UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
_______________________________________________________
Commission File Number 1-4147
PHARMACIA & UPJOHN, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0155411
(State of incorporation) (I. R. S. Employer
Identification No.)
Pharmacia & Upjohn Company, 7000 Portage Road, Kalamazoo, MI 49001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 616/833-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months, and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $1 Par Value, outstanding as of
July 31, 1997, was 507,707,945.
Page 1 of 21 pages
The exhibit index is set forth on page 16.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(All U.S. dollar amounts in millions, except per-share data)
<CAPTION>
Unaudited
--------------------------------------------------
For Three Months For Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,703 $1,775 $3,338 $3,515
Other revenue 35 29 62 46
---------- ---------- ---------- ----------
Operating revenue 1,738 1,804 3,400 3,561
Cost of products sold 550 500 1,053 1,003
Research and development 281 303 564 603
Marketing, administrative and other 652 718 1,254 1,347
Restructuring charges - 164 - 421
Merger costs - 29 - 51
---------- ---------- ---------- ----------
Operating income 255 90 529 136
Interest income 25 47 54 96
Interest expense (11) (23) (18) (43)
All other, net 1 9 (1) 8
---------- ---------- ---------- ----------
Earnings before income taxes 270 123 564 197
Provision for income taxes 92 41 192 65
---------- ---------- ---------- ----------
Net earnings 178 82 372 132
Dividends on preferred stock
(net of tax) 3 3 6 6
---------- ---------- ---------- ----------
Net earnings on common stock $ 175 $ 79 $ 366 $ 126
========== ========== ========== ==========
Earnings per common share:
Primary $.34 $.16 $.71 $.25
Fully diluted $.34 $.16 $.71 $.25
</TABLE>
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
(All U.S. dollar amounts in millions)
Unaudited
-----------------
1997 1996
------- ------
Net cash provided by operations $ 533 $ 188
------- ------
Cash provided (required) by investment activities:
Acquisition of subsidiaries (34) -
Additions of properties (224) (224)
Proceeds from sales of properties 36 12
Proceeds from sales of investments 647 868
Purchase of investments (363) (763)
Other (10) (5)
------- ------
Net cash provided (required) by investment activities 52 (112)
------- ------
Cash provided (required) by financing activities:
Proceeds from issuance of debt 30 19
Repayment of debt (16) (124)
Payments of ESOP debt (12) (8)
Debt maturing in three months or less (net) 123 85
Dividends paid to shareholders (284) (283)
Purchase of common stock (63) (51)
Sales of treasury stock 10 62
Other (20) (1)
------- ------
Net cash (required) by financing activities (232) (301)
------- ------
Effect of exchange rate changes on cash (13) (11)
------- ------
Net change in cash and cash equivalents 340 (236)
------- ------
Cash and cash equivalents, beginning of period 641 841
------- ------
Cash and cash equivalents, end of period $ 981 $ 605
======= ======
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All U.S. dollar amounts in millions)
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 981 $ 641
Short-term investments 353 696
Trade accounts receivable, less allowance
of $95 (1996: $95) 1,471 1,705
Inventories 1,016 1,012
Other current assets 858 841
----------- ---------
Total current assets 4,679 4,895
----------- ---------
Long-term investments 483 512
----------- ---------
Goodwill and other intangible assets, net 1,368 1,522
----------- ---------
Properties, net 3,455 3,602
----------- ---------
Other noncurrent assets 712 642
----------- ---------
Total assets $10,697 $11,173
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 370 $ 235
Other current liabilities 2,044 2,268
----------- -----------
Total current liabilities 2,414 2,503
----------- -----------
Long-term debt and guarantee of ESOP debt 807 823
----------- -----------
Other noncurrent liabilities 1,539 1,606
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value;
authorized 100,000,000 shares; issued
Series A convertible 7,059 shares
(1996: 7,125 shares) at stated value 284 287
Common stock, one cent par value;
authorized 1,500,000,000 shares, issued
508,647,457 shares (1996: 508,500,633 shares) 5 5
Capital in excess of par value 1,429 1,457
Retained earnings 5,694 5,603
Currency translation adjustments (1,174) (855)
Other shareholders' equity (301) (256)
----------- -----------
Total shareholders' equity 5,937 6,241
----------- -----------
Total liabilities and shareholders' equity $10,697 $11,173
=========== ===========
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(All U.S. dollar amounts in millions, except per-share data)
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial information presented herein is unaudited, other
than the condensed consolidated balance sheet at December 31, 1996, which is
derived from audited financial statements. The interim financial statements
and notes thereto do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
financial statements and notes thereto included in the company's latest annual
report on Form 10-K.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. The current period's results of operations are
not necessarily indicative of results that ultimately may be achieved for the
year.
B - INVENTORIES:
June 30, December 31,
1997 1996
--------- ------------
Estimated Replacement Cost
(FIFO Basis):
Pharmaceutical and Other Finished Products $ 512 $ 437
Raw Materials, Supplies and Work-in-Process 664 726
---------- ----------
1,176 1,163
Less Reduction to LIFO Cost (160) (151)
---------- ----------
$1,016 $1,012
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $463 at June 30, 1997, and $410 at December 31, 1996.
C - LITIGATION:
The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products, including a number of cases
involving Halcion; administrative and judicial proceedings at approximately 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
the following: (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. Thirteen of the twenty-seven 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 nonsettling 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 those in Alabama, Arizona, California, Colorado, District of
Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New
Mexico, New York, North Carolina, Tennessee, Washington and Wisconsin. The
California State court has certified a class of consumers seeking damages
resulting from the same alleged conspiracy by the defendant pharmaceutical
companies. In February 1997, the District of Columbia judge granted the
plaintiffs' motion for class certification in part, and the parties have
submitted briefs with regard to class definition and notice issues.
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.
D - RESTRUCTURING CHARGES:
Since the fourth quarter of 1995, the company has recorded restructuring
accruals that included estimated costs of $610 associated with the November
1995 merger of the former Pharmacia AB and the former Upjohn Company. The
accruals reflected the planned reduction of approximately 4,350 positions, the
elimination of duplicate facilities, and other exit costs related to the
merger. Expenditures associated with these accruals are expected to be
substantially completed by the end of 1997. Of the amount originally accrued,
approximately $85 remains as current liabilities. There have been no
adjustments to previously recorded accruals.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
FINANCIAL REVIEW
OVERVIEW OF CONSOLIDATED RESULTS
The table below provides an overview of consolidated results (in millions of
U.S. dollars, except per-share data):
Second Quarter Six Months
-------------------------- --------------------------
Percent Percent
1997 Change 1996 1997 Change 1996
-------- ------- -------- -------- ------- --------
Total Revenue $1,738 (3.7)% $1,804 $3,400 (4.5)% $3,561
Operating Income 255 ** 90* 529 ** 136*
Net Earnings 178 ** 82* 372 ** 132*
Fully Diluted Earnings
Per Common Share $0.34 ** $0.16* $0.71 ** $0.25*
*Includes nonrecurring items
**Not a meaningful comparison
In the quarter-to-quarter comparison of operating performance, nonrecurring
items should be considered. Second quarter 1996 operating income was
significantly diminished by restructuring and merger-related costs of $193
million ($0.22 per share, after tax). Restructuring charges of $164 million
($0.19 per share) resulted primarily from work force reductions associated with
the merger. Additional costs totaling $29 million ($.03 per share) were
incurred to effect the merger. For the first six months of 1996, restructuring
and merger costs were $472 million ($0.57 per share). In addition, in the
second quarter of 1996, the company announced the termination of an agreement
to develop the hemoglobin-based oxygen transport product Hemopure. Dissolution
of this agreement led to an impairment of an investment resulting in a charge
of $106 million ($0.13 per share) reported in marketing, administrative and
other expense.
Excluding these 1996 nonrecurring charges, both operating income and net
earnings decreased 34 percent in the second quarter of 1997. A 4 percent
decline in sales coupled with a 5 percent increase in operating costs and
expenses (excluding nonrecurring items) contributed to the drop in overall
performance in the second quarter of 1997. For the first half, operating
income fell 26 percent and net earnings decreased by 25 percent. Negative
sales and earnings trends may continue throughout 1997.
To improve performance, the company announced action steps in July which will
be implemented throughout the remainder of 1997. These initiatives are
expected to increase revenue and reduce costs. Strengthening the product
portfolio is a key step to higher sales growth. New product introductions
include recently launched Rescriptor which received marketing clearance from
the United States Food and Drug Administration (U.S. FDA) in April.
Rescriptor is a non-nucleoside reverse transcriptase inhibitor for the
treatment of HIV infection. Edronax, the first of a new class of anti-
depressants, was launched in the U.K. in July. Also in July, the U.S. FDA
granted marketing clearance to Mirapex, a new drug to treat Parkinson's
disease. Pharmacia & Upjohn will co-market Mirapex in the U.S. with
Boehringer Ingelheim Pharmaceuticals, Inc. Detrusitol, a treatment for
urinary incontinence, remains under regulatory review in the U.S. and Europe.
Steps to simplify the company's structure will be taken in the near future and
are anticipated to enhance performance and reduce costs. Plans to streamline
research and development were announced in July; plans for other areas of the
company will follow. The company expects to complete its assessment of the
expected restructuring charges and related cost savings in the second half of
1997.
NET SALES
Worldwide sales fell 4 percent to $1.703 billion in the second quarter of 1997
compared to $1.775 billion in the same period in 1996. Sales increased as a
result of combined volume and price (activity) by 2 percent while currency
exchange rate fluctuations reduced sales by 6 percent. Strong sales growth in
new prescription pharmaceutical products during the second quarter was more
than offset by weak performance in older product lines due to generic
competition and the continued effects of year-end 1996 trade inventory
accumulations. In addition, sales in Japan and key European countries
continued to be adversely impacted by currency exchange rate fluctuations.
Throughout the first half of 1997, the U.S. dollar has been strong relative to
the yen and most major European currencies. Significant over-the-counter
(OTC) product launches in the U.S. during 1996 also contributed to the
comparative decrease in sales.
Sales performance by country, based on the markets in which sales are made to
customers, is provided in the table below (in millions of U.S. dollars):
Second Quarter Six Months
-------------------------- --------------------------
Percent Percent
1997 Change 1996 1997 Change 1996
-------- ------- -------- -------- ------- --------
United States $ 493 (9.3)% $ 543 $ 997 (7.8)% $1,082
Japan 187 (12.8) 214 367 (5.9) 390
Italy 129 (2.1) 132 250 (3.9) 260
Germany 119 (8.5) 130 229 (14.4) 268
United Kingdom 86 7.7 79 168 10.6 151
Sweden 74 (5.7) 79 145 (15.2) 170
France 67 (16.5) 81 139 (7.9) 151
Spain 48 (14.6) 56 96 (19.4) 120
Rest of World 500 8.5 461 947 2.6 923
-------- ------- -------- -------- ------- --------
Consolidated Sales $1,703 (4.1)% $1,775 $3,338 (5.0)% $3,515
======== ======= ======== ======== ======= ========
<PAGE>
<TABLE>
PRODUCT SALES
The tables below provide a year-to-year comparison of consolidated net sales by
major product group and by major product (in millions of U.S. dollars):
<CAPTION>
Second Quarter Six Months
---------------------------- -----------------------------
Net % Chg Net % Chg
Percent Excl. Percent Excl.
1997 Change Curr.* 1996 1997 Change Curr.* 1996
------ ------- ------ ------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Infectious Disease $133 (2.5)% (3.4)% $136 $285 (4.9)% (3.8)% $300
Metabolic Disease 169 (15.5) (8.4) 200 334 (11.5) (4.4) 378
Inflammation 138 4.6 9.6 132 271 1.3 6.4 267
Central Nervous System 124 (13.1) (7.7) 143 231 (15.6) (10.1) 274
Oncology 170 11.0 16.5 153 339 19.1 25.1 285
Women's Health/Urology 147 (0.3) (1.4) 148 283 (9.0) (8.7) 311
Ophthalmology 98 40.1 43.3 70 176 33.2 38.1 132
Other Prescription
Pharmaceuticals 141 (11.3) 1.8 160 276 (12.2) (2.8) 314
Nutrition 98 (9.2) (2.9) 108 196 (10.3) (4.4) 218
Consumer Health Care 167 (18.8) (14.9) 206 320 (18.3) (14.8) 392
Animal Health 94 4.6 7.4 90 180 2.5 5.0 175
Chemical and Contract
Manufacturing 66 2.5 6.2 65 136 (1.9) 0.8 139
------ ------- ------ ------ ------ ------- ------- ------
Total Pharmaceuticals 1,546 (4.0) 0.8 1,610 3,026 (5.0) (0.3) 3,184
Diagnostics 57 (1.5) 7.9 58 111 (5.6) 4.1 117
Biotech 100 (7.0) 6.4 107 201 (5.9) 4.9 214
------ ------- ------ ------ ------ ------- ------- ------
Consolidated Net Sales $1,703 (4.1)% 1.4% $1,775 $3,338 (5.0)% 0.1% $3,515
====== ======= ====== ====== ====== ======= ======= ======
Second Quarter Six Months
---------------------------- -----------------------------
Net % Chg Net % Chg
Percent Excl. Percent Excl.
1997 Change Curr.* 1996 1997 Change Curr.* 1996
------ ------- ------ ------ ------ ------- ------- ------
Genotropin $ 97 (10.9)% (2.0)% $109 $187 (5.6)% 3.4% $198
Xanax 77 (11.2) (11.1) 87 142 (11.9) (9.7) 162
Cleocin 70 5.3 9.2 66 135 1.5 5.9 133
Medrol 63 (3.1) (0.2) 65 125 (2.3) 0.9 128
Pharmorubicin 47 (5.6) 2.4 50 96 (5.2) 3.0 101
Depo-Provera 46 (4.7) (7.0) 49 87 (10.6) (11.5) 97
Healon 42 (16.1) (10.1) 50 74 (18.8) (12.5) 91
Fragmin 42 1.9 12.1 41 81 15.6 27.7 70
Xalatan 38 N/A N/A 0 67 N/A N/A 0
Camptosar 38 N/A N/A 0 79 N/A N/A 0
------ ------- ------ ------ ------ ------- ------- ------
Total $560 8.3% 14.9% $517 $1,073 9.5% 13.0% $980
====== ======= ====== ====== ====== ======= ======= ======
*Represents percent change excluding the impact of currency exchange.
</TABLE>
New products Camptosar and Xalatan achieved solid sales growth again in the
second quarter, each contributing $38 million to consolidated sales. For the
first six months, Camptosar sales were $79 million and Xalatan sales were $67
million. Camptosar, a treatment for refractory colorectal cancer, was
launched in the U.S. in the third quarter of 1996. New competition and
Camptosar's strong market penetration have led to a leveling of sales in the
second quarter compared to the first quarter of 1997. Xalatan, an intraocular
pressure-lowering medication for glaucoma, was launched in the U.S., Sweden,
and Switzerland in the third quarter of 1996 and in selected Latin American
countries in the second quarter of 1997. Following passage of the mutual
recognition procedure for the European Union (EU) in May, Xalatan is expected
to be registered and launched in EU member states later this year. Camptosar
is reported in Oncology and Xalatan is reported in Ophthalmology.
Caverject, the treatment for male impotence, posted a 45 percent increase over
the second quarter of 1996. Reported in Women's Health/Urology, Caverject
sales were $22 million for the quarter and $40 million for the first half.
Sales increased primarily due to the growth in the erectile dysfunction market
fueled by promotional spending of new competitors.
Fragmin, a treatment for the prevention of blood clots in connection with
surgery, achieved sales of $81 million in the first six months of 1997, an
increase of 16 percent. Sales grew 2 percent in the quarter. Sales in Europe
declined despite overall activity gains due to the unfavorable impact of
exchange rate fluctuations. In addition, new competition and 1996 year-end
trade inventory accumulations combined to lower sales in France, the largest
market for Fragmin in Europe. Fragmin is reported in Metabolic Disease.
Genotropin, a human growth hormone, achieved sales of $97 million in the
second quarter of 1997, $12 million below the second quarter of 1996. Sales
declines in European markets accounted for $10 million of the worldwide
decrease due partially to the negative effects of exchange rate fluctuations.
France, Italy, and Spain all recorded lower sales, more than offsetting good
growth in the U.K. and Germany. In Japan, a major market for Genotropin,
second quarter sales fell below the prior year period by $5 million. While
most of this decline was due to an unfavorable exchange effect, a small
decrease in activity was caused by higher-than-normal sales in the second
quarter of 1996 resulting from a mandatory price decrease effective at the
beginning of that quarter. U.S. sales increased as new patient recruitment
efforts proved successful and four major HMO contracts were signed. In the
six-month comparison, worldwide Genotropin sales decreased by 6 percent, or
$11 million. Excluding the 9 percent unfavorable effect of exchange, sales
rose by 3 percent due primarily to growth in new markets and new indications.
Xanax, the anti-anxiety agent, posted worldwide sales of $77 million for the
second quarter, a decline of $10 million from the prior year period. Nine
million dollars of the decline occurred in the U.S. where generic competition
continued to erode sales. Outside the U.S., Xanax enjoyed activity growth in
major markets Italy, Spain, and France, as well as many smaller markets across
Europe, Latin America, and Asia/Pacific. The increase was offset by the
unfavorable effect of currency exchange resulting in flat growth compared to
the prior year quarter. In the six-month comparison, Xanax sales fell 12
percent, to $142 million, a decline resulting from both generic competition
and year-end trade inventory accumulations.
Worldwide sales of $70 million were recorded for the antibiotic Cleocin
(Dalacin outside the U.S.) in the second quarter, an increase of $4 million.
In the U.S., sales grew 17 percent due to a recall of competitors' products.
In non-U.S. markets, sales rose by 1 percent. Cleocin demonstrated strong
growth in emerging markets (defined as countries in Eastern Europe, Middle
East, and Africa), in smaller markets throughout Europe and Asia/Pacific, and
in two major markets, Sweden and Italy. However, sales declined in Japan,
France, and Germany, primarily due to increasing generic competition. In the
six-month comparison, Cleocin achieved a 6 percent increase in sales activity
excluding an unfavorable exchange impact of 4 percent.
Sales of Depo-Provera, Healon, Provera, and Micronase fell in the quarter-to-
quarter comparison by 5 percent, 16 percent, 31 percent, and 56 percent,
respectively, collectively accounting for a $40 million decrease. Significant
factors contributing to sales declines for these older products included
generic competition and year-end 1996 trade inventory build-ups. In July,
Pharmacia & Upjohn announced its brand-specific, direct-to-consumer television
advertising campaign for Depo-Provera Contraceptive Injection. Depo-Provera
and Provera are reported in Women's Health/Urology. Healon, reported in
Ophthalmology, is a viscoelastic used for cataract surgery. Micronase is an
oral anti-diabetes agent and is reported in Metabolic Disease.
Sales of Consumer Health Care products were $167 million in the second
quarter, a decline of 19 percent from the second quarter of 1996. In the six-
month comparison, OTC sales declined 18 percent. Higher sales in the prior
year quarter and first six months reflected U.S. OTC launches of Rogaine 2%
solution for hair loss and Nicorette Gum, the treatment for smoking cessation.
Lower 1997 sales for these products more than offset the net sales increase
related to the product swap with Johnson & Johnson. In June, the company
acquired three brands from two Johnson & Johnson affiliates: Nasalcrom and
PediaCare from McNeil Consumer Products and Micatin from Johnson & Johnson
Consumer Products. In exchange, the company traded Motrin IB in certain
markets to McNeil and Mycitracin to Johnson & Johnson Consumer Products. The
swap is expected to strengthen the OTC product portfolio, as is the
anticipated addition of Rogaine Extra Strength for Men which was recommended
by the U.S. FDA Advisory Committee in July to be made available for OTC sales.
Other associated businesses provided a solid base of sales to the company.
These include Animal Health, Chemical and Contract Manufacturing, and
Diagnostics. Excluding the negative effects of exchange, sales of each
associated business rose in the second quarter and first half of 1997 over the
same periods in 1996.
Sales of Biotech, the company's biotechnology supply business, were $100
million in the second quarter, down $7 million from the prior year quarter due
to the partial divestiture of Biacore. In June, Pharmacia & Upjohn announced
the proposed merger of Biotech with Amersham Life Science Ltd., a division of
Amersham International plc. The merger, finalized in August, created a new
company, Amersham Pharmacia Biotech, which is expected to be the largest
research-based biotechnology supplier in the world. Pharmacia & Upjohn owns
45 percent of the new company which is accounted for under the equity method.
Coincident with the Biotech merger, Amersham Pharmacia Biotech is planning a
third-quarter restructuring. Also related to the merger, Pharmacia & Upjohn
expects to incur various charges including the write-off of certain acquired
research and development costs in accordance with U.S. accounting practices.
As a result of these actions, Pharmacia & Upjohn anticipates a third-quarter
charge against earnings of approximately $0.10 to $0.16 per share, after tax.
OTHER OPERATING REVENUE
Other operating revenue increased over the second quarter and first half of
1996 due to higher revenue earned from the company's agreement with Solvay &
Cie to jointly market Luvox, a treatment for obsessive-compulsive disorder.
Earlier this year, the U.S. FDA approved Luvox as a treatment for obsessive-
compulsive disorder in children.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of net sales, were as
follows:
Second Quarter Six Months
--------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Cost of Products Sold 32.3% 28.2% 31.5% 28.5%
Research and Development 16.5 17.1 16.9 17.1
Marketing, Administrative
and Other 38.3 40.4 37.6 38.3
Restructuring Charges - 9.2 - 12.0
Merger Costs - 1.7 - 1.5
Operating Income 15.0 5.1 15.8 3.9
During the second quarter and first six months, cost of products sold
increased as a percentage of sales due to decreased sales levels and increased
manufacturing expenses. The unfavorable effects of selling price erosion,
product mix, and currency exchange caused sales levels to decline.
Manufacturing expenses increased because of higher production start-up
expenses for new products, project expenses incurred in 1997 to achieve long-
term production efficiencies, and unfavorable manufacturing variances
resulting largely from decreases in volume. The increase in manufacturing
expenses was partially offset by favorable effects of currency exchange
fluctuations.
Research and development spending in the second quarter and first half of 1997
declined both as a percent of net sales and in dollars. Lower levels of
spending primarily reflected the favorable effects of currency exchange in
Sweden and Italy. In addition, the ongoing efforts to focus resources on
selected projects resulted in lower research and development expense in 1997.
In March, the company entered into research agreements with two biotechnology
companies: MorphoSys GmbH of Germany for antibody technologies and Geron
Corporation of the U.S. for anticancer research. In May, the company signed
an extensive research collaboration agreement with the renowned Karolinska
Institute in Sweden to establish a center for genomics research there. These
collaborations will significantly enhance Pharmacia & Upjohn's worldwide
research capabilities.
Marketing, administrative and other (MA&O) expense declined as a percent of
sales due to the termination of an agreement with the Biopure Corporation in
the second quarter of 1996. The termination resulted in a charge of $106
million to recognize the consequent impairment of the company's investment in
Biopure. Excluding the Biopure write-off, MA&O expense increased in 1997 by
$40 million for the quarter and $13 million for the first six months. The
increase was mainly due to promotion of new products in the U.S. New product
introductions and sales force expansions in China, Australia, and certain
Latin American markets also contributed to the overall increase. The
additional spending was partially offset by the favorable effects of currency
exchange fluctuations.
The company did not incur additional merger-related restructuring charges in
the first half of 1997. Merger-related restructuring charges recorded in the
second quarter of 1996 totaled $164 million and in the first six months $421
million, reflecting the planned reduction of approximately 3,650 positions as
of June 30, 1996. Total restructuring charges associated with the merger were
$610 million, recorded in 1995 and 1996. These charges reflected the planned
reduction of approximately 4,350 positions. As of June 30, 1997,
approximately 4,300 employees have left the company under this program. Cash
spending in the first six months of 1997 for this program totaled $115
million, a decrease from the first half of 1996 spending of $175 million.
Approximately $85 million remains accrued as of June 30, 1997, as current
liabilities of the company.
Merger expenses of $29 million also recorded in the second quarter of 1996
consisted largely of costs related to certain nonrecurring organizational
activities, establishing the corporate identity for the new company, and
various other costs of combining the two companies. For the first half of
1996, merger costs were $51 million.
NONOPERATING INCOME AND EXPENSE
The favorable interest income to interest expense relationship contributed to
second quarter 1997 earnings. Declines in both interest income and interest
expense for the quarter as compared to the same period in 1996 were primarily
due to the termination of certain borrowing arrangements in Europe in the
third quarter of 1996 and lower interest rates, primarily in Europe.
INCOME TAXES
The estimated annual effective tax rate for 1997 is 34 percent. The effective
tax rate for 1996 was 35 percent excluding the tax benefits related to
nonrecurring charges (33 percent with nonrecurring charges). The lower 1997
rate is the result of increased earnings in jurisdictions with lower tax
rates.
FINANCIAL CONDITION
June 30, December 31,
1997 1996
--------- ----------
Working Capital (U.S. dollars in millions) $2,265 $2,392
Current Ratio 1.94 1.96
Debt to Total Capitalization 16.5% 14.5%
Working capital fell slightly with the corresponding decrease in the current
ratio due to reductions in short-term investments and accounts receivable.
The increase in the ratio of debt to capitalization was the result of an
increase in short-term debt during the first half of 1997.
The company's net financial asset position, presented below, declined from the
prior year-end due to the net increase in short-term debt. Net reductions in
both short and long-term investments were mostly offset by increases in cash
and cash equivalents.
June 30, December 31,
1997 1996
--------- ----------
Cash, Equivalents and Investments $1,817 $1,849
Short-Term and Long-Term Debt 1,177 1,058
--------- ------
Net Financial Assets $ 640 $ 791
======== ======
Net cash provided by operations for the first six months of 1997 increased to
$533 million from $188 million for the same period in the prior year. The
1996 operating cash flows were particularly low due to large cash expenditures
related to the merger and restructuring combined with an increase in
receivables, inventories and other current assets. In the first half of 1997,
merger and restructuring related spending declined, as noted above. In
addition, current assets decreased, particularly accounts receivable.
Reductions in both short-term and long-term investments as well as increases
in short-term debt represented major cash inflows during the first six months
of 1997, while capital spending and payment of dividends represented major
cash outflows. Additions of property, plant and equipment totaling $224
million in the first half included expansion of bulk chemical production
facilities in Ireland; manufacturing centers of excellence in the U.S.,
Belgium, Italy and Sweden; and a nutritional plant in China. The company's
future cash provided by operations and borrowing capacity are expected to
cover normal operating cash flow needs, planned capital acquisitions, and
dividend payments that may be approved by the board of directors for the
foreseeable future.
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 a portion of 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. Gains and losses from forward exchange
contracts related to hedges for product shipments are recognized as "Cost of
Products Sold" and are included in the operating section of the statement of
cash flows. Gains and losses from forward exchange contracts related to
hedges on other activities are recognized as "All Other, Net", and are
included in the investing section of the statement of cash flows.
LITIGATION
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 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 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.
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 cannot be presently estimated, a majority of the
defendants in this class action (not including the company) have agreed to $10
million to $60 million settlement 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.
OTHER ITEMS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.128, Earnings per Share, effective
for fiscal periods ending after December 15, 1997. Earlier application is not
permitted. The statement simplifies the calculation of earnings per share and
requires presentation of basic and diluted earnings per share in lieu of
primary and fully diluted earnings per share. The company anticipates the
adoption of SFAS No.128 will not have a material impact on its earnings per
share calculations.
The company completed a detailed assessment in June of the expected impact of
the Year 2000 date recognition problem on existing automated systems
worldwide. Resulting solutions will involve a mix of purchasing new systems
and modifying existing systems, with the emphasis on replacement rather than
repair of many older applications developed in-house. The company anticipates
spending between $100 to $120 million over the next two years, approximately
80 percent on replacement of applications that for reasons other than the date
recognition problem had already been selected for replacement. A portion of
the total spending will be capitalized as purchased software.
In close association with the company-wide restructuring efforts announced in
July, the company continues to develop its manufacturing facility
rationalization program intended to consolidate and reduce manufacturing
facilities by 40 percent worldwide. The plan is expected to be finalized in
the second half of 1997.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report, such as statements concerning the
company's anticipated financial or product performance, its ability to pay
dividends, 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: sales and earnings projections; the effectiveness of and expense
estimates related to future projects including restructuring plans and the
Year 2000 date recognition problem; 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 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; the
company's exposure to antitrust lawsuits; 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, including its Proxy Statement and Annual Report
on Form 10-K for the year ended December 31, 1996.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Four directors were elected by security holders at the company's Annual
Meeting of Shareholders which convened on April 29, 1997:
Frank C. Carlucci Votes for 387,010,888
Votes withheld 13,375,002
J. Soren Gyll Votes for 386,898,849
Votes withheld 13,487,041
William U. Parfet Votes for 387,159,174
Votes withheld 13,226,716
Ulla B. Reinius Votes for 387,118,344
Votes withheld 13,267,546
Members of the Board of Directors whose term of office continued after the
meeting include:
Richard H. Brown
Gustaf A.S. Douglas
M. Kathryn Eickhoff
Jan E. Ekberg
Daryl F. Grisham
William E. LaMothe
Goran A. Linden
R.L. Berthold Lindqvist
Olof G. Lund
William D. Mulholland
Bengt I. Samuelsson
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page
18).
(a)(ii) Exhibit 10 - Fred Hassan Employment Agreement (EDGAR
filing only).
(a)(iii) Exhibit 11 - Statement regarding computation of
earnings per share (page 19).
(a)(iv) Exhibit 12 - Ratio of Earnings to Fixed Charges (page
20).
(a)(v) Exhibit 15 - Awareness of Coopers & Lybrand L.L.P.
(page 21).
(a)(vi) Exhibit 27 - Financial Data Schedule (EDGAR filing
only).
(b) Form 8-K - No reports on Form 8-K were filed during
the quarter ended June 30, 1997.
SIGNATURE:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACIA & UPJOHN, INC.
(Registrant)
DATE: August 13, 1997 /S/R. C. SALISBURY
R. C. Salisbury
Executive Vice President,
Finance and Administration
and Chief Financial Officer
+44 1753 757575
DATE: August 13, 1997 /S/D. W. SCHMITZ
D. W. Schmitz
Vice President, Corporate Assistant
Secretary, and Acting General Counsel
+44 1753 757575
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE - PRIMARY
(In millions, except per-share data)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings $178.3 $ 82.4 $372.4 $132.3
Dividends on preferred stock, net of tax 3.1 3.1 6.2 6.3
------ ------ ------ ------
Net earnings on common shares - primary $175.2 $ 79.3 $366.2 $126.0
====== ====== ====== ======
Average number of common shares outstanding 507.9 509.1 508.1 508.3
Number of common shares issuable assuming
exercise of stock options 2.2 4.1 2.5 4.1
Contingently issuable incentive common shares .6 .5 .7 .5
----- ----- ----- -----
Total shares - primary 510.7 513.7 511.3 512.9
===== ===== ===== =====
Primary earnings per common share $.34 $.16 $.71 $.25
==== ==== ==== ====
COMPUTATION OF EARNINGS PER COMMON SHARE - FULLY DILUTED(1)
Net earnings $178.3 $ 82.4 $372.4 $132.3
Less ESOP contribution assumed to be required
if preferred shares are converted into common
shares 1.0 1.0 2.1 2.1
Less tax benefit of preferred stock dividend on
allocated shares .3 .3 .7 .7
Plus tax benefit assumed on common stock dividend .2 .2 .4 .4
------ ------ ------ ------
Net earnings on common shares - fully diluted $177.2 $ 81.3 $370.0 $129.9
====== ====== ====== ======
Average number of common shares outstanding 507.9 509.1 508.1 508.3
Number of common shares issuable assuming
exercise of stock options 2.2 4.7 2.5 4.8
Contingently issuable incentive common shares .6 .5 .7 .5
Number of common shares issuable assuming
conversion of preferred shares 10.3 10.4 10.3 10.4
----- ----- ----- -----
Total shares - fully diluted 521.0 524.7 521.6 524.0
===== ===== ===== =====
Fully diluted earnings per common share $.34 $.16 $.71 $.25
==== ==== ==== ====
(1) This calculation is submitted in accordance with the regulations of the Securities
and Exchange Commission although not required by APB Opinion No. 15 because it results in
dilution of less than 3%.
</TABLE>
<TABLE>
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(U.S. dollar amounts in millions)
<CAPTION>
Six Months Year Ended December 31,
Ended
June 30, 1997 1996 1995 1994 1993 1992
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $ 564 $ 838 $1,136 $1,271 $ 778 $ 947
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 2 5 7 8 8 6
-------- -------- --------- --------- --------- ---------
562 833 1,129 1,263 770 941
Add:
Amortization of previously
capitalized interest 6 11 10 8 6 4
Fixed charges included in the above:
Interest and amortization of debt
expense 30 82 121 139 209 162
Rental expense representative
of an interest factor 19 37 35 35 32 35
-------- -------- --------- --------- --------- ---------
Earnings from continuing operations
before income taxes and fixed
charges 617 $ 963 $1,295 $1,445 $1,017 $1,142
======== ======== ========= ========= ========= =========
Interest incurred and amortization
of debt expense $ 43 $ 115 $ 149 $ 164 $ 234 $ 178
Rental expense representative of an
interest factor 19 37 35 35 32 35
-------- -------- --------- --------- --------- ---------
Total fixed charges $ 62 $ 152 $ 184 $ 199 $ 266 $ 213
======== ======== ========= ========= ========= =========
Ratio of earnings to fixed charges 9.91 6.33 7.05 7.24 3.82 5.35
===== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 15
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Pharmacia & Upjohn, Inc.
Registration on Form 10-Q
We are aware that our report dated July 29, 1997, on our review of interim
financial information of Pharmacia & Upjohn, Inc. and Subsidiaries for the
three-month and six-month periods ended June 30, 1997 and 1996, included in
this Form 10-Q, is incorporated by reference in the Company's prospectus on
Form S-8 Registration Statement (No. 033-63903) and the prospectus on Form S-8
Registration Statement (No. 333-03109). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of the Act.
Coopers & Lybrand L.L.P.
Chicago, Illinois
August 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
EARNINGS STATEMENT AND THE BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 981
<SECURITIES> 0
<RECEIVABLES> 1,566
<ALLOWANCES> 95
<INVENTORY> 1,016
<CURRENT-ASSETS> 4,679
<PP&E> 6,056
<DEPRECIATION> 2,601
<TOTAL-ASSETS> 10,697
<CURRENT-LIABILITIES> 2,414
<BONDS> 567<F1>
0
284
<COMMON> 5
<OTHER-SE> 5,648
<TOTAL-LIABILITY-AND-EQUITY> 10,697
<SALES> 3,338
<TOTAL-REVENUES> 3,400
<CGS> 1,053
<TOTAL-COSTS> 1,053
<OTHER-EXPENSES> 564<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 564
<INCOME-TAX> 192
<INCOME-CONTINUING> 372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 372
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<FN>
<F1>EXCLUDES COMPANY'S GUARANTEE OF ESOP DEBT: 240
<F2>ONLY INCLUDES R&D EXPENSE.
</FN>
</TABLE>
EXHIBIT A
INDEPENDENT ACCOUNTANT'S REPORT
To the Shareholders and
Board of Directors
Pharmacia & Upjohn, Inc.
We have reviewed the condensed consolidated balance sheet of Pharmacia &
Upjohn, Inc. and Subsidiaries as of June 30, 1997, and the related
condensed consolidated statements of earnings and cash flows for the three-
month and six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
that an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1996, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for the year then ended (not presented herein);
and in our report, dated February 26, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
Coopers & Lybrand L.L.P.
Chicago, Illinois
July 29, 1997
May 7, 1997
Mr. Fred Hassan
142 Summit Road
Florham Park, New Jersey 07932
Dear Sir:
This letter confirms the terms for your employment as President and Chief
Executive Officer of Pharmacia & Upjohn, Inc. ("the Company"). I very much
hope that you will become our new President and Chief Executive
Officer. The principal terms of your employment will be:
1. You will join the Company as an employee on May 9, 1997. On
May 10, 1997 you will be appointed President and Chief Executive
Officer for a term beginning on May 10, 1997 and ending on June 1,
2000. However, subject to paragraph 6 below, you will serve at the
will of the Board. You will also serve as a member of the Board of
Directors and on the Board's Executive Committee, subject to being
nominated by the Board and approved by the shareholders of the
Company. As President and Chief Executive Officer, you will report
directly to the Board and will be responsible for the general
management of the affairs of the Company in accordance with
customary practices for chief executive officers of comparable
companies. While serving as President and Chief Executive Officer
of the Company, for legal and tax purposes, you will be a direct
employee of, and serve as President and Chief Executive Officer of,
Pharmacia & Upjohn Management Company Ltd., a wholly owned U.K.
subsidiary of the Company that provides management services to the
Company under contract ("PUMCO").
You will devote substantially all of your business time to
your duties and responsibilities with the Company and PUMCO.
However, you will not be precluded from (i) serving on the board of
directors of other companies (subject to the reasonable approval of
the Board of Directors of the Company) and boards of trade
associations or charitable organizations; (ii) engaging in
charitable activities and community affairs; and (iii) managing
your personal investments and affairs provided that such activities
do not materially interfere with your duties and responsibilities
hereunder.
2. Your beginning annual base salary will be $1,000,000 and will
be subject to annual review for increases.
3. You will be included in the Company's Annual Incentive
Compensation Plan at a level determined by the Compensation
Committee of the Board to be appropriate based on your position,
job performance and Company policy. Your 1997 incentive
compensation target award will be $1,000,000 and will be subject to
adjustment following the end of the year by the performance
criteria established for the Company's other senior executive
officers (the 1997 performance criteria provide that 30% of
targeted incentive compensation will be adjusted based on external
measures (total market return and earnings per share) compared to
a group of comparable global pharmaceutical companies, and the
remaining 70% will be adjusted based on relative growth in the
Company's sales, earnings and cash flow and on individual
performance). However, you will be guaranteed a minimum cash bonus
of $636,000 for 1997. The actual amount of your 1997 incentive
compensation (including the guaranteed minimum amount) will be
reduced by the amount of any annual bonus you receive from your
current employer for services rendered during 1997. Payment of
your incentive compensation will be made in March 1998 unless you
elect to defer payment until after you retire. Your ongoing annual
incentive compensation target awards will be no less than $1
million, payable if the performance criteria determined by the
Compensation Committee are met. If the performance criteria are
exceeded or not fully met, you will receive such greater or lesser
amount as the Compensation Committee determines is appropriate.
4. To provide you with new long-term equity incentive
compensation and to replace the stock options, performance shares
and restricted stock from your current employer that you will lose
as a result of joining Pharmacia & Upjohn, the Company will grant
you, on May 9, 1997, which shall be deemed your "Employment
Commencement Date," stock options and restricted stock according to
the schedule set forth below:
NEW LONG-TERM INCENTIVES
AND REPLACEMENT AWARDS
(see notes following table)
TYPE NATURE OF AWARD NUMBER OF SHARES VESTING DATE
- ------------------------------------------------------------------------------
Stock Options New Incentive 500,000 1/3 of grant
on 6/1/98,
6/1/99 &
6/1/2000
- ------------------------------------------------------------------------------
Restricted Stock Replacement Award 200,000 June 1, 1998
- ------------------------------------------------------------------------------
Restricted Stock Replacement Award 40,000 June 1, 1998
- ------------------------------------------------------------------------------
Restricted Stock Replacement Award 75,000 January 1, 1998
- ------------------------------------------------------------------------------
A. The exercise price of the stock options will be the fair
market value (as defined in the Company's Stock Option Plan as
the average of the daily high and low) for Pharmacia & Upjohn
Common Stock on the New York Stock Exchange on your Employment
Commencement Date. All stock options will be non-qualified
stock options under the U.S. Internal Revenue Code, will be
subject to the terms of the Plan and will expire not later
than ten years from the date of grant.
B. Stock options and restricted stock not vesting until the
indicated dates will nevertheless vest immediately upon your
death or disability, a Change in Control of the Company (as
defined in the Company's Stock Option Plan), your involuntary
termination of employment other than for Cause (as defined
below) or your termination of employment for Good Reason (as
defined below) provided you do not enter into Competition (as
defined below) with the Company within two years after your
employment is terminated.
C. The stock options set forth in the table above represent your
annual stock option grant for 1997. Beginning in 1998, you
will be granted stock options pursuant to the Company's Stock
Option Plan at the same time as other senior executives of the
Company and at a level determined by the Compensation
Committee of the Board to be appropriate based on your
position, job performance, competitive practices and Company
policy. If your performance is found to be satisfactory, it
is expected that the target for your stock option grants would
be at least 250,000 options in 1998 and 250,000 options in
1999.
D. The 40,000 restricted shares of Pharmacia & Upjohn Common
Stock issued to replace certain restricted stock and
performance shares from your current employer that may not be
paid due to termination of your current employment, will be
reduced by the value of any such restricted stock or
performance shares you subsequently receive from your current
employer.
E. The 75,000 restricted shares of Pharmacia & Upjohn Common
Stock issued to replace 133,200 options awarded in 1996 by
your current employer and 12,500 shares of restricted stock
from your current employer that may not vest or may not be
paid due to termination of your current employment, will be
reduced by the value of any such options which subsequently
vest or any such restricted stock you subsequently receive
from your current employer.
5. You will be eligible to receive employee benefits and
perquisites at least as favorable as those provided to any other
similarly situated senior executives of the Company, including,
without limitation, if offered to such other senior executives,
pension, profit sharing, savings, deferred compensation and other
retirement plans or programs, medical, dental, hospitalization,
short-term and long-term disability, life insurance, accidental
death, travel accident, vacation and any other benefit programs or
plans that may be sponsored by the Company, including any plans
that supplement the above-listed plans, whether funded or unfunded.
You shall be entitled to post-retirement welfare benefits, if any,
as are made available by the Company to its senior level
executives, provided that for this purpose your period of
employment shall be deemed to be the period necessary to obtain the
maximum level of such benefits.
To the extent that there is a period of employment required as a
condition for full benefit coverage under any employee benefit
plan, you shall be deemed to have met such requirement, and to the
extent that you and/or your dependents will not be eligible to
participate fully in any medical plan because of any exclusion for
preexisting conditions, the Company will either, at its option,
waive any such exclusion for pre-existing conditions or reimburse
you for the cost of paying for the COBRA continuation coverage
available under your prior employer's medical plans.
6. In the event your employment is involuntarily terminated by
the Company other than for Cause or you terminate your employment
for Good Reason, in either case prior to June 1, 2000, provided
that you do not enter into Competition with the Company, then, as
liquidated damages and in lieu of any other damages or compensation
under this agreement, (i) you shall be entitled to receive a lump
sum severance payment, payable within 60 days after termination,
equal to the total amount of base salary and annual target
incentive compensation you would have received had you continued
your employment until June 1, 2000 (calculated using your base
salary and target bonus in effect on your date of termination) but
in no event less than an amount equal to two years' base salary and
annual target incentive compensation so calculated; (ii) you shall
have your period of employment service used to calculate retirement
and other employee benefits extended as if you had worked until
November 12, 2000, and the compensation used to calculate your
retirement benefits will be determined as if you had continued to
receive your then current annual base salary and annual target
incentive compensation until November 12, 2000; (iii) you will be
entitled to exercise during the five years following your
termination, in accordance with their terms, any remaining stock
options that had been granted prior to your termination (all of
which will become vested under such circumstances); (iv) you shall
earn the restricted shares you receive pursuant to paragraph 4
above if not yet vested; (v) you shall be entitled to payment of
your expenses in connection with the relocation of your family from
the United Kingdom to the United States on the same basis as your
expenses were paid with respect to your relocation from the United
States to the United Kingdom in connection with the commencement of
your employment; (vi) you and your dependents shall continue to
participate (with the same level of coverage) for the period in
respect to which you receive salary and bonus payments under
subparagraph (i) above, in all medical, accident, disability and
life insurance on the same terms as in effect immediately prior to
your termination, provided, however, such benefits will cease on
the date of your receiving equivalent benefits from a new employer,
and, at your option, you may have such benefits determined as if
you had terminated employment from the Company's principal U.S.
operating subsidiary; (vii) you shall be entitled to outplacement
services, at the expense of the Company, from a provider selected
by you, subject to a maximum expense of $100,000, and (viii) you
shall receive any other amounts earned, accrued or owing to you
under the plans and programs of the Company. In the event you
should die prior to June 1, 2000 while still employed by Pharmacia
& Upjohn, your spouse or other beneficiary shall receive a lump sum
payment equal to two years' base salary offset by any death
benefits payable under the Company's life insurance plans under
which you are covered. In the event you enter into Competition
with the Company within two years after your employment is
terminated, and you have received severance payments under
subparagraph (i) above, additional retirement or other employee
benefits under subparagraph (ii) above, or (iii) restricted stock
under subparagraph (iv) above, you agree to promptly repay the
amount of such severance payments, additional retirement and other
employee benefits and restricted stock to the Company, and any
remaining stock options will be canceled.
7. In the event that, within one year following a Change in
Control of the Company (as currently defined in the Company's Stock
Option Plan without regard to any future amendment) occurring prior
to June 1, 2000, your employment with the Company is involuntarily
terminated other than for Cause or you terminate your employment
for Good Reason, the Company will assure you that the stock options
granted under paragraph 4 above and any other stock options granted
to you before the Change in Control (even if previously exercised
or if not yet exercisable) will have a before-tax value of at least
$15 million on the date of the Change in Control. If they do not
have that value, then the Company will pay you, within sixty days
after the date of your involuntary termination or the date you
terminate your employment for Good Reason, a lump sum cash payment
in an amount (which amount will be grossed up for any resulting IRS
Code Section 4999 excise taxes) equal to the difference between $15
million and the market spread on the date of the Change in Control
of the 500,000 stock options granted under paragraph 4 and any
other stock options granted to you before the Change in Control
(even if previously exercised or if not yet exercisable).
8. In the event, prior to June 1, 2000, you voluntarily terminate
your employment (other than for Good Reason or due to permanent
disability) or you are discharged by the Company for Cause, you
will forfeit your right to receive any salary, incentive
compensation, severance pay or restricted stock that has not been
fully earned at the time your employment terminates, provided,
however, you will be entitled to receive any benefits or amounts
accrued but not yet paid as of the date of termination, and you
will be able to exercise any remaining vested stock options only
during the three months following termination of your employment.
9. You will receive the Company's customary relocation benefits,
including, unless you sell your home yourself, an amount equal to
the average appraised value of your home as determined by at least
two independent real estate appraisers (you would then deed your
home to the Company). The Company will also reimburse you, grossed-
up for any resulting taxes, for reasonable house-hunting, personal
transportation, moving expenses, temporary living expenses and
other related costs associated with your move to Pharmacia &
Upjohn's management center in Windsor, England. The Company will
also pay you $25,000, grossed-up for any resulting taxes, for
incidental expenses incurred in establishing a residence in
England.
10. (a) If your employment with the Company is terminated on
account of disability or is involuntarily terminated by the Company
other than for Cause or you terminate your employment for Good
Reason, the Company will pay you the greater of (i) the amount of
(A) qualified and non-qualified retirement income you would have
been entitled to receive under the retirement benefit formula now
in effect with your current employer if you had remained employed
by your current employer until the later of (x) your attainment of
age 55 or (y) your employment with the Company terminates and if
your current employer had paid you the same compensation as you
received from the Company, less (B) the amount of any qualified or
non-qualified retirement income you are actually entitled to
receive from your current employer; or (ii) the amount of
retirement income you are entitled to receive under the Company's
Global Officer Pension Plan (or any other retirement plan hereafter
provided by the Company for its senior executive officers) using
your actual years of service and compensation with the Company, as
described in paragraph (c) below.
(b) If you voluntarily terminate your employment with the
Company other than for Good Reason or if the Company terminates
your employment for Cause, the Company will pay you the greater of
(i) the amount of (A) qualified and non-qualified retirement income
you would have been entitled to receive under the retirement
benefit formula now in effect with your current employer if you had
remained employed by your current employer until your employment
with the Company terminates and if your current employer
compensation had increased at a 5% compounded rate annually, less
(B) the amount of any qualified or non-qualified retirement income
you are actually entitled to receive from your current employer; or
(ii) the amount of retirement income you are entitled to receive
under the Company's Global Officer Pension Plan (or any other
retirement plan hereafter provided by the Company for its senior
executive officers) using your actual years of service and
compensation with the Company, as described in paragraph (c) below.
(c) The Company's Global Officer Pension Plan, which is not
qualified under the U.S. Internal Revenue Code, supplements the
officer's other sources of retirement income to provide the officer
with the actuarial value of an annual life annuity of 65% of the
officer's final three-year average annual salary and cash bonus
compensation prior to retirement from the Company, provided the
officer retires at age 65 with at least ten years of service under
the Plan. Appropriate adjustments will be made if the officer has
less than ten years of service under the Plan or retires before age
65. The benefits payable under the Company's Global Officer
Pension Plan will be offset for any social security or other
governmental retirement income and any retirement income from any
prior employers that you may be entitled to receive.
(d) If you die while employed by the Company or thereafter
under circumstances in which a spousal survivor's benefit would
have been payable under the retirement plans of your current
employer had you continued employment with your current employer
and/or you elect the pre-retirement 60% spousal survivor benefit
under the Company's Global Officer Pension Plan or a spousal
survivor's benefit becomes payable under any other retirement plans
of the Company under which you are covered, then the benefit
payable by the Company to your surviving spouse shall be the
greater of (i) the amount which would have been payable as a
spousal survivor's benefit under the retirement plans of your
current employer had you continued employment with your current
employer or (ii) the amount payable as a spousal survivor's benefit
under the Global Officer Pension Plan or any other retirement plans
of the Company, with each such amount being calculated in
accordance with the assumptions described in and offsets
corresponding to those provided for in subparagraph (a), above,
subparagraph (b), above, and/or subparagraph (e), below, whichever
is applicable to the circumstances of the termination of your
employment with the Company.
(e) For the purpose of the foregoing calculations,
alternative forms of benefits will be made actuarially equivalent
using the actuarial assumptions then applied to all senior
executive officers under the Company's Global Officer Pension Plan
(or any successor plan).
11. You are authorized to incur reasonable expenses in carrying
out your duties and responsibilities with the Company and PUMCO,
and the Company shall promptly reimburse you for all business
expenses in accordance with Company policy. The Company shall pay
your reasonable expenses for legal counsel and financial advice in
connection with the negotiation and documentation of your
employment arrangements with the Company. You will be provided
with an automobile and chauffeur in the U.K. for business purposes.
You will receive annual assistance from an independent accounting
firm selected by the Company, at Company expense, in preparing your
income tax returns. Your children will be entitled to attend
private school in the U.K. through high school at Company expense.
12. During the period of your employment and thereafter, you will
maintain the confidentiality of all confidential or proprietary
information relating to the business of the Company or any of its
subsidiaries or affiliates provided, however, you may disclose such
information as (i) may be required or appropriate in carrying out
your duties at the Company or PUMCO or (ii) may be required for you
to disclose by applicable law, governmental regulations or judicial
or regulatory process.
13. To the fullest extent permitted by applicable law, all
intellectual property (including patents, trademarks, and
copyrights) which are made, developed or acquired by you in the
course of your employment with the Company will be and remain the
absolute property of the Company.
14. Without the written consent of the Board of Directors of the
Company, you agree that during the period of your employment with
the Company and for a period of two years following the termination
of your employment, you will not enter into Competition with the
Company. "Competition" as used in this agreement means that you
commence employment with, or provide substantial consulting
services to, any pharmaceutical company (except companies where
sales from pharmaceutical products constitute less than 20% of
total sales). Anything herein to the contrary notwithstanding,
your service solely as a member of the board of directors of a
company whose annual sales, for its last fiscal year prior to your
becoming a member of its board of directors, are less than $100
million shall not be deemed to be Competition for purposes of this
agreement. For purposes of the preceding sentence, if a company is
a subsidiary of another company, the sales of both companies shall
be taken into account.
15. To the fullest extent permitted by applicable law, the Company
will, during and after termination of your employment, indemnify
you (including providing advancement of expenses) for any
judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees, incurred by you in connection
with the defense of any lawsuit or other claim to which you are
made, or threatened to be made, a party by reason of being or
having been an officer, director or employee of the Company or any
of its subsidiaries or affiliates. In addition, you will be
covered under any directors and officers' liability insurance
policy for your acts (or non-acts) as an officer or director of the
Company or any of its subsidiaries or affiliates to the extent the
Company provides such coverage for its senior executive officers.
16. Any disputes arising under or in connection with this
agreement shall, unless other arrangements are agreed upon in
writing by you and the Company, be resolved by binding arbitration
to be held in London, England, in accordance with the rules and
procedures of the London Court of International Arbitration.
Judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. Costs of the arbitration
or litigation, including (but not by way of limitation) reasonable
attorneys' fees of both parties, shall be borne by the party which
does not prevail in the proceedings. In the event that each party
prevails as to certain aspects of the proceedings, the
arbitrator(s) shall determine an appropriate allocation of costs
between the parties.
17. In the event of termination of your employment, you will
immediately, unless otherwise requested by the Company's Board of
Directors, resign from all directorships, trusteeships, other
offices and employment held at that time with the Company or any of
its subsidiaries or affiliates.
18. For purposes of this agreement, "Cause" means (i) a material
breach by you of your duties and responsibilities (other than as a
result of incapacity due to physical or mental illness) which is
demonstrably willful and deliberate on your part, which is
committed in bad faith or without reasonable belief that such
breach is in the best interests of the Company, and which is not
remedied in a reasonable period of time after receipt of written
notice from the Company specifying such breach; or (ii) your
conviction of a felony which is materially and demonstrably
injurious to the Company as determined in the sole discretion of
the Board of Directors of the Company.
19. For purposes of this agreement, "Good Reason" means that,
without your consent, (i) your rate of annual base salary or the
target amount of your annual cash incentive bonus are reduced in a
manner that is not applied proportionately to all other senior
executive officers of the Company, (ii) the Company fails to retain
you as President and Chief Executive Officer of the Company,
(iii) the Company fails to nominate you (or renominate you) for
election to the Board of Directors of each of the Company and of
PUMCO, (iv) there is a material diminution in your duties, or the
assignment to you of duties which are materially inconsistent with
your duties or materially impair your ability to function, as the
President and Chief Executive Officer of the Company or of PUMCO or
(v) there is a change in your reporting so that you no longer
report directly to the Board of the Company or of PUMCO; provided,
however, that in the event PUMCO ceases to provide senior
management services to the Company under contract, any changes
related solely to PUMCO shall not be deemed Good Reason.
20. The obligation of the Company to make any payments provided
for hereunder and otherwise to perform their obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have
against you or others. In no event shall you be obligated to seek
other employment or take other action by way of mitigation of the
amounts payable to you under any of the provisions of this
agreement, and such amounts shall not be reduced (except as
otherwise specifically provided herein) whether or not you obtain
other employment.
21. In the event of any change in the outstanding shares of the
Company's Common Stock (including any increase or decrease in such
shares) by reason of any stock dividend or split, recapitalization,
merger, consolidation, spinoff, combination or exchange of shares
or other similar corporate change, or any distributions to common
stockholders other than regular cash dividends, the Compensation
Committee of the Board may make such substitution or adjustment, if
any, as it deems to be equitable, as to the number or kind of
shares of Common Stock provided for in this agreement.
22. As with all prospective employees, a recent medical
examination evidencing general good health must be completed prior
to employment. Your physician should send the results of such
examination to the Company's Chief Medical Officer at the
management center in Windsor, England.
23. This agreement will be governed by and construed in accordance
with the laws of the State of Delaware, U.S.A.
24. (a) No rights or obligations of the Company under this
agreement may be assigned or transferred by the Company except that
such rights or obligations may be assigned or transferred pursuant
to a merger or consolidation in which the Company is not the
continuing entity, or pursuant to the sale or transfer of all or
substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all
of the assets of the Company.
(b) This agreement shall not be terminated by any merger,
consolidation, or transfer of assets referred to above. In the
event of any such merger, consolidation or transfer of assets, the
provisions of this agreement shall be binding upon the surviving or
resulting corporation or the person or entity to which such assets
are transferred.
(c) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to above, it will
cause any successor or transferee unconditionally to assume, either
contractually or as a matter of law, the liabilities, obligations,
and duties of the Company hereunder. (d) This agreement shall
inure to the benefit of, and be enforceable by or against, you or
your personal or legal representatives, executors, administrators,
successors, heirs, distributees, designees and legatees. None of
your rights or obligations under this agreement may be assigned or
transferred by you other than your rights to compensation and
benefits, which may be transferred only by will or operation of
law. If you should die while any amounts or benefits have been
accrued by you but not yet paid as of the date of your death and
which would be payable to you hereunder had you continued to live,
all such amounts and benefits unless otherwise provided herein
shall be paid or provided in accordance with the terms of this
agreement to such person or persons appointed in writing by you to
receive such amounts or, if no such person is so appointed, to your
estate.
25. No provisions of this agreement may be waived, modified or
discharged unless such waiver, modification or discharge is agreed
to in writing signed by both you and an authorized officer of the
Company. No waiver by any party hereto at any time of any breach
by any other party hereto of, or compliance with, any condition or
provision of this agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made
by any party which are not set forth expressly in this agreement.
26. This agreement may be executed by the parties in two or more
counterparts, each of which shall be deemed to be an original, but
all such counterparts shall constitute one and the same instrument,
and all signatures need not appear on any one counterpart. A faxed
signature of a party which is a reproduction of a genuine signature
of that party shall be conclusive evidence of execution of this
agreement by that party.
27. This agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party
hereto in respect of the subject matter contained herein.
I am always available at your convenience to discuss any matters
you may wish.
Very truly yours,
William E. LaMothe
Chairman, Search Committee
I accept the terms set forth in this letter and will serve in the
capacity stated:
______________________________________
Date: May 9, 1997
