom of Sweden and the Republic of Italy; otherwise, amounts
invested in a single institution are limited to minimize risk. The company has
not incurred losses related to these investments.
The company sells a broad range of pharmaceutical products to a diverse
group of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
17. SHAREHOLDERS' EQUITY
Preferred stock - The Series A Convertible Perpetual Preferred Stock is held by
the Employee Stock Ownership Trust (ESOP Trust). The per-share stated value is
$40,300.00 and the preferred stock ranks senior to the company's common stock
as to dividends and liquidation rights. Each share is convertible, at the
holder's option, into 1,450 shares of the company's common stock and has voting
rights equal to 1,450 shares of common stock. The company may redeem
the preferred stock at any time after July 20, 1999, or upon termination of the
ESOP at a minimum price of $40,300.00 per share. Dividends, at the rate of 6.25
percent, are cumulative, paid quarterly, and charged against retained earnings.
Common stock - The number of common shares outstanding at December 31, 1996 and
1995, was 508,283,260 and 506,625,800, respectively. The number of common
shares deemed to be outstanding, for purposes of these financial statements at
December 31, 1994, was 504,707,825.
On a per-share basis, dividends were declared on common stock at a rate of
$1.08 in 1996. A dividend was declared on common stock in December 1995 on a
per-share basis of $.27. Dividends payable were $138 and $137 at December 31,
1996 and 1995, respectively.
Capital in excess of par value - Amounts of paid-in capital that exceed the par
value ($.01 per share) of the company's common stock are recorded in this
account, including all such amounts that were attributed to previously
outstanding Pharmacia common shares and Upjohn common stock. This method was
followed for all periods covered by the financial statements prior to 1996
because the new common stock is assumed to have been outstanding for all
periods preceding the November 1995 merger.
Note receivable from ESOP Trust - The note matures on February 1, 2005; bears
interest at 6.25 percent; and may be repaid, in whole or in part, at any time.
Accrued interest at the end of any calendar year shall be added to the note
principal.
ESOP deferred compensation - Upon recognition of the company's guarantee of the
debt of the ESOP Trust, an offsetting charge was made to shareholders' equity.
As guaranteed debt is repaid, this account balance diminishes correspondingly
(see Notes 11 and 18). Also, to the extent the company recognizes expense more
rapidly than the corresponding cash contributions are made to the trust, this
account is reduced.
Currency translation adjustments - This account includes all adjustments that
arise from translating the financial statements of non-U.S. subsidiaries from
local currencies into U.S. dollars (see Note 1).
Other shareholders' equity - At December 31, 1996, other shareholders' equity
is comprised of net unrealized gains (net of deferred taxes) relating to
investments categorized as available-for-sale and marked-to-market of $18 and
treasury stock of $8. The number of treasury shares acquired in 1996, net of
shares issued for stock options, dividend reinvestment, and employee benefit
plans, was 211,595.
58
<PAGE> 26
Shareholder rights plan - In February 1997, the board of directors adopted a
shareholder protection rights plan declaring a dividend of one right for each
share of the company's common stock outstanding on or after March 7, 1997. The
rights which may be exercised (except by the acquirer of 15 percent or more
of the company's common stock) at a time specified by the board of directors
after a person or group has acquired 15 percent or more of the company's common
stock, entitle the holder to purchase stock having a market value equal to
twice the exercise price. In lieu of the right to purchase stock, if the
acquirer acquires more than 15 percent but not more than 50 percent of the
company's common stock, the board may elect to exchange one share of common
stock for each right. The rights are redeemable for $.01 per right until
becoming exercisable and have a life of 10 years unless redeemed earlier by the
company.
Under the shareholder rights plan for the former Upjohn Company, each
share of the former Upjohn common stock included one-third of a right, which
entitled the holder to purchase additional shares of Upjohn stock under
specified limited circumstances. In connection with the merger, the rights were
redeemed for $.05 per right, pursuant to the plan, resulting in payment of $3
to former Upjohn shareholders in 1995.
18. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP is a funding vehicle for the Employee Savings Plan covering certain
U.S. employees. As the ESOP Trust makes debt principal and interest payments, a
proportionate amount of preferred stock is released for allocation to plan
participants. The preferred shares are allocated to participants' accounts
based upon their respective savings plan contributions and the dividends earned
on their previously allocated preferred shares. As of December 31, 1996, 1,437
preferred shares had been released and allocated; 317 shares were released but
unallocated; and 5,371 shares remained unreleased, of which 23 shares are
committed to be released.
Under the agreement whereby the company guaranteed third-party debt of the
ESOP Trust, the company is obligated to contribute sufficient cash annually to
the trust to enable it to make required principal and interest payments. The
company satisfies this annual cash flow requirement through payment of
dividends on all preferred shares outstanding, loans and cash contributions.
The company has fully and unconditionally guaranteed the ESOP Trust's payment
obligations whether at maturity, upon redemption, upon declaration of
acceleration, or otherwise. The holders of the debt securities have no recourse
against the assets of the ESOP Trust except in the event that the trust
defaults on payments due and the company also fails to make such payments. In
that event, the holders may have recourse against unallocated funds held by the
trust. At December 31, 1996, assets of the ESOP Trust consisted primarily of
$287 of Pharmacia & Upjohn Series A Convertible Perpetual Preferred Stock.
ESOP expense is determined by a formula that apportions debt service to
each year of the plan based on shares allocated to participants and deducts
dividends paid on all preferred stock held by the trust.
Key measures of the ESOP were:
<TABLE>
<CAPTION>
1996 1995 1994
Years ended December 31 $M $m $m
- ------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense of ESOP Trust 28 29 29
Dividend income of ESOP Trust 18 18 18
Company contribution to ESOP Trust 16 8 8
Company ESOP expense (net) 14 14 13
- ------------------------------------------------------------------
</TABLE>
59
<PAGE> 27
19. STOCK COMPENSATION
Incentive and nonqualified stock options are granted to certain employees.
These options have a ten-year term, are exercisable after one year of service
following grant, and have an exercise price equal to the market value of the
underlying stock at date of grant. Since the company has elected the
disclosure-only option under Statement of Financial Accounting Standard (SFAS)
No. 123 and continues to account for stock options per the terms of APB No. 25,
no compensation expense is recognized in earnings.
Upon a stock-for-stock exercise of an option, an active employee will
receive a new, nonqualified "reloaded" option at the then-current market price
for the number of shares surrendered to exercise the option. The "reloaded"
option will have an exercise term equal to the remaining term of the original
exercised option.
The number of shares authorized for grants each year is equal to 1.25
percent of outstanding common shares.
Information concerning option activity and balances follows:
<TABLE>
<CAPTION>
Weighted
average Number
exercise price of shares
per share (000)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance outstanding, January 1, 1994 $23.96 12,688
Granted 20.08 2,795
Exercised 17.23 (400)
Cancelled 25.02 (785)
- -----------------------------------------------------------------------------------
Balance outstanding, December 31, 1994 23.63 14,298
Granted 24.00 2,559
Exercised 22.13 (4,076)
Cancelled 26.18 (210)
- -----------------------------------------------------------------------------------
Balance outstanding, December 31, 1995 24.32 12,571
Granted 38.26 3,585
Exercised 24.49 (4,146)
Cancelled 35.17 (77)
- -----------------------------------------------------------------------------------
Balance outstanding, December 31, 1996 $28.50 11,933
- -----------------------------------------------------------------------------------
<CAPTION>
Weighted Weighted
average average Number
Composition of the December 31, 1996 balance: remaining exercise price of shares
Options having a per-share exercise price of: life per share (000)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
$17.07 - 19.99 7.05 years $19.62 1,348
$20.00 - 29.99 5.20 years 25.16 6,867
$30.00 - 39.99 9.12 years 37.35 3,307
$40.00 - 43.81 7.42 years 42.13 411
- -----------------------------------------------------------------------------------
11,933
Less non-exercisable options 8.74 years 38.05 3,272
- -----------------------------------------------------------------------------------
Exercisable options $24.90 8,661
- -----------------------------------------------------------------------------------
</TABLE>
Had the company elected to measure stock compensation using the fair value
of the awards at grant date under the provisions of SFAS No. 123, the earnings
effect would not have been material.
60
<PAGE> 28
20. RETIREMENT BENEFITS
The company has various pension plans covering substantially all employees.
Benefits provided under the defined benefit pension plans are primarily based
on years of service and the employee's compensation. The following table
summarizes the funded status of the material defined benefit plans:
<TABLE>
<CAPTION>
1996 1996 1995 1995
ASSETS ACCUMULATED Assets Accumulated
EXCEED BENEFITS exceed benefits
ACCUMULATED EXCEED accumulated exceed
BENEFITS ASSETS benefits assets
December 31 $M $M $m $m
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation 700 303 736 171
- ------------------------------------------------------------------------------------------------
Projected benefit obligation 892 374 958 241
Plan assets at fair value 1,163 84 1,178 14
- ------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 271 (290) 220 (227)
Unrecognized net (gains) losses (44) 66 20 15
Unamortized net transition amount (72) 6 (85) 5
Unrecognized prior service cost 33 2 37 -
- ------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost 188 (216) 192 (207)
- ------------------------------------------------------------------------------------------------
Actuarial assumptions:
U.S.
Discount rate 7.5% 7.5%
Salary growth rate 4.0 - 5.5% 4.0 - 6.5%
Return on plan assets 9.0 - 9.5% 8.5 - 9.5%
- ------------------------------------------------------------------------------------------------
Non-U.S.
Discount rate 5.0 - 9.5% 5.5 - 9.5%
Salary growth rate 3.5 - 8.0% 3.5 - 7.5%
Return on plan assets 4.75 - 10.0% 4.75 - 10.0%
- ------------------------------------------------------------------------------------------------
</TABLE>
The assets of the U.S. plans, which comprise the majority of the combined
plan assets, are invested approximately two-thirds in equity securities. Fair
value is determined principally by reference to publicly quoted year-end
prices.
The principal pension obligations outside the U.S. are the defined benefit
plans which cover essentially all employees in the company's Swedish
operations. These plans (Swedish FPG/PRI pensions) form part of a Swedish
secured multi-employer pension plan which is centrally administered. The level
of benefits and actuarial assumptions are established jointly for all plans,
and can not unilaterally be changed by the company.
The consolidated net pension expense amounts reflected below are exclusive
of curtailments, settlements, and termination benefit costs associated with the
restructuring. A net charge of $25 before tax was recorded in 1996 for these
amounts and was included in restructuring costs.
<TABLE>
<CAPTION>
1996 1995 1994
Years ended December 31 $M $m $m
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year 55 43 53
Interest cost on projected benefit obligation 88 80 77
Actual return on plan assets (161) (231) 6
Net amortization and deferral 59 133 (93)
- ------------------------------------------------------------------------
Net pension expense 41 25 43
- ------------------------------------------------------------------------
</TABLE>
61
<PAGE> 29
21. OTHER POSTRETIREMENT BENEFITS
The company provides nonpension benefits to eligible retirees and their
dependents, primarily in the form of medical and dental benefits.
The following table summarizes the funded status of these plans operating
principally in the U.S.:
<TABLE>
<CAPTION>
1996 1995
December 31 $M $m
- ---------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees 183 191
Fully eligible active participants 10 10
Other active participants 173 178
- ---------------------------------------------------------------------
Accumulated postretirement benefit obligation 366 379
Plan assets at fair value 142 111
- ---------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 224 268
Unrecognized net gains 67 54
Unrecognized prior service cost 46 51
- ---------------------------------------------------------------------
Accrued postretirement benefit cost 337 373
- ---------------------------------------------------------------------
Actuarial assumptions:
Discount rate 7.5% 7.5%
Return on plan assets 9.5% 9.5%
Weighted average health care cost
trend rates:
Initially 6.8% 7.0%
Trending down to 5.25% 5.25%
- ---------------------------------------------------------------------
</TABLE>
The plan assets are presently invested in long-term securities. The fair
value was established by the trustee of the fund.
The composition of expense for the postretirement benefit plan is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
Years ended December 31 $M $m $m
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost 10 9 12
Interest cost 26 27 25
Actual return on plan assets (14) (18) 1
Net amortization and deferral (1) 5 (10)
- ------------------------------------------------------------------------------
21 23 28
Curtailment gain (24)
Portion attributable to discontinued operations (1)
- ------------------------------------------------------------------------------
Net postretirement benefit cost, continuing operations (3) 23 27
- ------------------------------------------------------------------------------
</TABLE>
The assumption concerning health care cost trend rate has a significant
effect on the amounts reported. For example, increasing the rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996, by approximately $46 and the total
of service and interest cost components of net postretirement benefit cost for
the year then ended by approximately $6.
During 1996, the company recognized administrative credits of $24 related
to curtailments of its postretirement plans. The curtailments resulted
principally from a change in retiree life plans which eliminated the company's
obligation to provide future postretirement life insurance benefits for those
retirees electing to switch to the new plan.
62
<PAGE> 30
22. SEGMENT OPERATIONS
The company operates in one industry, pharmaceutical products, which includes
prescription and nonprescription products for both humans and animals. In
addition, the company sells diagnostic systems and biotechnology supply
products. The company's products are sold throughout the world to a wide range
of customers including pharmacies, hospitals, chain warehouses, governments,
physicians, and wholesalers and other distributors. No single customer accounts
for 10 percent or more of the company's consolidated sales.
The table below shows the company's operations by geographic area. All the
sales are presented by originating area. U.S. exports to third-party customers
are less than 10 percent of U.S. sales. Sales between geographic areas are
priced to reflect consideration of economic circumstances and the regulations
of countries in which the transferring entities are located. These transfers
are eliminated in consolidation.
<TABLE>
<CAPTION>
1996 1995 1994
Geographic areas for years ended December 31 $M $m $m
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to customers (includes exports):
United States 2,318 2,205 2,429
Sweden 743 644 603
Other Europe 2,697 2,656 2,378
Japan and Pacific 1,051 1,048 904
Other 367 396 390
- ----------------------------------------------------------------------------------------------------------------------
Interarea transfers from:
United States 348 569 495
Sweden 999 1,012 856
Other Europe 969 635 566
Japan and Pacific 16 21 11
Other 22 21 22
Eliminations (2,354) (2,258) (1,950)
- ----------------------------------------------------------------------------------------------------------------------
7,176 6,949 6,704
- ----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes:
United States 56 399 563
Sweden 320 301 290
Other Europe 408 308 297
Japan and Pacific 21 89 49
Other 33 39 72
- ----------------------------------------------------------------------------------------------------------------------
838 1,136 1,271
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets, December 31:
United States 3,904 4,292 4,227
Sweden 3,792 3,315 2,875
Other Europe 2,356 2,809 2,901
Japan and Pacific 866 801 737
Other 255 244 207
- ----------------------------------------------------------------------------------------------------------------------
11,173 11,461 10,947
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 31
Six-year summary of operations
<TABLE>
<CAPTION>
U.S. dollar amounts in millions, except per-share data 1996 1995 1994 1993 1992 1991
Years ended December 31 $M $m $m $m $m $m
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating results:
- ------------------------------------------------------------------------------------------------------------------
Net sales 7,176 6,949 6,704 6,507 5,910 5,292
Other revenue 110 146 119 54 28 22
- ------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 7,286 7,095 6,823 6,561 5,938 5,314
- ------------------------------------------------------------------------------------------------------------------
Cost of products sold 2,116 1,967 1,877 1,822 1,623 1,415
Research and development 1,266 1,254 1,163 1,144 940 785
Marketing, administrative and other 2,642 2,617 2,583 2,596 2,393 2,183
Restructuring charges 518 104 20 269 46 58
Merger costs 67 138 - - - -
- ------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 6,609 6,080 5,643 5,831 5,002 4,441
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 677 1,015 1,180 730 936 873
Interest income 159 216 157 227 248 166
Interest expense (56) (94) (112) (183) (136) (119)
Gain on sale and issuance
of subsidiary stock 55 - - - - -
All other, net 3 (1) 46 4 (101) (10)
- ------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 838 1,136 1,271 778 947 910
Provision for income taxes 276 397 438 217 243 307
- ------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 562 739 833 561 704 603
Discontinued operations, net - - 2 46 (129) 164
Cumulative effect of accounting changes
(net of tax) - - - (19) (224) -
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS 562 739 835 588 351 767
- ------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock (net of tax) 13 13 12 12 12 12
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS ON COMMON STOCK 549 726 823 576 339 755
- ------------------------------------------------------------------------------------------------------------------
Net earnings per common share:
Fully diluted $1.07 $ 1.41 $1.60 $1.13 $.67 $ 1.46
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 32
<TABLE>
<CAPTION>
U.S. dollar amounts in millions, except per-share data 1996 1995 1994 1993 1992 1991
Years ended December 31 $M $m $m $m $m $m
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial position:
Cash and cash equivalents 641 841 652 393 373 544
Short-term investments 696 974 1,134 447 1,176 670
Trade accounts receivable, net 1,705 1,535 1,480 1,416 1,272 1,109
Inventories 1,012 976 887 833 728 735
Other current assets 841 648 652 559 436 480
- --------------------------------------------------------------------------------------------------------------------
Current assets 4,895 4,974 4,805 3,648 3,985 3,538
Net assets of discontinued operations - - - 278 1,989 2,644
Properties 3,602 3,393 3,074 2,906 2,517 2,495
Goodwill and other intangible assets, net 1,522 1,722 1,795 1,843 1,556 1,813
Other noncurrent assets 1,154 1,372 1,273 1,220 826 855
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 11,173 11,461 10,947 9,895 10,873 11,345
- --------------------------------------------------------------------------------------------------------------------
Short-term debt, including current
maturities of long-term debt 235 524 766 769 500 216
Other current liabilities 2,268 2,116 2,110 2,001 2,077 1,572
Long-term debt and ESOP debt 823 870 953 950 739 919
Other noncurrent liabilities 1,606 1,564 1,508 1,411 1,158 949
Shareholders' equity 6,241 6,387 5,610 4,764 6,399 7,689
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 11,173 11,461 10,947 9,895 10,873 11,345
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 33
Quarterly data
<TABLE>
<CAPTION>
First Second Third Fourth
U.S. dollars in millions, except per-share data Quarter Quarter Quarter Quarter
1996 (unaudited) $m $m $m $m
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 1,740 1,775 1,721 1,940
Other revenue 17 29 20 44
- -------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 1,757 1,804 1,741 1,984
Cost of products sold 503 500 533 580
Research and development 300 303 330 333
Marketing, administrative and other 629 718 540 755
Restructuring charges 257 164 37 60
Merger costs 22 29 16 -
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 46 90 285 256
Interest income 49 47 31 32
Interest expense (20) (23) (9) (4)
Gain on sale and issuance of subsidiary stock - - - 55
All other, net (1) 9 (3) (2)
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 74 123 304 337
Provision for income taxes 24 41 100 111
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 50 82 204 226
Dividends on preferred stock (net of tax) 3 3 3 4
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS ON COMMON STOCK 47 79 201 222
- -------------------------------------------------------------------------------------------------------------------------
Net earnings per common share:
Primary $ .09 $ .16 $ .39 $ .43
Fully diluted $ .09 $ .16 $ .39 $ .43
- -------------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ .27 $ .27 $ .27 $ .27
- -------------------------------------------------------------------------------------------------------------------------
Market Price:
High $44.375 $44.375 $ 44.625 $42.750
Low $35.875 $36.625 $ 38.625 $34.125
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE> 34
<TABLE>
<CAPTION>
First Second Third Fourth
U.S. dollars in millions, except per-share data Quarter Quarter Quarter Quarter
1995 (unaudited) $m $m $m $m
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 1,681 1,770 1,693 1,805
Other revenue 58 38 28 22
- -------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 1,739 1,808 1,721 1,827
Cost of products sold 507 484 466 510
Research and development 295 323 304 332
Marketing, administrative and other 608 670 636 703
Restructuring charges - 12 - 92
Merger costs - - 2 136
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 329 319 313 54
Interest income 45 54 57 60
Interest expense (22) (23) (25) (24)
All other, net 3 (4) (1) 1
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 355 346 344 91
Provision for income taxes 117 114 113 53
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 238 232 231 38
Dividends on preferred stock (net of tax) 3 4 3 3
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS ON COMMON STOCK 235 228 228 35
- -------------------------------------------------------------------------------------------------------------------------
Net earnings per common share:
Primary $.46 $.45 $.45 $.07
Fully diluted $.46 $.44 $.44 $.07
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction
in which
Corporate Name Incorporated
---------------------------
<S> <C>
PHARMACIA & UPJOHN, INC. Delaware (Parent)
Subsidiaries (excluding those which when
- ----------------------------------------
considered in the aggregate as a single
- ---------------------------------------
subsidiary did not constitute a significant
- -------------------------------------------
subsidiary as of December 31, 1996):
- ------------------------------------
Pharmacia & Upjohn Company Delaware
Pharmacia & Upjohn AB Sweden
Pharmacia Treasury Services AB Sweden
Pharmacia & Upjohn SpA Italy
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the prospectus included in
Form S-8 Registration Statement (No. 33-63903) and the prospectus included in
Form S-8 Registration Statement (No. 333-03109) of our report, dated February
26, 1997, on our audits of the consolidated financial statements of Pharmacia &
Upjohn, Inc. and its subsidiaries as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994, included or incorporated by
reference into this Form 10-K for the fiscal year ended December 31, 1996 of
Pharmacia & Upjohn, Inc.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 641
<SECURITIES> 0
<RECEIVABLES> 1,800
<ALLOWANCES> 95
<INVENTORY> 1,012
<CURRENT-ASSETS> 4,895
<PP&E> 6,261
<DEPRECIATION> 2,659
<TOTAL-ASSETS> 11,173
<CURRENT-LIABILITIES> 2,503
<BONDS> 567<F1>
<COMMON> 5
0
287
<OTHER-SE> 5,949
<TOTAL-LIABILITY-AND-EQUITY> 11,173
<SALES> 7,176
<TOTAL-REVENUES> 7,286
<CGS> 2,116
<TOTAL-COSTS> 2,116
<OTHER-EXPENSES> 1,266<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 838
<INCOME-TAX> 276
<INCOME-CONTINUING> 562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 562
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<FN>
<F1>Does not include guarantee of ESOP debt of 256.
<F2>Only includes R&D expense.
</FN>
</TABLE>
