<PAGE>
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 September 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
October 30, 1998 was 508,051,850.
Page 1 of 24 pages
The exhibit index is set forth on page 23
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
PHARMACIA & UPJOHN, INC.
QUARTER ENDED SEPTEMBER 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 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions of U.S. dollars, except per-share data)
<CAPTION>
Unaudited
--------------------------------------------------
For Three Months For Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,669 $1,551 $4,909 $4,889
Other revenue 38 36 101 98
---------- ---------- ---------- ----------
Operating revenue 1,707 1,587 5,010 4,987
Cost of products sold 515 476 1,493 1,529
Research and development 272 268 838 832
Marketing, administrative and other 634 585 1,952 1,839
Biotech (15) 31 (33) 31
Restructuring charges - 125 - 125
---------- ---------- ---------- ----------
Operating income 301 102 760 631
Interest income 20 26 65 80
Interest expense (6) (6) (17) (24)
All other, net 7 (2) 7 (3)
---------- ---------- ---------- ----------
Earnings before income taxes 322 120 815 684
Provision for income taxes 103 41 261 233
---------- ---------- ---------- ----------
Net earnings $ 219 $ 79 $ 554 $ 451
========== ========== ========== ==========
Earnings per common share:
Basic $.42 $.15 $1.07 $.87
Diluted $.41 $.15 $1.05 $.86
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
For the Nine Months Ended September 30
<CAPTION>
Unaudited
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash provided by operations $ 641 $ 862
-------- --------
Cash flows (required) provided by investment activities:
Acquisition of subsidiaries - (34)
Additions of properties (373) (354)
Proceeds from sales of properties 16 37
Purchases of investments (409) (584)
Proceeds from sales of investments 802 853
Other (7) 18
-------- --------
Net cash provided (required) by investment activities 29 (64)
-------- --------
Cash flows provided (required) by financing activities:
Proceeds from issuance of debt 19 32
Repayment of debt (153) (27)
Payments of ESOP debt (16) (12)
Net increase in debt with initial maturity
of 90 days or less 155 18
Dividend payments (425) (425)
Purchases of treasury stock (57) (84)
Proceeds from exercise of stock options 54 16
Other - 10
-------- --------
Net cash (required) by financing activities (423) (472)
-------- --------
Effect of exchange rate changes on cash (17) (41)
-------- --------
Net change in cash and cash equivalents 230 285
Cash and cash equivalents, beginning of year 775 641
-------- --------
Cash and cash equivalents, end of period $1,005 $ 926
======== ========
Noncash event:
In August 1997, the company exchanged the net assets of its biotechnology
supply business, Biotech, having a carrying cost of approximately $194, for a
45 percent ownership interest in the newly formed Amersham Pharmacia Biotech.
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,005 $ 775
Short-term investments 182 539
Trade accounts receivable, less allowance
of $99 (1997: $89) 1,312 1,303
Inventories 1,005 958
Other current assets 833 752
----------- -----------
Total current assets 4,337 4,327
Long-term investments 459 534
Goodwill and other intangible assets, net 1,278 1,287
Properties, net 3,397 3,306
Other noncurrent assets 796 926
----------- -----------
Total assets $10,267 $10,380
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 437 $ 401
Other current liabilities 2,313 2,287
----------- -----------
Total current liabilities 2,750 2,688
Long-term debt and guarantee of ESOP debt 558 634
Other noncurrent liabilities 1,308 1,520
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value; at
stated value; authorized 100,000,000 shares;
issued 6,889 shares (1997: 6,996 shares) 278 282
Common stock, one cent par value;
authorized 1,500,000,000 shares; issued
508,648,707 shares (1997: 508,647,507 shares) 5 5
Capital in excess of par value 1,385 1,440
Retained earnings 5,497 5,364
ESOP-related accounts (246) (260)
Treasury stock (17) (48)
Accumulated other comprehensive income (1,251) (1,245)
----------- -----------
Total shareholders' equity 5,651 5,538
----------- -----------
Total liabilities and shareholders' equity $10,267 $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.
B - INVENTORIES
September 30, December 31,
1998 1997
---------- -----------
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $ 526 $ 500
Raw materials, supplies and work-in-process 633 618
---------- ----------
1,159 1,118
Less reduction to LIFO cost (154) (160)
---------- ----------
$ 1,005 $ 958
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $414 at September 30, 1998, and $416 at December 31, 1997.
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 Superfund 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 the
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
(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.
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 reached a settlement with the plaintiffs
in the federal class action cases for $103. 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 an accrual of $316 for estimated restructuring
costs associated with the global turnaround program. The restructuring costs
included employee separation and facility closure costs to be incurred as part
of the global plan to simplify infrastructure and eliminate duplication of
resources in manufacturing, administration, and research and development. At
September 30, 1998, the remaining accrual balance was $150. Additional
restructuring charges are expected to be recognized in the fourth quarter of
1998 when all remaining elements of the turnaround program are finalized and
announced. Expenditures related to the restructuring charges are anticipated
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 September 30, 1998, and December 31, 1997.
Total comprehensive income for the three months ended September 30, 1998, and
September 30, 1997, was $324 and $121, respectively. Total comprehensive
income for the nine months ended September 30, 1998, and September 30, 1997,
was $548 and $168, 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 third quarter ended September 30, 1998 1998 1997 1997
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
EPS numerator:
Net earnings $ 219 $ 219 $ 79 $ 79
Less: Preferred stock dividends,
net of tax (3) - (3) -
Less: ESOP contribution, net of tax - (1) - (1)
------- ------- ------- -------
Income available to common shareholders $ 216 $ 218 $ 76 $ 78
======= ======= ======= =======
EPS denominator:
Average common shares outstanding 508 508 508 508
Effect of dilutive securities:
Stock options - 5 - 2
Convertible preferred stock and
incentive compensation - 10 - 11
------- ------- ------- -------
Total shares 508 523 508 521
======= ======= ======= =======
Earnings per share $.42 $.41 $.15 $.15
======= ======= ======= =======
For nine months ended September 30, 1998 1998 1997 1997
Basic Diluted Basic Diluted
------- ------- ------- -------
EPS numerator:
Net earnings $ 554 $ 554 $ 451 $ 451
Less: Preferred stock dividends,
net of tax (10) - (9) -
Less: ESOP contribution, net of tax - (4) - (3)
------- ------- ------- -------
Income available to common shareholders $ 544 $ 550 $ 442 $ 448
======= ======= ======= =======
EPS denominator:
Average common shares outstanding 508 508 508 508
Effect of dilutive securities:
Stock options - 3 - 2
Convertible preferred stock and
incentive compensation - 11 - 11
------- ------- ------- -------
Total shares 508 522 508 521
======= ======= ======= =======
Earnings per share $1.07 $1.05 $.87 $.86
======= ======= ======= =======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL REVIEW
OVERVIEW OF CONSOLIDATED RESULTS
In the following discussion of consolidated results, the three and nine month
periods ended September 30, 1998 are compared to the corresponding periods in
1997 unless otherwise noted. The table below provides an overview of
consolidated results in millions of U.S. dollars, except per-share data.
Third Quarter Nine Months
----------------------- -----------------------
Percent Percent
1998 Change 1997 1998 Change 1997
------ ------- ------ ------ ------- ------
Sales $1,669 7.6% $1,551 $4,909 0.4% $4,889
Operating income 301 195.4 102 760 20.6 631
Earnings before income taxes 322 168.3 120 815 19.1 684
Net earnings 219 176.7 79 554 22.7 451
Net earnings per common share:
Basic $0.42 180.0 $0.15 $1.07 23.0 $0.87
Diluted $0.41 173.3 $0.15 $1.05 22.1 $0.86
Three nonrecurring items affect the comparison of 1998 and 1997 reported
financial results: (1) the 1998 settlement of the retail pharmacy lawsuit; (2)
the 1997 partial divestiture of the company's biotechnology business; and (3)
the 1997 global turnaround restructuring. In July 1998, 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
the third quarter of 1997, the company merged its biotechnology business,
Pharmacia Biotech, with Amersham Life Science and recorded $34 million ($30
million after tax or $0.06 per share) for transaction costs and the write-off
of acquired research and development. The ownership structure of Biotech
changed from a wholly-owned subsidiary to an equity affiliate further
affecting comparability between periods. Also in the third quarter of 1997,
the company recorded restructuring charges for its manufacturing facility
rationalization program of $125 million ($75 million after tax or $0.14 per
share).
In addition to the nonrecurring items, the impact of currency exchange rate
fluctuations affects the period-to-period comparison. Although the dollar
weakened against most major currencies near the end of the third quarter, the
1998 third quarter and year-to-date average exchange rates still reflected a
stronger dollar as compared to the 1997 averages resulting in unfavorable
exchange effects in the current periods.
Excluding negative exchange effects and nonrecurring items, the company
recorded a strong performance in 1998 relative to 1997. Consolidated sales
increased 12 percent in the third quarter and 9 percent year-to-date largely
due to increased demand for recently launched products, particularly in the
U.S. On the same basis, net earnings increased 25 percent in the quarter and
13 percent year-to-date.
NET SALES
Excluding Biotech, consolidated sales growth of 10 percent in the third
quarter represented a 14 percent volume increase, a 2 percent price decrease,
and a 2 percent negative exchange impact. On the same basis, the 5 percent
year-to-date sales growth represented a 10 percent volume increase, a 1
percent price decrease, and a 4 percent negative exchange effect. Sales
growth was led by U.S. pharmaceutical products with a 35 percent increase in
the third quarter and a 28 percent increase in the first nine months. Year-
to-date, this increase represented a 20 percent rise in volume primarily
reflecting strong performance of new products and trade inventory
accumulations in the third quarter in anticipation of price increases.
Management does not expect U.S. pharmaceutical product sales growth to remain
at third-quarter growth levels for the remainder of the year.
Consistent with the company's accelerated U.S. growth strategy, total sales in
the U.S. represented an increasingly larger percentage of worldwide sales at
37 percent year-to-date compared to 32 percent in 1997, excluding Biotech.
Outside the U.S., major markets recorded good growth in local currency with
the exception of Japan, Sweden, and Spain. Lower diagnostics and nutrition
sales in Sweden depressed overall performance in this country while declining
nutrition sales and product divestments reduced sales in Spain. Sales in
Japan fell for several reasons as further discussed in the "Product Sales"
section below. Excluding Japan, sales outside the U.S. grew 6 percent in
local currency in the third quarter and 5 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>
Third Quarter Nine 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>
Non-U.S.:
Japan $ 133 (16.7)% (6.1)% $ 159 $ 397 (19.6)% (9.4)% $ 493
Italy 104 9.8 14.3 95 331 (1.8) 2.2 337
Germany 101 6.2 10.2 95 299 (1.0) 2.8 302
United Kingdom 83 12.4 10.9 74 256 13.9 12.3 225
Sweden 69 (7.1) (3.3) 74 212 (7.0) (3.2) 228
France 65 17.0 20.8 56 201 7.9 11.4 186
Spain 39 (6.1) (1.9) 41 121 (11.0) (7.1) 135
Rest of World 417 0.1 2.1 417 1,290 0.6 7.7 1,282
United States 655 28.5 28.5 510 1,794 22.2 22.2 1,469
------ ------- ------- ------ ------ ------- ------- ------
Subtotal 1,666 9.5 12.1 1,521 4,901 5.2 9.1 4,657
Biotech 3 (90.2) (90.2) 30 8 (96.4) (96.4) 232
------ ------- ------- ------ ------ ------- ------- ------
Consolidated sales $1,669 7.6% 10.1% $1,551 $4,909 0.4% 4.1% $4,889
====== ======= ======= ====== ====== ======= ======= ======
*Underlying growth equals percent change excluding currency exchange effects.
</TABLE>
PRODUCT SALES
A period-to-period consolidated net sales comparison of the company's top
twenty human pharmaceutical products (including generic equivalents where
applicable) and five other businesses is provided in the table below.
Underlying growth is represented by the percent change excluding currency
exchange effects.
<TABLE>
<CAPTION>
Third Quarter Nine 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 $ 103 7.9% 12.1% $ 96 $ 275 (2.5)% 2.1% $ 282
Xanax 83 24.7 27.8 66 236 17.5 22.4 201
Cleocin/Dalacin 82 7.5 11.1 77 228 4.9 9.4 217
Xalatan 90 102.7 103.9 45 228 109.0 111.0 109
Medrol 62 6.1 11.0 59 190 6.4 12.5 179
Depo-Provera 62 22.7 26.4 51 174 25.6 28.3 138
Nicorette 48 13.0 15.0 42 147 25.0 30.3 118
Camptosar 50 44.7 45.4 35 136 19.3 19.6 114
Fragmin 39 0.8 3.8 39 131 9.3 15.4 120
Pharmorubicin 43 (17.0) (14.6) 52 130 (11.9) (6.9) 148
Healon 31 (19.2) (15.0) 38 101 (10.2) (4.8) 112
Rogaine 32 47.0 48.1 22 92 7.4 8.7 85
Micronase/Glynase 26 (26.2) (26.2) 35 79 9.1 9.2 73
Provera 25 14.0 18.8 22 75 10.6 15.6 68
Azulfidine/Salazopyrin 25 20.6 25.1 21 69 1.6 6.5 68
Halcion 21 (14.9) (6.8) 25 64 (8.6) (1.2) 70
Sermion 20 12.1 18.1 18 59 (1.2) 5.4 59
Caverject 16 (28.3) (26.2) 22 57 (8.3) (3.5) 62
Detrol/Detrusitol 32 n/a n/a - 55 n/a n/a -
Adriamycin 16 (23.3) (21.8) 22 51 (18.8) (15.8) 63
Other 441 6.0 8.1 416 1,337 (3.8) 0.2 1,389
------ ------- ------- ------ ------ ------- ------- ------
Total human pharma-
ceutical products 1,347 12.1 14.9 1,203 3,914 6.5 10.7 3,675
Animal health 102 (1.8) (0.4) 104 288 1.8 3.9 283
Chemical & contract
manufacturing 72 8.6 9.2 67 231 14.2 15.1 203
------ ------- ------- ------ ------ ------- ------- ------
Total pharmaceuticals 1,521 10.8 13.5 1,374 4,433 6.5 10.4 4,161
Diagnostics 46 1.1 4.4 46 152 (2.8) 3.0 156
Nutrition 82 (8.9) (9.0) 89 262 (11.8) (8.5) 297
Plasma 17 39.8 40.4 12 54 24.8 29.7 43
------ ------- ------- ------ ------ ------- ------- ------
Sales excl. Biotech 1,666 9.5 12.1 1,521 4,901 5.2 9.1 4,657
Biotech 3 (90.2) (90.2) 30 8 (96.4) (96.4) 232
------ ------- ------- ------ ------ ------- ------- ------
Consolidated sales $1,669 7.6% 10.1% $1,551 $4,909 0.4% 4.1% $4,889
====== ======= ======= ====== ====== ======= ======= ======
*Underlying growth equals percent change excluding currency exchange effects.
</TABLE>
Detrol, a therapy for overactive bladder and its symptoms of urgency,
frequency and urge incontinence, was launched in the U.S. in April and already
captures more than 50 percent of new prescriptions. While prescription
refills continue to increase reflecting good patient acceptance of Detrol, the
overactive bladder market is also expanding fueled by direct-to-consumer
advertising. Outside the U.S., Detrusitol sales were strong in the U.K.,
Germany, and Sweden.
Xalatan, a novel therapy for glaucoma, led product sales growth in the third
quarter and first nine months of 1998 both in the U.S. and Europe. In the
U.S., Xalatan now captures a market-leading share of total glaucoma
prescriptions where it is the most widely prescribed branded ophthalmology
product. In Europe, Xalatan recorded strong results in major markets led by
Germany and France.
Sales of Genotropin, a human growth hormone, increased in the U.S. and Europe
but fell in Japan following retrieval of marketing rights to the product at
the end of the second quarter. Several strategic measures have been taken to
address the challenges of the transition. In addition, sales levels are lower
in Japan due to the weak yen and the April 1 mandatory price decrease as
further discussed below.
Camptosar, a treatment for advanced colorectal cancer, achieved solid growth
in the quarter and first nine months. During the third quarter, Camptosar
sales continued to react positively to new survival data released earlier this
year. The U.S. FDA granted Camptosar full second-line approval for colorectal
cancer in October, two years after the product was introduced with an
accelerated approval.
Other products posting strong sales performances in the third quarter included
Mirapex, Nicorette, Rogaine, and Depo-Provera. Since its U.S. launch in mid-
1997, Mirapex, a dopamine agonist for the treatment of Parkinson's disease,
has become the leading dopamine agonist in both new and total prescriptions.
Strong growth in the Nicorette line of smoking cessation products was led by
Nicorette Gum and new line extensions, including the Nicotrol Inhaler which
recently became available in the U.S. Higher Rogaine sales were due to trade
inventory purchasing associated with a new promotion launched in September.
In addition, the prior year third-quarter levels were low due to trade
inventory reductions in anticipation of the approval of Rogaine Extra
Strength. Sales growth in Depo-Provera, the long-acting injectable
contraceptive, was led by the U.S.
Sales of Fragmin, a low molecular weight heparin for prevention of blood
clots, were flat in the third quarter as growth in Europe, the U.S., and Latin
America was offset by a decline in Japan. Year-to-date, worldwide volume
growth of 21 percent was moderated by a 6 percent price decline and a 6
percent unfavorable exchange effect. Sales fell 19 percent in Japan, the
largest market for Fragmin, due to a mandatory price decrease and the weak
yen.
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 comparisons included Azulfidine/Salazopyrin,
Healon, and Pharmorubicin. Azulfidine is a treatment for inflammatory bowel
disease and rheumatoid arthritis. Healon is a viscoelastic used in ophthalmic
surgery. Pharmorubicin, an oncology product, also experienced lower sales in
Latin America due to loss of a contract in that region.
The other businesses represent approximately 20 percent of consolidated sales
(exclusive of Biotech) and include Animal Health, Chemical & Contract
Manufacturing, Diagnostics, Plasma, and Nutrition. Combined third-quarter
sales of these businesses totaled $318 million, flat compared to the third
quarter of 1997. Year-to-date, sales grew 3 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 growth. As previously mentioned, sales of
Biotech subsequent to August 1997 are not reported in consolidated sales
leading to a comparative sales decrease of approximately $224 million in the
first nine months. Biotech is further discussed in Note F to the consolidated
financial statements.
In accordance with its strategy to focus on 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>
Third quarter Nine 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 30.9% 30.3% 30.7% 30.4% 30.9% 31.3%
Research and development 16.3 17.4 17.3 17.1 17.4 17.0
Marketing, administrative
and other 38.0 37.5 37.7 39.8 37.2 37.6
Operating income 18.0 6.7 6.6 15.5 13.5 12.9
</TABLE>
On a year-to-date basis, a favorable comparison in product mix and selling
price continued to drive cost of products sold lower as a percentage of sales.
Newer 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. In the third quarter, the increase in the percentage was
an aberration due partially to one-time plant and product start-up costs and
is not indicative of a future negative trend in margins.
Research and development (R&D) decreased as a percentage of sales in the third
quarter and first nine months of 1998 primarily due to higher 1998 sales
levels. Excluding Biotech, R&D spending levels are comparable to the prior
year increasing only 3 percent in both the third quarter and year-to-date.
R&D infrastructure costs are lower in the current year due to efficiencies
generated by the 1997 restructuring. These savings have been 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. In the third quarter, the company entered into an
important two-year pharmacogenomics collaboration. Spending during the first
quarter also supported the product filing of Aromasin (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 for
depression.
Marketing, administrative, and other (MA&O) expense increased as a percentage
of sales partially 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, Mirapex, 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 $33 million in the first nine months of 1998 primarily
for its share of Amersham Pharmacia Biotech's pretax earnings. Amersham
Pharmacia Biotech (APB) was the result of a 1997 third quarter merger of
Pharmacia Biotech with Amersham Life Science. At that time, the company
recorded merger costs of $34 million representing transaction costs to effect
the merger and charges associated with the write-off of acquired R&D.
In 1997, the company recognized charges of $316 million for the restructuring
portion of its global turnaround program. Of this total, $125 million was
recorded in the third quarter of 1997. Cash spending for this program is
anticipated to approximate $80 million in 1998. In the fourth quarter of
1998, the company expects to record between $100 million and $150 million in
additional charges related to the turnaround program. The company also
incurred $30 million in restructuring-related charges in 1998. These charges,
while not included in restructuring, are one-time costs associated with the
turnaround program and include 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 remainder 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.
Comprehensive income for the three months ended September 30, 1998, and
September 30, 1997, was $324 million and $121 million, respectively. For the
first nine months, comprehensive income was $548 million in 1998 and $168
million in 1997. The difference between net earnings and comprehensive income
in the third quarter of 1998 represented favorable currency translation
adjustments of $147 million partially offset by unrealized losses on
available-for-sale securities of $42 million. Year-to-date, modestly
favorable currency translation adjustments were offset by unrealized losses
resulting in only a small difference between net income and comprehensive
income.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
September 30, December 31,
1998 1997
------------- ------------
Working capital (U.S. dollars in millions) $1,587 $1,639
Current ratio 1.58 1.61
Debt to total capitalization 14.9% 15.7%
The company's working capital and current ratio decreased slightly as of the
end of the third quarter as compared to the prior year-end due primarily to a
small increase in short-term debt. The decrease in the percentage of debt to
total capitalization reflects lower long-term debt levels which more than
offset the increase in short-term debt. As indicated below, net financial
assets have decreased since year-end mainly due to a reduction in cash, cash
equivalents, and investments.
September 30, December 31,
1998 1997
------------- ------------
Cash, cash equivalents and investments $1,646 $1,848
Short-term and long-term debt 995 1,035
------- -------
Net financial assets $ 651 $ 813
======= =======
The increase in cash and cash equivalents as of September 30, 1998 as compared
to the December 31, 1997 balance and the corresponding decrease in short-term
investments for the same periods was the result of a shift from investments
held for greater than 90 days (short-term investments) to investments with
shorter holding periods (cash equivalents). The net decline in cash, cash
equivalents, and investments was due primarily to the sale of long-term
investments, the unrealized devaluation of security holdings, the previously
discussed debt repayment, and a reduction in cash from operations.
Net cash provided by operations for the first nine months of 1998 decreased to
$641 million from $862 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 whereas a significant reduction in accounts receivable
and an increase in current liabilities constituted sources of cash in 1997.
Other significant uses of cash in 1998 were expenditures for the company's
quarterly dividend and property, plant, and equipment (capital). Capital
expenditures of $373 million largely represented spending on manufacturing
facilities in the U.S., Belgium, Puerto Rico, and Sweden. In addition to net
cash provided by operations, a major source of cash in the quarter was
proceeds from the sale of investments net of purchases which increased $124
million over the prior year.
On November 2, 1998, the company announced a $1 billion stock repurchase
program. The program is expected to be completed over approximately a
two-year period through both open market and privately negotiated
transactions.
The company's future cash provided by operations and borrowing capacity are
expected to cover normal operating cash flow needs, planned capital
acquisitions, dividend payments, and stock repurchases as 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.
YEAR 2000
The company's global program to address the year 2000 (Y2K) date recognition
problem was launched in early 1997. The goal of the program is to ensure the
millennium event does not have a material adverse effect on the company's
business operations. The program is comprised of three main efforts:
assessment and remediation of information technology (IT) systems; assessment
and remediation of embedded systems; and assessment of high-level business
risks and development of contingency plans to address those risks. 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. The latter half of 1999 is reserved for integration testing. The
high-level risk assessment is substantially completed and the corresponding
contingency plans are expected to be finished by early 1999. The company is
currently working with critical external partners to assess their
vulnerability and determine what risk mitigation and contingency actions will
be necessary.
The company anticipates total spending of $150 million between 1997 and 2000
largely on replacement of applications that, for reasons other than Y2K
noncompliance, had been previously selected for replacement. Many of the
replacement projects are enterprise-wide in scope and offer improved
functionality and commonality over current systems while at the same time
resolve the Y2K problem. To date, the company has spent approximately $100
million of the total projected costs.
There are many factors outside the company's control that could cause the Y2K
problem to seriously disrupt its operations. For example, a widespread
failure in the utilities industry could severely interrupt or even halt the
company's operations. There are risks, however, for which the company may
prepare and, in so doing, reduce or eliminate its exposure. The more critical
of these risks are listed below. The scope of the company's efforts regarding
each risk is limited to the company's key products, key compounds, key
clinical supplies, top subsidiaries, critical suppliers, and major customers.
- a disruption in the supply of product with particular emphasis
on failures of raw material suppliers, third-party
manufacturers, and external distribution channels
- internal infrastructure failures such as utilities, communications,
internal IT services and integrated IT systems
- non-U.S. government failures, especially as they impact import
and export activity
- interruption of the product regulatory filing process such as a
delay in clinical trials or corruption of clinical trial data
- a major customer failure or interruption
Contingency plans to address these risks will be finalized in early 1999.
Barring critical failures arising from factors beyond the company's direct
control, management believes that by meeting the objectives of its Y2K
program, the date recognition problem should not have a material adverse
effect on the company's consolidated financial position, its results of
operations, or liquidity.
OTHER ITEMS
Effective January 1, 1999, several European countries will begin operating
with a new common currency, the euro. The euro will completely replace these
countries' national currencies by January 1, 2002. The conversion to the euro
will require changes in the company's operations as systems and commercial
arrangements are modified to deal with the new currency. Management created a
project team to evaluate the impact of the euro conversion on the company's
operations and to develop and execute action plans, as necessary, to
successfully effect the change. The cost of this effort is not expected to be
material. While information technology systems are planned to be fully euro-
compliant by the year 2000, a minimum of euro-compliance for strategic
locations will be achieved in 1999. The conversion to the euro may have
competitive implications on pricing and marketing strategies; however, any
such impact is not known at this time. The euro conversion will also have a
limited impact on outstanding derivatives and other financial instruments.
Currently, the company has no outstanding contracts maturing after the
conversion period. The impact on currency risk is similarly limited. The
company will be involved in fewer hedging contracts in the future when it is
able to treat all countries converting to the euro as one when hedging their
exposure.
At this point in its overall assessment, management believes the impact of the
euro conversion on the company will not be significant; however, uncertainty
exists as to the effects the euro currency will have on the marketplace. As a
result, there is no guarantee that all problems will be foreseen and
corrected, or that no material disruption of the company's business will
occur.
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, the Year
2000 date recognition problem, and conversion to the euro; 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 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 25).
(a)(ii) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 26).
(a)(iii) Exhibit 15 - Awareness of PricewaterhouseCoopers (page 27).
(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 September 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: November 13, 1998 /S/C.J. Coughlin
C. J. Coughlin
Executive Vice President
and Chief Financial Officer
DATE: November 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>
Nine Months Year Ended December 31,
Ended
September 30,
1998 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $ 815 $ 468 $ 838 $1,136 $1,271 $ 778
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 37 (32) 5 7 8 8
-------- ----- ------ ------ ------ ------
778 500 833 1,129 1,263 770
Add:
Amortization of previously
capitalized interest 9 12 11 10 8 6
Fixed charges included in the above:
Interest and amortization of debt
expense 35 58* 82 121 139 209
Rental expense representative
of an interest factor 30 38 37 35 35 32
-------- ----- ------ ------ ------ ------
Earnings from continuing operations
before income taxes and fixed
charges $ 852 $ 608* $ 963 $1,295 $1,445 $1,017
======== ===== ====== ====== ====== ======
Interest incurred and amortization
of debt expense $ 61 $ 90 $ 115 $ 149 $ 164 $ 234
Rental expense representative of an
interest factor 30 38 37 35 35 32
-------- ----- ------ ------ ------ ------
Total fixed charges $ 91 $ 128 $ 152 $ 184 $ 199 $ 266
======== ===== ====== ====== ======= ======
Ratio of earnings to fixed charges 9.4 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 October 28, 1998 on our
review of interim financial information of Pharmacia &
Upjohn, Inc. and Subsidiaries for the three and nine month
periods ended September 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.
Chicago, Illinois
November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,005
<SECURITIES> 0
<RECEIVABLES> 1,411
<ALLOWANCES> 99
<INVENTORY> 1,005
<CURRENT-ASSETS> 4,337
<PP&E> 6,097
<DEPRECIATION> 2,700
<TOTAL-ASSETS> 10,267
<CURRENT-LIABILITIES> 2,750
<BONDS> 340<F1>
0
278
<COMMON> 5
<OTHER-SE> 5,368
<TOTAL-LIABILITY-AND-EQUITY> 10,267
<SALES> 4,909
<TOTAL-REVENUES> 5,010
<CGS> 1,493
<TOTAL-COSTS> 1,493
<OTHER-EXPENSES> 838<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 815
<INCOME-TAX> 261
<INCOME-CONTINUING> 554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 554
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.05
<FN>
<F1>DOES NOT INCLUDE GUARANTEE OF ESOP DEBT OF 218.
<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 September 30, 1998,
and the related condensed consolidated statements of earnings and cash
flows for the three and nine month periods ended September 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.
Chicago, Illinois
October 28, 1998
