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, 1998
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, 95 Corporate Drive, Bridgewater, NJ 08807
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 888/768-5501
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, 1998 was 508,045,682.
Page 1 of 20 pages
The exhibit index is set forth on page 19.
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
PHARMACIA & UPJOHN, INC.
QUARTER ENDED JUNE 30, 1998
INDEX OF INFORMATION INCLUDED IN REPORT
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Earnings 3
Condensed Consolidated Statements of Cash Flows 4
Condensed Consolidated Balance Sheets 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30
(in millions of U.S. dollars, except per-share data)
<CAPTION>
Unaudited
--------------------------------------------------
For Three Months For Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,654 $1,703 $3,240 $3,338
Other revenue 37 35 63 62
---------- ---------- ---------- ----------
Operating revenue 1,691 1,738 3,303 3,400
Cost of products sold 493 550 978 1,053
Research and development 292 281 566 564
Marketing, administrative and other 717 652 1,318 1,254
Biotech (9) - (18) -
---------- ---------- ---------- ----------
Operating income 198 255 459 529
Interest income 21 25 45 54
Interest expense (5) (11) (11) (18)
All other, net 2 1 - (1)
---------- ---------- ---------- ----------
Earnings before income taxes 216 270 493 564
Provision for income taxes 70 92 158 192
---------- ---------- ---------- ----------
Net earnings $ 146 $ 178 $ 335 $ 372
========== ========== ========== ==========
Earnings per common share:
Basic $.28 $.34 $.65 $.72
Diluted $.28 $.34 $.64 $.71
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
(in millions of U.S. dollars)
<CAPTION>
Unaudited
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash provided by operations $ 234 $ 533
-------- --------
Cash flows (required) provided by investment activities:
Acquisition of subsidiaries - (34)
Additions of properties (221) (224)
Proceeds from sales of properties 5 36
Purchases of intangibles (6) -
Purchases of investments (336) (363)
Proceeds from sales of investments 582 647
Other - (10)
-------- --------
Net cash provided by investment activities 24 52
-------- --------
Cash flows provided (required) by financing activities:
Proceeds from issuance of debt 14 30
Repayment of debt (147) (16)
Payments of ESOP debt (16) (12)
Net increase (decrease) in debt with initial maturity
of 90 days or less 377 123
Dividend payments (283) (284)
Purchases of treasury stock (31) (63)
Proceeds from exercise of stock options 25 10
Other - (20)
-------- --------
Net cash (required) by financing activities (61) (232)
-------- --------
Effect of exchange rate changes on cash (3) (13)
-------- --------
Net change in cash and cash equivalents 194 340
Cash and cash equivalents, beginning of year 775 641
-------- --------
Cash and cash equivalents, end of period $ 969 $ 981
======== ========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(in millions of U.S. dollars)
June 30, December 31,
1998 1997
----------- -----------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 969 $ 775
Short-term investments 317 539
Trade accounts receivable, less allowance
of $89 (1997: $89) 1,329 1,303
Inventories 1,000 958
Other current assets 841 752
----------- -----------
Total current assets 4,456 4,327
----------- -----------
Long-term investments 581 534
----------- -----------
Goodwill and other intangible assets, net 1,273 1,287
----------- -----------
Properties, net 3,268 3,306
----------- -----------
Other noncurrent assets 785 926
----------- -----------
Total assets $10,363 $10,380
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 644 $ 401
Other current liabilities 2,211 2,287
----------- -----------
Total current liabilities 2,855 2,688
----------- -----------
Long-term debt and guarantee of ESOP debt 601 634
----------- -----------
Other noncurrent liabilities 1,431 1,520
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value;
authorized 100,000,000 shares; issued
Series A convertible 6,919 shares
(1997: 6,996 shares) at stated value 279 282
Common stock, one cent par value;
authorized 1,500,000,000 shares, issued
508,647,507 shares 5 5
Capital in excess of par value 1,410 1,440
Retained earnings 5,418 5,364
ESOP-related accounts (246) (260)
Treasury stock (34) (48)
Accumulated other comprehensive income (1,356) (1,245)
----------- -----------
Total shareholders' equity 5,476 5,538
----------- -----------
Total liabilities and shareholders' equity $10,363 $10,380
=========== ===========
See accompanying notes.
</TABLE>
<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, 1997, which is
derived from audited financial statements. The interim financial statements
and notes thereto do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
financial statements and notes thereto included in the company's latest annual
report on Form 10-K.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. The current period's results of operations are
not necessarily indicative of results that ultimately may be achieved for the
year.
Certain 1997 amounts, as presented herein, differ from amounts presented in
the 1997 annual report. The changes result from the reclassification of $72
from noncurrent assets to goodwill and other intangibles to better reflect the
nature of the related assets.
<TABLE>
<CAPTION>
B - INVENTORIES
June 30, December 31,
1998 1997
---------- -----------
Estimated replacement cost (FIFO basis):
<S> <C> <C>
Pharmaceutical and other finished products $ 538 $ 500
Raw materials, supplies and work-in-process 616 618
---------- ---------
1,154 1,118
Less reduction to LIFO cost (154) (160)
---------- ----------
$ 1,000 $ 958
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $535 at June 30, 1998, and $416 at December 31, 1997.
</TABLE>
C - CONTINGENT LIABILITIES
The consolidated balance sheets include accruals for estimated product,
litigation, 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 D). The company's ultimate liability in connection with those sites
depends on many factors, including the number of other responsible parties and
their financial viability and the remediation methods and technology to be
used. Actual costs to be incurred may vary from the estimates given inherent
uncertainties in evaluating environmental exposures.
With regard to the company's discontinued industrial chemical facility in
North Haven, Connecticut, the company may soon be required to submit a
corrective measures study report to the U.S. Environmental Protection Agency.
As the corrective action process progresses, it may become appropriate to
reevaluate the existing reserves designated for remediation in light of
changing circumstances. It is reasonably possible that a material increase in
accrued liabilities will be required but it is not possible to determine what,
if any, exposure exists at this time.
D - 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, and administrative and judicial proceedings at
approximately 50 "Superfund" sites.
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 any potentially 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 has been a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits,
some of which were consolidated and transferred to the Federal District Court
for the Northern District of Illinois. 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
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, Mississippi, and Wisconsin. Eighteen class
action lawsuits seeking damages based on the same alleged conduct have been
filed in 14 states and the District of Columbia. The plaintiffs claim to
represent consumers who purchased prescription drugs in those jurisdictions
and four other states. Two of the lawsuits have been dismissed.
The company announced in July that it has reached a settlement with the
plaintiffs in the federal class action cases. The company believes that any
potential remaining liability above amounts accrued will not have a material
adverse effect on the company's consolidated financial position, its results
of operations, or liquidity.
E - RESTRUCTURING
In 1997, the company recorded restructuring accruals which included estimated
costs of $316 associated with the global turnaround program. The accruals
reflected employee separation and facility closure costs that will be incurred
as part of the global plan to simplify infrastructure and eliminate
duplication of resources in manufacturing, administration, and research and
development. At June 30, 1998, the remaining accrual amounted to $207.
Additional restructuring charges are expected to be recognized in 1998 when
all remaining elements of the turnaround program are finalized and announced.
Expenditures related to the restructuring charges are expected to be
substantially completed by the end of 2000.
F - BIOTECH
In August 1997, the company merged its biotechnology supply business,
Pharmacia Biotech, with Amersham Life Science, a division of Amersham
International plc, in a noncash transaction that did not result in the
recognition of a gain or loss. The merger created a new company, Amersham
Pharmacia Biotech Ltd. Pharmacia & Upjohn owns 45 percent of the new company
which is accounted for using the equity method. The related caption on the
consolidated statement of earnings primarily represents the company's share of
Amersham Pharmacia Biotech's pretax earnings.
G - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement requires capitalization of certain costs
incurred in the development of internal-use software, including external
direct material and service costs, employee payroll and payroll-related costs,
and capitalized interest. Prior to adoption of SOP 98-1, the company expensed
these costs as incurred. The effect of this change in accounting principle on
consolidated earnings during the current period is immaterial.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
record derivatives on the balance sheet as assets and liabilities measured at
fair value. The accounting treatment of gains and losses resulting from
changes in the value of derivatives depends on the use of the derivative and
whether it qualifies for hedge accounting. The company will adopt SFAS No.
133 as required no later than January 1, 2000, and is currently assessing the
impact of adoption on its financial position, results of operations, and
liquidity.
H - COMPREHENSIVE INCOME
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income". The statement establishes standards for reporting
comprehensive income and its components. Comprehensive income is defined as
all nonowner changes in equity and equals net earnings plus other
comprehensive income. Accumulated other comprehensive income for the company
is shown on the consolidated balance sheets and represents the accumulated
balance of currency translation adjustments and unrealized gains and losses on
available-for-sale securities as of June 30, 1998, and December 31, 1997.
Total comprehensive income for the three months ended June 30, 1998, and June
30, 1997, was $159 and $161, respectively. Total comprehensive income for the
six months ended June 30, 1998, and June 30, 1997, was $224 and $47,
respectively.
I - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common
stock outstanding. Diluted earnings per share is computed assuming the
exercise of all stock options that are beneficial to the recipients,
conversion of all preferred stock, and the issuance of stock as incentive
compensation to certain employees. Under these assumptions, the weighted-
average number of common shares outstanding is increased accordingly, and net
earnings is reduced by an incremental contribution to the Employee Stock
Ownership Plan (ESOP). This contribution is the after-tax difference between
the income the ESOP would have received from the preferred stock and the
assumed dividend yield to be earned on the common shares.
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the second quarter ended June 30, 1998 1998 1997 1997
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
EPS numerator:
Net earnings $ 146 $ 146 $ 178 $ 178
Less: Preferred stock dividends,
net of tax (3) - (3) -
Less: ESOP contribution, net of tax - (1) - (1)
------- ------- ------- -------
Income available to common shareholders $ 143 $ 145 $ 175 $ 177
======= ======= ======= =======
EPS denominator:
Average common shares outstanding 508 508 508 508
Effect of dilutive securities:
Stock options - 4 - 2
Convertible preferred stock and
incentive compensation - 10 - 11
------- ------- ------- -------
Total shares 508 522 508 521
======= ======= ======= =======
Earnings per share $.28 $.28 $.34 $.34
======= ======= ======= =======
For six months ended June 30, 1998 1998 1997 1997
Basic Diluted Basic Diluted
------- ------- ------- -------
EPS numerator:
Net earnings $ 335 $ 335 $ 372 $ 372
Less: Preferred stock dividends,
net of tax (6) - (6) -
Less: ESOP contribution, net of tax - (2) - (2)
------- ------- ------- -------
Income available to common shareholders $ 329 $ 333 $ 366 $ 370
======= ======= ======= =======
EPS denominator:
Average common shares outstanding 508 508 508 508
Effect of dilutive securities:
Stock options - 3 - 3
Convertible preferred stock and
incentive compensation - 11 - 11
------- ------- ------- -------
Total shares 508 522 508 522
======= ======= ======= =======
Earnings per share $.65 $.64 $.72 $.71
======= ======= ======= =======
</TABLE>
<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.
<TABLE>
<CAPTION>
Second Quarter Six Months
----------------------- -----------------------
Percent Percent
1998 Change 1997 1998 Change 1997
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,654 (2.9)% $1,703 $3,240 (2.9)% $3,338
Operating Income 198 (22.3) 255 459 (13.1) 529
Earnings before income taxes 216 (20.2) 270 493 (12.6) 564
Net Earnings 146 (17.8) 178 335 (10.0) 372
Net earnings per common share:
Basic $0.28 (17.6) $0.34 $0.65 (9.7) $0.72
Diluted $0.28 (17.6) $0.34 $0.64 (9.9) $0.71
</TABLE>
When comparing operating performance for the second quarter and first half of
1998 to the same periods in 1997, three events should be considered: the
settlement of the retail pharmacy lawsuit; the partial divestiture of the
company's biotechnology supply business; and the negative impact of currency
exchange rate fluctuations. In July, the company reached a settlement of $103
million in a federal class-action lawsuit filed in 1993 on behalf of retail
pharmacies. As a result of the settlement, the company increased its
litigation reserves by $61 million, resulting in an after-tax charge of $41
million or $0.08 per share in the second quarter of 1998. In addition, the
change in ownership structure of Pharmacia Biotech from a wholly-owned
subsidiary to an equity affiliate in August 1997 affected the period-to-period
comparison of operating performance as did the comparative strength of the
U.S. dollar against most major Asian and European currencies.
Excluding negative exchange effects, Biotech, and the litigation charge,
consolidated sales increased 7 percent in the second quarter and 8 percent
year-to-date largely due to increased demand for new products, particularly in
the U.S. On the same basis, operating expenses increased 12 percent in the
quarter and 11 percent in the first half primarily attributable to investments
in new product launches and sales force expansions. Net earnings on this more
comparable basis increased 13 percent in the second quarter and 7 percent in
the first six months.
NET SALES
Excluding Biotech, consolidated sales growth of 3 percent in the second
quarter represented a 7 percent volume increase and a 4 percent negative
exchange impact over the second quarter of 1998. On the same basis, the 3
percent year-to-date sales growth represented an 8 percent volume increase and
a 5 percent negative exchange effect. Sales growth was led by the U.S. market
with an 18 percent increase in the second quarter and a 20 percent increase in
the first six months. Consistent with the company's accelerated U.S. growth
strategy, sales in the U.S. represented an increasingly larger percentage of
worldwide sales at 35 percent in the second quarter and first half compared to
30 percent in the same periods in 1997, excluding Biotech. Outside the U.S.,
most major markets recorded growth in local currency as quantified in the
table below. Lower diagnostics and nutrition sales in Sweden depressed
overall second quarter performance in this country. Japan sales fell for
several reasons as further discussed in the "Product Sales" section below.
Excluding Japan, sales outside the U.S. grew 5 percent in local currency in
the second quarter and 6 percent year-to-date. Sales performance by country
in the following table is based on location of customer and is in millions of
U.S. dollars:
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------- ------------------------------
Net % Chg Net % Chg
Percent Excl. Percent Excl.
1998 Change Curr.* 1997 1998 Change Curr.* 1997
Non-U.S.: ------ ------- ------- ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Japan $ 138 (20.1)% (12.3)% $ 172 $ 264 (21.0)% (14.7)% $ 334
Italy 118 (5.3) 1.6 125 227 (6.4) 1.3 242
Germany 101 (5.3) 1.1 107 198 (4.3) 3.6 207
United Kingdom 88 12.4 11.7 78 173 14.5 14.0 151
Sweden 73 (10.7) (6.0) 81 143 (6.9) (0.4) 154
France 69 10.4 17.4 62 136 4.1 12.0 130
Spain 43 (8.8) (1.7) 47 82 (13.1) (5.5) 94
Rest of World 444 0.3 5.9 444 873 0.0 7.3 873
United States 577 18.5 18.5 487 1,139 19.9 19.9 951
------ ------- ------- ------ ------ ------- ------- ------
Subtotal 1,651 3.0 7.0 1,603 3,235 3.1 7.8 3,136
Biotech 3 (97.5) (97.5) 100 5 (97.3) (97.3) 202
------ ------- ------- ------ ------ ------- ------- ------
Consolidated sales $1,654 (2.9)% 0.9% $1,703 $3,240 (2.9)% 1.5% $3,338
====== ======= ======= ====== ====== ======= ======= ======
*Underlying growth equals percent change excluding currency exchange effects.
</TABLE>
PRODUCT SALES
New primary-care products, Detrol (Detrusitol outside the U.S.) and Edronax,
achieved key milestone dates in 1998 with U.S. FDA approval of Detrol in March
and the filing of a New Drug Application with the FDA for Edronax in May.
Detrol, a therapy for overactive bladder and its symptoms of urge, frequency
and urge incontinence, was launched in Sweden in October 1997; in Germany and
the U.K. in the first quarter of 1998; in the U.S. in April; and in other
European markets in the second quarter for a total of 10 countries worldwide.
The product has performed well, especially in the U.S., with sales of $21
million in the second quarter and $24 million year-to-date. Patent protection
for Detrol extends through 2012 for the U.S. and 2009 for Europe and Japan.
The anti-depressant Edronax, the first and only selective norepinephrine
reuptake inhibitor, was launched in the U.K. in July 1997 and in selected
European countries in the first half of 1998.
A period-to-period consolidated net sales comparison of the company's top
twenty human pharmaceutical products (including generic equivalents where
applicable) and five associated businesses is provided in the table below.
Underlying growth is represented by the percent change excluding currency
exchange effects.
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------- ------------------------------
Net % Chg Net % Chg
Percent Excl. Percent Excl.
1998 Change Curr.* 1997 1998 Change Curr.* 1997
------ ------- ------- ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Genotropin $ 95 (1.7)% 1.9% $ 97 $ 172 (7.8)% (3.1)% $ 186
Xanax 77 7.5 13.4 72 153 14.2 19.8 134
Cleocin/Dalacin 75 2.8 7.0 73 146 3.7 8.4 141
Xalatan 68 88.5 91.9 36 137 113.0 116.0 64
Medrol 63 4.1 10.0 61 128 6.8 13.0 120
Depo-Provera 60 29.3 31.6 46 111 27.5 29.9 87
Nicorette 47 33.5 37.3 36 100 31.8 38.9 76
Fragmin 48 14.1 21.1 42 92 13.3 21.0 81
Pharmorubicin 41 (12.3) (7.3) 47 87 (9.1) (2.9) 96
Camptosar 44 15.9 15.8 38 85 8.1 8.4 79
Healon 36 (14.3) (8.3) 42 70 (5.6) 0.2 74
Rogaine 29 (16.5) (15.4) 35 60 (6.1) (4.7) 64
Micronase/Glynase 23 42.4 43.4 16 53 42.0 42.1 38
Provera 25 14.4 19.4 22 50 8.9 13.9 46
Azulfidine/
Salazopyrin 23 (8.5) (4.9) 25 44 (6.8) (1.8) 47
Halcion 23 (4.2) 4.4 24 43 (5.3) 2.0 45
Caverject 19 (13.6) (9.4) 21 41 2.8 8.2 40
Sermion 20 (5.1) 1.9 21 38 (7.1) (0.1) 41
Adriamycin 17 (24.6) (22.5) 22 35 (16.5) (13.2) 42
Vantin 6 (15.9) (15.3) 7 27 (25.3) (25.2) 36
Other human pharma-
ceutical products 466 (2.9) 0.6 480 894 (4.3) 0.9 934
------ ------- ------- ------ ------ ------- ------- ------
Total human pharma-
ceutical products 1,305 3.3 9.8 1,263 2,566 3.8 8.7 2,471
Animal health 99 5.4 7.5 94 187 3.7 6.3 180
Chemical & contract
manufacturing 81 22.2 23.2 66 159 16.9 18.0 136
Diagnostics 54 (5.9) 0.3 57 106 (4.3) 2.4 111
Nutrition 91 (12.9) (10.2) 104 180 (13.0) (8.4) 207
Plasma 21 12.0 16.2 19 37 18.6 25.7 31
------ ------- ------- ------ ------ ------- ------- ------
Total sales
excluding Biotech 1,651 3.0 7.0 1,603 3,235 3.1 3.1 3,136
Biotech 3 (97.5) (97.5) 100 5 (97.3) (97.3) 202
------ ------- ------- ------ ------ ------- ------- ------
Consolidated sales $1,654 (2.9)% 0.9% $1,703 $3,240 (2.9)% 1.5% $3,338
====== ======= ======= ====== ====== ======= ======= ======
*Underlying growth equals percent change excluding currency exchange effects.
</TABLE>
Xalatan led new product sales growth in the second quarter and first half of
1998 both in the U.S. and Europe. Since 1996, Xalatan has been launched in 40
markets worldwide. Demand for this novel glaucoma treatment has resulted in
its market leadership position in the U.S. where year-to-date sales increased
$42 million over the prior year. Sales increased $24 million across Europe
where the product was launched throughout 1997. Patent protection for Xalatan
extends through 2011 in the U.S. and 2009 in Europe and Japan.
Other human pharmaceutical products registering strong sales performances in
1998 included Mirapex, Nicorette, and Depo-Provera. Mirapex (Mirapexin
outside the U.S.), a dopamine agonist used in the treatment of Parkinson's
disease, was launched in the U.S. in July 1997 and achieved 1998 sales of $13
million in the second quarter and $23 million in the first half. The product
was approved in Europe in the first quarter of 1998 and is expected to be
launched in major European markets in September. Nicorette, a line of
nicotine replacement therapy products, achieved a 39 percent increase in year-
to-date sales excluding exchange. This growth, representing a 32 percent
increase in volume and a 7 percent rise in prices, was led by Nicorette Gum
and the Nicorette Inhaler in the U.S. and the U.K. Depo-Provera, the long-
acting injectable contraceptive, attained a 30 percent increase in local
currency year-to-date sales. The growth, driven by the U.S. and Bangladesh,
was comprised of a 24 percent volume increase and a 6 percent price increase.
Depo-Provera sales were higher in the U.S. due to weak demand in the first
half of 1997. Strong promotional efforts initiated later in that year and in
the first quarter of 1998 fueled subsequent growth. U.S. sales of Depo-
Provera in the second half of 1998 are expected to grow at a lesser rate than
in the first six months of the year.
Fragmin, an antithrombotic agent, and Camptosar, a treatment for advanced
colorectal cancer, achieved solid growth in the quarter and first half. Year-
to-date, Fragmin attained worldwide volume growth of 27 percent as prices fell
6 percent. Increasing demand for Fragmin led to higher U.S. sales, while a
new indication for unstable coronary artery disease (UCAD) drove growth in the
U.K. The company submitted a supplemental New Drug Application in May for the
UCAD indication in the U.S. Despite volume growth of 7 percent in Japan, the
largest market for Fragmin, sales fell 7 percent due to a mandatory price
decrease and the weak yen. Camptosar sales rose 8 percent in the first six
months representing a 6 percent price and 2 percent volume increase. June
sales were notably strong following presentation of survival data at a recent
meeting of the American Society of Clinical Oncology.
Worldwide sales of Genotropin, a human growth hormone, were up slightly in the
second quarter in local currency. In Europe, a 9 percent year-to-date
increase in volume was partially offset by a 5 percent negative exchange
effect and a 1 percent price decrease. In the U.S., Genotropin achieved
growth of 128 percent where the product currently captures over 40 percent of
new patient prescriptions. In Japan, sales in the first half of the year were
$26 million below the prior year due to the weak yen and the April 1 mandatory
price decrease as further discussed below. In addition, at the end of 1997,
the company reacquired sales and marketing rights to Genotropin in Japan.
Related to this agreement, the company repurchased a one-month supply of
inventory from the Japan distributor in the first quarter of 1998 which
accounted for a portion of the comparative sales decrease. As a result of
reacquiring the import license effective June 24, 1998, the company will be
able to sell finished product through its distributors which will result in
higher sales and profitability.
A mandatory price decrease in Japan effective April 1, 1998, and government
restrictions in health care reimbursements have severely depressed the
pharmaceutical market in this country. These factors in combination with the
weak yen negatively impacted sales of several products for which Japan is a
major market. In addition to Genotropin and Fragmin, products particularly
affected in the period-to-period comparison included Sermion, Azulfidine/
Salazopyrin, Healon, and Pharmorubicin. Sermion is a treatment for senile
dementia. Azulfidine is a treatment for inflammatory bowel disease and
rheumatoid arthritis. Healon is a viscoelastic used in ophthalmic surgery.
Pharmorubicin, an oncology product, also registered lower sales in Germany
largely due to price competition and in Latin America due to loss of a
contract in that region.
Vantin, Rogaine, and Caverject experienced declines in the second quarter.
Sales of Vantin, a broad spectrum oral antibiotic, declined 25 percent year-
to-date due to intense competition, a relatively mild 1998 flu season, and a
change in sales detailing focus. In addition, Vantin sales in the prior year
were especially strong due to both sales incentives offered and a more potent
flu season. Rogaine (Regaine outside the U.S.), the hereditary hair loss
treatment, also declined in the first six months. Strong growth in France and
Sweden was more than offset by a decline in the U.S. where Rogaine Extra
Strength for Men was launched late in 1997. Lower than expected demand
resulted in excess trade inventories which may further depress sales recorded
in the third quarter. Caverject sales declined in the second quarter but rose
year-to-date compared to the same prior year periods. Intense U.S.
competition caused sales there to decline; however, the success of competitors
in expanding the market is ultimately anticipated to benefit Caverject, a
treatment for erectile dysfunction with a particularly high efficacy rate.
Caverject recorded double-digit percentage growth in all regions outside the
U.S.
Several products which have faced vigorous generic competition during prior
years reported increases in the first half of 1998. The increases were due in
part to weak performances in the first half of 1997 caused by year-end 1996
trade inventory accumulations in the U.S. In addition, an expanded and
revitalized sales force has fueled demand for these products which include
Xanax, an anxiolytic; Glynase and Micronase, oral anti-diabetes agents;
Provera, a progestational product; and Medrol steroid products.
The other businesses represented 21 percent of consolidated sales (exclusive
of Biotech) and include Animal Health, Chemical & Contract Manufacturing,
Diagnostics, Plasma, and Nutrition. Combined second quarter sales of these
businesses totaled $346 million, up 2 percent from the second quarter of 1997.
Excluding the negative impact of exchange, sales increased 5 percent. Sales
in the first six months grew 4 percent in local currency. Diagnostics sales
suffered from restrictions in government reimbursements and the weak yen in
Japan, its largest market. Growth recorded by Chemical and Contract
Manufacturing resulted primarily from increases in inhalation steroids for use
in the asthma/allergy market. ReFacto, a treatment for hemophilia A, drove
Plasma sales higher in the first half. As previously mentioned, sales of
Biotech subsequent to August 1997 are not reported in consolidated sales
leading to a comparative sales decrease of approximately $197 million in the
first six months. Biotech is further discussed in Note F to the consolidated
financial statements.
In accordance with its strategy to focus on higher-margin prescription
pharmaceuticals, the company announced in June that it reached an agreement to
sell its Nutrition business to Germany's Fresenius AG, a global supplier of
dialysis products and services, hospital products, and home care products. To
comply with local antitrust regulations, the company will retain its Nutrition
activities in Germany.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percentage of net sales, are
provided in the table below. The 1997 percentages are also shown as if
Biotech, formerly a consolidated subsidiary, were accounted for under the
equity method in 1997 consistent with its accounting treatment in 1998. The
following discussions are based on the comparison of 1998 percentages with the
adjusted 1997 percentages.
<TABLE>
<CAPTION>
Second quarter Six Months
1998 1997 adj. 1997 1998 1997 adj. 1997
as for as as for as
reported Biotech reported reported Biotech reported
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cost of products sold 29.8% 32.0% 32.3% 30.2% 31.1% 31.5%
Research and development 17.7 16.9 16.5 17.5 17.4 16.9
Marketing, administrative
and other 43.3 37.8 38.3 40.7 37.0 37.6
Operating income 12.0 15.9 15.0 14.2 16.9 15.8
</TABLE>
A favorable period-to-period comparison in product mix and selling price
combined to drive cost of products sold lower as a percentage of sales. New
products, representing an increasing percentage of sales, contributed a higher
gross profit than older products in price competition with generics.
Improvements in production efficiencies, increased production volumes, and the
favorable effect of currency exchange on costs more than offset the negative
currency impact on sales further reducing cost of products sold as a
percentage of sales.
Research and development (R&D) spending increased as a percentage of sales in
the second quarter and first half of 1998 as compared to the same periods in
1997. Excluding Biotech, R&D increased 8 percent in the second quarter and 4
percent in the first six months. The increase in both periods was primarily
due to the increased level of Phase IV studies in support of product launches.
R&D infrastructure costs were lower in 1998 due to efficiencies generated by
the prior year restructuring. These savings were reinvested into strategic
licensing agreements, other R&D collaborations to supplement the company's
internal research base, and increased clinical spending on products in
development. In the first quarter of 1998, the company acquired the rights to
almotriptan, an anti-migraine compound, and entered into a collaboration to
identify small molecule inhibitors of the Hepatitis C virus. In the second
quarter, the company acquired the rights to new compounds for the treatment of
diabetes and anxiety. Spending during the first quarter also supported the
product filing of exemestane with the European Union for advanced breast
cancer and the development activities related to filing a New Drug Application
for Edronax with the U.S. FDA.
Marketing, administrative, and other (MA&O) expense increased as a percentage
of sales primarily due to the previously mentioned $61 million increase in
litigation reserves. Sales force expansions and increased product promotion
in the U.S. and Europe, particularly for Detrol, Rogaine, and Edronax, also
increased MA&O spending. The comparative spending increase was partially
offset by the favorable effects of exchange and a decrease in general and
administrative expense, a consequence of the 1997 restructuring.
The company recorded $18 million in the first half of 1998 representing its
share of Amersham Pharmacia Biotech's pretax earnings. In August 1997, the
company merged Pharmacia Biotech with Amersham Life Science. The merger
created a new company, Amersham Pharmacia Biotech Ltd. Pharmacia & Upjohn
owns 45 percent of the new company which is accounted for using the equity
method. In August 1998, Amersham Pharmacia Biotech Ltd. announced it had
entered into an agreement to acquire Molecular Dynamics, a leading provider of
systems that accelerate genetic discovery and analysis.
In 1997, the company recognized charges of $316 million for the restructuring
portion of its global turnaround program. In the latter half of 1998, the
company expects to record less than $100 million in additional charges for
this program. Cash spending during 1998 is anticipated to approximate $100
million. In addition, the company incurred $12 million in restructuring-
related charges in 1998. These charges, while not included in restructuring,
relate to similar activities such as the establishment of a new global
headquarters in New Jersey and registration and validation costs associated
with the company's manufacturing rationalization program. Management expects
to record additional restructuring-related expenses during the latter half of
1998.
The estimated annual effective tax rate for 1998 is 32 percent. The effective
tax rate for 1997 was 34 percent excluding the tax benefits related to
nonrecurring items (31 percent inclusive of nonrecurring items). The lower
1998 estimated rate is the result of increased earnings in jurisdictions with
lower tax rates.
COMPREHENSIVE INCOME
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". The
statement establishes standards for reporting comprehensive income and its
components. Comprehensive income is defined as all nonowner changes in equity
and equals net earnings plus other comprehensive income. For the company,
other comprehensive income consists of currency translation adjustments and
unrealized gains and losses on available-for-sale securities. Total
comprehensive income for the three months ended June 30, 1998, and June 30,
1997, was $159 million and $161 million, respectively. For the first six
months, total comprehensive income was $224 million in 1998 and $47 million in
1997. The difference between net earnings and other comprehensive income was
largely related to unfavorable currency translation adjustments recorded in
equity.
FINANCIAL CONDITION
June 30, December 31,
1998 1997
------------ ------------
Working capital (U.S. dollars in millions) $1,601 $1,639
Current ratio 1.56 1.61
Debt to total capitalization 18.5% 15.7%
The company's working capital and current ratio decreased slightly as of the
end of the second quarter as compared to the prior year-end due primarily to
an increase in short-term debt. The increase in the percentage of debt to
total capitalization reflects the higher short-term debt levels as well as a
decline in shareholders' equity. The increase in negative currency
translation adjustments recorded in equity caused essentially all of this
decline. As indicated below, net financial assets have decreased since year-
end mainly due to the increase in short-term debt.
June 30, December 31,
1998 1997
------------ ------------
Cash, equivalents and investments $1,867 $1,848
Short-term and long-term debt 1,245 1,035
------- -------
Net financial assets $ 622 $ 813
======= =======
Net cash provided by operations for the first six months of 1998 decreased to
$234 million from $533 million for the same period in 1997. The decrease was
attributable to changes in current assets and liabilities being predominantly
uses of cash in 1998 as compared to a mix of uses and sources in the first six
months of 1997. Increases in trade accounts receivable and inventories in
1998, coupled with reductions in accounts payable and income taxes,
represented a combined use of cash of $233 million. The same operating items
in 1997 constituted a net source of cash of $108 million. Other significant
uses of cash were expenditures for property, plant, and equipment (capital)
and the company's quarterly dividend. Capital expenditures of $221 million
largely represented spending on manufacturing facilities in the U.S., Belgium,
Puerto Rico, and Sweden. Major sources of cash in the quarter included short-
term debt and the net proceeds from the sale of investments. 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.
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
also is involved in several administrative and judicial proceedings relating
to environmental concerns, including actions brought by the U.S. Environmental
Protection Agency (EPA) and state environmental agencies for remedial cleanup
at approximately 50 sites.
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 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 has been 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 company announced in July that it has
reached a settlement with plaintiffs in the federal class action cases that
had been consolidated in federal court in Chicago, Illinois. The company
believes that any potential remaining liability above amounts accrued will not
have a material adverse effect on the company's consolidated financial
position, its results of operations, or liquidity. Further discussion of
current litigation matters is provided in Note D to the consolidated financial
statements.
CONTINGENT LIABILITIES
The company's estimate of the ultimate cost to be incurred in connection with
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 share of a site's cost. With regard to the company's discontinued
industrial chemical facility in North Haven, Connecticut, the company may soon
be required to submit a corrective measures study report to the EPA. As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required but it is not possible to determine what, if any,
exposure exists at this time.
OTHER ITEMS
The company's global program to address the year 2000 (Y2K) date recognition
problem continued to make progress toward its ultimate goal to ensure the
millennium event does not have a material adverse effect on its business
operations. While the company is taking steps to remediate and replace
internal information technology (IT) and embedded systems, and is actively
working with critical external partners, there are many factors outside the
company's control that could allow the Y2K problem to seriously disrupt its
operations. For example, a widespread failure in the utilities industry could
severely interrupt or halt the company's operations.
In the second quarter, management initiated a Y2K corporate risk management
effort to develop a comprehensive risk and contingency management plan that
will identify major risks and detail contingency plans for critical business
processes across the company. Management anticipates completion of these
plans by the end of 1998. Repair and replacement projects to ensure IT and
embedded systems are Y2K-compliant are currently underway and are expected to
be completed by the end of 1998 for many business-critical systems and by mid-
1999 for remaining business-critical systems. Barring critical third-party
failures, management believes that by meeting the objectives of its Y2K
Program, the date recognition problem will not have a material adverse effect
on the company's consolidated financial position, its results of operations,
or liquidity.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement requires companies to record derivatives on the balance sheet as
assets and liabilities measured at fair value. The accounting treatment of
gains and losses resulting from changes in the value of derivatives depends on
the use of the derivative and whether it qualifies for hedge accounting. The
company will adopt SFAS No.133 as required no later than January 1, 2000, and
is currently assessing the impact of adoption on its financial position,
results of operations, and liquidity.
The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities" in April 1998. The SOP requires start-up costs and organization
costs to be expensed as incurred. The SOP is effective beginning in 1999 and
will be adopted by the company at that time. Currently, the company is
evaluating adoption of the statement but does not anticipate its impact to be
material to the consolidated financial statements.
In March 1998, the company adopted the AICPA's SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". The
statement requires capitalization of certain costs incurred in the development
of internal-use software, including external direct material and service
costs, employee payroll and payroll-related costs, and capitalized interest.
Prior to adoption of SOP 98-1, the company expensed these costs as incurred.
The effect of initially applying the provisions of SOP 98-1 was not material
to the consolidated financial statements.
The company currently reports its operations as a single industry segment:
pharmaceutical products. This industry designation includes human
pharmaceutical (prescription and over-the-counter) products and five
associated businesses. In 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for reporting information
about operating segments and will be adopted by the company in the fourth
quarter of 1998. Assessment of the new standard is not yet concluded.
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 global turnaround program; 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 health care 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, 1997.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes from the disclosures in Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page 21).
(a)(ii) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 22).
(a)(iii) Exhibit 15 - Awareness of PricewaterhouseCoopers (page 23).
(a)(iv) 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, 1998.
<PAGE>
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, 1998 /S/C.J. Coughlin
C. J. Coughlin
Executive Vice President
and Chief Financial Officer
DATE: August 13, 1998 /S/R.T. Collier
R. T. Collier
Senior Vice President
and General Counsel
<TABLE>
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND 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, 1998 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $ 493 $ 468 $ 838 $1,136 $1,271 $ 778
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 21 (32) 5 7 8 8
-------- ----- ------ ------ ------ ------
472 500 833 1,129 1,263 770
Add:
Amortization of previously
capitalized interest 5 12 11 10 8 6
Fixed charges included in the above:
Interest and amortization of debt
expense 23 58* 82 121 139 209
Rental expense representative
of an interest factor 20 38 37 35 35 32
-------- ----- ------ ------ ------ ------
Earnings from continuing operations
before income taxes and fixed
charges $ 520 $ 608* $ 963 $1,295 $1,445 $1,017
======== ===== ====== ====== ====== ======
Interest incurred and amortization
of debt expense $ 39 $ 90 $ 115 $ 149 $ 164 $ 234
Rental expense representative of an
interest factor 20 38 37 35 35 32
-------- ----- ------ ------ ------ ------
Total fixed charges $ 59 $ 128 $ 152 $ 184 $ 199 $ 266
======== ===== ====== ====== ======= ======
Ratio of earnings to fixed charges 8.8 4.8* 6.2 7.0 7.2 3.8
===== ==== ==== ==== ==== ====
*Revised from Form 10-K.
</TABLE>
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pharmacia & Upjohn, Inc. and Subsidiaries
Quarterly Report on Form 10Q
We are aware that our report dated July 27, 1998 on our review of
interim financial information of Pharmacia & Upjohn, Inc. and
Subsidiaries for the three and six month periods ended June 30, 1998 and
1997 and included in the Company's quarterly report on Form 10-Q for the
quarter then ended 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 that Act.
PricewaterhouseCoopers LLP
Chicago, Illinois
August 13, 1998
<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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 969
<SECURITIES> 0
<RECEIVABLES> 1418
<ALLOWANCES> 89
<INVENTORY> 1000
<CURRENT-ASSETS> 4456
<PP&E> 5860
<DEPRECIATION> 2592
<TOTAL-ASSETS> 10363
<CURRENT-LIABILITIES> 2855
<BONDS> 384<F1>
0
279
<COMMON> 5
<OTHER-SE> 5192
<TOTAL-LIABILITY-AND-EQUITY> 10363
<SALES> 3240
<TOTAL-REVENUES> 3303
<CGS> 978
<TOTAL-COSTS> 978
<OTHER-EXPENSES> 566<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 493
<INCOME-TAX> 158
<INCOME-CONTINUING> 335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
<FN>
<F1>EXCLUDES COMPANY'S GUARANTEE OF ESOP DEBT OF 217.
<F2>ONLY INCLUDES R&D EXPENSE.
</FN>
</TABLE>
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Pharmacia & Upjohn, Inc.
We have reviewed the condensed consolidated balance sheet of Pharmacia &
Upjohn, Inc. and subsidiaries (the "Company") as of June 30, 1998, and
the related condensed consolidated statements of earnings and cash flows
for the three and six month periods ended June 30, 1998 and 1997. 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
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the 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,
1997, 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 17, 1998, 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, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois
July 27, 1998
