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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to__________
Commission file number 1-11557
PHARMACIA & UPJOHN, INC.
(Exact name of Registrant as specified in its charter)
Delaware 98-0155411
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
95 Corporate Drive, Bridgewater, New Jersey 08807 U.S.A.
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 888/768-5501
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $.01) New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Title of class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant estimates the aggregate market value of the voting stock held by
non-affiliates of the registrant (based upon the NYSE--Composite Transactions
closing price on January 31, 1998 as reported in The Wall Street Journal and
treating all executive officers and directors of the Company and all beneficial
owners of 5% or more of the Registrant's voting stock as affiliates) was
approximately $19,494,311,322.
The number of shares of Common Stock, $.01 par value, outstanding as of January
31, 1998 is 507,245,672 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Proxy Statement are incorporated into Parts III and IV of
this report. Portions of the 1997 Annual Report to Shareholders are incorporated
into Parts II and IV of this report.
Certain statements contained in this report, such as statements concerning the
Company's anticipated financial or product performance and other non-historical
facts, are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Since these statements are based on
factors that involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Such factors include, among others: management's ability to make further
progress under the Company's turnaround plan; the Company's ability to
successfully market new and existing products in new and existing domestic and
international markets; the success of the Company's research and development
activities and the speed with which regulatory authorizations and product
rollouts may be achieved; fluctuations in foreign currency exchange rates; the
effects of the Company's accounting policies and general changes in generally
accepted accounting practices; the Company's exposure to product liability
lawsuits and contingencies related to actual or alleged environmental
contamination; domestic and foreign social, legal and political developments,
especially those relating to healthcare reform and product liabilities; general
economic and business conditions; the Company's ability to attract and retain
current management and other employees of the Company; and other risks and
factors detailed in the Company's other Securities and Exchange Commission
filings.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Pharmacia & Upjohn, Inc. ("the Company") is a global
pharmaceutical group engaged in the research, development, manufacture and sale
of pharmaceutical and healthcare products. The Company was formed in November
1995 through the combination (the "Combination") of Pharmacia Aktiebolag
("Pharmacia") and The Upjohn Company ("Upjohn"). The Company is engaged in
discovery research, product development, manufacturing, sales and marketing of
various prescription human pharmaceutical products.
In addition to prescription human pharmaceuticals, the Company
manufactures and sells certain nonprescription drugs; manufactures
pharmaceutical chemicals and intermediates for use in its own products and for
sale to others; researches, develops, manufactures and markets pharmaceutical
products for both food and companion animals; and markets specialty products in
hospital care, diagnostics and nutritional supplements.
INDUSTRY BACKGROUND
The world market for advanced human pharmaceuticals is
concentrated in the U.S., Western Europe and Japan. Regulatory pressures and
pricing constraints have intensified as governmental and private healthcare
providers strive to control the rapid growth in healthcare expenditures.
Pharmaceuticals are increasingly chosen according to the therapeutic benefit in
relation to cost, such that pharmaceuticals that minimize hospital stays and
reduce treatment costs are increasingly preferred. It is therefore essential for
pharmaceutical companies to develop new improved and more efficient products
that increase the total value both for buyers and patients. The Company believes
that these developments have also led to more intense competition in the
pharmaceutical industry worldwide. Innovation, high-quality research and
development focused on unmet medical needs, rapid product introduction, wide
geographical distribution and cost efficiency are likely to be key competitive
factors in the pharmaceutical industry.
PRESCRIPTION PHARMACEUTICAL PRODUCTS
The Company researches, develops, manufactures and markets
human pharmaceutical products to healthcare providers worldwide. The following
summary discusses the Company's principal human pharmaceutical products.
DETROL(R)/DETRUSITOL(R) Tablets (tolterodine tartrate tablets)
has been approved for marketing in the U.S. under the trademark DETROL and in
Europe under the trademark DETRUSITOL. This product offers a treatment for
overactivity in the bladder, thus reducing symptoms such as increased frequency
and urge to urinate, as well as urge incontinence episodes. The U.S. patent
covering DETROL Tablets expires in 2012, and in 2009 in Europe and Japan,
although patent term extensions may be possible.
GENOTROPIN(TM), a recombinant human growth hormone identical
to the body's own hormone, is marketed in Europe, Japan and the U.S. The Company
recently reacquired exclusive sales and marketing rights to GENOTROPIN in Japan
from Sumitomo Pharmaceuticals. GENOTROPIN products are not covered by product
patents, but patents covering processes to manufacture the product and delivery
systems for the products offer some level of exclusivity for the specific
presentations sold by the Company. GENOTROPIN, which promotes longitudinal
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bone growth, is used for the treatment of growth hormone deficiency in children
and adults and for patients with renal insufficiency.
The Company produces several drugs for CNS disorders,
including XANAX(R), HALCION(R) and SERMION(R), none of which have significant
patent protection and are subject to intense generic competition. XANAX Tablets,
containing alprazolam, are used for symptomatic relief of anxiety with and
without depressive symptoms and for the treatment of panic disorder. The use
patent for the panic disorder indication for XANAX expires in 2002. HALCION
Tablets, containing triazolam, are a hypnotic agent used for the treatment of
insomnia. SERMION Tablets are used primarily to treat cognitive and behavioral
disorders related to senile dementia.
EDRONAX (reboxetine), for the treatment of major depression,
has been approved for marketing in several European countries and will be
submitted for U.S. approval. European patents provide protection until 2001 and
U.S. patents provide protection until 1999, although patent term extensions may
be possible.
XALATAN(R) (latanoporost ophthalmic solution) is used in the
U.S. for the treatment of open-angle glaucoma and ocular hypertension in
patients who are either intolerant of, or insufficiently responsive to, other
intraocular pressure-lowering medications. Approval for marketing in Europe is
pending. XALATAN is covered by a patent in the U.S. expiring in 2011 and in
Europe and Japan in 2009, although patent term extensions in Europe and Japan
may be possible.
HEALON(R) Solution for Intraocular Use is a viscoelastic
product which includes sodium hyaluronate and is used primarily in cataract
surgery to facilitate the implantation of plastic intraocular lenses ("IOLs")
without injuring the sensitive cells lining the cornea and functions as a soft
surgical instrument. The Company markets HEALON and HEALON GV(R), a more viscous
fluid form, directly to ophthalmologists in Europe, the U.S. and Japan and
through independent distributors in certain other countries.
The Company is one of the world's leading producers of
anticancer drugs. Its most important products in the oncology area are
FARMORUBICIN(R) (or PHARMORUBICIN(R)) and ADRIAMYCIN(R) for use in chemotherapy.
Each of these products is used in the treatment of breast cancer as well as
other solid tumors. Both are among the world's most frequently prescribed
anticancer drugs. ADRIAMYCIN was the Company's first anthracycline preparation
and is no longer subject to patent protection. Subsequent research efforts to
reduce the toxicity and increase the efficacy of ADRIAMYCIN led to the
development of FARMORUBICIN, a second generation anthracycline product used
primarily to treat solid tumors (primarily breast and bladder cancer) and
lymphomas. Although the product patents on FARMORUBICIN have generally expired,
patents on the best selling formulation of FARMORUBICIN do not expire until
2006.
CAMPTOSAR(R) (irinotecan hydrochloride injection), an
injectable DNA topoisomerase-I inhibitor pro-drug licensed from Yakult Honsha
for the U.S. and certain other territories, is marketed in the U.S. for
refractory colorectal cancer. CAMPTOSAR Injection is protected by a patent in
the U.S. until 2004, with a patent term extension until 2007 currently pending.
The Company also produces ZAVEDOS(TM)/IDAMYCIN(R) (idarubicin
hydrochloride), an anthracycline used to treat acute leukemia that can be
administered both intravenously and orally, as well as ESTRACYT(R), which is
used for the treatment of advanced prostate cancer. Based on clinical tests to
date, ZAVEDOS is superior to standard therapy in
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extending the survival of certain patients who suffer from acute
myeloblastic leukemia. Although the last product patents on ZAVEDOS expire in
1999-2002, patents on a new formulation do not expire until 2006. ESTRACYT/EMCYT
has no patent protection and is subject to competition from other products and
therapies. ZINECARD(R) (dexrazoxane for injection) sold in the U.S. and Canada,
is a preparation for reducing cardiac side effects in women with metastatic
breast cancer who are undergoing treatment with ADRIAMYCIN.
FRAGMIN(R) Injection is a low molecular weight heparin product
for the prevention of thrombosis in connection with surgery, during
hemodialysis, in the treatment of acute deep vein thrombosis and (in the U.K.)
in the treatment of unstable angina. FRAGMIN is protected by patents in the
U.S., Europe and Japan, with patent expiration dates ranging from the year 2000
in some European countries to 2005 in the U.S.
The Company provides a broad line of antibiotic products
including CLEOCIN(R) (or DALACIN(R)) and LINCOCIN(R) products. CLEOCIN
PHOSPHATE(R) is an injectable form of clindamycin that is used in the treatment
of certain life-threatening anaerobic infections. CLEOCIN T(R) is a topical
formulation for treatment of acne. CLEOCIN(R) Vaginal Cream is used to treat
bacterial vaginosis. LINCOCIN is used in the treatment of serious infections
caused by many strains of gram-positive bacteria. The Company has semi-exclusive
U.S. marketing rights to VANTIN(R) Tablets and Oral Suspension, an advanced
cephalosporin antibiotic, under patents licensed from Sankyo Company, Ltd., the
last of which expires in the U.S. in late 2001.
The Company produces various forms of chemical modifications
of hormone products under the trademark MEDROL(R) or DEPO-MEDROL(R), which are
used to treat a number of inflammatory and allergic conditions. SOLU-CORTEF(R)
Sterile Powder and SOLU-MEDROL(R) Sterile Powder are injectable corticosteroid
products.
The Company markets several steroid hormone products having a
variety of uses, including the treatment of allergic reactions, inflammation,
asthma and certain hormone deficiencies. The Company's most important synthetic
hormone product is PROVERA(R) Tablets, which is a female sex hormone replacement
agent. The Company also markets DEPO-PROVERA(R) Contraceptive Injection and
OGEN(R) Tablets and Vaginal Cream, an estrogen replacement product licensed from
Abbott Laboratories. The Company intends to increase its marketing in this area
directed towards the patient or ultimate consumer, who is increasingly
participating in the choice of product.
CAVERJECT(R) (alprostadil injection), a treatment for erectile
dysfunction due, among other reasons, to diabetes, cardiovascular problems,
injuries and aging, is self-administered by intracavernosal injection. CAVERJECT
is no longer covered by patents.
DOSTINEX(R) Tablets, an oral medication for
hyperprolactinemia, a condition that can cause absence of menstruation
(amenorrhea) and excessive breast milk discharge (galactorrhea), is effective
and better tolerated than bromocriptine, the only other product indicated for
hyperprolactinemia. DOSTINEX is covered by a patent in the U.S. expiring in
2002, although an extension application which would extend the patent term until
late 2005 is currently pending. Patent expiration dates for the product in
European countries under Supplemental Protection Certificates generally expire
between 2002 and 2006.
MIRAPEX (pramipexole tablets) has been approved in the U.S.
and Europe (sold under the tradename MIRAPEXIN) for the treatment of the signs
and symptoms of Parkinson's disease. The product was licensed from
Boehringer-Ingelheim, which has co-promotion rights in the U.S. A centralized
European Commission application was filed in late 1996 under the mutual
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recognition procedure. The compound patent expires in 2005 in Europe and Japan
and in 2006 in the U.S. CABASER(R) (cabergoline) has also been approved in
several European countries for treatment of Parkinson's disease and is subject
to European patent protection until at least 2002.
The Company markets MYCOBUTIN Capsules(R), for the prevention
of Mycobacterium Avium Complex, a fatal bacterial infection that is a common
cause of death in HIV-positive individuals and people with AIDS. MYCOBUTIN is
marketed to specialists in infectious diseases and to internists. The relevant
patent rights in the U.S. have recently been extended until 1999 and Orphan Drug
Exclusivity expiration is in late 1999. Corresponding patent rights expire in
Europe generally during the period of 2000 to 2003 with the exception of Italy
which expire in the year 2012.
RESCRIPTOR(R) (delavirdine mesylate tablets), a non-nucleoside
reverse transcriptase inhibitor, has been approved in the U.S. for the treatment
of HIV-1 infection in combination with appropriate antiretroviral agents when
therapy is warranted. The product is protected by a U.S. patent until 2013.
The Company has worldwide marketing rights except in the U.S.
to VISTIDE(R) (cidofovir injection), indicated for the treatment of
cytomegalovirus (CMV) infection in the retina in AIDS patients unsuitable for
other therapy.
The Company's major oral antidiabetes agents are MICRONASE(R)
Tablets, containing glyburide, and GLYNASE(R) PresTab(R) Tablets, also
containing glyburide, for the treatment of non-insulin-dependent diabetes. The
Company is experiencing increased levels of competition from generic substitutes
in this area.
The Company also markets certain prostaglandin products,
including PROSTIN E2(R) Vaginal Suppository, which is generally used for
pregnancy disorders, and PROSTIN VR PEDIATRIC(R) Sterile Solution, for
cardiovascular use. PREPIDIL(R) Gel, used for cervical ripening, is protected by
U.S. patents until 2004.
ESTRING(R) Vaginal Ring, a local hormone replacement therapy
for post-menopausal women, is a soft intravaginal plastic ring that secretes a
low dose of natural estrogen over a period of three months.
The product is sold in the U.S. and in several European countries.
The Company markets several products for intravenous
nutrition, including products that meet the body's nutritional needs for fats,
amino acids, vitamins and trace elements. The Company's largest selling
nutritional product is the fat emulsion INTRALIPID(R), launched in 1962.
INTRALIPID has no patent protection and competes with other fat emulsions in all
its major markets. The Company also markets KABIMIX and VITRIMIX, pre-mixed
nutritional supplements, and GLAMIN and VAMIN(R), amino acid solutions.
Management believes that there are limited opportunities for growth in this area
except in developing countries such as China, where there are developing
healthcare systems and large patient populations.
CONSUMER HEALTH CARE PRODUCTS
The Company develops, manufactures and markets nonprescription
healthcare products to drug stores, food stores and mass merchandisers in the
U.S. and Europe.
The Company developed and manufactures NICORETTE(R) and
NICOTROL(R) for smokers who seek a medical product to aid in smoking cessation.
NICORETTE Chewing Gum is
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sold over-the-counter in the U.S. by SmithKline Beecham Consumer
Pharmaceuticals. The Company's NICORETTE Chewing Gum and Transdermal Patch
administer nicotine to the body through slow-release formulations in order to
alleviate withdrawal symptoms. Although the Company's U.S. patent covering
nicotine polacrilex, the active ingredient in NICORETTE Chewing Gum, expired in
August 1992, the Company has market exclusivity for NICORETTE Chewing Gum in the
U.S. until 1999, during which time no abbreviated new drug applications (ANDAs)
for the product can be approved by the U.S. Food and Drug Administration. In
other countries, the Company has no patent protection for NICORETTE Chewing Gum;
however, the NICORETTE Transdermal Patch is patented in certain jurisdictions,
and is sold in the U.S. by McNeil Consumer Products Company.
In addition, the Company produces and sells ROGAINE(R) Extra
Strength for Men and ROGAINE(R) Regular Strength, a 5% and 2%, respectively,
solution of minoxidil applied topically to treat hair loss in men with male
pattern baldness and, in the Regular Strength formulation, in women with
androgenetic alopecia or hereditary hair loss. The product is also sold in
numerous foreign countries. Although the U.S. patents covering ROGAINE expired
in February 1996, ROGAINE Extra Strength for Men is covered by a three-year ANDA
moratorium. ROGAINE is sold over-the-counter in the U.S. and competes with
several generic 2% topical minoxidil products not produced by the Company.
During 1997, the Company acquired NASALCROM, a nasal spray for
allergic rhinitis, PEDIACARE, a line of children's cough and cold products, and
MICATIN, an antifungal to treat athlete's foot, from Johnson & Johnson in
exchange for MOTRIN IB, an analgesic, and MYCITRACIN, a topical antibiotic.
The Company also manufactures and distributes other
non-prescription products including KAOPECTATE(R) products, for diarrhea;
MICROLAX(R) Enema, for constipation; CORTAID(R) products, anti-inflammatory
topical products; the family of UNICAP(R) vitamin products; and DRAMAMINE(R),
anti-motion sickness products. The Company also holds a license from
Hoechst-Roussel Pharmaceuticals Inc. for exclusive U.S. rights to the
nonprescription laxative products DOXIDAN(R) and SURFAK(R).
RESEARCH AND DEVELOPMENT
The Company aims to direct its R&D efforts to develop new
innovative pharmaceuticals and other healthcare products offering high
therapeutic benefits in a number of therapeutic areas in which the Company
believes it has the ability to establish a leading global position. The Company
also seeks to expand the markets for its existing products by identifying new
indications and administrative forms as well as by expanding their international
market penetration and extending product life, including by converting suitable
patented products to over-the-counter products. The Company concentrates its R&D
resources on selected areas both where it has in-house expertise and where there
are identified substantial unmet medical needs. The Company's research
activities are being focused on four medically important therapeutic areas,
including infectious disease, metabolic disease, CNS and oncology, and are
conducted principally in the Company's three regional centers in Kalamazoo,
Michigan, Stockholm, Sweden and Milan, Italy.
The R&D process has historically taken from 10 to 15 years
from discovery to initial product launch and is conducted in various stages.
During each stage of development, there is a substantial risk that the desired
objectives will not be achievable and that the product will therefore have to be
abandoned or the objectives modified. During the "preclinical" stage, generally
the first two to four years, research is carried out in order to identify an
active substance
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in the laboratory and then perform pharmacology and toxicology studies of its
effects in various animals. Before testing in humans, an application for the
compound must be filed and processed by the requisite regulatory authorities.
Testing in humans is performed in different clinical phases to assure the safety
and efficacy of the new compound. In clinical Phase I, studies to establish the
tolerance, absorption, distribution, metabolism and excretion of the compound
are performed on healthy human subjects. Clinical Phase II studies are performed
on a limited number of patients to determine efficacy and to define an effective
dose. Clinical Phase III comparative studies are then performed on a larger
number of patients in order to further establish efficacy and safety. Together,
Phases I, II and III typically take from three to five years to complete.
Thereafter, an application containing all data for the proposed drug is sent to
regulatory authorities for approval, which may take an additional one to two
years. Further clinical trials, called Phase IV trials, are generally carried
out after product launch to continue to monitor the efficacy and safety of a new
drug.
In the area of infectious disease research, oxazolidinones are
a potentially important new class of antibiotics that have a novel mechanism of
action: inhibition of mRNA translation. A compound (linezolid) is in Phase III
clinical studies. In vitro studies show the oxazolidinones to be effective
against gram-positive bacteria including antibiotic-resistant strains of
staphylococci, streptococci and enterococci. Management believes that
oxazolidinones have the potential to meet a significant unmet need due to the
increasing incidence of resistant bacterial infections. Linezolid is claimed in
a U.S. patent currently set to expire in 2014, but which could be extended
depending on the date of NDA approval. Patents issuing on patent applications
filed in various other countries will similarly expire generally in 2014, but
may be subject to extension in certain countries.
The Company's primary research area in the field of metabolic
disease concerns growth disorders. In addition, research projects are currently
in process in the field of obesity, diabetes, arteriosclerosis and vascular
disease. Research and development in the area of growth and growth factors is
concentrated on a broader spectrum of indications for GENOTROPIN. In addition,
the Company is pursuing further development of convenience products to
administer GENOTROPIN.
Oncology is another major research focus for the Company with
discovery and development efforts directed and focused on finding effective
treatments for various forms of tumors, particularly those which respond poorly,
or are resistant, to currently available therapy. The research programs cover
chemotherapy, hormone therapy, immunotherapy of cancer as well as novel
approaches and mechanisms of antitumor action which are being pursued mainly in
discovery phase.
Development candidates licensed by the Company include
almotriptan, an anti-migraine compound for which the Company will have exclusive
U.S. marketing rights, and thrombopoietin (TPO), a compound being evaluated for
use in treating cancer patients suffering from chemotheraphy.
ANIMAL HEALTH
The Company researches, develops, manufactures and markets a
broad range of pharmaceutical products for both food and companion animals.
These products are sold worldwide to veterinarians, feed manufacturers,
distributors and growers who choose the Company's products primarily because of
their efficacy and suitability for particular uses, as well as price and
quality. Major products include NAXCEL(R) (or EXCENEL(R)) Sterile Powder, an
antibiotic for bovine and swine respiratory disease and early chick mortality;
LINCO-SPECTIN(R) Soluble Powder and
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Premix, a combination lincomycin/spectinomycin antibiotic;
LINCOMIX(R) 20 and LINCOMIX 50 Feed Medication, which are feed-additive
antibiotics; MGA(R) Premix, which is a growth-promoting feed additive for
feedlot heifers; various products for the treatment of mastitis, LINCOCIN(R),
small-animal antibiotics; and LUTALYSE(R) (or DINOLYTIC(R)) Sterile Solution,
which is used to synchronize breeding performance in mares and cattle.
In 1997, the Company sold its animal health vaccine business
to Bayer Corporation.
CHEMICAL AND CONTRACT MANUFACTURING
The Company researches, develops, manufactures and markets
bulk pharmaceutical chemicals and selected high-technology specialty
(nonpharmaceutical) chemicals. In addition, the Company manufactures finished
dosage forms for sale to third parties.
BIOTECHNOLOGY
The Company owns 45% of Amersham Pharmacia Biotech, Ltd.
("APB"), one of the world's leading suppliers of biotechnology equipment,
systems, reagents and chemicals for pharmaceutical and biotechnology companies
and for life science research in the public and private sectors. APB was formed
in 1997 by the combination of the Company's biotechnology supply business with
the life sciences business of Amersham International plc. The business area's
traditional products are for use in laboratory-scale chromatography and
electrophoresis, two key separation technologies for biomolecules, and also
produces reagents, chemicals and systems used by researchers to perform
experiments in the areas of molecular and cell biology, and media and systems
devoted to large-scale purification of substances prepared by biotechnological
methods in the pharmaceutical industry. In recent years, the market for
biotechnology research instruments and other products has been adversely
affected by budgeting constraints in universities and publicly funded research
centers, resulting in increasing competition and downward price pressure.
DIAGNOSTICS
The Company is the world leader in the area of in vitro
allergy diagnostics. The Company's main allergy diagnostic product, the
Pharmacia CAP System(R), is a highly automated laboratory system that enables
testing from patient blood samples for allergenic sensitivity to nearly 500
substances. The Company believes that no competitor in the allergy diagnostic
business markets a product that can test allergenic sensitivity to as many
different substances. The Company markets the Pharmacia CAP System to diagnostic
laboratories worldwide. Patents on the Pharmacia CAP System expire in 2004.
During 1996, a new easy-to-use, low-volume test instrument, UniCAP 100(R), was
introduced for use by small to medium size laboratories and family physicians.
The Company's largest market for allergy diagnostics is Japan,
while sales in the U.S. are relatively low because of the relatively high
incidence of more traditional in vivo (skin prick) diagnostic testing by medical
professionals in the U.S.
PRODUCTION
The Company produces its products mainly in the U.S., Sweden,
Italy, Belgium, Ireland and Puerto Rico.
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The Company purchases a variety of raw materials for use in
its manufacturing processes. When available, the Company has a policy of
maintaining multiple sources of supply for materials. The Company obtains its
supplies of raw materials from several companies in a number of countries. The
Company has not experienced any difficulty in obtaining a sufficient supply of
raw materials in recent years and believes that it will be able to obtain them
in sufficient quantities in the future. However, the price of its raw materials
may vary from year to year.
MARKETING AND DISTRIBUTION
The Company's products are sold worldwide. The Company markets
its products through its own marketing companies or through local distributors
and licensees. As part of its ongoing commitment to its customers, the Company
periodically organizes educational programs to provide specialist doctors with
information on the most recent product innovations and scientific advances.
The Company's marketing companies are organized by
geographical markets to meet the requirements of the markets in which they
operate.
COMPETITION
The pharmaceutical industry is highly competitive. The
Company's principal competitors consist of major international corporations with
substantial resources. A drug may be subject to competition from alternative
therapies during the period of patent protection and thereafter it will be
subject to further competition from generic products. The manufacturers of
generic products typically do not bear the related research and development
costs and consequently are able to offer generic products at considerably lower
prices than the branded equivalents. A research-based pharmaceutical company
will therefore normally seek to achieve a sufficiently high profit margin and
sales volume during the period of patent protection to justify the original
investment and to fund research for the future. There are, however, a number of
factors which may enable products to remain profitable once patent protection
has ceased. These include the establishment of a strong brand image with the
prescriber or the consumer, supported by an active trademark registration and
enforcement policy, and the development of a broader range of alternative
formulations than the generic manufacturer typically supplies.
As is the case for the pharmaceutical industry in general, the
introduction of new products and processes by competitors may affect pricing
levels or result in product replacement for existing products, and there can be
no assurances that any of the Company's products may not become outmoded,
notwithstanding patent or trademark protection. In addition, increasing
governmental and other pressures towards the dispensing of generic products in
substitution for brand-name drugs may increase competition for products no
longer covered by patents.
Over the last few years, the pharmaceutical industry has
experienced increased vertical and horizontal consolidation, and the breadth of
products offered and distribution capabilities of a company may become a
competitive feature. The Company competes with other pharmaceutical companies in
discovering or licensing new chemical entities useful in treating medical
conditions. In addition, significant changes in marketing conditions are
occurring in the U.S., Swedish and other pharmaceutical markets, including
decreased pricing flexibility, restrictions on promotional and marketing
practices and the impact of managed care, particularly with respect to product
selections and pricing concessions.
The Company's competitive position depends in part upon its
ability to develop innovative, cost-effective new products, as well as new
indications for, and improvements in,
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existing products. Its competitive position also depends upon, among other
things, its ability to compete on the basis of price as well as to maintain a
reputation for quality, efficacy and cost-effectiveness with the specialist
doctors and hospital purchasing groups to which its products are targeted, as
well as with the wider group of customers which includes pharmacies,
wholesalers, hospitals and insurers.
In addition, the Company's ability to maintain long-standing
and interactive relationships with specialist doctors and its ability to attract
and retain qualified scientific and other personnel, develop and implement
production and marketing plans, obtain and maintain patent protection for
selected products in its significant markets and secure adequate capital
resources are also important competitive factors.
PRICING
In addition to the normal competitive forces that affect the
level of prices, a further constraint exists in the form of price controls in
most countries in which the Company sells its products. These controls arise
either by law or because the government or other healthcare providers in a
particular jurisdiction are the principal purchasers of the product or reimburse
purchasers for the cost of the product. Price control mechanisms operate
differently from jurisdiction to jurisdiction and can result in large price
differentials between markets, which may be aggravated by currency fluctuations.
These price differentials are exploited by traders (parallel importers) who
purchase branded products in lower-priced markets for resale in higher-priced
markets.
PRODUCT REGULATION
Like other pharmaceutical companies, the Company is subject to
strict controls on the manufacture, labeling, distribution and marketing of its
products. Further controls exist on the non-clinical and clinical development of
pharmaceutical products. Of particular importance is the requirement to obtain
and maintain regulatory approval for a pharmaceutical product from a country's
national regulatory authority before such product may be marketed in a
particular country.
The submission of an application to a regulatory authority
does not guarantee that a license to market the product will be granted.
Furthermore, each regulatory authority may impose its own requirements and may
delay or refuse to grant, or may require additional data before granting, an
approval, even though the relevant product has been approved in another country.
Regulatory authorities also have administrative powers that include product
recalls, seizure of products and other sanctions.
The U.S., Europe, Japan, Australia and Canada have very high
standards for technical appraisal and consequently, in most cases, a lengthy
approval process. The time taken to obtain approval varies by country, but
generally takes from six months to four years from the date of application,
depending upon the quality of the data produced, the degree of control exercised
by the regulatory authority, the efficiency of its review procedure and the
nature of the product. The trend in recent years has been toward greater
regulation and higher standards with higher levels of standardization among
jurisdictions.
In Europe, the European Agency for the Evaluation of Medicinal
Products (the "Medicinal Products Agency") was created in July 1993 and opened
on January 1, 1995. Based in London, the Medicinal Products Agency will give
opinions on medicinal products by using two
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<PAGE> 12
new procedures, a centralized community procedure and a decentralized procedure,
the latter being based on the principle of mutual recognition of assessments.
In the U.S., most human and animal pharmaceutical products
manufactured or sold by the Company are subject to regulation by the FDA as well
as by other federal and state agencies. The FDA regulates the introduction of
new drugs, advertising of prescription drug products, manufacturing, laboratory
and clinical practices, labeling, packaging and record-keeping with respect to
drug products. The FDA also reviews the safety and effectiveness of marketed
drugs and may require withdrawal of products from the market and modification of
labeling claims where necessary. In addition, the manufacturing, marketing and
use of Animal Health drug products are closely regulated by the FDA.
Government approval of new drugs under the federal Food, Drug
and Cosmetic Act requires substantial evidence of safety and efficacy. As a
result of this requirement, as interpreted by the FDA, the length of time and
the laboratory and clinical information required for approval of an NDA is
considerable.
The FDA has adopted streamlined procedures for the approval of
duplicate drugs (drugs containing the same active ingredient as the originator's
product), including abbreviated NDAs. Approval of abbreviated NDAs may not be
made effective prior to expiration of valid patents. The FDA has established a
similar expedited approval process for antibiotics. The availability of the
abbreviated NDA and expedited antibiotic approval processes has reduced the time
required to obtain FDA approval of some competing products and has facilitated
generic competition.
At the state level, so-called "generic substitution"
legislation permits the dispensing pharmacist to substitute a different
manufacturer's version of a drug for the one prescribed. In a number of states,
such substitution is mandatory unless precluded by the prescribing physician.
U.S. pharmaceutical manufacturers are required to provide
rebates to state governments for prescriptions covered by Medicaid. The issue of
further price controls on sales of prescription drugs continues to be considered
in Congress and various states, and additional federal or state legislation to
limit prices of prescription drugs is possible.
It is difficult to predict the ultimate effect of streamlined
approval of duplicate or generic drugs, "generic substitution," the Medicaid
reimbursement and rebate programs and possible price limitations. However, the
Company believes that its development of patented and exclusively licensed
products may moderate the impact of programs and legislation focusing mainly on
products available from multiple suppliers.
Financial information about industry segments and financial
information about foreign and domestic operations and export sales is contained
in the Company's financial statements.
EMPLOYEES
The Company has approximately 30,000 employees worldwide,
although the number is changing based on realignment of operations and related
reductions in force.
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<PAGE> 13
The Company believes that it has good relations with its
employees. Employees at several non-U.S. locations are represented either by
freely elected unions or by legally mandated workers' councils or similar
organizations.
ENVIRONMENTAL MATTERS
The Company is subject to extensive environmental legislation
and regulation, requiring substantial environmental compliance costs, including
capital expenditures related to future production. Projects related to the
prevention, mitigation and elimination of environmental effects are implemented
worldwide.
Since several capital projects are undertaken for both
environmental control and other business purposes, such as production process
improvements, it is difficult to estimate the specific capital expenditures for
environmental control. However, it is estimated that capital expenditures for
environmental protection will exceed $25 million in both 1998 and 1999.
Operating expenses for compliance with environmental protection laws and
regulations in 1997 are estimated to have been in excess of $50 million. It is
estimated that such operating expenses for 1998 will also be in excess of $50
million. Cash payments charged to the environmental reserves in 1997 were
approximately $10 million and are estimated to be approximately $10 million in
1998.
ITEM 2. PROPERTIES
The Company's various businesses operate through a number of
offices, research laboratories and production facilities throughout the world
with principal locations in Kalamazoo, Michigan; Stockholm, Uppsala and
Helsingborg, Sweden; Milan, Italy; and Puurs, Belgium. The Company also has
major facilities in Japan and Puerto Rico. The Company will establish its
headquarters in Bridgewater, New Jersey. The Company believes its properties to
be adequately maintained and suitable for their intended use and its production
facilities to have a capacity adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Various suits and claims arising in the ordinary course of
business, primarily for personal injury alleged to have been caused by the use
of the Company's products, are pending against the Company and its subsidiaries.
Product liability is a significant commercial risk for the Company. Substantial
damage awards have been made in certain jurisdictions against pharmaceutical
companies based upon claims for injuries allegedly caused by the use of their
products.
The Company is involved in several administrative and judicial
proceedings relating to environmental concerns, including actions brought by the
U.S. EPA and state environmental agencies for remedial cleanup at approximately
50 sites, including site clean-up at the Company's discontinued industrial
chemical operations in North Haven, Connecticut. The Company's estimate of the
ultimate cost to be incurred in connection with these environmental situations
could change due to uncertainties at many sites, such as potential cleanup
remedies, the estimated cost of cleanup and the Company's ultimate share of a
site's cost.
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<PAGE> 14
Based on information currently available and the Company's
experience with lawsuits of the nature of those currently filed or anticipated
to be filed which have resulted from business activities to date, the amounts
accrued for product and environmental liabilities are considered to be adequate.
While it is not possible to predict or determine the outcome
of legal actions brought against the Company, or the ultimate cost of
environmental matters, the Company continues to believe that the unaccrued costs
and liabilities associated with such matters will not have a material adverse
effect on the Company's consolidated financial position, and unless there is a
significant deviation from the historical pattern of resolution of these issues,
there should not be a material adverse effect on the Company's results of
operations or liquidity.
The Company is a party along with a number of other defendants
(both manufacturers and wholesalers) in several federal civil antitrust
lawsuits, some of which have been 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. The California and Wisconsin courts have certified
retailer classes. Motions to certify are pending in Alabama and Minnesota. The
suits seek treble damages and an injunction prohibiting the alleged illegal
practices. Fourteen of the twenty-four pharmaceutical company defendants (not
including the Company) have reached settlement agreements with the plaintiffs in
the class action pending in the Northern District of Illinois for amounts
ranging from $10 to $60 million. These settlements were approved by the court in
1996.
Actions have been filed in 14 states and the District of
Columbia on behalf of proposed consumer classes seeking damages based on the
same alleged conduct. The Courts in California and the District of Columbia have
certified the proposed consumer classes. After removal, the Federal District
Court denied certification of a proposed Alabama consumer class, but a similar
action was later remanded to the state court where it is pending. The state
courts in Maine, Michigan and Minnesota denied certification of a consumer
class, and plaintiffs' appeals are pending. The state courts in Colorado, New
York and Washington dismissed complaints on behalf of proposed consumer classes.
Plaintiffs appealed the dismissal in Washington and New York, and those appeals
are pending. Similar actions by proposed consumer classes are pending in the
state courts of Arizona, Florida, Kansas, North Carolina, Tennessee and
Wisconsin. The U.S. Federal Trade Commission has instituted an inquiry into
whether pharmaceutical companies, including the Company, may have violated
federal antitrust laws in connection with establishing prices and rebates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended December 31, 1997.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company
The Common Stock is listed and traded on the New York Stock
Exchange (the "NYSE") under the symbol PNU. As of January 31, 1998, there were
36,914 holders of record of the Common Stock. Swedish Depositary Shares, each
representing one share of Common Stock, are traded on the Stockholm Stock
Exchange under the symbol PH&U.
Information regarding the market prices and dividends for the
Company's Common Stock and related stockholder matters appearing under the
caption "Quarterly Data" in the 1997 Annual Report to Shareholders (Exhibit 13)
is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Background information for the Board of Directors, including Fred
Hassan, the Company's President and Chief Executive Officer, is
incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of shareholders to be held on May 8,
1998.
In addition to Fred Hassan, the following are the Company's executive
officers:
Goran A. Ando, M.D., age 48, Executive Vice President and
President, Research & Development. He had been Executive Vice President
and Deputy Chief Executive Officer of Pharmacia since February 1995,
and before that had been at Glaxo Holdings p.l.c., where he was
director of research and development activities.
Robert C. Salisbury, age 54, Executive Vice President, Finance
and Administration, and Chief Financial Officer. He had been Executive
Vice President and Chief Financial Officer for Upjohn since 1994, and
before that had been Senior Vice President for Finance and Chief
Financial Officer.
Richard T. Collier, age 44, Senior Vice President and General
Counsel. He had been Senior Vice President, General Counsel and Member
of the Executive Council of Rhone-Poulenc Rorer until December 1997. He
joined Rhone-Poulenc Rorer in 1986 as Assistant Counsel and held
various positions including Vice President and Assistant to the
Chairman from 1991 to 1992.
Timothy G. Rothwell, age 46, Executive Vice President and
President, Pharmaceutical Operations. He had been President of
Rhone-Poulenc Rorer since 1996 and was a member of that Board of
Directors since January 1997. He joined Rhone-Poulenc Rorer in 1995 as
Executive Vice President and President, Pharmaceutical Operations.
Prior to that he was CEO and President of the U.S.
pharmaceutical business for Sandoz Pharmaceuticals.
Christopher J. Coughlin, age 45, Executive Vice President
and Chief Financial Officer. He had been President of Nabisco
International until February 1998. He joined Nabisco International as
Executive Vice President and Chief Financial Officer in 1996. Prior to
that he was Chief Financial Officer at Sterling Winthrop, Inc.
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<PAGE> 17
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be
held on May 8, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be
held on May 8, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be
held on May 8, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(A)1. FINANCIAL STATEMENTS
The following are included in the 1997 Annual Report to
Shareholders (Exhibit 13) and are incorporated by reference
into this Form 10-K pursuant to Item 8.
Report of Independent Accountants - Coopers & Lybrand, L.L.P.
Consolidated Statements of Earnings, Years ended December 31,
1997, 1996 and 1995.
Consolidated Balance Sheets, December 31, 1997 and 1996.
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows, Years ended December
31, 1997, 1996 and 1995.
Note 7. Earnings Per Common Share, Years ended December 31,
1997, 1996 and 1995.
Note 22. Segment and Geographic Information, Years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
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<PAGE> 18
(A)2. FINANCIAL STATEMENT SCHEDULES
NOTES:
(1) Schedules are omitted because they are either not required,
are not applicable or because equivalent information has been
included in the financial statements, the notes thereto or
elsewhere herein.
(2) Financial statements of 50 percent-or-less-owned affiliated
persons are omitted because such persons, in the aggregate, do
not constitute a significant subsidiary.
(A)3. EXHIBITS
<TABLE>
<S> <C>
(3)(i) Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-03109), and incorporated
herein by reference).
(3)(ii) By-laws of the Registrant (filed as Exhibit 4.2 to
the Registrant's Registration Statement on Form S-8
(Reg. No. 333-03109), and incorporated herein by
reference).
(3)(iii) Amendment to By-laws of the Registrant.
(4)(a) Loan Agreement between Puerto Rico Industrial,
Medical and Environmental Pollution Control
Facilities Financing Authority and The Upjohn
Company, dated as of December 1, 1983, and Trust
Agreement between Puerto Rico Industrial, Medical
and Environmental Pollution Control Facilities
Financing Authority and The Chase Manhattan Bank
(National Association), Trustee, dated as of
December 1, 1983 (not filed pursuant to Regulation
S-K, Item 601 (b)(4)(iii)(A); the Registrant agrees
to furnish a copy of these documents to the
Securities and Exchange Commission upon request).
(4)(b) Indenture dated as of February 1, 1990, with
respect to debt securities issued by the Upjohn
Employee Stock Ownership Trust and 9.79% Amortizing
Notes, Series A, Due February 1, 2004, issued by
the Upjohn Employee Stock Ownership Trust and
guaranteed by the Registrant (not filed pursuant to
Regulation S-K, Item 601 (b)(4)(iii)(A); the
Registrant agrees to furnish a copy of these
documents to the Securities and Exchange Commission
upon request).
(4)(c) Indenture dated as of August 1, 1991 between the
Company and The Bank of New York, as trustee, with
respect to Debt Securities to be issued thereunder
from time to time (not filed pursuant to Regulation
S-K, Item 601(b)(4)(iii)(A); the Registrant agrees
to furnish a copy of these documents to the
Securities and Exchange Commission upon request.
(4)(d) Rights Agreement, which includes as Exhibit A the forms
of Rights Certificate and Election to Exercise and as
Exhibit B the form of Certificate of Designation
and Terms of the Participating Preferred Stock (filed
as Exhibit 4 to the Registrant's Current Report on Form
8-K dated February 25, 1997 and incorporated herein by
reference).
</TABLE>
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<PAGE> 19
<TABLE>
<S> <C>
(10)(a) Form of Indemnification Agreement entered into with
each Officer and Director (incorporated by
reference to Exhibit (10)(a) to the Registrant's
Form 10-K for the year ending December 31, 1995).
(10)(b) Employment Agreement with J.L. Zabriskie dated
March 7, 1996 (incorporated by reference to Exhibit
(10)(b) to the Registrant's Form 10-K for the year
ending December 31, 1995).
(10)(c) Employment Agreement with G.A. Ando dated January
4, 1996 (incorporated by reference to Exhibit
(10)(c) to the Registrant's Form 10-K for the year
ending December 31, 1995).
(10)(d) Employment Agreement with R.C. Salisbury dated
January 4, 1996 (incorporated by reference to
Exhibit (10)(d) to the Registrant's Form 10-K for
the year ending December 31, 1995).
(10)(e) Employment Agreement with Fred Hassan dated May 7,
1997 (incorporated by reference to Exhibit (10) to
the Registrant's Form 10-Q for the quarter ending
June 30, 1997).
(10)(f) Employment Agreement with L.S. Smith dated February
25, 1997 (incorporated by reference to Exhibit
(10)(f) to the Registrant's Form 10-K for the year
ending December 31, 1996).
(10)(g) Employment Agreement with K.M. Cyrus dated March 8,
1996 (incorporated by reference to Exhibit (10)(g)
to the Registrant's Form 10-K for the year ending
December 31, 1996).
(10)(h) Employment Agreement with Richard T. Collier dated
November 17, 1997.
(10)(i) Employment Agreement with Timothy G. Rothwell dated
December 16, 1997.
(10)(j) Registration Rights Agreement dated as of August
20, 1995, among Pharmacia & Upjohn, Inc., The
Upjohn Company, Pharmacia Aktiebolag and AB Volvo
(filed as Exhibit 10(b) to the Registrant's
Registration Statement on Form S-4 (Reg. No.
33-61969), and incorporated herein by reference).
(10)(k) Long-Term Incentive Plan (incorporated by reference
to Exhibit (10)(h) to the Registrant's Form 10-K
for the year ending December 31, 1995).
(10)(l) Annual Incentive Plan (incorporated by reference to
Exhibit (10)(i) to the Registrant's Form 10-K for
the year ending December 31, 1995).
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Annual Report to Shareholders.
(21) Subsidiaries of the Registrant.
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C>
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
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<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PHARMACIA & UPJOHN, INC.
By: /s/ Fred Hassan
-------------------------------------
Fred Hassan
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this Registration Report has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ /Soren Gyll Chairman of the Board and Director February 16, 1998
- ----------------------------------
Soren Gyll
/s/ Fred Hassan President and Chief Executive February 16, 1998
- ---------------------------------- Officer and Director
Fred Hassan
/s/ Robert C. Salisbury Executive Vice President (Chief February 16, 1998
- ---------------------------------- Financial Officer)
Robert C. Salisbury
/s/ Robert G. Thompson Senior Vice President (Chief February 16, 1998
- ---------------------------------- Accounting Officer)
Robert G. Thompson
/s/ Frank C. Carlucci Director February 16, 1998
- ----------------------------------
Frank C. Carlucci
- ---------------------------------- Director February 16, 1998
Gustaf Douglas
/s/ M. Kathryn Eickhoff Director February 16, 1998
- ----------------------------------
M. Kathryn Eickhoff
/s/ Daryl F. Grisham Director February 16, 1998
- ----------------------------------
Daryl F. Grisham
/s/ William E. La Mothe Director February 16, 1998
- ----------------------------------
William E. La Mothe
/s/ Berthold Lindquist Director February 16, 1998
- ----------------------------------
Berthold Lindquist
/s/ Olof Lund Director February 16, 1998
- ----------------------------------
Olof Lund
</TABLE>
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<PAGE> 22
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William D. Mulholland Director February 16, 1998
- ----------------------------------
William D. Mulholland
/s/ William U. Parfet Director February 16, 1998
- ----------------------------------
William U. Parfet
/s/ Ulla Reinius Director February 16, 1998
- ----------------------------------
Ulla Reinius
/s/ Bengt Samuelsson Director February 16, 1998
- ----------------------------------
Bengt Samuelsson
</TABLE>
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<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(3)(iii) Amendment to By-laws of the Registrant
(10)(h) Employment Agreement with Richard T. Collier
(10)(i) Employment Agreement with Timothy G. Rothwell
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(27) Financial Data Schedule
<PAGE> 1
EXHIBIT (3)(iii)
PHARMACIA & UPJOHN, INC.
AMENDMENT OF BY-LAWS
MINUTES OF MEETING
OCTOBER 13, 1997
Section 1.02 of the Company's By-laws is amended to read as follows:
SECTION 1.02. Other Offices. The Corporation may have an office or offices
at any place or places within or without the State of Delaware as
the Board of Directors of the Corporation (the "Board") may from
time to time determine or the business of the Corporation may from
time to time require.
<PAGE> 2
EXHIBIT (10)(h)
November 17, 1997
Mr. Rick Collier
500 Arcola Road
Collegeville
Pennsylvania 19426-0107
U.S.A.
Dear Mr. Collier:
This letter confirms the terms of our offer for your employment as Senior Vice
President and General Counsel of Pharmacia & Upjohn, Inc. (the "Company"). I
very much hope that you will find this opportunity attractive and rewarding and
will accept our offer. The principal terms of your employment will be:
1. You will join the Company on December 1, 1997 (your "Employment Commencement
Date") as an employee of the Company, and the Company's Board of Directors will
elect you as Senior Vice President and General Counsel of the Company at its
first meeting after your acceptance of this Agreement.
The term of this agreement will be from your Employment Commencement Date until
November 1, 2000, and will be automatically renewed for an indefinite period
thereafter (the "Term"), unless and until at least sixty (60) days' prior
written notice of termination is given by either party stating the date of
termination.
You will devote substantially all of your business time to your duties and
responsibilities with the Company. However, you will not be precluded from (i)
serving on the board of directors of other companies (subject to the reasonable
approval of the Chief Executive Officer of the Company) and boards of trade
associations or charitable organizations; (ii) engaging in charitable activities
and community affairs; or (iii) managing your personal investments and affairs,
provided that such activities do not materially interfere with your duties and
responsibilities with the Company.
2. Your beginning annual base salary will be $350,000 and will be subject to
annual review for increases.
3. You will be included in the Company's Annual Incentive Plan at a level
determined by the Compensation Committee of the Board to be appropriate based on
your position, job performance and Company policy. Your 1997 incentive
compensation target award will be set at 60% of your annual base salary or
$210,000. Your actual award will be calculated as if you had been employed
<PAGE> 3
2 November 17, 1997
by the Company for all of 1997 but will be subject to adjustment following the
end of the year by the performance criteria established for the Company's other
senior executive officers (the 1997 performance criteria provide that 30% of
targeted incentive compensation will be adjusted based on external measures
(total market return and earnings per share) compared to a group of comparable
global pharmaceutical companies, and the remaining 70% will be adjusted based on
relative growth in the Company's annual sales, earnings and cash flow and on
individual performance). However, you will be guaranteed a minimum cash bonus
for 1997 equal to $140,000. The amount of your 1997 incentive compensation from
the Company (including the guaranteed minimum amount) will be reduced by the
amount of any annual bonus you receive from your current employer for services
rendered during 1997. Payment of your incentive compensation will be made in
March 1998. Your ongoing annual incentive compensation target awards will be set
at 60% of your annual base salary, payable if the performance criteria
determined by the Compensation Committee of the Board are met. If the
performance criteria are exceeded or not fully met, you will receive such
greater or lesser amount as the Compensation Committee determines is
appropriate.
4. To provide you with new long-term equity incentive compensation and to
replace the equity awards from your current employer that you will lose as a
result of joining the Company, the Board of Directors of the Company will grant
you, as of your Employment Commencement Date, a stock option for 20,000 shares
of the Company's Common Stock.
The exercise price of the stock options will be the fair market value (defined
in the Company's Long-Term Incentive Plan as the average of the daily high and
low) for Pharmacia & Upjohn Common Stock on the New York Stock Exchange on the
last trading day before your Employment Commencement Date. All stock options
will be "Incentive Stock Options" to the maximum extent permitted, and the
remainder will be non-qualified stock options, under the U.S. Internal Revenue
Code, will be subject to the terms of said Plan and will expire no later than
ten years from the date of grant.
Beginning in 1998, you will be granted stock options pursuant to the Company's
Long-Term Incentive Plan at the same time as other senior executives of the
Company and at a level determined by the Compensation Committee of the Board to
be appropriate based on your position, job performance, competitive practices
and Company policy.
Stock options not yet vested will nevertheless vest immediately upon your death
or permanent disability, a Change in Control of the Company (as defined in the
Company's Long-Term Incentive Plan), your involuntary termination of employment
other than for Cause (as defined below), or your termination of employment for
Good Reason (as defined below).
5. You will be eligible to receive employee benefits and perquisites at least as
favorable as those provided to any other similarly situated senior executives of
the Company, including,
<PAGE> 4
3 November 17, 1997
without limitation, if offered to such other senior executives, pension, profit
sharing, savings, deferred compensation, private medical and dental,
hospitalization, short-term and long-term disability, life insurance, accidental
death, travel accident, vacation and any other benefit programs or plans that
may be sponsored by the Company, including any plans that supplement the
above-listed plans, whether funded or unfunded.
To the extent that there is a period of employment service required as a
condition for full benefit coverage under any employee benefit program or plan,
you shall be deemed to have met such requirement, and to the extent that you
and/or your dependents will not be eligible to participate fully in any
medical/dental plan because of any exclusion for preexisting conditions, the
Company will waive any such exclusion for pre-existing conditions.
6. In the event your employment is involuntarily terminated by the Company other
than for Cause (as defined below) or you terminate your employment for Good
Reason (as defined below), during the Term of this agreement, provided that you
do not enter into Competition (as defined below) with the Company, then, as
liquidated damages and in lieu of any other damages or compensation under this
agreement, (i) you shall be entitled to receive a lump sum severance payment,
payable within 60 days after termination, equal to twice the combined amount of
your base salary and annual target incentive compensation as in effect on your
date of termination; (ii) you shall have your period of employment service used
to calculate retirement and other employee benefits, including eligibility for
post-retirement medical/dental coverage, extended for two additional years
following your employment termination date and the compensation used to
calculate your retirement benefits will be determined as if you had continued to
receive your then current annual base salary and annual target incentive
compensation for two additional years following your employment termination
date, which retirement benefits will be paid in a lump sum within 30 days after
termination subject to appropriate actuarial reductions consistent with those
applied under the plan to reflect your age when you terminate employment; (iii)
you will receive a pro-rata annual incentive compensation award in March of the
year following your termination equal to the amount you would have received if
you had worked for the full year multiplied by a fraction where the numerator is
the number of months (rounded to the next highest number for a partial month) of
the year elapsed prior to your termination and the denominator is 12; (iv) you
will be entitled to exercise during a period of up to five years following your
termination, in accordance with their terms, any remaining stock options that
had been granted to you prior to your termination (all of which will become
vested under such circumstances); (v) you and your dependents shall continue to
participate (with the same level of coverage) for two additional years following
your employment termination date, in all medical/dental, accident, disability
and life insurance plans on the same terms as in effect immediately prior to
your termination, provided, however, that such benefits will cease on the date
of your receiving equivalent benefits from a new employer; (vi) you shall be
entitled to outplacement services, at the expense of the
<PAGE> 5
4 November 17, 1997
Company, from a provider selected by you, subject to a maximum expense of
$50,000, and (vii) you shall receive any other amounts earned, accrued or owing
to you under the plans and programs of the Company.
In the event you should die during the Term of this agreement, while still
employed by the Company, your spouse or other beneficiary shall receive a lump
sum payment equal to two years' base salary offset by any death benefits payable
under the Company's life insurance plans under which you are covered.
In the event you enter into Competition with the Company within two years after
your employment is terminated, and you have received severance payments under
subparagraph (i) above, or additional retirement or other employee benefits
under subparagraph (ii) above, you agree to promptly repay the amount of such
severance payments, additional retirement or other employee benefits to the
Company, and any remaining stock options will be canceled.
7. In the event that, during the Term of this agreement, you voluntarily
terminate your employment (other than for Good Reason or due to permanent
disability) or you are discharged by the Company for Cause, you will forfeit
your right to receive any salary, incentive compensation or severance pay that
has not been fully earned at the time your employment terminates, provided,
however, you will be entitled to receive any benefits or amounts accrued but not
yet paid as of the date of your termination, and you will be able to exercise
any remaining vested stock options only during the three months following
termination of your employment.
8. You will receive the Company's customary relocation benefits. You shall be
reimbursed for any loss incurred on the sale of your principal U.S. residence
(measured by the difference between the net sales price you receive after
deducting brokerage fees and closing costs and the original purchase price you
paid plus the reasonable cost of improvements made to your residence). If this
loss cannot be fully deducted for your U.S. income taxes, the amount not
deductible will be grossed-up for any resulting taxes. In lieu of selling your
home yourself, the Company will purchase your home for an amount equal to the
average appraised value of your home as determined by at least two independent
real estate appraisers mutually satisfactory to you and the Company, which
amount will be deemed your net sales price for the purpose of determining the
amount of any loss to be reimbursed by the Company. The Company will also
reimburse you, grossed-up for any resulting taxes, for reasonable house-hunting,
personal transportation, moving expenses, temporary living expenses and other
related costs associated with your move to Pharmacia & Upjohn's headquarters.
<PAGE> 6
5 November 17, 1997
9. You will be immediately eligible to participate in, and shall be immediately
vested under, the Company's Global Officer Pension Plan, which is not qualified
under the U.S. Internal Revenue Code, supplements the officer's other sources of
retirement income to provide the officer with the actuarial value of an annual
life annuity of 65% of the officer's highest three-year average annual salary
and cash bonus compensation within the ten years prior to retirement from the
Company, provided the officer retires at age 65 with at least ten years of
service under the Plan. Appropriate actuarial adjustments consistent with those
applied under the Plan will be made if you have less than ten years of service
under the Plan or retire before age 65. Subject to such adjustments, you may
receive your retirement benefits in a lump sum within thirty days following your
termination of employment. The benefits payable under the Company's Global
Officer Pension Plan will be offset for any social security or other
governmental retirement income and any retirement income from any prior
employers that you may be entitled to receive.
10. You are authorized to incur reasonable expenses in carrying out your duties
and responsibilities with the Company, and the Company shall promptly reimburse
you for all business expenses in accordance with Company policy.
11. During the period of your employment and thereafter, you will maintain the
confidentiality of all confidential or proprietary information relating to the
business of the Company or any of its subsidiaries or affiliates, provided,
however, you may disclose such information as (i) may be required or appropriate
in carrying out your duties at the Company or (ii) may be required for you to
disclose by applicable law, governmental regulations or judicial or regulatory
process.
12. To the fullest extent permitted by applicable law, all intellectual property
(including patents, trademarks, and copyrights) which are made, developed or
acquired by you in the course of your employment with the Company will be and
remain the absolute property of the Company.
13. Without the written consent of the Chief Executive Officer of the Company,
you agree that during the period of your employment with the Company and for a
period of two years following the termination of your employment, you will not
enter into Competition with the Company. "Competition" as used in this agreement
means that you commence employment with, or provide substantial consulting
services to, any pharmaceutical company (except companies where sales from
pharmaceutical products constitute less than 20% of total sales). Anything
herein to the contrary notwithstanding, your service solely as a member of the
Board of Directors of a company whose annual sales are less than $100 million
shall not be deemed to be Competition for purposes of this agreement. For
purposes of the preceding sentence, if a
<PAGE> 7
6 November 17, 1997
company is a subsidiary of another company, the sales of both companies shall be
taken into account.
14. To the fullest extent permitted by applicable law, the Company will, during
and after termination of your employment, indemnify you (including providing
advancement of expenses) for any judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, incurred by you in
connection with the defense of any lawsuit or other claim or investigation to
which you are made, or threatened to be made, a party or witness by reason of
being or having been an officer, director or employee of the Company or any of
its subsidiaries or affiliates. In addition, you will be covered under any
directors' and officers' liability insurance policy for your acts (or non-acts)
as an officer or director of the Company or any of its subsidiaries or
affiliates to the extent the Company provides such coverage for its senior
executive officers.
15. Any disputes arising under or in connection with this agreement shall,
unless other arrangements are agreed to by you and the Company, be resolved by
binding arbitration to be held in New York, New York in accordance with the
rules and procedures of the American Arbitration Association, and judgment upon
any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Costs of the arbitration, including (but not by way of limitation)
reasonable attorney's fees of both parties, shall be borne by the party which
does not prevail in the proceedings, but in no event shall a party be liable to
pay for such costs in excess of $100,000. In the event that each party prevails
as to certain aspects of the proceedings, the arbitrator(s) shall determine an
appropriate allocation of costs between the parties.
16. In the event of termination of your employment, you will immediately, unless
otherwise requested by the Company's Board of Directors, resign from all
directorships, trusteeships, other offices and employment held at that time with
the Company or any of its subsidiaries or affiliates.
17. For purposes of this agreement, "Cause" means (i) a material breach by you
of your duties and responsibilities (other than as a result of incapacity due to
physical or mental illness) which is demonstrably willful and deliberate on your
part, which is committed in bad faith or without reasonable belief that such
breach is in the best interests of the Company, and which is not remedied in a
reasonable period of time after receipt of written notice from the Company
specifying such breach; or (ii) your conviction of a felony which is materially
and demonstrably injurious to the Company as determined in the sole discretion
of the Board of Directors of the Company.
<PAGE> 8
7 November 17, 1997
18. For purposes of this agreement, "Good Reason" means that, without your
consent, (i) your rate of annual base salary or the target amount of your annual
cash incentive bonus are reduced in a manner that is not applied proportionately
to all other senior executive officers of the Company, (ii) the Company fails to
retain you as Senior Vice President and General Counsel of the Company; (iii)
there is a material diminution in your duties, or the assignment to you of
duties which are materially inconsistent with your duties or which materially
impair your ability to perform your duties with the Company, or (iv) there is a
material breach of this agreement by the Company which is not remedied in a
reasonable period of time after receipt of written notice from you specifying
such breach.
19. The obligation of the Company to make any payments provided for hereunder
and otherwise to perform their obligations hereunder shall not be affected by
any set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against you or others. In no event shall you be
obligated to seek other employment or take other action by way of mitigation of
the amounts payable to you under any of the provisions of this agreement, and
such amounts shall not be reduced (except as otherwise specifically provided
herein) whether or not you obtain other employment.
20. In the event of any change in the outstanding shares of the Company's Common
Stock (including any increase or decrease in such shares) by reason of any stock
dividend or split, recapitalization, merger, consolidation, spinoff, combination
or exchange of shares or other similar corporate change, or any distributions to
common stockholders other than regular cash dividends, the Compensation
Committee of the Board may make such substitution or adjustment, if any, as it
deems to be equitable, as to the number or kind of shares of Common Stock
provided for in this agreement.
21. As with all prospective employees, a recent medical examination evidencing
general good health must be completed prior to employment. Your physician should
send the results of such examination to the Company's Chief Medical Officer.
22. This agreement will be governed by and construed in accordance with the laws
of the State of Delaware, U.S.A.
23. (a) No rights or obligations of the Company under this agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or pursuant to the sale or transfer of
all or substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company.
<PAGE> 9
8 November 17, 1997
(b) This agreement shall not be terminated by any merger, consolidation
or transfer of assets of the Company referred to above. In the event of any such
merger, consolidation or transfer of assets, the provisions of this agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to above, it will cause any successor or
transferee unconditionally to assume, either contractually or as a matter of
law, all of the obligations of the Company hereunder.
(d) This agreement shall inure to the benefit of, and be enforceable by
or against, you or your personal or legal representatives, executors,
administrators, successors, heirs, distributes, designees and legatees. None of
your rights or obligations under this agreement may be assigned or transferred
by you other than your rights to compensation and benefits, which may be
transferred only by will or operation of law. If you should die while any
amounts or benefits have been accrued by you but not yet paid as of the date of
your death and which would be payable to you hereunder had you continued to
live, all such amounts and benefits unless otherwise provided herein shall be
paid or provided in accordance with the terms of this agreement to such person
or persons appointed in writing by you to receive such amounts or, if no such
person is so appointed, to your estate.
24. No provisions of this agreement may be waived, modified or discharged unless
such waiver, modification or discharge is agreed to in writing signed by both
you and an authorized officer of the Company. No waiver by any party hereto at
any time of any breach by any other party hereto of, or compliance with, any
condition or provision of this agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by any party which are not set forth expressly in this agreement.
25. This agreement sets forth the entire agreement of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto in respect of the subject matter contained
herein.
26. This agreement may be executed by the parties in two or more counterparts,
each of which shall be deemed to be an original, but all such counterparts shall
constitute one and the same
<PAGE> 10
9 November 17, 1997
instrument, and all signatures need not appear on any one counterpart. A faxed
signature of a party which is a reproduction of a genuine signature of that
party shall be conclusive evidence of execution of this agreement by that party.
Very truly yours,
FRED HASSAN
Chief Executive Officer
I accept the terms set forth in this letter and will serve in the capacity
stated:
- --------------------------------------
Dated: November ______, 1997
<PAGE> 1
EXHIBIT (10)(i)
December 16, 1997
Mr Timothy G. Rothwell
207 Sandy Ridge, Mt Airy Road
Stockton, NJ 08559
United States of America
Dear Tim:
This letter confirms the terms of our offer for your employment as Executive
Vice President of Pharmacia & Upjohn, Inc. (the "Company") and President,
Pharmaceutical Operations. I very much hope that you will find this opportunity
attractive and rewarding and will accept our offer. The principal terms of your
employment will be:
1. You will join the Company on January ___, 1998 (your "Employment Commencement
Date") as an employee of the Company, and the Company's Board of Directors will
elect you as Executive Vice President of the Company and President,
Pharmaceutical Operations, at its December meeting, subject to your acceptance
of this Agreement.
The term of this agreement will be from your Employment Commencement Date until
December 31, 2000, and will be automatically renewed for an indefinite period
thereafter (the "Term"), unless and until at least sixty (60) days' prior
written notice of termination is given by either party stating the date of
termination.
You will devote substantially all of your business time to your duties and
responsibilities with the Company. However, you will not be precluded from (i)
serving on the board of directors of other companies (subject to the reasonable
approval of the Chief Executive Officer of the Company) and boards of trade
associations or charitable organizations; (ii) engaging in charitable activities
and community affairs; or (iii) managing your personal investments and affairs,
provided that such activities do not materially interfere with your duties and
responsibilities with the Company.
2. Your beginning annual base salary will be $720,000 and will be subject to
annual review for increases.
3. You will be included in the Company's Annual Incentive Plan at a level
determined by the Compensation Committee of the Board to be appropriate based on
your position, job performance and Company policy. Your 1998 incentive
compensation target award will be set at 75% of your annual base salary or
$540,000. Your incentive compensation award will be subject to adjustment
following the end of the year by the performance criteria established by the
Compensation Committee of the Board of Directors. In addition, you will receive
18,500 shares of restricted Common Stock of the Company to compensate you for
the loss of your long-term incentive shares
<PAGE> 2
2 December 16, 1997
from your previous employer. The restricted shares will vest over the same
period as the 1997 award at your previous employer. You will also receive on
March 1, 1998 a special cash payment of $325,000 to compensate you for any loss
of bonus from your previous employer.
4. To provide you with new long-term equity incentive compensation and to
replace the equity awards from your current employer that you will lose as a
result of joining the Company, the Board of Directors of the Company will grant
you, as of your Employment Commencement Date, a stock option for 120,000 shares
of the Company's Common Stock, vesting ratably over a three-year period on each
of the first three annual anniversaries of your Employment Commencement Date.
The exercise price of the stock options will be the fair market value (defined
in the Company's Long-Term Incentive Plan as the average of the daily high and
low) for Pharmacia & Upjohn Common Stock on the New York Stock Exchange on your
Employment Commencement Date. All stock options will be "Incentive Stock
Options" to the maximum extent permitted, and the remainder will be
non-qualified stock options, under the U.S. Internal Revenue Code, will be
subject to the terms of said Plan and will expire no later than ten years from
the date of grant.
Beginning in 1998, you will be granted stock options pursuant to the Company's
Long-Term Incentive Plan at the same time as other senior executives of the
Company and at a level determined by the Compensation Committee of the Board to
be appropriate based on your position, job performance, competitive practices
and Company policy, which currently is approximately 100,000 shares, but in an
amount not less than 100,000 shares of the Company's Common Stock.
Stock options not yet vested will nevertheless vest immediately upon a Change in
Control of the Company (as defined in the Company's Long-Term Incentive Plan).
5. You will be eligible to receive employee benefits and perquisites in line
with the general plan applicable to our Global Officers including, without
limitation, if offered to such other senior executives, pension, profit sharing,
savings, deferred compensation, medical, dental, hospitalization, short-term and
long-term disability, life insurance, accidental death, travel accident,
vacation and any other benefit programs or plans that may be sponsored by the
Company, including any plans that supplement the above-listed plans, whether
funded or unfunded.
To the extent that there is a period of employment service required as a
condition for full benefit coverage under any employee benefit program or plan,
you shall be deemed to have met such requirement, and to the extent that you
and/or your dependents will not be eligible to participate fully in any
medical/dental plan because of any exclusion for preexisting conditions, the
Company will waive any such exclusion for pre-existing conditions.
<PAGE> 3
3 December 16, 1997
6. In the event your employment is involuntarily terminated by the Company other
than for Cause (as defined below) or you terminate your employment for Good
Reason (as defined below), during the Term of this agreement, provided that you
do not enter into Competition (as defined below) with the Company, then, as
liquidated damages and in lieu of any other damages or compensation under this
agreement, (i) you shall be entitled to receive a lump sum severance payment,
payable within 60 days after termination, equal to twice the combined amount of
your annual base salary and annual target incentive compensation as in effect on
your date of termination; (ii) you shall have your period of employment service
used to calculate retirement and other employee benefits, including eligibility
for post-retirement medical/dental coverage, extended for two additional years
following your employment termination date and the compensation used to
calculate your retirement benefits will be determined as if you had continued to
receive your then current annual base salary and annual target incentive
compensation for two additional years following your employment termination
date, which retirement benefits will be paid in a lump sum within 30 days after
termination subject to appropriate actuarial reductions consistent with those
applied under the plan to reflect your age when you terminate employment; (iii)
you will receive a pro-rata annual incentive compensation award in March of the
year following your termination equal to the amount you would have received if
you had worked for the full year as adjusted for the performance criteria
specified for your award multiplied by a fraction where the numerator is the
number of months (rounded to the next highest number for a partial month) of the
year elapsed prior to your termination and the denominator is 12; (iv) you and
your dependents shall continue to participate (with the same level of coverage)
for two additional years following your employment termination date, in all
medical/dental, accident, disability and life insurance plans on the same terms
as in effect immediately prior to your termination, provided, however, that such
benefits will cease on the date of your receiving equivalent benefits from a new
employer; (v) you shall be entitled to outplacement services from a provider
selected by you, at the expense of the Company, subject to a maximum expense of
$25,000; and (vi) you shall receive any other amounts earned, accrued or owing
to you under the plans and programs of the Company.
In the event you enter into Competition with the Company within two years after
your employment is terminated, and you have received severance payments under
subparagraph (i) above, or additional retirement or other employee benefits
under subparagraph (ii) above, you agree to promptly repay the amount of such
severance payments and additional retirement or other employee benefits to the
Company.
7. In the event that, during the Term of this agreement, you voluntarily
terminate your employment (other than for Good Reason) or you are discharged by
the Company for Cause, you will forfeit your right to receive any salary,
incentive compensation or severance pay that has not been fully earned at the
time your employment terminates, provided, however, you will be entitled to
receive any benefits or amounts accrued but not yet paid as of the date of your
termination.
<PAGE> 4
4 December 16, 1997
8. You acknowledge that the Company may at any time relocate your place of
employment to such location as may at that time constitute the Company's
principal executive offices. You will begin your employment at the Company's
Management Centre in Windsor, England and the temporary living expenses incurred
by you (and your family if they accompany you) will be reimbursed by the Company
net of any resulting income tax. You will receive the Company's customary
relocation benefits for your move from your current home in the United States to
the Company's new headquarters in New Jersey. You shall be reimbursed for any
loss incurred on the sale of your principal U.S. residence (measured by the
difference between the net sales price you receive after deducting brokerage
fees and closing costs and the original purchase price you paid plus the
reasonable cost of improvements made to your residence) up to a maximum amount
of $100,000. In lieu of selling your home yourself, the Company will purchase
your home for an amount equal to the average appraised value of your home as
determined by at least two independent real estate appraisers mutually
satisfactory to you and the Company, which amount will be deemed your net sales
price for the purpose of determining the amount of any loss to be reimbursed by
the Company. The Company will also reimburse you, grossed-up for any resulting
taxes, for reasonable house-hunting, personal transportation, moving expenses,
temporary living expenses and other related costs associated with your move to
the Company's new headquarters in New Jersey.
9. You will be immediately eligible to participate in, and shall be immediately
vested under, the Company's Global Officer Pension Plan, which is not qualified
under the U.S. Internal Revenue Code, supplements the officer's other sources of
retirement income to provide the officer with the actuarial value of an annual
life annuity of 65% of the officer's highest three-year average annual salary
and cash bonus compensation within the ten years prior to retirement from the
Company, provided the officer retires at age 65 with at least ten years of
service under the Plan. Appropriate actuarial adjustments consistent with those
applied under the Plan will be made if you have less than ten years of service
under the Plan or retire before age 65. The benefits payable under the Company's
Global Officer Pension Plan will be offset for any social security or other
governmental retirement income and any retirement income from any prior
employers that you may be entitled to receive.
10. You are authorized to incur reasonable expenses in carrying out your duties
and responsibilities with the Company, and the Company shall promptly reimburse
you for all business expenses in accordance with Company policy.
11. During the period of your employment and thereafter, you will maintain the
confidentiality of all confidential or proprietary information relating to the
business of the Company or any of its subsidiaries or affiliates, provided,
however, you may disclose such information as (i) may be required or appropriate
in carrying out your duties at the Company or (ii) may be required for you to
disclose by applicable law, governmental regulations or judicial or regulatory
process.
<PAGE> 5
5 December 16, 1997
12. To the fullest extent permitted by applicable law, all intellectual property
(including patents, trademarks, and copyrights) which are made, developed or
acquired by you in the course of your employment with the Company will be and
remain the absolute property of the Company, and you shall assist the Company in
perfecting and defending its rights to such intellectual property.
13. In consideration of the offer of employment and the compensation and
benefits provided hereunder, without the written consent of the Chief Executive
Officer of the Company, you agree that during the period of your employment with
the Company and for a period of two years following the termination of your
employment, you will not enter into Competition with the Company. "Competition"
as used in this agreement means that you engage in substantially the same work
as you had been engaged in while employed by the Company with another
pharmaceutical company (except companies where sales from pharmaceutical
products constitute less than 20% of total sales) as either an employee or
consultant. Anything herein to the contrary notwithstanding, your service solely
as a member of the Board of Directors of a company whose annual sales are less
than $100 million shall not be deemed to be Competition for purposes of this
agreement. For purposes of the preceding sentence, if a company is a subsidiary
of another company, the sales of both companies shall be taken into account.
14. To the fullest extent permitted by applicable law, the Company will, during
and after termination of your employment, indemnify you (including providing
advancement of expenses) for any judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, incurred by you in
connection with the defense of any lawsuit or other claim or investigation to
which you are made, or threatened to be made, a party or witness by reason of
being or having been an officer, director or employee of the Company or any of
its subsidiaries or affiliates. In addition, you will be covered under any
directors' and officers' liability insurance policy for your acts (or non-acts)
as an officer or director of the Company or any of its subsidiaries or
affiliates to the extent the Company provides such coverage for its senior
executive officers.
15. Any disputes arising under or in connection with this agreement shall,
unless other arrangements are agreed to by you and the Company, be resolved by
binding arbitration to be held in New York, New York in accordance with the
rules and procedures of the American Arbitration Association, and judgment upon
any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Costs of the arbitration, including (but not by way of limitation)
reasonable attorney's fees of both parties, shall be borne by the party which
does not prevail in the proceedings, but in no event shall a party be liable to
pay for such costs in excess of $25,000. In the event that each party prevails
as to certain aspects of the proceedings, the arbitrator(s) shall determine an
appropriate allocation of costs between the parties.
16. In the event of termination of your employment, you will immediately, unless
otherwise requested by the Company's Board of Directors, resign from all
directorships, trusteeships, other offices and employment held at that time with
the Company or any of its subsidiaries or affiliates.
<PAGE> 6
6 December 16, 1997
17. For purposes of this agreement, "Cause" means (i) a material breach by you
of your duties and responsibilities (other than as a result of incapacity due to
physical or mental illness) which is demonstrably willful and deliberate on your
part, which is committed in bad faith or without reasonable belief that such
breach is in the best interests of the Company, and which is not remedied in a
reasonable period of time after receipt of written notice from the Company
specifying such breach; or (ii) your conviction of a felony which is materially
and demonstrably injurious to the Company as determined in the sole discretion
of the Board of Directors of the Company.
18. For purposes of this agreement, "Good Reason" means that, without your
consent, (i) your rate of annual base salary or the cash target amount of your
annual cash incentive bonus are reduced in a manner that is not applied
proportionately to all other senior executive officers of the Company; (ii) the
Company fails to retain you as an Executive Vice President of the Company,
although the Company may at any time change your job description without
constituting "Good Reason;" (iii) there is a material diminution of your primary
job function, or the assignment to you of duties which are materially
inconsistent with your primary job function, or which materially impair your
ability to perform your primary job function with the Company; (iv) the Company
delivers to you a written notice of intended termination of this agreement
pursuant to Section 1 above at a time when the Company would not have Cause to
terminate your employment; or (v) there is a material breach of this agreement
by the Company which is not remedied in a reasonable period of time after
receipt of written notice from you specifying such breach.
19. The obligation of the Company to make any payments provided for hereunder
and otherwise to perform their obligations hereunder shall not be affected by
any set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against you or others. In no event shall you be
obligated to seek other employment or take other action by way of mitigation of
the amounts payable to you under any of the provisions of this agreement, and
such amounts shall not be reduced (except as otherwise specifically provided
herein) whether or not you obtain other employment.
20. In the event of any change in the outstanding shares of the Company's Common
Stock (including any increase or decrease in such shares) by reason of any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
combination or exchange of shares or other similar corporate change, or any
distributions to common stockholders other than regular cash dividends, the
Compensation Committee of the Board may make such substitution or adjustment, if
any, as it deems to be equitable, as to the number or kind of shares of Common
Stock provided for in this agreement.
21. As with all prospective employees, a recent medical examination evidencing
general good health must be completed prior to employment. Your physician should
send the results of such examination to the Company's Chief Medical Officer.
<PAGE> 7
7 December 16, 1997
22. This agreement will be governed by and construed in accordance with the laws
of the State of New Jersey, U.S.A.
23. (a) No rights or obligations of the Company under this agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or pursuant to the sale or transfer of
all or substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company.
(b) This agreement shall not be terminated by any merger, consolidation
or transfer of assets of the Company referred to above. In the event of any such
merger, consolidation or transfer of assets, the provisions of this agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to above, it will cause any successor or
transferee unconditionally to assume, either contractually or as a matter of
law, all of the obligations of the Company hereunder.
(d) This agreement shall inure to the benefit of, and be enforceable by
or against, you or your personal or legal representatives, executors,
administrators, successors, heirs, distributes, designees and legatees. None of
your rights or obligations under this agreement may be assigned or transferred
by you other than your rights to compensation and benefits, which may be
transferred only by will or operation of law. If you should die while any
amounts or benefits have been accrued by you but not yet paid as of the date of
your death and which would be payable to you hereunder had you continued to
live, all such amounts and benefits unless otherwise provided herein shall be
paid or provided in accordance with the terms of this agreement to such person
or persons appointed in writing by you to receive such amounts or, if no such
person is so appointed, to your estate.
24. No provisions of this agreement may be waived, modified or discharged unless
such waiver, modification or discharge is agreed to in writing signed by both
you and an authorized officer of the Company. No waiver by any party hereto at
any time of any breach by any other party hereto of, or compliance with, any
condition or provision of this agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by any party which are not set forth expressly in this agreement.
25. This agreement sets forth the entire agreement of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto in respect of the subject matter contained
herein.
<PAGE> 8
8 December 16, 1997
26. This agreement may be executed by the parties in two or more counterparts,
each of which shall be deemed to be an original, but all such counterparts shall
constitute one and the same instrument, and all signatures need not appear on
any one counterpart. A faxed signature of a party which is a reproduction of a
genuine signature of that party shall be conclusive evidence of execution of
this agreement by that party.
Very truly yours,
FRED HASSAN
Chief Executive Officer
I accept the terms set forth in this letter and will serve in the capacity
stated:
- --------------------------------------
TIMOTHY G. ROTHWELL
Dated: December ______, 1997
<PAGE> 1
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations before
income taxes $468 $838 $1,136 $1,271 $778
Less: Equity in undistributed net income
(loss) of companies owned less than 50% (32) 5 7 8 8
-------- -------- -------- -------- --------
$500 833 1,129 1.263 770
Add: Amortization of previously capitalized
interest 12 11 10 8 6
Fixed charges included in the above:
Interest and amortization of debt expense 121 82 121 139 209
Rental expense representative of an
interest factor 38 37 35 35 32
-------- -------- -------- -------- --------
Earnings from continuing operations before
income taxes and fixed charges $671 $963 $1,295 $1,445 $1,017
======== ======== ======== ======== ========
Interest incurred and amortization of debt
expense 90 115 149 164 234
Rental expense representative of an
interest factor 38 37 35 35 32
-------- -------- -------- -------- --------
Total fixed charges $128 $152 $184 $199 $266
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 5.25 6.33 7.05 7.24 3.82
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13
PHARMACIA & UPJOHN
Financial review
OVERVIEW
Pharmacia & Upjohn, Inc. (the company) was formed through the merger of
Pharmacia AB and The Upjohn Company and began operating in November 1995. The
merger was accounted for as a pooling of interests under U.S. generally
accepted accounting principles. All data prior to the November 2, 1995 merger
date have been combined as if the companies had been merged during the prior
periods.
All per-share amounts in the following discussion are presented on a
diluted, after-tax basis.
Earnings declined in 1997 compared to the previous two years. The
year-to-year earnings comparison is significantly affected by the
restructuring of the company since 1995. The restructuring activity reflects
the ongoing transformation of the company from two unique operations into an
effective, well-integrated global enterprise. Restructuring charges were $316
million ($.39 per share) in 1997; $518 million ($.62 per share) in 1996, and
$104 million ($.13 per share) in 1995. Restructuring charges in 1997 were
associated with the global turnaround program designed to achieve simplified
infrastructure and improved efficiency. Restructuring efforts in 1996 and
1995 related primarily to the November 1995 merger and included the
reduction of 4,350 positions, the elimination of duplicate facilities, and
other activities associated with the merger. In addition, merger costs of $67
million ($.09 per share) were reported in 1996 and $138 million ($.22 per
share) in 1995. These costs consisted of certain nonrecurring organizational
activities, establishing the corporate identity for the new company, and
other costs of combining the two predecessor companies.
Changes in ownership of non-core businesses also have materially
affected the year-to-year earnings comparison. In 1997, the company merged
Pharmacia Biotech, its biotechnology supply business, with Amersham Life
Science creating a new company, Amersham Pharmacia Biotech Ltd. Pharmacia &
Upjohn owns 45 percent of the new company. In 1996, Pharmacia & Upjohn sold
59 percent of its holding in Biacore International AB through an initial
public offering. Prior to these transactions, the results of both
subsidiaries had been consolidated with the results of Pharmacia & Upjohn.
After the transactions, Pharmacia & Upjohn accounted for its share of the net
results of operations of each company on the equity basis. In connection with
the merger and subsequent restructuring of Biotech, Pharmacia & Upjohn
recorded nonrecurring charges of $79 million ($.12 per share) in 1997. In
1996, the company recorded a gain on the sale of Biacore stock of $55 million
($.08 per share) which was included in non-operating income.
The company took additional strategic steps during the last three years
which have affected earnings comparability. The reacquisition of sales and
marketing rights to GENOTROPIN in Japan and related inventory repurchase
resulted in a charge of $115 million ($.11 per share) in 1997. Components of
this transaction were recorded in sales; cost of goods sold; and marketing,
administrative, and other (MA&O) expense. Also in 1997, the company purchased
exclusive worldwide commercialization rights to a research compound for $35
million ($.04 per share) and terminated certain future product plans
resulting in a charge of $36 million ($.05 per share). Both charges were
reported in research and development (R&D) expense.
Significant events in 1996 included the termination of a product
development agreement with the Biopure Corporation resulting in a charge of
$106 million ($.13 per share) and the sale of an equity interest and related
dissolution of a joint venture resulting in a gain of $46 million ($.06 per
share), both reported in MA&O expense. In 1995, items materially affecting
comparability included the write-down of an equity investment to fair value
and the sale of the company's rights under a product co-marketing agreement.
The write-down of $59 million ($.08 per share) was recorded in MA&O expense.
The sale of co-marketing rights for $42 million ($.05 per share) was
classified as other operating revenue.
<TABLE>
<CAPTION>
OVERVIEW OF CONSOLIDATED RESULTS 1997 % 1996 % 1995
U.S. dollars in millions, except per-share data $M change $m change $m
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue 6,710 (8) 7,286 3 7,095
Operating income 390 (42) 677 (33) 1,015
Earnings before income taxes 468 (44) 838 (26) 1,136
Net earnings 323 (43) 562 (24) 739
Net earnings per common share:
- Basic $.61 (44) $1.08 (25) $1.44
- Diluted $.61 (43) $1.07 (24) $1.41
- -------------------------------------------------------------------------------------
</TABLE>
NET SALES
Following increases in worldwide sales of 3 percent in 1996 and 4
percent in 1995, sales declined 8 percent in 1997 to $6.6 billion. Volume
growth of 2 percent was greatly offset by a 1 percent price decrease,
a 6 percent unfavorable exchange rate effect, and a 3 percent decline due to
the exclusion of Biotech and Biacore sales from the consolidated total. In
1997, sales outside the U.S. represented 68 percent of worldwide sales
consistent with 1996 and down from 70 percent in 1995. The magnitude of sales
in Japan and key European markets resulted in significant adverse exchange
effects to the company as the U.S. dollar strengthened relative to the yen
and most major European currencies throughout 1997. The company's
26
<PAGE> 2
ANNUAL REPORT 1997
geographic composition of sales will continue to result in significant
exposure to the fluctuations of currency exchange rates in both translation
of financial results and the underlying transactions that comprise the
results. The effect of currency exchange on sales performance by country,
based on location of customer, is provided in the table below.
The markets in which the company conducts business are competitive and
highly regulated. Price reductions and product substitutions may result from
the introduction of new, technologically innovative products and processes by
competitors, even for products protected by patents. Pricing pressures
are exerted both from governmental bodies and the private sector in an effort
to contain health care costs. Loss of patent protection results in increased
competition and generic substitution. This is evidenced by a gradual decline in
sales of the affected product as new competition enters the marketplace,
usually at a lower price to gain market share. The company cannot predict the
outcome or timing of future governmental or other health care initiatives and
cannot reasonably estimate the effect on operations or cash flows.
<TABLE>
<CAPTION>
EXCHANGE EFFECT ON SALES 1997 % %CHANGE 1996
U.S. dollars in millions $M change excl. FX* $m
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-U.S.:
Japan 625 (12.6) (2.4) 715
Italy 466 (6.9) 2.5 501
Germany 414 (15.0) (2.3) 487
United Kingdom 312 6.6 12.2 292
Sweden 278 (17.1) (5.8) 335
France 254 (11.0) 1.2 286
Spain 185 (17.2) (4.5) 223
Rest of world 1,797 5.3 9.5 1,707
United States 2,019 (7.9) (7.9) 2,191
- ------------------------------------------------------------
Subtotal 6,350 (5.8) (0.2) 6,737
Biotech/Biacore 236 (46.2) (39.5) 439
- ------------------------------------------------------------
Consolidated sales 6,586 (8.2) (2.6) 7,176
- ------------------------------------------------------------
</TABLE>
*Represents percent change from the prior year excluding the approximate
effects of currency exchange rate fluctuations.
<TABLE>
<CAPTION>
SALES OF SELECTED PRODUCTS (PRODUCT CATEGORY) 1997 % 1996 % 1995
U.S. dollars in millions $M change $m change $m
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENOTROPIN (Metabolic disease) 349 (12.0) 397 2.3 388
XANAX (Central nervous system) 294 (16.7) 353 10.2 320
CLEOCIN/DALACIN (Infectious disease) 292 4.6 279 (3.3) 288
MEDROL (Inflammation) 251 (6.7) 269 (1.6) 273
DEPO-PROVERA (Women's health) 196 (5.1) 206 23.3 167
PHARMORUBICIN (Oncology) 196 (5.8) 208 0.8 206
NICORETTE (Consumer pharmaceuticals) 168 (18.7) 207 79.7 115
FRAGMIN (Metabolic disease) 165 10.4 150 37.2 109
XALATAN (Ophthalmology) 165 452.7 30 n/a n/a
HEALON (Ophthalmology) 155 (17.7) 188 (11.5) 212
CAMPTOSAR (Oncology) 154 162.0 59 n/a n/a
ROGAINE (Consumer pharmaceuticals) 129 (31.8) 189 52.2 124
CAVERJECT (Urology) 88 26.5 70 192.9 24
MIRAPEX (Central nervous system) 20 n/a n/a n/a n/a
- -------------------------------------------------------------------------------------------------------------------------
Total 2,622 0.7 2,605 16.9 2,226
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
PRODUCT SALES
New product sales growth represented an increasing percentage of total sales
in 1997 as compared to the previous two years. XALATAN, a glaucoma treatment,
enjoyed strong growth in 1997 with sales increasing every quarter since its
launch in 1996. Two other key new products for the company include DETRUSITOL
(DETROL in the U.S.) and EDRONAX. DETRUSITOL, a treatment for overactive
bladder, was launched in Sweden in October. The company expects to launch
this primary-care product in the U.S. and several key European markets in
1998. EDRONAX, the first in a new class of anti-depressants, was launched in
the U.K. in July and is planned for launch in 13 additional European
countries during the next year.
The strong sales performances of CAMPTOSAR, FRAGMIN, and MIRAPEX have
established these products as important to the company's future growth.
CAMPTOSAR, a treatment for metastatic colorectal cancer, achieved record
sales in 1997, its first full year on the U.S. market. FRAGMIN, an
antithrombotic agent, attained worldwide volume growth of 23 percent with
excellent growth in the U.S., the U.K. and Germany. FRAGMIN sales in Japan
were also higher in part due to the restructuring of a distributor
relationship early in 1996 which had no impact on earnings. MIRAPEX, a new
treatment for Parkinson's disease, quickly established an important presence
after its July 1997 launch, capturing 4.8 percent of the U.S. market.
CAVERJECT also registered substantial growth in 1997 with a 31 percent
increase in worldwide volume as compared to 1996. CAVERJECT, a treatment
for male impotence, was launched late in 1995.
Other products essential to the company's top-line growth strategy are
GENOTROPIN, NICORETTE, and ROGAINE, sales of which declined in 1997 after
strong performances in prior years. GENOTROPIN,
27
<PAGE> 3
PHARMACIA & UPJOHN
FINANCIAL REVIEW
a human growth hormone, achieved good growth in the U.S. propelled by the
success of new patient recruitment efforts and the approval of the product for
use in treating growth hormone deficiency in adults. Excluding the inventory
repurchase in Japan, worldwide volume growth of GENOTROPIN was 8 percent. This
growth, however, was more than offset by price declines and the adverse
effects of exchange. NICORETTE and ROGAINE performed well outside the U.S. In
the U.S., sales levels were lower due to the initial establishment of retail
inventories for the launches of both over-the-counter products in 1996.
ROGAINE also has faced intense private-label competition as well as wholesaler
inventory reductions in anticipation of the approval of ROGAINE Extra Strength
for Men, which was launched in the U.S. late in 1997. Early in 1998, the
company was granted three years of marketing exclusivity for ROGAINE Extra
Strength for Men. NICORETTE represents a line of nicotine replacement therapy
products and ROGAINE (REGAINE outside the U.S.) is a treatment for hereditary
hair loss.
Mandatory price decreases in Japan over the last two years and the
increasing strength of the U.S. dollar against the yen has had a significant
negative impact on the company's performance since 1996 due to the importance
of this market to several products. These products include GENOTROPIN, SERMION,
SOLU-MEDROL and other MEDROL products, PHARMORUBICIN, CLEOCIN, SALAZOPYRIN, and
HEALON. SERMION is a treatment for senile dementia reported in the CNS
category. SOLU-MEDROL, an injectable steroid, and SALAZOPYRIN/AZULFIDINE, a
treatment for inflammatory bowel disease and rheumatoid arthritis, are reported
in inflammation. PHARMORUBICIN is a cytostatic agent for the treatment of solid
tumors and leukemias and HEALON is a viscoelastic used for cataract surgery.
Loss of patent protection and ensuing generic erosion have led to sales
declines in the U.S. and Europe for several products. XANAX, an anti-anxiety
agent, and CNS product HALCION, a sleep-inducing agent, have experienced this
trend since 1993. Oral anti-diabetes agents GLYNASE and MICRONASE, reported in
the Metabolic Disease group, lost patent protection in the U.S. in 1995 and
1994, respectively. PROVERA, the progestational agent reported in Women's
Health, also has faced competition from generics in the U.S. throughout the
past few years. PHARMORUBICIN, ADRIAMYCIN, and HEALON were especially affected
by generic erosion in Europe in 1997. Competition from generics is expected to
continue to adversely affect future sales of these products.
Additional factors in the U.S. market affected sales of certain
products. Discontinuation of special promotions in 1997 that were offered in
1996 and the resulting effects of year-end 1996 trade inventory accumulations
led to unfavorable sales comparisons for DEPO-PROVERA, PROVERA, GLYNASE, XANAX,
and MICRONASE. DEPO-PROVERA, the injectable contraceptive, also was adversely
affected by a temporary cutback in promotional spending in 1997. A refocusing
of sales force efforts and a direct-to-consumer campaign beginning mid-year
have since bolstered sales. The antibiotic CLEOCIN (DALACIN outside the U.S.)
demonstrated solid growth of 10 percent worldwide excluding adverse exchange
effects. Strong growth in the U.S. market was partially attributed to a recall
of a competitor's product early in 1997. Another Infectious Disease product
VANTIN, a broad spectrum oral antibiotic, continued to face competition from
the macrolide class of antibiotics introduced in 1996.
The company reports its operations as a single industry segment:
pharmaceutical products. This industry designation includes eight major
pharmaceutical product categories and five associated businesses, each
contributing in excess of $200 million in sales in 1997. The table below
provides a year-to-year comparison of consolidated net sales by major product
group and associated business.
Associated businesses continued to provide a solid base of sales to the
company. Excluding the unfavorable impact of exchange, current year Animal
Health and Diagnostics sales increased by 2 percent and 9 percent,
respectively, over 1996 levels. Diagnostics sales declined
<TABLE>
<CAPTION>
SALES BY PRODUCT GROUP 1997 % 1996 % 1995
U.S. dollars in millions $M change $m change $m
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Metabolic disease 656 (15.8) 778 4.5 745
Oncology 669 6.2 630 11.2 566
Women's health/urology 604 (7.9) 656 10.1 596
Infectious disease 563 (4.2) 587 (14.5) 687
Inflammation 544 (12.9) 625 0.2 623
Central nervous system 498 (12.4) 568 (0.6) 572
Ophthalmology 383 29.7 295 (0.4) 296
Other prescription pharmaceuticals 470 (15.6) 558 (10.9) 626
Consumer pharmaceuticals 642 (9.5) 710 25.4 566
- -------------------------------------------------------------------------------------------------
Total pharmaceuticals 5,029 (7.0) 5,407 2.5 5,277
Animal health 403 (2.4) 413 7.9 383
Nutrition 394 (7.3) 425 6.5 399
Chemical and contract manufacturing 318 16.6 273 36.4 200
Diagnostics 206 (6.3) 219 (13.4) 253
Biotech/Biacore* 236 (46.2) 439 0.4 437
- -------------------------------------------------------------------------------------------------
Consolidated net sales 6,586 (8.2) 7,176 3.3 6,949
- -------------------------------------------------------------------------------------------------
</TABLE>
*Includes Biacore sales of $32 million in 1996 and $29 in 1995.
28
<PAGE> 4
ANNUAL REPORT 1997
from 1995 to 1996 due to adverse exchange effects and poor climatic
conditions for allergies in Europe and Japan. Sales growth recorded by Chemical
and Contract Manufacturing in 1997 resulted primarily from increased
opportunities in the inhalation steroids business. The prior year increase was
due largely to the transfer of certain European products into this sales
classification (reported in the Other Prescription Pharmaceutical category in
1995). As previously mentioned, sales of Biotech (subsequent to July 1997) and
Biacore were not reported in consolidated sales leading to a comparative sales
decrease of $203 million in 1997. Biotech and Biacore transactions are further
discussed in Notes 5 and 6 to the consolidated financial statements.
OTHER OPERATING REVENUE
From 1996 to 1997, other operating revenue increased due to higher
revenue earned from the company's agreement with Solvay & Cie to jointly market
LUVOX, a treatment for obsessive-compulsive disorder. In 1995, this revenue
classification included $42 million for the sale of rights under a product
co-marketing agreement. Other revenue in 1995 also included revenue from
promotional services provided by the company for ZOVIRAX, a product of Glaxo
Wellcome Company. This agreement was terminated at the end of 1995.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percentage of net sales, are
provided in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Cost of products sold 31.1% 29.5% 28.3%
Research and development 18.5 17.6 18.0
Marketing, administrative and other 40.5 36.8 37.7
Restructuring charges 4.8 7.2 1.5
Biotech merger and restructuring costs 1.1 - -
P&U merger costs - 0.9 2.0
Operating income 5.9 9.4 14.6
- --------------------------------------------------------------------
</TABLE>
Cost of products sold increased as a percentage of sales due to
decreased sales levels and increased manufacturing expenses. The unfavorable
effects of selling price erosion, product mix, and currency exchange caused
sales levels to decline. Manufacturing expense increased due to higher
production start-up expenses for new products and project expenses incurred in
1997 to achieve long-term production efficiencies. The increase in manufacturing
expenses was partially offset by the favorable effects of exchange.
R&D in the pharmaceutical industry is inherently a long-term process. As
evidenced below, the company has continued to make significant investments in
R&D over the past seven years. This commitment, along with continual refocusing
of spending to the most promising projects, is necessary to provide sales growth
for future years.
<TABLE>
<CAPTION>
U.S. dollars in millions 1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
R&D Expenditures 1,217 1,266 1,254 1,163 1,144 940 785
</TABLE>
From 1996 to 1997, R&D spending grew as a percentage of sales but
declined 4 percent in dollar terms. The company's ongoing efforts to focus R&D
resources on selected projects contributed to the decline as did the favorable
effects of exchange due to the concentration of non-U.S. R&D activity in Sweden
and Italy. In addition, 1996 spending levels were higher due to spending for 11
significant product filings and the recognition of a $26 million contractual
obligation for a co-development agreement to acquire future rights to a product.
Mitigating the downward spending trend were two previously mentioned 1997
transactions: the company purchased rights to a research compound and canceled
future product rights under a research agreement for a total of $71 million.
From 1995 to 1996, R&D spending increased 1 percent.
Marketing, administrative, and other (MA&O) expense increased as a
percentage of sales due to comparative spending increases in 1997 in conjunction
with an 8 percent sales decrease. Current year spending included higher
advertising and promotion expense for new products; prelaunch and launch
activities throughout the world; sales force expansions in the U.S. and certain
Latin American countries; additional marketing investments in emerging markets;
and increased information technology expenses. The greater 1997 spending was
largely offset by the favorable effects of exchange. Spending levels in 1997
were lower than in the previous two years when the following
29
<PAGE> 5
PHARMACIA & UPJOHN
FINANCIAL REVIEW
significant transactions recorded during the recent past are excluded from
the comparisons: The retrieval of marketing rights to GENOTROPIN in Japan
increased MA&O expense in 1997 by $95 million. In the same year,
litigation-related charges added $70 million to this expense category.
Conversely, in 1996, MA&O expense was reduced by a gain of $46 million on the
sale of an equity interest and related dissolution of a joint venture. This
same investment had been previously written down by $59 million in 1995 to
reflect the fair market value at December 31, 1995, leading to a net favorable
comparison in expense of $105 million from 1995 to 1996. MA&O expense in 1996
also included the impairment of an investment of $106 million resulting from
the termination of a product development agreement as well as increases in
certain environmental and legal reserves of $73 million.
MERGER COSTS AND RESTRUCTURING CHARGES
In 1997, the company recognized charges of $316 million for the restructuring
portion of its global turnaround program. The objective of the global
initiative is to reduce costs and improve effectiveness by streamlining the
company's structure and decision making processes. The restructuring charges
include employee separations and facility rationalization for marketing,
administration and R&D. They also include a rationalization plan for the
company's manufacturing infrastructure which is intended to consolidate and
reduce manufacturing facilities by 40 percent worldwide. In 1998, the company
expects to record less than $100 million in additional charges for this program
and anticipates cash spending to approximate $100 million. Another element of
the global turnaround program not included in restructuring charges is the
establishment of a new global headquarters in New Jersey. The move supports the
company's strategy for more cohesive global operations and accelerated growth
in the United States.
The company recorded Biotech merger costs of $36 million in 1997 as
well as its share of the new company's merger-related restructuring costs of
$43 million. The merger costs included transaction costs to effect the merger
and charges associated with the write-off of acquired R&D. Beginning in 1998,
Amersham Pharmacia Biotech is expected to make positive contributions to
earnings.
Restructuring charges totaled $518 million in 1996 and $104 million in
1995. Total restructuring charges associated with the merger were $610 million
and reflected the planned reduction of approximately 4,350 positions. Other
nonmerger restructuring charges recorded in 1995 totaled $12 million and were
associated with the closure of a manufacturing facility in Sweden. Regarding
the merger-related restructuring, all position reductions were completed by
December 31, 1997. Cash spending in 1997 totaled $132 million, a decrease of
$212 million compared to 1996. Cash spending related to 1997 headcount
reductions will be incurred in 1998. Approximately $48 million remains accrued
as of December 31, 1997, as current liabilities of the company. Merger costs of
$67 million and $138 million also were recorded in 1996 and 1995, respectively.
As described earlier, these charges resulted primarily from the combination of
operations.
NONOPERATING INCOME AND EXPENSE
The decline in both interest income and interest expense in 1997 was
primarily due to lower interest rates, mainly in Europe, and lower average
interest-bearing assets and liabilities. The gain on the initial public
offering of stock for Biacore of $55 million was recorded as nonoperating
income in 1996. Of the total gain, $8 million represented the gain on the
issuance of new shares. Further information is presented in Note 5 to the
consolidated financial statements.
INCOME TAXES
The annual effective tax rate for 1997 was 31 percent compared to 33 percent
for 1996. Excluding nonrecurring items, the rate for 1997 was 34 percent
compared to 35 percent for 1996. The lower 1997 rate is the result of increased
earnings in jurisdictions with lower tax rates. Also, nonrecurring charges in
1997 were tax-effected at higher weighted-average rates than those in 1996.
30
<PAGE> 6
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
FINANCIAL CONDITION 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Working capital (U.S. $in millions) 1,639 2,392 2,334
Current ratio 1.61:1 1.96:1 1.88:1
Debt to total capitalization 15.7% 14.5% 17.9%
- ---------------------------------------------------------------
</TABLE>
The company's working capital and current ratio decreased from 1996 to 1997
due to declines in receivables and short-term investments. Despite a slight
reduction in debt in 1997, the percentage of debt to total capitalization
increased over 1996 due to a decline in shareholders' equity. The negative
currency translation adjustments recorded in equity caused much of this
decline coupled with lower 1997 earnings levels. The percentage of debt to
total capitalization in 1995 reflected higher debt levels. As indicated
below, since 1995, net financial assets have decreased. The decline is
primarily due to restructuring and merger-related spending.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash, equivalents and investments $1,848 $1,850 $2,530
Short-term and long-term debt 1,035 1,058 1,395
----------------------
Net financial assets $ 813 792 1,135
======================
</TABLE>
Net cash provided by operations is considered a major source of funds to
finance working capital, shareholder dividends, and capital expenditures.
Cash from operations totaled $1,222 million in 1997, $805 million in 1996,
and $1,145 million in 1995. The increase in operating cash flows in 1997 was
attributable to a decrease in receivables and an increase in liabilities. The
rise in liabilities resulted from certain significant transactions which were
previously discussed including the GENOTROPIN rights repurchase and the
litigation-related accruals. The 1996 operating cash flows were lower due to
large cash expenditures related to the merger and restructuring combined with
an increase in receivables, inventories, and other current assets. In 1997,
merger and restructuring related spending declined, as noted above.
Expenditures for property, plant and equipment were $577 million in
1997, $656 million in 1996, and $592 million in 1995. Anticipated
capital spending for 1998 of approximately $600 million includes spending on
research facilities in Stockholm as well as remaining spending on expansion of
manufacturing facilities in the U.S., Belgium, Italy and Sweden. It does not
include internal-use software development costs. Financing activities continued
to be a significant use of cash, primarily for payment of dividends to
shareholders. Dividends to common shareholders rose in 1997 and 1996 compared
to 1995 due to the greater number of outstanding shares issued to effect the
merger and an effective increase in combined dividend rate per share. Cash
proceeds from the issuance of treasury stock were related to the employee
option program and were primarily utilized for the purchase of common shares to
be issued upon future exercise of stock options.
The company'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. As of December 31, 1997, unused lines
of credit available for company use totaled $646 million. The company had
A-1+ and P-1 ratings for its commercial paper, and AA- and A1 general bond
ratings from Standard & Poor's and Moody's, respectively, as of December 31,
1997.
The company utilizes foreign exchange forward and option contracts
according to established policies to mitigate the effect of currency
exchange rate fluctuations. Because foreign exchange forward and option
contracts used to hedge anticipated transaction exposures are marked to market
each period, but only part of the anticipated transactions have been recorded,
the timing of recognition of the related gains and losses may not match. Gains
and losses from contracts related to hedges for product shipments are
recognized as "Cost of Products Sold" and are included in the operating section
of the statement of cash flows. Gains and losses from foreign exchange forward
and option contracts related to hedges on other activities are recognized as
"All Other, Net," and are included in the investment section of the statement
of cash flows. Further information is presented in Note 14 to the consolidated
financial statements and in the sensitivity analysis that follows.
MARKET RISK
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices.
The company handles market risks in accordance with established policies
and thereby enters into various derivative transactions. No such transactions
are entered into for trading purposes.
Because the company's cash and investments exceed short and long-term
debt, the exposure to interest rate risk relates primarily to the investment
portfolios. Most of the investments in the long term portfolio are at fixed
rates. The company is actively managing the investment portfolios to increase
return on investment, but, in order to ensure liquidity, will only invest in
instruments with high credit quality where a secondary
31
<PAGE> 7
PHARMACIA & UPJOHN
FINANCIAL REVIEW
market exists. The company does not hold any derivatives related to its
interest rate exposure. The company is in a position to keep all investments
until final maturity. The company also maintains long-term debt at fixed
rates.
The sensitivity analysis presents the hypothetical change in fair value
of those financial instruments held by the company at December 31, 1997 which
are sensitive to changes in interest rates. Market risk is estimated as the
potential change in fair value resulting from an immediate hypothetical one
percentage point parallel shift in the yield curve. The fair values of the
company's investments and loans have been based on quoted market prices or
discounted future cash flows. As the carrying amounts on short term loans and
investments maturing in less than 180 days approximate the fair value, these
are not included in the sensitivity analysis. The fair value of investments
over 180 days is $656 million. The fair value of the debt included in the
analysis is $800 million. Although not expected, a one percentage point
change in the interest rates would change the fair value of investments over
180 days by $17 million and debt by $24 million.
The company's management of currency exposure is primarily
focused on reducing the negative impact on consolidated cash flow and
earnings as a result of currency fluctuations. The company enters into
foreign exchange forward and option contracts to actively manage the net
exposure in accordance with established hedging policies. The company hedges
intercompany loans and deposits as well as a portion of both firm commitments
and anticipated transactions. The company has concentrated most of the
currency exposure in production facilities in Sweden, Italy and Belgium. The
largest exposures from these units are against other European currencies,
Japanese yen and U.S. dollar.
Certain derivatives entered into to hedge anticipated transactions are
exposed to currency fluctuations. A ten percent decrease in the Swedish krona
and Italian lira would have a negative impact on fair value of those
derivatives by $10 million and $3 million, respectively, and a ten percent
increase in the Japanese yen would have a negative impact of $8 million.
The company also has investments in equity securities. All such
investments are classified as long term investments. The fair market value of
these investments is $187 million, of which 84 percent is listed on a stock
exchange or quoted in an over-the-counter market. If the market price on
those securities would decrease by ten percent the fair value of those
equities would decrease by $16 million.
OTHER INFORMATION
Various suits and claims arising in the ordinary course of business,
primarily for personal injury alleged to have been caused by the use of the
company's products, are pending against the company and its subsidiaries. The
company also is involved in several administrative and judicial proceedings
relating to environmental concerns, including actions brought by the U.S.
Environmental Protection Agency and state environmental agencies for remedial
cleanup at approximately 50 sites including site cleanup at the company's
discontinued industrial chemical operations.
In 1997, the company adopted American Institute of Certified Public
Accountants' Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." SOP 96-1 provides additional guidance for recognizing,
measuring and disclosing environmental remediation liabilities. The effect of
initially applying the provisions of SOP 96-1 was not material to the
consolidated financial statements. The company's estimated liability includes
both direct and indirect costs associated with remediation and is reduced to
reflect the anticipated participation of other potentially responsible
parties where such parties are considered solvent and it is probable that
they will pay their respective share of relevant costs. Such accruals are
adjusted as further information develops or circumstances change. Costs of
future expenditures do not reflect any claims for recoveries and are not
discounted to their present value. The company's estimate of the ultimate
cost to be incurred in connection with these environmental situations could
change due to uncertainties at many sites with respect to potential cleanup
remedies, the estimated cost of cleanup, and the company's ultimate share of
a site's cost.
Based on information currently available and the company's experience
with lawsuits of the nature of those currently filed or anticipated to be
filed which have resulted from business activities to date, the amounts
accrued for product and environmental liabilities are considered 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.
With regard to the company's discontinued industrial chemical facility
in North Haven, Connecticut, as the corrective action process progresses, it
may become appropriate to reevaluate the existing reserves designated for
remediation in light of changing requirements. It is at least 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.
32
<PAGE> 8
ANNUAL REPORT 1997
The company is a party, along with many other U.S. drug manufacturers
and wholesalers, in numerous related federal and state civil antitrust lawsuits
brought by U.S. independent and chain retail pharmacies and consumers. These
suits claim violations of antitrust and pricing laws as a result of the
defendants providing discounts and rebates to allegedly favored managed care
customers that were not offered to the plaintiffs. Several of the suits are
class actions. The federal cases have been consolidated in federal court in
Chicago, Illinois. The company believes it has meritorious defenses, and
although potential liability cannot presently be estimated, a majority of the
defendants in this class action (not including the company) have agreed to $10
million to $60 million settlement of claims per defendant in this action. The
company believes that any potential liability above amounts accrued will not
have a material adverse effect on the company's consolidated financial position
or the company's results of operations or liquidity. Further discussion of
current litigation matters is provided in Note 13 to the consolidated financial
statements.
The company is addressing the year 2000 date recognition problem
through a global program designed to ensure the event does not have a material
adverse effect on its business operations. In 1997, the company finalized its
assessment of the expected impact of year 2000 on existing computer systems
worldwide, including embedded and process-control systems. The solution
involves a mix of purchasing new systems and modifying existing systems, with
the emphasis on replacement rather than repair of many older applications
developed in-house. Repair and replacement projects are currently underway and
are anticipated to be completed by December 31, 1998 for all business-critical
systems. The final phase of the program allows adequate time for testing during
1999. The company anticipates total spending of $150 million between 1997 and
2000 largely on replacement of applications that, for reasons other than year
2000 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 year 2000 problem.
The company believes that by meeting the objectives of its Year 2000
Program, the date recognition problem will not have a material adverse effect
on the company's consolidated financial position or its results of operations
or liquidity. The program also has addressed the year 2000 compliance efforts
of the company's significant suppliers and customers. While the company cannot
guarantee the success of any third party's year 2000 compliance efforts, it
does not anticipate a material adverse consequence in reliance on third-party
systems. Nor does the company believe it has exposure to contingencies related
to year 2000 noncompliance for the products it sells.
FORWARD-LOOKING INFORMATION
Many matters discussed in this Annual Report are forward-looking statements
that involve risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the company's
operations, markets, products, services and prices, and other factors more
specifically discussed in the company's filings with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Years Ended December 31 1997 1996 1995 1994 1993
U.S. dollar amounts in millions, except per-share data $M $m $m $m $m
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue 6,710 7,286 7,095 6,823 6,561
Earnings from continuing operations 323 562 739 833 561
Diluted earnings per share from
continuing operations $.61 $1.07 $1.41 $1.60 $1.08
Dividends declared per share (a) $1.08 $1.08 $.27 - -
Total assets 10,380 11,173 11,461 10,947 9,895
Long-term debt 394 567 603 678 675
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Separate dividend information for Pharmacia AB and The Upjohn Company
prior to the merger has not been presented because the information would not be
meaningful.
33
<PAGE> 9
PHARMACIA & UPJOHN
REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements and the
other financial information included in this Annual Report. The Board of
Directors, acting through its Audit Committee which is composed solely of
directors who are not employees of the company, oversees the financial
reporting process. The financial statements have been prepared in accordance
with U.S. generally accepted accounting principles and include amounts based on
judgments and estimates made by management. Actual results could differ from
amounts estimated.
Management has established systems of internal controls over financial
reporting designed to provide reasonable assurance that the financial records
used for preparing financial statements are reliable and that assets are
safeguarded from unauthorized use or disposition. Internal auditors review
accounting and control systems. The systems are also reviewed by the
independent accountants to the extent deemed necessary to express the opinion
set forth in their report.
Management takes corrective actions to improve reporting and control
systems in response to recommendations by the internal auditors and independent
accountants. The appointment of the independent accountants is recommended by
the Audit Committee to the Board of Directors.
FRED HASSAN PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROBERT C. SALISBURY EXECUTIVE VICE PRESIDENT,
FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER
February 17, 1998
REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS,
PHARMACIA & UPJOHN, INC.
We have audited the consolidated balance sheets of Pharmacia & Upjohn, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the years
1997, 1996 and 1995. These financial statements are the responsibility of the
management of Pharmacia & Upjohn, Inc. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
(pages 35 to 52) present fairly, in all material respects, the consolidated
financial position of Pharmacia & Upjohn, Inc. and subsidiaries as of December
31, 1997 and 1996, and the consolidated results of their operations and their
cash flows for the years 1997, 1996 and 1995, in conformity with generally
accepted accounting principles in the U.S.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 17, 1998
34
<PAGE> 10
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
For the years ended December 31 1997 1996 1995
U.S. dollar amounts in millions, except per-share data $m $m $m
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE:
Net sales 6,586 7,176 6,949
Other revenue 124 110 146
- --------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 6,710 7,286 7,095
OPERATING COSTS AND EXPENSES:
Cost of products sold 2,049 2,116 1,967
Research and development 1,217 1,266 1,254
Marketing, administrative and other 2,665 2,642 2,617
Biotech merger and restructuring costs 73 - -
Restructuring charges 316 518 104
Merger costs - 67 138
- --------------------------------------------------------------------------------
OPERATING INCOME 390 677 1,015
Interest income 110 159 216
Interest expense (33) (56) (94)
Gain on sale of subsidiary stock - 55 -
All other, net 1 3 (1)
- --------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 468 838 1,136
Provision for income taxes 145 276 397
- --------------------------------------------------------------------------------
NET EARNINGS 323 562 739
==================
EARNINGS PER COMMON SHARE:
Basic $.61 $1.08 $1.44
Diluted $.61 $1.07 $1.41
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 11
PHARMACIA & UPJOHN
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Pharmacia & Upjohn, Inc. and subsidiaries
December 31 1997 1996
U.S. dollar amounts in millions $M $m
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 775 641
Short-term investments 539 696
Trade accounts receivable, less allowance of $89 (1996: $95) 1,303 1,705
Inventories 958 1,012
Deferred income taxes 335 326
Other 417 515
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,327 4,895
Long-term investments 534 512
Goodwill and other intangible assets, net 1,215 1,522
Properties, net 3,306 3,602
Other noncurrent assets 998 642
- -------------------------------------------------------------------------------------------
TOTAL ASSETS 10,380 11,173
==============
CURRENT LIABILITIES:
Short-term debt 401 235
Accounts payable 425 449
Compensation and compensated absences 186 218
Dividends payable 141 142
Income taxes payable 404 318
Other 1,131 1,141
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,688 2,503
Long-term debt 394 567
Guarantee of ESOP debt 240 256
Postretirement benefit cost 337 337
Deferred income taxes 362 494
Other noncurrent liabilities 821 775
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,842 4,932
SHAREHOLDERS' EQUITY:
Preferred stock, one cent par value; authorized 100,000,000 shares,
issued Series A convertible 6,996 shares at stated value
(1996: 7,125 shares) 282 287
Common stock, one cent par value; authorized
1,500,000,000 shares, issued 508,647,507 shares
(1996: 508,500,633 shares) 5 5
Capital in excess of par value 1,440 1,457
Retained earnings 5,364 5,603
ESOP-related accounts (260) (266)
Currency translation adjustments (1,298) (855)
Other shareholders' equity 5 10
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,538 6,241
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 10,380 11,173
==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
36
<PAGE> 12
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Pharmacia & Upjohn, Inc. and subsidiaries
For the years ended December 31 1997 1996 1995
U.S. dollar amounts in millions $M $m $m
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year 287 291 295
Redemptions and conversions (5) (4) (4)
- ---------------------------------------------------------------------------------------
Balance at end of year 282 287 291
- ---------------------------------------------------------------------------------------
COMMON STOCK:
Balance at end of year 5 5 5
- ---------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 1,457 1,457 1,394
Stock option, incentive and dividend reinvestment plans (22) 10 32
Retirements, conversions and other 5 (10) 31
- ---------------------------------------------------------------------------------------
Balance at end of year 1,440 1,457 1,457
- ---------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 5,603 5,603 5,602
Net earnings 323 562 739
Dividends declared (549) (549) (422)
Dividends on preferred stock (net of tax) (13) (13) (13)
Retirement of common stock - - (45)
Reclassification to currency translation adjustments - - (258)
- ---------------------------------------------------------------------------------------
Balance at end of year 5,364 5,603 5,603
- ---------------------------------------------------------------------------------------
ESOP-RELATED ACCOUNTS:
Balance at beginning of year (266) (272) (278)
Third-party debt repayment 11 8 -
ESOP expense exceeding cash contributed 5 - 8
Additional loan (7) - -
Rollover of interest on ESOP note receivable (3) (2) (2)
- ---------------------------------------------------------------------------------------
Balance at end of year (260) (266) (272)
- ---------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year (855) (728) (1,394)
Translation adjustments (443) (127) 408
Reclassification from retained earnings - - 258
- ---------------------------------------------------------------------------------------
Balance at end of year (1,298) (855) (728)
- ---------------------------------------------------------------------------------------
OTHER SHAREHOLDERS' EQUITY:
Balance at beginning of year 10 31 (14)
Stock option, incentive and dividend reinvestment plans 54 85 57
Purchases of treasury stock (94) (93) (101)
Retirement of common stock - - 44
Change in unrealized investment gains and losses, net-of-tax 35 (13) 45
- ---------------------------------------------------------------------------------------
Balance at end of year 5 10 31
- ---------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,538 6,241 6,387
========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE> 13
PHARMACIA & UPJOHN
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pharmacia & Upjohn, Inc. and subsidiaries
For the years ended December 31 1997 1996 1995
U.S. dollar amounts in millions $M $m $m
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operations:
NET EARNINGS 323 562 739
ADJUSTMENTS TO NET EARNINGS:
Depreciation 324 343 327
Amortization of intangibles 116 130 153
Restructuring charges 316 518 104
Cash expended on restructurings (132) (344) (48)
Net gains on sales of noncurrent assets (35) (79) (12)
Write-downs of investments, properties and intangibles 43 106 40
Deferred income taxes (286) (94) 74
Other 17 2 (27)
CHANGES IN:
Accounts receivable (net) 196 (218) 12
Inventories (127) (69) (18)
Accounts payable 32 (25) (71)
Income taxes payable 107 52 (122)
Other current and noncurrent assets and liabilities 328 (79) (6)
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATIONS 1,222 805 1,145
- ---------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT ACTIVITIES:
Acquisitions of subsidiaries (34) (26) (57)
Additions of properties (577) (656) (592)
Proceeds from sales of properties 70 50 53
Purchases of investments (979) (1,551) (2,407)
Proceeds from sales of investments 1,120 2,105 2,634
Other (14) 20 157
- ---------------------------------------------------------------------------------------------------
NET CASH REQUIRED BY INVESTMENT ACTIVITIES (414) (58) (212)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of debt 40 38 14
Repayment of debt (72) (410) (107)
Net increase (decrease) in debt with initial maturity of 90 days or less 26 33 (317)
Dividend and rights payments (567) (567) (353)
Purchases of treasury stock (94) (93) (101)
Sales of common stock 18 83 51
Other 1 (4) 24
- ---------------------------------------------------------------------------------------------------
NET CASH REQUIRED BY FINANCING ACTIVITIES (648) (920) (789)
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (26) (27) 45
- ---------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 134 (200) 189
Cash and cash equivalents, beginning of year 641 841 652
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 775 641 841
==========================
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) 29 60 78
Income taxes 281 287 405
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE> 14
ANNUAL REPORT 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements are presented on
the basis of accounting principles that are generally accepted in the U.S.
All professional accounting standards that are effective as of December 31,
1997, have been taken into consideration in preparing the financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions which affect the reported earnings, financial position and
various disclosures. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Investments in affiliates
which are not majority owned are reported using the equity method and are
recorded in other noncurrent assets. Gains and losses resulting from the
issuance of subsidiaries' stock are recognized in consolidated earnings.
CURRENCY TRANSLATION The results of operations for non-U.S. subsidiaries,
other than those located in highly inflationary countries, are translated
into U.S. dollars using the average exchange rates during the year, while
assets and liabilities are translated using period-end rates. Resulting
translation adjustments are recorded as currency translation adjustments in
shareholders' equity. For subsidiaries in highly inflationary countries,
currency gains and losses resulting from translation and transactions are
determined using a combination of current and historical rates and are
reported directly in the consolidated statements of earnings.
CASH EQUIVALENTS The company considers all highly liquid debt instruments
with an original maturity of 91 days or less to be cash equivalents.
INVESTMENTS In addition to cash equivalents, the company has investments in
debt securities that are classified in the consolidated balance sheet as
short-term (restricted bank deposits and securities that mature in more than
91 days but not more than one year and securities with maturities beyond one
year which management intends to sell within one year) or long-term
(maturities beyond one year). The company also has investments in equity
securities, all of which are classified as long-term investments.
Investments are further categorized as being available for sale or are
expected to be held to maturity. Investments categorized as available-for-sale
are marked to market based on fluctuations in the market values of the
securities, with the resulting adjustments, net of deferred taxes, reported as
a component of other shareholders' equity until realized (see Note 17).
Investments categorized as held-to-maturity are carried at amortized cost,
without recognition of gains or losses that are deemed to be temporary, because
the company has both the intent and the ability to hold these investments until
they mature.
INVENTORIES Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for substantially all U.S.
inventories and the first-in, first-out (FIFO) method for substantially all
non-U.S. inventories.
PROPERTIES Property, plant and equipment are recorded at acquisition cost.
Depreciation is computed principally on the straight-line method for
financial reporting, while accelerated methods are used for income tax
purposes where permitted. Maintenance and repair costs are charged to
earnings as incurred. Costs of renewals and improvements are capitalized.
Upon retirement or other disposition of property, any gain or loss is
included in earnings. Purchased computer software is capitalized and
amortized over the software's useful life. All repair costs associated with
the year 2000 date recognition problem are expensed as incurred.
GOODWILL AND OTHER INTANGIBLES Goodwill represents the excess of the purchase
cost over the fair value of net assets acquired in a business or product
acquisition and is presented net of accumulated amortization. Amortization of
goodwill is recorded on a straight-line basis over periods ranging primarily
from 5 to 20 years. Rights acquired under patent are reported at acquisition
cost. Amortization is calculated on a straight-line basis over the remaining
legal lives of the patents. Other intangible assets are amortized over the
useful lives of those assets.
INCOME TAXES The company applies an asset and liability approach to
accounting for income taxes. Deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the years in which the differences are
expected to reverse.
The company provides deferred income taxes on subsidiaries' earnings
that are not considered to be permanently invested in those subsidiaries.
CURRENCY EXCHANGE CONTRACTS Forward currency exchange contracts and currency
options (hereafter referred to as contracts) are held for purposes
other than trading. Contracts held to hedge anticipated transactions are marked
to market at each balance sheet date with resulting gains and losses recognized
in earnings. Contracts that hedge recorded assets and liabilities are valued at
the month-end exchange rate with resulting exchange gains and
39
<PAGE> 15
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars amounts in millions except per-share data
losses recognized in earnings, offsetting the respective losses and
gains recognized on the underlying recorded exposure. Any premium or discount
is amortized over the life of the contract. The carrying values of all
contracts are generally reported with other current assets or other current
liabilities.
ENVIRONMENTAL REMEDIATION LIABILITIES In 1997, the company adopted Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP 96-1
provides additional guidance for recognizing, measuring and disclosing
environmental remediation liabilities. The effect of initially applying the
provisions of SOP 96-1 was not material to the consolidated financial
statements. The company accrues for such losses when they are probable and
reasonably estimable based on current law and existing technologies. The
company's estimated liability is reduced to reflect the anticipated
participation of other potentially responsible parties where such parties are
considered solvent and it is probable that they will pay their respective
share of relevant costs. Such accruals are adjusted as further information
develops or circumstances change. Costs of future expenditures do not reflect
any claims for recoveries and are not discounted to their present value. The
accruals for environmental liabilities are reflected in the consolidated
balance sheets primarily in other noncurrent liabilities.
RECLASSIFICATIONS Certain reclassifications have been made to conform prior
years' data to the current presentation including certain deferred income tax
balances.
In 1996, certain reclassifications were made in the 1995 financial
statements to conform to the 1996 presentation. The company restated the
components of shareholders' equity for the year ended December 31, 1995, and
for the nine months ended September 30, 1996, to reflect reclassifications from
retained earnings to currency translation adjustments. These reclassifications
were made to conform the translation practices of the former Pharmacia AB group
to those of the former Upjohn Company.
Basic and diluted earnings per share have replaced "primary" and "fully
diluted" earnings per share in all prior periods in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share (see Note
7).
Employee stock options are accounted for pursuant to Accounting
Principles Board Opinion (APB) No. 25.
2. MERGER
In November 1995, Pharmacia AB (Pharmacia) and The Upjohn Company (Upjohn)
completed a business combination (the merger) that resulted in the formation
of Pharmacia & Upjohn, Inc.
Effective upon the consummation of the merger, each share of
outstanding common stock of Upjohn was converted into 1.45 shares of common
stock of the company. Outstanding Upjohn employee stock options were similarly
converted into options to purchase common stock of the company. In addition,
each share of Upjohn Series B Convertible Perpetual Preferred Stock was
converted into one share of Series A Convertible Perpetual Preferred Stock of
the company.
Shareholders of Pharmacia were extended an offer to exchange each
outstanding Pharmacia Class A common share (or an American Depository Share
representing a Class A common share) and each outstanding Pharmacia Class B
common share for one share of company common stock (or a Swedish Depository
Share representing one share of company common stock).
The merger constituted a tax-free reorganization and, for accounting
purposes, has been treated as a pooling of interests. Under this accounting
method, the assets and liabilities of Upjohn and Pharmacia were carried forward
to the company at historical values after restatement of the Pharmacia
financial statements to conform to accounting principles that are generally
accepted in the U.S. The accompanying financial statements contain information
for periods prior to the merger. All such information was derived from the
separate financial statements of Pharmacia and Upjohn, which were reclassified
and combined to conform to the basis of presentation adopted by the company.
3. RESTRUCTURING CHARGES AND MERGER COSTS
In 1997, the company recorded restructuring charges of $316 associated with
the global turnaround program. The charges include 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. Third-quarter
charges of $125 were associated with manufacturing rationalization and
include $96 for full or partial shut-down of manufacturing operations in
various locations worldwide and $29 for employee separation costs.
Fourth-quarter charges of $191 include $84 marketing and administration and
$22 research and development employee separation costs, and $85 for closure
of excess facilities and other exit costs. At December 31, 1997, the
remaining accrual amounted to $250. Additional restructuring charges will 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.
In 1996, the company recorded restructuring charges of $518 primarily
associated with the merger. The charges included the elimination of
approximately 2,640 marketing and administration ($363), 500 research and
development ($59), and 360 manufacturing positions ($31); elimination of
duplicate facilities ($43); and other exit costs resulting from the
40
<PAGE> 16
ANNUAL REPORT 1997
merger ($22). At December 31, 1997, the remaining accrual amounted to $48.
Expenditures related to the restructuring charges will be completed in the
first quarter of 2000.
In association with the merger, the company recorded restructuring
charges of $92 in the fourth quarter of 1995. The majority of these pertained
to elimination of approximately 850 positions ($83). Expenditures for these
restructuring charges were materially completed by the end of 1996.
Restructuring charges of $12 were recorded in the second quarter of 1995
related to a plant closure in Sweden.
Restructuring charges were recognized in 1993 with respect to
elimination or reduction of excess manufacturing capacity. Open projects from
that restructuring were superseded by the global turnaround program announced
in 1997, and the remaining $20 accrual was reversed.
The company incurred merger costs of $67 in 1996, largely consisting of
costs to combine operations. In 1995, the company recorded merger costs of
$138, including transaction costs of $69 and costs to combine operations of
$69. Transaction costs include investment banker, professional, and
registration fees. Costs to combine operations include expenses incurred for
termination of two marketing agreements which conflicted with the merged
operations, and other nonrecurring costs associated with planning and executing
the merger of operations.
4. INCOME TAXES
The provision for income taxes included in the consolidated statements of
earnings consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
Years ended December 31 $M $m $m
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENTLY PAYABLE:
U.S. 34 171 82
Non-U.S. 429 214 224
- ------------------------------------------------------------------------------------------------------------
463 385 306
- ------------------------------------------------------------------------------------------------------------
DEFERRED:
U.S. (46) (100) 19
Non-U.S. (272) (9) 72
- ------------------------------------------------------------------------------------------------------------
(318) (109) 91
- ------------------------------------------------------------------------------------------------------------
145 276 397
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Percent of pretax income % % %
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0 35.0 35.0
Lower rates in other jurisdictions, net (10.9) (3.9) (6.3)
Goodwill amortization and other non-deductible expenses 6.7 4.2 6.9
All other, net 0.2 (2.3) (0.6)
- ------------------------------------------------------------------------------------------------------------
31.0 33.0 35.0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The lower rates in other jurisdictions are principally attributable to
manufacturing operations in jurisdictions subject to more favorable tax rates.
Additionally, certain nonrecurring charges were incurred in jurisdictions with
higher tax rates.
41
<PAGE> 17
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
Deferred income taxes are in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
1997 1997 1996 1996
ASSETS LIABILITIES Assets Liabilities
December 31 $M $m $m $m
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current 335 3 326 30
Noncurrent 382 362 232 494
- ------------------------------------------------------------------------------------
COMPONENTS OF DEFERRED TAXES WERE:
Property, plant and equipment - 277 - 261
Inventory 185 - 158 -
Compensation and benefit plans 174 60 189 79
Swedish tax deferrals - 62 - 162
Tax loss and tax credit carryforwards 167 - 120 -
Environmental and product liabilities 107 - 102 -
Restructuring accruals 107 - 74 -
Tax on unremitted earnings - 121 - 122
All other 293 124 172 87
- ------------------------------------------------------------------------------------
Subtotal 1,033 644 815 711
Valuation allowances (37) (70)
- ------------------------------------------------------------------------------------
Total deferred taxes 996 644 745 711
- ------------------------------------------------------------------------------------
Net deferred tax assets 352 34
- ------------------------------------------------------------------------------------
</TABLE>
Valuation allowances have been provided for certain deferred tax assets
that are not likely to be realized. Tax loss carryforwards of $99 have various
expiration dates through 2011. At December 31, 1997, undistributed earnings of
subsidiaries considered permanently invested, for which deferred income taxes
have not been provided, were approximately $3,000.
5. GAIN ON SALE OF MAJORITY INTEREST IN SUBSIDIARY
In December 1996, the company completed the sale of a portion of its
holdings in its wholly-owned subsidiary, Biacore International AB (formerly
Biosensor), through an initial public offering, reducing the company's ownership
to 41 percent. The investment in Biacore, previously consolidated, is now
accounted for using the equity method. Biacore develops, manufactures, and
markets advanced scientific instruments employing affinity-based biosensor
technology.
The global offering included 5.75 million total shares (or American
Depository Shares) at $16 per share. Of the total shares, 1.5 million
were newly issued and 4.25 million were sold by the company. The sale generated
net proceeds to the company of $57 and a gain of $55. The gain is composed of an
$8 gain on the issuance of new shares and a $47 gain on the sale of existing
shares.
6. BIOTECH MERGER
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. In 1997, the company recorded
$79 in charges related to the Biotech merger and subsequent restructuring of the
new company. Of this total, $36 consisted of transaction costs to effect the
merger and a write-off of certain acquired research and development costs. The
related caption on the consolidated statement of earnings includes these charges
as well as the company's portion of Amersham Pharmacia Biotech's earnings and
losses since the merger.
7. EARNINGS PER COMMON SHARE
The company adopted SFAS No. 128, "Earnings Per Share," in 1997. This
new accounting pronouncement eliminates the measure of performance called
"primary" earnings per share and replaces it with "basic" earnings per share.
The essential difference between the two calculations is that the dilutive
effects of stock options outstanding are not considered in the basic
computation. As a result, basic earnings per share tends to be slightly higher
than primary. All prior periods have been restated. The pronouncement also
changed the measure previously reported as "fully diluted" earnings per share to
"diluted" earnings per share. The computational differences between them are
minor and no restatement of prior periods was necessary.
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
42
<PAGE> 18
ANNUAL REPORT 1997
stock outstanding. Diluted earnings per share is computed assuming the
exercising of all stock options that are profitable 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 (EPS) computations:
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
BASIC DILUTED Basic Diluted Basic Diluted
Years ended December 31 $M $M $m $m $m $m
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EPS NUMERATOR:
Net earnings 323 323 562 562 739 739
Less: Preferred stock dividends, net of tax (13) - (13) - (13) -
Less: ESOP contribution, net of tax - (5) - (5) - (5)
- ----------------------------------------------------------------------------------------------------------------------
Income available to common shareholders 310 318 549 557 726 734
- ----------------------------------------------------------------------------------------------------------------------
EPS DENOMINATOR:
Average common shares outstanding 508 508 508 508 505 505
Effect of dilutive securities:
Stock options - 2 - 4 - 5
Convertible preferred stock
and incentive compensation - 11 - 11 - 11
- ----------------------------------------------------------------------------------------------------------------------
Total shares 508 521 508 523 505 521
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $.61 $.61 $1.08 $1.07 $1.44 $1.41
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
8. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
December 31 $M $m
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ESTIMATED REPLACEMENT COST (FIFO BASIS):
Pharmaceutical and other finished products 500 437
Raw materials, supplies and work in process 618 726
- ----------------------------------------------------------------------------------------------------------------------
1,118 1,163
Less reduction to LIFO cost (160) (151)
- ----------------------------------------------------------------------------------------------------------------------
Inventories 958 1,012
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost
(FIFO basis) of $416 at December 31, 1997, and $410 at December 31, 1996.
43
<PAGE> 19
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
9. INVESTMENTS
<TABLE>
<CAPTION>
1997 1996
December 31 $M $m
- ------------------------------------------------------------------
SHORT-TERM INVESTMENTS:
<S> <C> <C>
AVAILABLE-FOR-SALE:
Kingdom of Sweden debt instruments 267 503
Government of Italy debt instruments 30 47
Government of Belgium debt instruments 10 -
Government of Norway debt instruments 48 -
Mortgage certificates of deposit 61 39
Corporate commercial paper 31 34
Other 81 16
- ------------------------------------------------------------------
528 639
Held-to-maturity 11 57
- ------------------------------------------------------------------
539 696
- ------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, unrealized holding gains of $1 and $6,
respectively, were recorded in shareholders' equity related to short-term
investment securities classified above as Kingdom of Sweden debt instruments.
Short-term investments classified as held-to-maturity consist primarily of bank
certificates of deposit with amortized cost approximating fair market value.
<TABLE>
<CAPTION>
Unrealized Carrying
Cost Gains Value
Long-term investments $m $m $m
- --------------------------------------------------------------------------------------------------------
December 31, 1997:
<S> <C> <C> <C>
AVAILABLE-FOR-SALE:
Equity securities 52 77 129
Mortgage-backed securities - guaranteed by the U.S. Government 179 4 183
Other 3 - 3
- --------------------------------------------------------------------------------------------------------
234 81 315
Held-to-maturity 219
- --------------------------------------------------------------------------------------------------------
534
- --------------------------------------------------------------------------------------------------------
December 31, 1996:
AVAILABLE-FOR-SALE:
Equity securities 31 16 47
Mortgage-backed securities - guaranteed by the U.S. Government 210 2 212
Other 3 - 3
- --------------------------------------------------------------------------------------------------------
244 18 262
Held-to-maturity 250
- --------------------------------------------------------------------------------------------------------
512
- --------------------------------------------------------------------------------------------------------
</TABLE>
The total of unrealized gains (net of deferred taxes) included in other
shareholders' equity amounted to $53 at December 31, 1997, compared to $18
and $31 at December 31, 1996 and 1995, respectively.
During 1997 and 1996, the company sold debt securities in the
held-to-maturity category for the amortized cost of $25 and $70,
respectively. Because these sales were initiated through the call option of the
issuer, which effectively accelerates the maturity date of the security, no gain
or loss was realized. No sales of held-to-maturity securities occurred in 1995.
The proceeds realized from the sale of available-for-sale short-term debt
securities were $939 and $1,128 for 1997 and 1996, respectively. Profits
realized on these sales are recorded as interest income and amounted to $1 and
$3 in 1997 and 1996, respectively.
The proceeds realized from the sale of available-for-sale equity
securities amounted to $4, $123 and $9 during 1997, 1996 and 1995,
respectively. Based on original cost, gains of $3, $49 and $4 were realized on
these sales, respectively.
44
<PAGE> 20
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
Long-term investments held to maturity are summarized as follows: 1997 1997 1996 1996
FAIR AMORTIZED Fair Amortized
VALUE COST value cost
December 31 $M $M $m $m
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guaranteed by the U.S. Government 92 83 91 88
Commonwealth of Puerto Rico debt instruments 73 71 84 82
BANK OBLIGATIONS:
Certificates of deposit 15 15 30 30
Other 51 50 51 50
- -----------------------------------------------------------------------------------------------------------------------------------
231 219 256 250
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, long-term mortgage-backed securities available for sale
had scheduled maturities ranging from 2001 to 2024. Scheduled maturities of
long-term securities to be held to maturity were as follows:
<TABLE>
<CAPTION>
FAIR AMORTIZED
VALUE COST
$M $M
- -------------------------------------------------------------------------
<S> <C> <C>
One to five years 168 162
Six to ten years 51 46
After ten years 12 11
- -------------------------------------------------------------------------
231 219
- -------------------------------------------------------------------------
</TABLE>
10. PROPERTIES, NET
<TABLE>
<CAPTION>
1997 1996
December 31 $M $m
- -------------------------------------------------------------------------
<S> <C> <C>
Land 92 118
Buildings and improvements 1,897 2,043
Equipment 3,037 3,375
Construction in process 794 725
Less allowance for depreciation (2,514) (2,659)
- -------------------------------------------------------------------------
Properties, net 3,306 3,602
- -------------------------------------------------------------------------
</TABLE>
11. LINES OF CREDIT AND LONG-TERM DEBT
The company has a borrowing facility amounting to $500 available through the
year 2004 to support commercial paper borrowings and for other corporate
purposes. This facility does not require compensating balances but is subject to
various fees. The company also has uncommitted lines of credit amounting to $146
available with various international banks. All lines of credit were unused at
December 31, 1997.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
December 31 $M $m
- -------------------------------------------------------------------------
<S> <C> <C>
3.78% Industrial Revenue Bonds due 2008 6 16
7.5% Industrial Revenue Bonds due 2023 40 40
5.35-7.95% Medium-Term Notes due 1998-1999 238 266
5.875% Notes due 2000 200 200
2.05-11.85% Italian Government Loans due 1998-2004 54 75
Other 28 14
Current maturities (172) (44)
- -------------------------------------------------------------------------
Total long-term debt 394 567
- -------------------------------------------------------------------------
</TABLE>
Current maturities of long-term debt are included with short-term debt in the
consolidated balance sheets. Annual aggregate maturities of long-term debt
during the next five years are: 1998 - $172; 1999 - $89; 2000 - $202; 2001 -
$23; and 2002 - $7.
45
<PAGE> 21
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
The company has guaranteed $275 original principal amount of ESOP 9.79% notes
due in 2004. Principal payments that began in 1995 cause the recognition of
compensation expense (see Note 18). Annual aggregate maturities of guaranteed
debt during the five years subsequent to 1997 are: 1998 - $16; 1999 - $22;
2000 - $28; 2001 - $35; and 2002 - $44.
Information regarding interest expense and weighted average interest rates
follows:
<TABLE>
<CAPTION>
1997 1996 1995
Years ended December 31 $M $m $m
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Interest cost incurred 64 89 122
Less: Capitalized on construction (31) (33) (28)
- -------------------------------------------------------------------------------------------------------------------------
Interest expense 33 56 94
- -------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate on short-term borrowings at end of period 7.27% 5.99% 9.63%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
12. COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancelable operating leases at
December 31, 1997, approximately 65 percent real estate and 35 percent
equipment, are as follows: 1998 - $70; 1999 - $50; 2000 - $29; 2001 - $18;
2002 - $14; and later years - $58.
Capital asset spending approved for construction and equipment but
unexpended at December 31, 1997, was approximately $424.
The consolidated balance sheets also 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 13). 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, 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 at least reasonably
possible a material increase in accrued liabilities will be required but it is
not possible to determine what, if any, exposure exists at this time.
13. LITIGATION
The company is involved in a number of legal and environmental
proceedings. These include a substantial number of product liability suits
claiming damages as a result of the use of the company's products, including a
number of cases involving HALCION, 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 the unaccrued costs and
liabilities associated with such matters will not have a material adverse effect
on the company's consolidated financial position, and unless there is a
significant deviation from the historical pattern of resolution of these issues,
there should not be a material adverse effect on the company's results of
operations or liquidity.
The company is a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits, some
of which have been 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. The California and Wisconsin courts have certified
retailer classes. Motions to certify are pending in Alabama and Minnesota. The
suits seek treble damages and an injunction prohibiting the alleged illegal
practices. Fourteen of the twenty-four pharmaceutical company defendants (not
including the company) have reached settlement agreements with the plaintiffs in
the class action pending in the Northern District of Illinois for amounts
ranging from $10 to $60. These settlements were approved by the court in 1996.
Actions have been filed in 14 states and the District of Columbia on
behalf of proposed consumer classes seeking damages based on the same alleged
conduct. The courts in California and
46
<PAGE> 22
ANNUAL REPORT 1997
the District of Columbia have certified the proposed consumer classes. After
removal, the Federal District Court denied certification of a proposed Alabama
consumer class, but a similar action was later remanded to the state court where
it is pending. The state courts in Maine, Michigan, and Minnesota denied
certification of a consumer class, and plaintiffs appeals are pending. The
state courts in Colorado, New York, and Washington dismissed complaints on
behalf of proposed consumer classes. Plaintiffs appealed the dismissal in
Washington and New York, and those appeals are pending. Similar actions by
proposed consumer classes are pending in the state courts of Arizona, Florida,
Kansas, North Carolina, Tennessee, and Wisconsin. The U.S. Federal Trade
Commission has instituted an inquiry into whether pharmaceutical companies,
including the company, may have violated federal antitrust laws in connection
with establishing prices and rebates.
The company believes that any potential liability above amounts accrued
will not have a material adverse effect on the company's consolidated financial
position or the company's results of operations or liquidity.
14. CURRENCY RISK MANAGEMENT
The company is exposed to currency exchange rate fluctuations related to certain
intercompany and third-party transactions, primarily intercompany sales from
Sweden and Italy to other European countries, the U.S. and Japan. The company's
exposure and related hedging program are managed centrally by the corporate
treasury group, using forward exchange contracts and currency options to hedge
a portion of both net recorded currency transaction exposures on the balance
sheet as well as net anticipated currency transactions. The company does not
hold or issue financial instruments for trading purposes.
The company's program to hedge net anticipated currency transaction
exposures is designed to protect cash flows from potentially adverse effects of
exchange rate fluctuations. At December 31, 1997, the contract amount of the
company's outstanding contracts used to hedge net transaction exposure was $649.
Of these contracts, 30 percent were denominated in Japanese yen, 8 percent were
denominated in German marks, and 18 percent were denominated in mainly other
European currencies all against Swedish kronor; 12 percent were denominated in
various currencies, mainly Japanese yen and U.S. dollars, against Italian lira;
and 32 percent in various currencies, mainly European currencies and Japanese
yen, against U.S. dollars.
Gains and losses on hedges of intercompany loans and deposits offset the
currency exchange gains and losses of the underlying loans and deposits.
At December 31, 1997, the contract amount of forward exchange contracts held for
the balance sheet financial exposure hedging program was $661. Of these
contracts, 55 percent were denominated in U.S. dollars against European
currencies; 17 percent were denominated in U.S. dollars against Japanese yen; 20
percent were denominated in Swedish kronor against various European currencies;
and 8 percent were denominated in various other currencies against Swedish
kronor and U.S. dollars.
Because the contract amounts are stated as notional amounts, the amount
of contracts disclosed above is not a direct measure of the exposure of the
company through its use of derivatives. These contracts generally have
maturities that do not exceed twelve months and require the company to exchange
currencies at agreed upon rates at maturity. The counterparties to the contracts
consist of a limited number of major international financial institutions. The
company does not expect any losses from credit exposure.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
1997 1997 1996 1996
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
December 31 $M $M $m $m
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Short-term investments 539 539 696 696
Long-term investments 534 546 512 518
Forward currency exchange contracts
Hedges of loans and deposits 14 14 7 6
Hedges of anticipated transactions 10 10 10 10
FINANCIAL LIABILITIES:
Short-term debt 401 401 235 235
Long-term debt 394 394 567 568
Guaranteed ESOP debt 240 322 256 295
- --------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 23
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
Because maturities are short-term, fair value approximates carrying amount for
cash and cash equivalents, short-term investments, accounts receivable,
short-term debt, and accounts payable. Fair values of forward currency exchange
contracts, long-term investments, long-term debt, and guaranteed ESOP debt were
estimated based on quoted market prices for the same or similar instruments or
on discounted cash flows.
16. CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid debt instruments. Such investments
are made only in instruments issued or enhanced by high quality institutions.
Financial instruments which potentially subject the company to concentrations of
credit risk consist principally of short-term investments in instruments issued
by the Kingdom of Sweden; otherwise, amounts invested in a single institution
are limited to minimize risk. The company has not incurred losses related to
these investments.
The company sells a broad range of pharmaceutical products to a diverse
group of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
17. SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Series A Convertible Perpetual Preferred Stock is held by
the Employee Stock Ownership Trust (ESOP Trust). The per-share stated value is
$40,300.00 and the preferred stock ranks senior to the company's common stock as
to dividends and liquidation rights. Each share is convertible, at the
holder's option, into 1,450 shares of the company's common stock and has voting
rights equal to 1,450 shares of common stock. The company may redeem the
preferred stock at any time after July 20, 1999, or upon termination of the ESOP
at a minimum price of $40,300.00 per share. Dividends, at the rate of 6.25
percent, are cumulative, paid quarterly, and charged against retained earnings.
COMMON STOCK - The number of common shares outstanding at December 31, 1997,
1996 and 1995 was 507,234,696, 508,283,260 and 506,625,800, respectively.
On a per-share basis, dividends were declared on common stock at a rate of
$1.08 in 1997 and 1996. Dividends payable were $137 and $138 at December 31,
1997 and 1996, respectively.
CAPITAL IN EXCESS OF PAR VALUE - Amounts of paid-in capital that exceed the par
value ($.01 per share) of the company's common stock are recorded in this
account, including all such amounts that were attributed to previously
outstanding Pharmacia common shares and Upjohn common stock. This method was
followed for all periods covered by the financial statements prior to 1996
because the new common stock is assumed to have been outstanding for all periods
preceding the November 1995 merger.
ESOP-RELATED ACCOUNTS - The company holds a note receivable from the ESOP Trust
that matures on February 1, 2005; bears interest at 6.25 percent; and may be
added to or repaid, in whole or in part, at any time. Accrued interest at the
end of any calendar year shall be added to the note principal. At December 31,
1997, the note principal balance was $48. Also, upon recognition of the
company's guarantee of the debt of the ESOP Trust, an offsetting charge was made
to shareholders' equity. As guaranteed debt is repaid, this account balance
diminishes correspondingly (see Notes 11 and 18). Also, to the extent the
company recognizes expense more rapidly than the corresponding cash
contributions are made to the Trust, this account is reduced. The balance in
this account at December 31, 1997, was $212.
CURRENCY TRANSLATION ADJUSTMENTS - This account includes all adjustments
that arise from translating the financial statements of non-U.S. subsidiaries
from local currencies into U.S. dollars (see Note 1).
OTHER SHAREHOLDERS' EQUITY - At December 31, 1997, other shareholders' equity is
comprised of net unrealized gains (net of deferred taxes) relating to
investments categorized as available-for-sale and marked-to-market of $53 and
treasury stock of $48. The number of treasury shares acquired in 1997, net of
shares issued for stock options, dividend reinvestment, and employee benefit
plans, was 1,195,388.
SHAREHOLDER PROTECTION RIGHTS PLAN - In February 1997, the board of directors
approved a shareholder protection rights plan, declaring a dividend of one right
for each share of the company's common stock outstanding on or after March 7,
1997. Exercisable 10 days after any person or group acquires 15 percent or more
or commences a tender offer for 15 percent or more of the company's common
stock, the rights entitle holders to effectively purchase a specified amount of
the company's common stock at an exercise price equal to half of its market
value. The rights are redeemable for $.01 per right and have a life of 10
years, unless redeemed earlier by the company. In lieu of cash payment, the
company has the option to exchange stock for rights unless the acquiring person
acquires more than 50 percent of the company's common stock.
18. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP is a funding vehicle for the Employee Savings Plan covering certain
U.S. employees. As the ESOP Trust makes debt principal and interest payments, a
proportionate amount of preferred stock is released for allocation to plan
48
<PAGE> 24
ANNUAL REPORT 1997
participants. The preferred shares are allocated to participants' accounts based
upon their respective savings plan contributions and the dividends earned on
their previously allocated preferred shares. As of December 31, 1997, 1,647
preferred shares had been released and allocated; 324 shares were released but
unallocated; and 5,025 shares remained unreleased, of which 39 shares are
committed to be released.
Under the agreement whereby the company guaranteed third-party debt of
the ESOP trust, the company is obligated to provide sufficient cash annually to
the Trust to enable it to make required principal and interest payments.
The company satisfies this annual cash flow requirement through payment of
dividends on all preferred shares outstanding, loans and cash contributions. The
company has fully and unconditionally guaranteed the ESOP Trust's payment
obligations whether at maturity, upon redemption, upon declaration of
acceleration, or otherwise. The holders of the debt securities have no recourse
against the assets of the ESOP Trust except in the event that the Trust defaults
on payments due and the company also fails to make such payments. In that event,
the holders may have recourse against unallocated funds held by the Trust. At
December 31, 1997, assets of the ESOP trust consisted primarily of $282 of
Pharmacia & Upjohn Company Series A Convertible Perpetual Preferred Stock.
ESOP expense is determined by a formula that apportions debt service to
each year of the plan based on shares allocated to participants and deducts
dividends paid on all preferred stock held by the trust.
Key measures of the ESOP were:
<TABLE>
<CAPTION>
1997 1996 1995
Years ended December 31 $M $m $m
- -----------------------------------------------------------------
<S> <C> <C> <C>
Interest expense of ESOP Trust 28 28 29
Dividend income of ESOP Trust 18 18 18
Company contribution to ESOP Trust 12 16 8
Company ESOP expense (net) 14 14 14
- -----------------------------------------------------------------
</TABLE>
19. STOCK COMPENSATION
Incentive and nonqualified stock options are granted to certain employees.
Options granted prior to October 28, 1997 have a ten-year term and are
exercisable after one year of service following grant. Options granted on and
after that date vest at the end of three years or vest pro rata over three
years. All options have an exercise price equal to the market value of the
underlying stock at date of grant. Since the company has elected the
disclosure-only option under SFAS No. 123 and continues to account for stock
options per the terms of APB No. 25, no compensation expense is recognized in
earnings.
Upon a stock-for-stock exercise of an option, an active employee will
receive a new, nonqualified "reloaded" option at the then-current market price
for the number of shares surrendered to exercise the option. The
"reloaded" option will have an exercise term equal to the remaining term of the
original exercised option.
The number of shares authorized for grants each year is equal to 1.25
percent of outstanding common shares.
Information concerning option activity and balances follows:
<TABLE>
<CAPTION>
Weighted
average Number
exercise price of shares
per share (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding, January 1, 1995 $23.63 14,298
Granted 24.00 2,559
Exercised 22.13 (4,076)
Canceled 26.18 (210)
- -----------------------------------------------------------------------------------------
Balance outstanding, December 31, 1995 24.32 12,571
Granted 38.26 3,585
Exercised 24.49 (4,146)
Canceled 35.17 (77)
- -----------------------------------------------------------------------------------------
Balance outstanding, December 31, 1996 28.50 11,933
Granted 37.04 4,444
Exercised 24.07 (1,526)
Canceled 38.27 (179)
- -----------------------------------------------------------------------------------------
Balance outstanding, December 31, 1997 $31.43 14,672
- -----------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 25
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
<TABLE>
<CAPTION>
Weighted Weighted
average average Number
Composition of the December 31, 1997 balance: remaining exercise price of shares
Options having a per-share exercise price of: life per share (000)
============================================================================================================
<S> <C> <C> <C>
$19.44 - 19.99 5.73 years $19.62 1,073
$20.00 - 29.99 4.50 years 25.18 5,648
$30.00 - 39.99 8.39 years 37.22 7,577
$40.00 - 43.81 5.29 years 42.15 374
- ------------------------------------------------------------------------------------------------------------
14,672
Less non-exercisable options 9.23 years 37.09 3,982
- ------------------------------------------------------------------------------------------------------------
Exercisable options $29.32 10,690
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Had the company elected to measure stock compensation using the fair value of
the awards at grant date under the provisions of SFAS No. 123, the company's net
income and earnings per share would have been reduced by approximately $24 or
$.05 per share for 1997, $25 or $.05 per share for 1996, and $13 or $.03 per
share for 1995. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1997, 1996 and 1995, respectively: dividend yield of 2.83, 2.8
and 2.6 percent; volatility of 21 percent for all years; risk-free interest rate
of 5.45, 5.4 and 7.33 percent; and an expected life of 5.3, 5.5 and 5.5 years.
20. RETIREMENT BENEFITS
The company has various pension plans covering substantially all employees.
Benefits provided under the defined benefit pension plans are primarily based on
years of service and the employee's compensation. The following table summarizes
the funded status of the material defined benefit plans:
<TABLE>
<CAPTION>
1997 1997 1996 1996
ASSETS ACCUMULATED Assets Accumulated
EXCEED BENEFITS exceed benefits
ACCUMULATED EXCEED accumulated exceed
BENEFITS ASSETS benefits assets
December 31 $M $M $m $m
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation 788 302 700 303
- ------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 1,033 361 892 374
Plan assets at fair value 1,309 78 1,163 84
- ------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected benefit obligation 276 (283) 271 (290)
Unrecognized net (gains) losses (78) 74 (44) 66
Unamortized net transition amount (61) 5 (72) 6
Unrecognized prior service cost 33 - 33 2
- ------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost 170 (204) 188 (216)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ACTUARIAL ASSUMPTIONS:
<S> <C> <C>
U.S.
Discount rate 7.25% 7.5%
Salary growth rate 4.0 - 5.5% 4.0 - 5.5%
Return on plan assets 9.0 - 9.5% 9.0 - 9.5%
Non-U.S.
Discount rate 4.5 - 7.5% 5.0 - 9.5%
Salary growth rate 2.5 - 5.5% 3.5 - 8.0%
Return on plan assets 4.75 - 9.5% 4.75 - 10.0%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The assets of the U.S. plans, which comprise the majority of the combined
plan assets, are invested approximately two-thirds in equity securities. Fair
value is determined principally by reference to publicly quoted year-end prices.
50
<PAGE> 26
ANNUAL REPORT 1997
The principal pension obligations outside the U.S. are the defined
benefit plans which cover essentially all employees in the company's Swedish
operations. These plans (Swedish FPG/PRI pensions) form part of a Swedish
multi-employer pension plan which is centrally administered. The level of
benefits and actuarial assumptions are established jointly for all plans, and
cannot unilaterally be changed by the company.
The consolidated net pension expense amounts reflected below are
exclusive of curtailments, settlements, and termination benefit costs
associated with the restructuring. Net charges of $5 and $25 before tax were
recorded in 1997 and 1996, respectively, for these amounts and were included in
restructuring costs.
<TABLE>
<CAPTION>
1997 1996 1995
Years ended December 31 $M $m $m
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year 52 55 43
Interest cost on projected benefit obligation 90 88 80
Actual return on plan assets (207) (161) (231)
Net amortization and deferral 104 59 133
- ----------------------------------------------------------------------------------
Net pension expense 39 41 25
- ----------------------------------------------------------------------------------
</TABLE>
21. OTHER POSTRETIREMENT BENEFITS
The company provides nonpension benefits to eligible retirees and their
dependents, primarily in the form of medical and dental benefits.
The following table summarizes the funded status of these plans operating
principally in the U.S.:
<TABLE>
<CAPTION>
1997 1996
December 31 $M $m
- ----------------------------------------------------------------------------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Retirees 200 183
Fully eligible active participants 11 10
Other active participants 182 173
- ----------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 393 366
Plan assets at fair value 170 142
- ----------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 223 224
Unrecognized net gains 74 67
Unrecognized prior service cost 40 46
- ----------------------------------------------------------------------------------
Accrued postretirement benefit cost 337 337
- ----------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS:
Discount rate 7.25% 7.50%
Return on plan assets 9.50% 9.50%
Weighted average health care cost trend rates:
Initially 6.33% 6.80%
Trending down to 5.00% 5.25%
- ----------------------------------------------------------------------------------
</TABLE>
The plan assets are presently invested in long-term securities. The fair value
was established by the trustee of the fund.
The composition of expense for the postretirement benefit plan is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Years ended December 31 $M $m $m
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost 9 10 9
Interest cost 26 26 27
Actual return on plan assets (27) (14) (18)
Net amortization and deferral 10 (1) 5
- ----------------------------------------------------------------------------------
18 21 23
Curtailment gain - (24) -
- ----------------------------------------------------------------------------------
Net postretirement benefit cost 18 (3) 23
- ----------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 27
PHARMACIA & UPJOHN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollar amounts in millions, except per-share data
The assumption concerning health care cost trend rate has a significant effect
on the amounts reported. For example, increasing the rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997, by approximately $51 and the total of
service and interest cost components of net postretirement benefit cost for the
year then ended by approximately $6.
During 1996, the company recognized administrative credits of $24
related to curtailments of its postretirement plans. The curtailments resulted
principally from a change in retiree life plans which eliminated the company's
obligation to provide future postretirement life insurance benefits for those
retirees electing to switch to the new plan.
22. SEGMENT OPERATIONS
The company operates in one industry, pharmaceutical products, which includes
prescription and nonprescription products for both humans and animals. The
company's products are sold throughout the world to a wide range of customers
including pharmacies, hospitals, chain warehouses, governments, physicians, and
wholesalers and other distributors. No single customer accounts for 10 percent
or more of the company's consolidated sales.
The table below shows the company's operations by geographic area. All the
sales are presented by originating area. U.S. exports to third-party customers
are less than 10 percent of U.S. sales. Sales between geographic areas are
priced to reflect consideration of economic circumstances and the regulations
of countries in which the transferring entities are located. These transfers are
eliminated in consolidation.
<TABLE>
<CAPTION>
1997 1996 1995
Geographic areas for years ended December 31 $M $m $m
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO CUSTOMERS (INCLUDES EXPORTS):
United States 2,124 2,318 2,205
Sweden 806 743 644
Other Europe 2,363 2,697 2,656
Japan and Pacific 899 1,051 1,048
Other 394 367 396
- ----------------------------------------------------------------------------------------------------
INTERAREA TRANSFERS FROM:
United States 216 348 569
Sweden 978 999 1,012
Other Europe 587 969 635
Japan and Pacific 9 16 21
Other 31 22 21
Eliminations (1,821) (2,354) (2,258)
- ----------------------------------------------------------------------------------------------------
6,586 7,176 6,949
- ----------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES:
United States 13 56 399
Sweden 339 320 301
Other Europe 153 408 308
Japan and Pacific (76) 21 89
Other 39 33 39
- ----------------------------------------------------------------------------------------------------
468 838 1,136
- ----------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS, DECEMBER 31:
United States 3,618 3,904 4,292
Sweden 2,990 3,792 3,315
Other Europe 2,595 2,356 2,809
Japan and Pacific 847 866 801
Other 330 255 244
- ----------------------------------------------------------------------------------------------------
10,380 11,173 11,461
- ----------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 28
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
Seven-year summary of operations
- --------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
U.S. dollar amounts in millions, except 1997 1996 1995 1994 1993 1992 1991
per-share data $M $m $m $m $m $m $m
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales 6,586 7,176 6,949 6,704 6,507 5,910 5,292
Other revenue 124 110 146 119 54 28 22
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 6,710 7,286 7,095 6,823 6,561 5,938 5,314
- --------------------------------------------------------------------------------------------------------------------------------
Cost of products sold 2,049 2,116 1,967 1,877 1,822 1,623 1,415
Research and development 1,217 1,266 1,254 1,163 1,144 940 785
Marketing, administrative and other 2,665 2,642 2,617 2,583 2,596 2,393 2,183
Biotech merger and restructruing costs 73 - - - - - -
Restructuring charges 316 518 104 20 269 46 58
Merger costs - 67 138 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 6,320 6,609 6,080 5,643 5,831 5,002 4,441
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 390 677 1,015 1,180 730 936 873
Interest income 110 159 216 157 227 248 166
Interest expense (33) (56) (94) (112 ) (183) (136) (119)
Gain on sale of subsidiary stock - 55 - - - - -
All other, net 1 3 (1) 46 4 (101) (10)
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 468 838 1,136 1,271 778 947 910
Provision for income taxes 145 276 397 438 217 243 307
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 323 562 739 833 561 704 603
Discontinued operations, net - - - 2 46 (129) 164
Cumulative effect of accounting changes
(net of tax) - - - - (19) (224) -
- --------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 323 562 739 835 588 351 767
- --------------------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock (net of tax) 13 13 13 12 12 12 12
- --------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS ON COMMON STOCK 310 549 726 823 576 339 755
==============================================================================
Net earnings per common share:
Diluted $.61 $1.07 $1.41 $1.60 $1.13 $.67 $1.46
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Cash and cash equivalents 775 641 841 652 393 373 544
Short-term investments 539 696 974 1,134 447 1,176 670
Trade accounts receivable, net 1,303 1,705 1,535 1,480 1,416 1,272 1,109
Inventories 958 1,012 976 887 833 728 735
Other current assets 752 841 648 652 559 436 480
- --------------------------------------------------------------------------------------------------------------------------------
Current assets 4,327 4,895 4,974 4,805 3,648 3,985 3,538
Net assets of discontinued operations - - - - 278 1,989 2,644
Properties 3,306 3,602 3,393 3,074 2,906 2,517 2,495
Goodwill and other intangible assets, net 1,215 1,522 1,722 1,795 1,843 1,556 1,813
Other noncurrent assets 1,532 1,154 1,372 1,273 1,220 826 855
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 10,380 11,173 11,461 10,947 9,895 10,873 11,345
==============================================================================
Short-term debt, including current
maturities of long-term debt 401 235 524 766 769 500 216
Other current liabilities 2,287 2,268 2,116 2,110 2,001 2,077 1,572
Long-term debt and ESOP debt 634 823 870 953 950 739 919
Other noncurrent liabilities 1,520 1,606 1,564 1,508 1,411 1,158 949
Shareholders' equity 5,538 6,241 6,387 5,610 4,764 6,399 7,689
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 10,380 11,173 11,461 10,947 9,895 10,873 11,345
==============================================================================
</TABLE>
<PAGE> 29
PHARMACIA & UPJOHN
<TABLE>
<CAPTION>
QUARTERLY DATA
- ------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1997 (unaudited) QUARTER QUARTER QUARTER QUARTER
U.S. dollar amounts in millions, except per-share data $M $M $M $M
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 1,635 1,703 1,551 1,697
Other revenue 27 35 36 26
- ------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 1,662 1,738 1,587 1,723
Cost of products sold 503 550 476 520
Research and development 283 281 268 385
Marketing, administrative and other 602 652 585 826
Biotech merger and restructuring costs - - 31 42
Restructuring charges - - 125 191
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 274 255 102 (241)
Interest income 29 25 26 30
Interest expense (7) (11) (6) (9)
All other, net (2) 1 (2) 4
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 294 270 120 (216)
Provision for income taxes 100 92 41 (88)
- ------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 194 178 79 (128)
======================================================
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $.38 $.34 $.15 $(.26)
Diluted $.37 $.34 $.15 $(.26)
- ------------------------------------------------------------------------------------------------------------------------
Dividends declared per share $.27 $.27 $.27 $.27
- ------------------------------------------------------------------------------------------------------------------------
Market Price:
High $41.125 $36.875 $38.625 $37.500
Low $35.750 $27.500 $33.938 $28.875
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
1996 (unaudited) Quarter Quarter Quarter Quarter
U.S. dollar amounts in millions, except per-share data $m $m $m $m
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 1,740 1,775 1,721 1,940
Other revenue 17 29 20 44
- ------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 1,757 1,804 1,741 1,984
Cost of products sold 503 500 533 580
Research and development 300 303 330 333
Marketing, administrative and other 629 718 540 755
Restructuring charges 257 164 37 60
Merger costs 22 29 16 -
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 46 90 285 256
Interest income 49 47 31 32
Interest expense (20) (23) (9) (4)
Gain on sale of subsidiary stock - - - 55
All other, net (1) 9 (3) (2)
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 74 123 304 337
Provision for income taxes 24 41 100 111
- ------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 50 82 204 226
======================================================
Net earnings per common share:
Basic $.09 $.16 $.39 $.44
Diluted $.09 $.16 $.39 $.43
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction
in which
Corporate Name Incorporated
---------------------------
PHARMACIA & UPJOHN, INC. Delaware (Parent)
Subsidiaries (excluding those which when considered
in the aggregate as a single subsidiary did not constitute
a significant subsidiary as of December 31, 1997):
<S> <C>
Pharmacia & Upjohn (Perth) Pty Ltd Australia
Pharmacia & Upjohn Pty Ltd Australia
Pharmacia & Upjohn N.V./S.A. Belgium
Pharmacia & Upjohn Coordination Center N.V. Belgium
Pharmacia & Upjohn Inc. Canada
Sino-Swed Pharmaceutical Co Ltd China
Upjohn Suzhou Pharmaceutical Co Ltd China
Pharmacia & Upjohn GmbH Germany
Pharmacia & Upjohn S.A. Spain
Pharmacia & Upjohn S.A. France
Pharmacia & Upjohn Limited United Kingdom
Pharmacia UK Ltd United Kingdom
Pharmacia & Upjohn Cork Ltd Ireland
Prosec (Ireland) Ltd Ireland
Pharmacia & Upjohn S.p.A. Italy
Pharmacia & Upjohn Ltd Japan
Pro Re (Luxembourg) S.A. Luxembourg
Pharmacia & Upjohn S.A. Luxembourg
Pharmacia & Upjohn S.A. de C.V. Mexico
Pharmacia & Upjohn International N.V. Netherlands
Pharmacia & Upjohn Financial Services B.V. Netherlands
Pharmacia & Upjohn AS Norway
Pharmacia & Upjohn Caribe Inc. Puerto Rico
Pharmacia & Upjohn AB Sweden
Pharmacia Biosystems AB Sweden
Pharmacia & Upjohn Treasury Services AB Sweden
Kabi Pharmacia Peptide Hormones AB Sweden
Sopaco S.A. Switzerland
Pharmacia & Upjohn Company Delaware
Pharmacia & Upjohn Foreign Sales Corporation Delaware
Upjohn International Inc. Michigan
Pharmacia & Upjohn Inter-American Corporation Michigan
Pharmacia & Upjohn Trading Company Michigan
Pharmacia & Upjohn Holding Company Delaware
The Upjohn Manufacturing Company Delaware
The Upjohn Holding Company M Delaware
Greenstone Ltd. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the prospectus included in
Form S-8 Registration Statement (No. 33-63903) and the prospectus included in
Form S-8 Registration Statement (No. 333-03109) of our report, dated February
17, 1998, on our audits of the consolidated financial statements of Pharmacia &
Upjohn, Inc. and its subsidiaries as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995, included or incorporated by
reference into this Form 10-K for the fiscal year ended December 31, 1997 of
Pharmacia & Upjohn, Inc.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 775
<SECURITIES> 0
<RECEIVABLES> 1,392
<ALLOWANCES> 89
<INVENTORY> 958
<CURRENT-ASSETS> 4,327
<PP&E> 5,820
<DEPRECIATION> 2,514
<TOTAL-ASSETS> 10,380
<CURRENT-LIABILITIES> 2,688
<BONDS> 394<F1>
0
282
<COMMON> 5
<OTHER-SE> 5,251
<TOTAL-LIABILITY-AND-EQUITY> 10,380
<SALES> 6,586
<TOTAL-REVENUES> 6,710
<CGS> 2,049
<TOTAL-COSTS> 2,049
<OTHER-EXPENSES> 1,217<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 468
<INCOME-TAX> 145
<INCOME-CONTINUING> 323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
<FN>
<F1>Does not include guarantee of ESOP debt of 240.
<F2>Only includes R&D expense.
</FN>
</TABLE>
