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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, 1999
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)
<TABLE>
<S> <C>
Delaware 98-0155411
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
100 Route 206 North, Peapack, New Jersey 07977 U.S.A.
(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:
<TABLE>
<S> <C>
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)
</TABLE>
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. \ \
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 February 17, 2000 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 $25,907,648,570.
The number of shares of Common Stock, $.01 par value, outstanding as of February
17, 2000 is 520,103,359 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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None
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 of Pharmacia Aktiebolag ("Pharmacia") and The
Upjohn Company ("Upjohn").
The Company's core business is the development, manufacture and sale of
pharmaceutical products. This business is organized in two segments,
prescription pharmaceutical and consumer health care and various other smaller
operating units. The primacy prescription pharmaceutical segment includes
general therapeutics, ophthalmology and hospital products including oncology,
and diversified therapeutics. The consumer health care segment consists of
self-medication products that are available to consumers over the counter
without a prescription. This segment includes product line extensions of key
prescription drugs, plus products to treat tobacco dependency.
The remaining operating units include animal health, diagnostics,
nutrition, plasma, pharmaceutical commercial services and biotechnology. Animal
health produces and markets both pharmaceuticals and feed additives for
livestock and pets. Diagnostics provides services to identify specific allergies
in people. Nutrition sells food replacement products, primarily to hospitals.
Plasma is a therapeutic area that prepares and markets products derived from
blood plasma. Pharmaceutical commercial services develops, manufactures and
markets certain bulk pharmaceutical chemicals and selected high-technology and
specialty chemicals. Biotechnology primarily represents minority equity
positions in biotechnology joint ventures that manufacture and market reagents,
chemicals, and systems for biotechnology companies and academic research
laboratories.
During the second quarter of 1999, the Company merged with SUGEN, Inc.
("Sugen") a leader in target-driven drug discovery and development, to
strengthen its R&D efforts in cell signaling and oncology.
Also during the second quarter, the Company acquired 20 percent of
Sensus Drug Development Corporation, a privately-held Company focused on
developing drugs to treat endocrine disorders.
In December 1999, the Company and Monsanto Company entered into an
agreement to merge their businesses. Further information describing the proposed
merger can be found at the SEC's website, www.sec.gov.
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PHARMACEUTICAL SEGMENT
INDUSTRY BACKGROUND
The world market for 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 their therapeutic benefit in relation to cost,
for example, 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 key competitive factors in the pharmaceutical industry.
PHARMACEUTICAL PRODUCT DESCRIPTIONS
The Company's performance in 1999 continues to be driven by sales of
new prescription products that have been introduced within the last five years,
such as XALATAN, DETROL, CAMPTOSAR, and MIRAPEX which are making up an
increasing percentage of the Company's total sales. The growth has been
especially strong in the U.S. and Japan, where sales of prescription drugs grew
by 25 percent and 33 percent, respectively. According to IMS Health, Inc.,
Pharmacia & Upjohn was the fastest growing pharmaceutical company in Japan
during 1999 as a result of expanding the sales force by one-third since 1998 and
introducing three new products into the market.
In 1999 XALATAN, for the treatment of open-angle glaucoma and ocular
hypertension, became the Company's largest selling drug with sales of $507
million. Since its introduction in 1996, and subsequent launch in 49 countries,
XALATAN has become the leading glaucoma agent in the world on the basis of its
1999 sales. In May 1999, XALATAN was launched in Japan, the world's second
largest glaucoma market, for the first-line treatment of patients with ocular
hypertension. In preparation for the launch, Pharmacia & Upjohn tripled the size
of the ophthalmology sales force in Japan. As a result, the XALATAN launch in
Japan was the most successful to date. In December 1999, the Company filed a New
Drug Application for a fixed-dose combination formulation containing XALATAN and
TIMOLOL, which the U.S. Food and Drug Administration (FDA) has designated for
priority review.
DETROL (DETRUSITOL outside the U.S.), the leading treatment for
overactive bladder, reduces the symptoms of increased frequency and urge to
urinate, as well as urge incontinence episodes. DETROL has been launched in 30
countries throughout the world, generating 1999 sales of $329 million, an
increase of $204 million. Despite introduction of a new competitor in the U.S.
market, DETROL has maintained its position as the dominant product in the
market. A supplemental New Drug Application (NDA) was filed in December 1999 to
strengthen the DETROL label for urge incontinence. Management also expects to
file with regulatory agencies in the U.S. and Europe for a once-daily version of
DETROL early in the year 2000. Additionally, Pharmacia & Upjohn recently signed
a DETROL co-promotion agreement with G.D. Searle (Searle), the pharmaceutical
division
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of Monsanto Company. As a result, the promotional sales force for DETROL in
the U.S. will consist of over 1,800 representatives.
In 1999, the Company increased its efforts to build on its growing
presence in oncology and to capitalize on new opportunities to expand its global
cancer care franchise. Sales of CAMPTOSAR, the company's leading oncology agent,
increased by $100 million to a total of $293 million. Sales of CAMPTOSAR
continue to benefit from new clinical data documenting its ability to improve
survival in patients with colorectal cancer. Pharmacia & Upjohn markets
CAMPTOSAR in the U.S. as a first-line treatment for metastatic colorectal
cancer. In 1999, the Company filed a NDA for the use of CAMPTOSAR as a
first-line treatment of colorectal cancer and has been granted a priority review
by the FDA for this indication. Management expects to launch the new indication
in 2000.
In addition to CAMPTOSAR, the Company also markets a number of other
widely prescribed oncology agents including PHARMORUBICIN and ADRIAMYCIN,
anthracycline preparations which are used in the treatment of breast cancer and
other solid tumors.
In 1999, Pharmacia & Upjohn received U.S. FDA approval for two new
breast cancer treatments, ELLENCE and AROMASIN. ELLENCE, the trade name for
PHARMORUBICIN in the U.S., was launched shortly after its approval in September
1999. ELLENCE has been granted Orphan Drug Status by the FDA for the adjuvant
treatment of patients with breast cancer following surgery or radiation therapy.
AROMASIN, an oral hormonal drug that blocks the production of estrogen, was
approved in 1999 for the treatment of patients with metastatic breast cancer.
AROMASIN will be launched during 2000 in the U.S. and key markets in Europe and
Latin America.
Central nervous system (CNS) products, including MIRAPEX, CABASER, and
EDRONAX are also contributing to Pharmacia & Upjohn's new product sales growth.
New labeling urges physicians to warn their patients about the potential to
develop drowsiness during activities of daily living. MIRAPEX sales grew 65
percent in 1999 to $81 million. In addition to MIRAPEX, Pharmacia & Upjohn also
markets the dopamine agonist CABASER, for Parkinson's Disease, in Europe and
Japan. In August 1999, CABASER was launched in Japan, the world's second largest
market for Parkinson's Disease. CABASER is marketed in the U.S. under the trade
name DOSTINEX for the treatment of patients with hyperprolactinemia; it is not
approved for Parkinson's Disease in the U.S. EDRONAX, for the treatment of major
depression, has been launched in 18 European and Latin American countries since
1997. The FDA issued an approvable letter for VESTRA, the trade name for EDRONAX
in the U.S., in July 1999. The FDA issued a second approvable letter in February
2000 which will require the completion of an additional U.S. clinical trial. In
the U.S., VESTRA will be co-marketed by Janssen Pharmaceutica, a division of
Johnson & Johnson.
The Company also produces the CNS drugs XANAX, HALCION, and SERMION,
which are subject to intense generic competition. XANAX sales remained steady at
$320 million, while HALCION sales grew to $97 million on the basis of a 14
percent increase in non-U.S. markets. SERMION, a treatment for cognitive and
behavioral disorders related to senile dementia, continued to decline in 1999 as
it did in 1997 and 1998.
GENOTROPIN, the world's leading recombinant human growth hormone, is
Pharmacia & Upjohn's second-largest selling product. The company recorded
GENOTROPIN sales of $461 million in 1999. GENOTROPIN promotes longitudinal bone
growth in children and adults with
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growth hormone deficiency. Outside the U.S., GENOTROPIN is also used in the
treatment of growth disturbances associated with Turner's Syndrome and chronic
renal insufficiency. In the U.S., GENOTROPIN sales increased by 64 percent as
the product is capturing one-third of all new patients who are using growth
hormone therapy. Despite intense competition and declining volume in the growth
hormone market due to government imposed prescribing restrictions, GENOTROPIN
sales in Japan increased due to a positive price effect, a favorable currency
impact, and an improving market share after recovery of full marketing rights in
1998. The launch of GENOTROPIN MiniQuick, a new delivery system, has resulted in
strong growth of the brand in Europe. GENOTROPIN MiniQuick is being launched on
a wide-scale in the U.S. in early 2000.
FRAGMIN, a low-molecular-weight heparin product for the prevention of
thrombosis that is available in more than 50 countries, generated sales of $213
million in 1999. Outside the U.S., FRAGMIN is also used for treatment of deep
vein thrombosis and in hemodialysis. In 1999, the FRAGMIN label in the U.S. was
strengthened with the addition of new indications for the treatment of unstable
coronary artery disease and prevention of thrombosis following hip surgery. In
1999, Pharmacia & Upjohn and Centocor entered into a co-promotion agreement,
whereby Centocor will promote FRAGMIN to cardiovascular specialists in the U.S.
With the more competitive labeling and an increased presence in the
institutional arena, FRAGMIN sales grew 53 percent in the U.S. FRAGMIN also
outpaced the growth of the low-molecular-weight heparin market in Europe.
Pharmacia & Upjohn markets several hormonal products for women.
DEPO-PROVERA Contraceptive Injection is the Company's largest selling hormonal
product with 1999 sales of $252 million. It is approved in over 100 countries.
Although the patents protecting DEPO-PROVERA have expired, no generic
equivalents have been approved and the company does not foresee the introduction
of a generic equivalent of DEPO-PROVERA in the U.S. within the next 12 months.
LUNELLE (LUNELLA outside the U.S.), a monthly contraceptive injection, is
expected to be approved in 2000. Because of its shorter duration of action and
different drug profile, LUNELLE is targeted to a different patient population
than DEPO-PROVERA and is not expected to cannibalize sales of DEPO-PROVERA. The
Company also markets PROVERA, an agent used in progesterone replacement and
OGEN, an estrogen replacement product. In addition, Pharmacia & Upjohn acquired
U.S. promotional rights to three FDA approved products for hormone replacement
therapy: VAGIFEM, ACTIVELLA, and INNOFEM from Novo Nordisk A/S. The Company will
begin promotion of these products in 2000.
The Company produces various forms of steroids under the trade names
MEDROL, SOLU-MEDROL, and DEPO-MEDROL, which are used to treat a variety of
inflammatory conditions. In 1999, Pharmacia & Upjohn reported sales of $297
million for the MEDROL family of products, a 13 percent increase compared to
1998.
Pharmacia & Upjohn also introduced two new in-licensed products in the
U.S. during 1999. PLETAL, generically known as cilostazol, is being co-promoted
with Otsuka of America Pharmaceuticals Inc. PLETAL improves pain-free walking
distance in patients who suffer from intermittent claudication, a form of
peripheral arterial disease. GLYSET, a treatment for patients with Type-II
diabetes, was in-licensed from Bayer AG and introduced in early 1999.
In 1999, the company filed applications in the U.S. and Europe to
market ZYVOX (ZYVOXA) for the treatment of hospitalized patients with severe
Gram-positive infections. ZYVOX has been granted priority review by the FDA and
the Company expects to introduce the product in
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2000. ZYVOX is the lead compound in the oxazolidinone class of antibiotics, the
first new class of antibiotics to reach the market in over 30 years. ZYVOX will
be an important addition to Pharmacia & Upjohn's existing line of antibiotics
which includes CLEOCIN (or DALACIN), LINCOCIN, and VANTIN.
Generic price erosion has affected sales of older products including
HEALON, PROVERA, MICRONASE/GLYNASE, ADRIAMYCIN, and LINCOCIN. Competition from
generic drugs is expected to continue to adversely affect future sales of these
products, and may also negatively impact the sales of other products like XANAX,
CLEOCIN and MEDROL, which also face generic competition. Brand name competitive
products negatively influenced the sales of CAVERJECT and VANTIN in 1999.
CONSUMER HEALTH CARE SEGMENT
In the consumer health care or over-the-counter (OTC) products
business, the company's leading products are the NICORETTE line to treat tobacco
dependency, and ROGAINE (REGAINE), the treatment for hereditary hair loss.
During 1999, the company recorded $234 million in NICORETTE sales, an increase
in local currency of 13 percent over 1998. Sales of ROGAINE increased 4 percent
to $139 million. Sales of other OTC products in the U.S. declined in 1999
resulting in a net overall flat performance for the year in the global OTC
business when compared with the prior year. Sales of NICORETTE in 1999 were led
by Europe and Australia.
ALL OTHER BUSINESS SEGMENTS
NAXCEL(R) (or EXCENEL(R)) Sterile Powder is an antibiotic for
treating bovine and swine respiratory disease and early chick mortality;
LINCO-SPECTIN(R) Soluble Powder and Premix is a combination
lincomycin/spectinomycin antibiotic; LINCOMIX(R) 20 and LINCOMIX 50 Feed
Medication are feed-additive antibiotics; MGA(R) Premix is a growth-promoting
feed additive for feedlot heifers; LINCOCIN(R) is a line of small-animal
antibiotics; and LUTALYSE(R) (or DINOLYTIC(R)) Sterile Solution is used to
synchronize breeding performance in mares and cattle. The Company also markets
various products for the treatment of mastitis.
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.
The Company also owns 41% of Biacore International AB, which
develops, manufactures and markets advanced scientific instruments employing
affinity-based biosensor technology.
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. Patents on the Pharmacia CAP System expire in 2004. The Company also
markets an easy-
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to-use, low-volume test instrument, UniCAP 100(R), 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.
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 administration 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, central nervous system disease
and oncology, and are conducted principally in the Company's four regional
centers in Kalamazoo, Michigan; South San Francisco, California; 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 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.
Among the Company's most important research compounds in the
area of infectious diseases are a new class of antimicrobials called
oxazolidinones, which have a novel mechanism of action: inhibition of mRNA
translation. The lead compound in this class, linezolid, is in Phase III
clinical studies to evaluate the safety and efficacy of the compound in treating
infections caused by gram-positive bacteria including antibiotic-resistant
strains of staphylococci, streptococci and enterococci. 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
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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 aimed at 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. In addition, research and development programs conducted by the
Company's wholly-owned subsidiary, Sugen, Inc., will enhance our genomics-based
drug discovery capabilities and strengthen the Company's oncology portfolio by
providing new therapeutic approaches to the treatment of cancer. Sugen currently
has three anti-cancer drugs in clinical development including novel cytostatic
agents and angiogenesis inhibitors. In addition to its current focus in
oncology, SUGEN is applying its technology platform to identify and validate
novel targets for a range of potential clinical applications.
PRODUCTION
The Company produces its pharmaceutical products mainly in the
U.S., Sweden, Italy, Belgium, Ireland and Puerto Rico.
The Company purchases a variety of raw materials for use in
its manufacturing processes. When available, the Company has a policy of
maintaining multiple sources of supply for materials. The Company obtains its
supplies of raw materials from several companies in a number of countries. The
Company has not experienced any difficulty in obtaining a sufficient supply of
raw materials in recent years and believes that it will be able to obtain them
in sufficient quantities in the future. However, the price of its raw materials
may vary from year to year.
MARKETING AND DISTRIBUTION
The Company's pharmaceutical products are sold worldwide to
healthcare providers, veterinarians, drug stores, food stores, mass
merchandisors, distributors and wholesalers. 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.
COMPETITION
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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, 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.
The Company must obtain and maintain regulatory approval for a
pharmaceutical product from a country's national regulatory agency before the
product may be sold in a particular country.
The submission of an application to a regulatory authority
does not guarantee that it will grant a license to market the product. Each
authority may impose its own requirements and delay or refuse to grant approval,
even though a product has been approved in another country.
In the Company's principal markets, the approval process for a
new product is complex and lengthy. The time taken to obtain approval varies by
country but generally takes from six months to four years from the date of
application. This increases the cost to the Company of developing new products
and increases the risk that the Company will not succeed in selling them
successfully.
In addition to normal price competition in the marketplace,
the prices of the Company's products are restricted by price controls imposed by
governments and health care providers in most countries where we sell products.
Price controls operate differently in different countries and can cause wide
differences in prices between markets. Currency fluctuations can aggravate these
differences. The existence of price controls can limit the revenues the Company
earns on the Company's products and may have an adverse effect on the Company's
business and results of operations.
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.
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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 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
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<PAGE> 12
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.
EMPLOYEES
The Company has approximately 31,000 employees worldwide,
although the number is continually changing based on realignment of operations
and workforce needs.
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.
FOREIGN EXCHANGE FLUCTUATIONS
The Company records its transactions and prepares its
financial statements in U.S. dollars, but a significant portion of its earnings
and expenditures are in other currencies. Changes in exchange rates between the
U.S. dollar and such currencies can result in increases or decreases in the
Company's costs and earnings. Fluctuations in exchange rates between the U.S.
dollar and other currencies may also affect the book value of the Company's
assets outside the United States and the amount of shareholders' equity. The
Company seeks to minimize its currency exposure by engaging in hedging
transactions, where deemed appropriate.
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
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<PAGE> 13
environmental protection will exceed $30 million in 2000 and $35 million in
2001. Operating expenses for compliance with environmental protection laws and
regulations in 1999 are estimated to have been in excess of $50 million.
Management estimates that such operating expenses will be in excess of $50
million in each of years 2000 and 2001.
With regard to its discontinued industrial chemical facility in North
Haven, Connecticut, the Company may soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required, but it is not possible to determine what, if any,
exposure exists at this time or when the expenditures might be made.
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; South San Francisco, California;
Stockholm, Uppsala and Helsingborg, Sweden; Milan, Italy; and Puurs, Belgium.
The Company also has major facilities in Japan and Puerto Rico. The Company
headquarters is located in Peapack , 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
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 and
administrative and judicial proceedings at several "Superfund" sites. The
Company has successfully settled or otherwise resolved most of the Superfund
sites where it has had some alleged connection.
While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the Company continues to believe that any potentially unaccrued costs
and liabilities associated with such matters will not have a material adverse
effect on the Company's consolidated financial position. 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 consolidated
financial position, its results of operations or liquidity.
The Company has been a party along with a number of other defendants
(both manufacturers and wholesalers) in several federal civil antitrust
lawsuits, which were consolidated and transferred to the Federal District Court
for the Northern District of Illinois. These suits, brought by independent
pharmacies and chains, generally allege unlawful conspiracy, price
discrimination and price fixing and, in some cases, unfair competition. These
suits 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
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<PAGE> 14
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. The Company
announced in 1998 that it reached a settlement with the plaintiffs in the
federal class action case for $103 that was paid during the first quarter of
1999. Similar actions by proposed retailer classes have been filed in the state
courts of Alabama, California, Minnesota, Mississippi, and Wisconsin.
Twenty-three class action lawsuits seeking damages based on the same alleged
conduct have been filed in 18 states and the District of Columbia. The
plaintiffs claim to represent consumers who purchased prescription drugs in
those jurisdictions and one other state. Two of the lawsuits have been
dismissed. Fifteen have been settled. The Company believes that any potential
remaining liability above amounts accrued will not have a material adverse
effect on the Company's consolidated financial position, its results of
operations, or liquidity.
Please see the third paragraph of the section captioned "Environmental
Matters" for information concerning the Company's discontinued industrial
chemical facility in North Haven, Connecticut.
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, 1999.
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 February 17, 2000, there were 35,009
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.
On December 19, 1999, Pharmacia & Upjohn and Monsanto Company
("Monsanto") entered into reciprocal stock option agreements. Under the terms of
the stock option granted by Pharmacia & Upjohn to Monsanto, Monsanto may
purchase up to 77,388,932 shares of Pharmacia & Upjohn common stock
(representing approximately 14.9% of the outstanding Pharmacia & Upjohn common
stock as of December 17, 1999) at an exercise price of $50.25 per share. The
consideration received by Pharmacia & Upjohn for the stock option it granted to
Monsanto Company consisted of (1) a substantially similar stock option to
purchase up to 94,774,810 shares of Monsanto Company common stock (representing
approximately 14.9% of the outstanding Monsanto Company common stock as of
December 17, 1999) at an exercise price of $41.75 per share and (2) inducing
Monsanto Company to enter into the Agreement and Plan of Merger, dated as of
December 19, 1999, as amended by Amendment No. 1 dated as of February 18, 2000,
among Monsanto Company, MP Sub, Incorporated, a direct wholly-owned subsidiary
of Monsanto Company, and Pharmacia & Upjohn.
Monsanto Company may exercise the option granted to it, in whole or in
part, at any time after the occurrence of an event which would entitle it to
receive a full termination fee of $575 million under the merger agreement and
prior to termination of the option. The right to exercise the option terminates
upon the earliest to occur of the following circumstances:
o the merger is completed;
o six months after the option first becomes exercisable;
o termination of the merger agreement under circumstances which
cannot result in Monsanto becoming entitled to receive termination
fees of $575 million or more from Pharmacia & Upjohn;
o Monsanto receives $635 million, less any termination fee received
by Monsanto, for the repurchase of the option; and
o twelve months after termination of the merger agreement under
circumstances which could result in Monsanto becoming entitled to
receive an aggregate termination fee of $575 million upon the
occurrence of a subsequent event.
If a stock option becomes exercisable, Monsanto may, as to all or part
of the shares of common stock subject to the option, elect to receive a cash
payment from the option grantor. This cash payment would terminate Monsanto's
right to purchase those shares of common stock upon the exercise of the option.
The cash to be paid per share would be equal to the difference between the
exercise price of the option and the higher of:
o the highest price per share proposed to be paid by any other
person in connection with an acquisition proposal; and
o the average closing price of the stock for the ten trading days
preceding the date that the election to receive cash is exercised.
If a stock option becomes exercisable, Pharmacia & Upjohn may elect to
repurchase the option from Monsanto for a cash payment. This cash payment would
terminate Monsanto's right to purchase those shares upon the exercise of the
option. The cash to be paid per share would be computed the same as if Monsanto
had elected to receive cash for the option.
The stock option agreement provides that the total profit that Monsanto
is permitted to receive under the option agreement and the termination
provisions of the merger agreement cannot exceed $635 million in the aggregate.
The granting of the stock option by Pharmacia & Upjohn to Monsanto
Company was deemed to be exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), in reliance on Section 4(2) of the
Securities Act, as a transaction by an issuer not involving a public offering.
QUARTERLY DATA
-----------------------------------------
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
-12-
<PAGE> 15
<TABLE>
<CAPTION>
1999 (UNAUDITED) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dollar amounts in millions, except per-share data
Net sales $ 1,774 $ 1,760 $ 1,776 $ 1,943
Cost of products sold 493 447 481 472
Research and development 340 337 373 384
Selling, general and administrative 670 682 667 781
Merger and restructuring -- -- 32 38
Interest income (20) (18) (16) (26)
Interest expense 8 24 9 22
All other, net (19) 13 (37) (31)
------- ------- ------- -------
Earnings before income taxes 302 275 267 303
Provision for income taxes 90 83 82 89
------- ------- ------- -------
Net earnings $ 212 $ 192 $ 185 $ 214
======= ======= ======= =======
Net earnings per common share:
Basic .40 .37 .35 .41
Diluted .39 .36 .34 .40
------- ------- ------- -------
Dividends declared per share .27 .27 .27 .27
Market Price:
High 63.813 66.375 59.563 60.688
Low $51.875 $51.563 $46.375 $43.500
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 (UNAUDITED) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dollar amounts in millions, except per-share data
Net sales $ 1,586 $ 1,654 $ 1,669 $ 1,849
Cost of products sold 486 493 516 536
Research and development 285 305 279 365
Selling, general and administrative 568 702 599 683
Merger and restructuring -- -- -- 92
Interest income (24) (22) (21) (24)
Interest expense 6 5 6 8
All other, net (3) (34) (22) (3)
------- ------- ------- -------
Earnings before income taxes 268 205 312 192
Provision for income taxes 94 74 108 70
------- ------- ------- -------
Net earnings $ 174 $ 131 $ 204 $ 122
======= ======= ======= =======
Net earnings per common share:
Basic .33 .25 .39 .23
Diluted .33 .24 .38 .22
------- ------- ------- -------
Dividends declared per share .27 .27 .27 .27
------- ------- ------- -------
Market Price:
High $45.875 $46.688 $51.688 $57.250
Low $33.750 $38.250 $40.438 $44.875
======= ======= ======= =======
The quarterly dividend throughout fiscal year 1998 and 1999 was $0.27 per share
of Common Stock.
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
In the third quarter of 1999, the company merged with SUGEN, Inc., a drug
discovery and development company. The merger was accounted for as a pooling of
interests under U.S. generally accepted accounting principles. All data prior to
this date, except dividends, have been restated to reflect the combined
operations of the two companies as if they had been merged during all prior
periods.
-13-
<PAGE> 16
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997 1996 1995
- ----------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dollar amounts in millions,
except per-share data
Net sales $ 7,253 $ 6,758 $ 6,586 $ 7,176 $ 6,949
Earnings from continuing operations 803 631 258 550 733
Total assets 10,698 10,343 10,457 11,259 11,536
Long-term debt 142 295 411 567 603
Diluted earnings per share
from continuing operations 1.49 1.17 0.48 1.03 1.39
Dividends declared per share(*) $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 0.27
======= ======= ======= ======= =======
</TABLE>
* Information provided related to dividends declared is the historical
information for Pharmacia and Upjohn. SUGEN had no dividend history and
separate dividend history and separate dividend information for Pharmacia AB
and The Upjohn Company prior to their merger has not been presented because
the information would not be meaningful.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL REVIEW
-----------------------------------------
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
OVERVIEW
Pharmacia & Upjohn sales and earnings for 1999 showed significant growth over
the prior year continuing the turnaround that began in 1998. Sales grew at a
seven-percent rate in 1999 compared with three-percent growth in 1998. Adjusting
for divestitures of the nutrition business in 1998 and
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<PAGE> 17
the biotech business in 1997, the sales growth rates become more reflective of
underlying business performance. On this basis, sales rose 12 percent during
1999 and 8 percent in 1998.
Growth in earnings before income taxes and growth in net earnings are affected
by a number of events and transactions that, because of their magnitude and
relative infrequency of occurrence, warrant special reference. Throughout the
discussion that follows, we have identified such items that management believes
had a noteworthy effect on the comparability of year-to-year performance
measures. This was done to facilitate a better understanding of the company's
reported earnings growth trends. Significant among these events and transactions
were the following which are discussed more fully below: restructuring charges
in each of the past three years involving two acquisitions and a global
turnaround of the company's performance; the divestitures referred to in the
first paragraph above; a realignment of certain research and development (R&D)
projects; settlement of certain lawsuits; and termination of a licensing
arrangement in Japan.
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS 1999 %CHANGE 1998 %CHANGE 1997
- -------------------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Dollars in millions,
except per-share data
Sales $7,253 7% $6,758 3% $6,586
Earnings before income taxes 1,147 18 977 125 435
Net earnings 803 27 631 145 258
Net earnings per common share (EPS):
--Basic $ 1.53 27 $ 1.20 150 $ .48
--Diluted $ 1.49 27% $ 1.17 144% $ .48
====== ==== ====== ==== ======
</TABLE>
In the following discussion of consolidated results, per-share amounts are
presented on a diluted, after-tax basis. Throughout this document, Pharmacia &
Upjohn is alternatively referred to as the company or P&U.
During the third quarter of 1999, the company merged with SUGEN, Inc. (Sugen), a
leader in target-driven drug discovery and development, to strengthen its R&D
efforts in cell signaling and oncology. The merger was completed on August 31
and called for the exchange of approximately 10 million shares of P&U stock for
all the outstanding common stock of Sugen. Because the merger was accounted for
as a pooling of interests, all prior-period financial data were restated to
include Sugen's results as if it had always been a part of P&U. Also during the
third quarter, P&U acquired 20 percent of Sensus Drug Development Corporation
(Sensus), a privately held company focused on developing drugs to treat
endocrine disorders. The Sensus investment, accounted for using the equity
method, is expected to expand P&U's leadership position in endocrinology.
Sugen and Sensus together represented incremental costs of approximately $162
million in 1999 compared to 1998. R&D expense comprised the majority of these
costs totaling $104 million in 1999 for the two operations whereas Sugen
spending in 1998 was $32 million. In connection with the merger with Sugen, the
company recorded approximately $70 million in merger and restructuring expenses.
The remaining incremental cost was principally interest expense. On an
earning-per-share basis, the overall effect of Sugen and Sensus on reported
results was approximately $0.31 for 1999 and $0.14 in 1998 relating to Sugen.
The company recognized restructuring charges in 1998 and 1997 as well.
Restructuring charges were $92 million ($.11 per share) in 1998 and $316 million
($.38 per share) in 1997. These
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<PAGE> 18
restructuring efforts were associated with the company's global turnaround
program. This program was undertaken to achieve simplified infrastructure,
improved efficiency, and a global focus on the core pharmaceutical business.
To concentrate resources on the faster-growing, higher-margin pharmaceutical
businesses, management has divested two noncore businesses in the past three
years. Substantially all of the nutrition business was sold in 1998 and 1999. A
loss of $52 million ($.07 per share) was recognized in 1998 with the initial
transaction involving the business located in all parts of the world except
Germany and China. In the third quarter of 1999, the Germany portion of the
business was sold and the sale of the China component will close during the
first quarter of 2000. The gain realized on the Germany sale was reflected in
"All other, net." Also reported in "All other, net" in the latter half of the
year and largely offsetting the gain on the nutrition-Germany sale were costs
associated with the company's relocation of its corporate headquarters to
Peapack, New Jersey.
In 1997, the company merged Pharmacia Biotech, its biotechnology supply
business, with Amersham Life Science creating a new company, Amersham Pharmacia
Biotech Ltd., of which Pharmacia & Upjohn owns 45 percent which is accounted for
under the equity method. In connection with the merger and subsequent
restructuring of Biotech, the company recorded charges of $79 million ($.12 per
share) in 1997.
Also affecting earnings comparability, in 1998 management reached a settlement
of $103 million in a federal class-action lawsuit originally filed in 1993 on
behalf of retail pharmacies. As a consequence of the settlement, the company
increased its litigation reserves by $61 million ($0.08 per share), a charge
reported in selling, general and administrative (SG&A) expense in the second
quarter of 1998. In 1997, the company terminated a sales and marketing
arrangement in Japan related to one of its leading products, GENOTROPIN. The
contract termination and related inventory repurchase resulted in a charge of
$115 million ($.11 per share) recorded in sales, cost of goods sold, and SG&A
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. Management
additionally recognized $70 million ($.09 per share) in litigation-related
charges in 1997 which were recorded in SG&A expense.
NET SALES
Unless otherwise indicated, analysis of sales performance below excludes the
divested nutrition and biotech businesses.
Sales growth in 1999 of 12 percent was the combined result of volume increases
of 11% and nominal effects of price increases offset by currency exchange
effects netting to approximately one additional percentage point of growth.
Sales in the U.S. continue to represent an increasingly significant percentage
of worldwide sales, increasing to 41 percent in 1999 from 39 percent in 1998 and
34 percent in 1997. Despite increasing growth in the U.S. relative to non-U.S.
markets, the company's geographic composition of sales will continue to result
in significant exposure to the fluctuations of exchange rates in both
translation of
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<PAGE> 19
financial results and the underlying transactions that comprise the results. The
estimated effect of exchange rates on sales by country in the following table is
based on location of customer.
<TABLE>
<CAPTION>
EXCHANGE EFFECT %CHANGE
ON CONSOLIDATED SALES 1999 %CHANGE EXCL. FX* 1998
- --------------------- ---- ------- --------- ----
<S> <C> <C> <C> <C>
Dollars in millions
Non-U.S.:
Japan $ 738 31.2% 14.1% $ 562
Italy 430 (1.0) 3.2 434
Germany 357 (2.0) 2.0 364
United Kingdom 328 11.0 13.2 295
Sweden 257 (1.2) 2.5 260
France 273 6.8 10.9 256
Spain 170 9.1 13.7 156
Rest of world 1,710 6.1 10.4 1,612
United States 2,915 17.8 17.8 2,476
----- ---- ---- -----
Total Sales (adjusted for
divested businesses) 7,178 11.9% 12.5% 6,415
----- ---- ---- -----
Divested businesses 75 343
----- ---- ---- -----
Consolidated Net Sales $7,253 7.3% 7.9% $6,758
====== === === ======
</TABLE>
* Represents percent change from the prior year excluding the approximate
effects of currency exchange rate fluctuations.
Management reports its operations within two reportable segments: prescription
pharmaceutical and consumer health care, with the remaining operations being
combined in "all other."
The prescription pharmaceutical and consumer health care segments are each
comprised of a single operating unit. The "all other" grouping includes animal
health, diagnostics, nutrition, plasma, bulk drugs, third-party manufacturing
and biotechnology. Additional information regarding segments is provided in Note
21 to the consolidated financial statements.
<TABLE>
<CAPTION>
SALES BY SEGMENT 1999 %CHANGE 1998 %CHANGE 1997
- ---------------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Dollars in millions
Prescription pharmaceuticals $5,499 15.7% $4,752 8.7% $4,370
Consumer health care 683 (0.1) 683 6.5 642
All other 1,071 (19.1) 1,323 (15.9) 1,574
------ --- ------ --- ------
TOTAL CONSOLIDATED SALES $7,253 7.3% $6,758 2.6% $6,586
====== === ====== === ======
</TABLE>
The increase in prescription pharmaceutical segment sales in 1999 was due
largely to new prescription product growth in the U.S. and Japan. Although new
product growth was strong in 1998, sales that year included only partial year
sales of continually growing products such as XALATAN. New product growth was
also strong in 1997. Sales that year were adversely affected, though, by intense
generic competition and year-end 1996 trade inventory accumulations in the U.S.
and across major markets in Europe. In Japan, mandatory price decreases in each
of the last three years, negative exchange effects, and government restrictions
in health care reimbursements have adversely affected prescription
pharmaceutical segment sales.
-17-
<PAGE> 20
Sales of the consumer health care segment have remained constant since 1998. The
increase in sales of the consumer health care segment in 1998 was driven by
particularly strong growth in sales of the NICORETTE line of products.
The "all other" grouping accounted for approximately 15 percent of consolidated
sales in 1999, down from 20 percent in 1998 and 24 percent in 1997. As
previously mentioned, the company divested the majority of the nutrition
business to Fresenius AG in December 1998. As a result of this transaction,
sales associated with nutrition were significantly lower in 1999 than in
previous years. Also, the sale of Biotech, effective August 1997 (see Note 6 to
the consolidated financial statements) further reduced sales in this grouping.
SALES BY PRODUCT
A year-to-year consolidated net sales comparison of the company's top 20
products (including generic equivalents where applicable) is provided in the
table below.
<TABLE>
<CAPTION>
SALES OF TOP PRODUCTS 1999 %CHANGE 1998 %CHANGE 1997
- --------------------- ---- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C>
Dollars in millions
XALATAN $ 507 52.8% $ 332 101.6% $ 165
GENOTROPIN 461 16.6 395 13.1 349
CLEOCIN/DALACIN 343 9.2 314 5.1 299
DETROL/DETRUSITOL 329 162.5 125 N/A 1
XANAX 320 (0.2) 321 14.8 279
MEDROL 297 12.7 264 9.4 241
CAMPTOSAR 293 51.5 194 26.0 154
DEPO-PROVERA 252 11.2 227 15.8 196
NICORETTE 234 9.6 213 26.8 168
FRAGMIN 213 17.9 181 9.5 165
PHARMORUBICIN 206 16.4 177 (9.3) 196
ROGAINE/REGAINE 139 4.1 133 3.2 129
HEALON 137 (2.8) 140 (9.3) 155
AZULFIDINE/SALAZOPYRIN 98 1.7 97 3.2 94
HALCION 97 9.1 89 (5.8) 93
PROVERA 95 (5.5) 100 4.9 96
MIRAPEX/MIRAPEXIN 81 65.4 49 N/A N/A
MICRONASE/GLYNASE 74 (20.6) 93 8.5 84
ADRIAMYCIN 65 (3.9) 67 N/A N/A
CAVERJECT 58 (20.9) 73 (17.0) 88
------ ---- ------ ---- ------
TOTAL $4,299 19.9% $3,584 21.4% $2,952
====== ==== ====== ==== ======
</TABLE>
The company's performance in 1999 continues to be driven by sales of new
prescription products that have been introduced within the last five years, such
as XALATAN, DETROL, CAMPTOSAR, and MIRAPEX which are making up an increasing
percentage of the company's total sales. The growth has been especially strong
in the U.S. and Japan, where sales of prescription drugs grew by 25 percent and
33 percent, respectively. According to IMS Health, Inc., Pharmacia & Upjohn was
the fastest growing pharmaceutical company in Japan during 1999 as a result of
expanding the sales force by one-third since 1998 and introducing three new
products into the market.
In 1999 XALATAN, for the treatment of open-angle glaucoma and ocular
hypertension, became the company's largest selling drug with sales of $507
million. Since its introduction in 1996, and subsequent launch in 49 countries,
XALATAN has become the leading glaucoma agent in the world on the basis of its
1999 sales. In May 1999, XALATAN was launched in Japan, the world's second
largest glaucoma market, for the first-line treatment of patients with ocular
hypertension. In
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<PAGE> 21
preparation for the launch, Pharmacia & Upjohn tripled the size of the
ophthalmology sales force in Japan. As a result, the XALATAN launch in Japan was
the most successful to date. In December 1999, the company filed a New Drug
Application for a fixed-dose combination formulation containing XALATAN and
TIMOLOL, which the U.S. Food and Drug Administration (FDA) has designated for
priority review.
DETROL (DETRUSITOL outside the U.S.), the leading treatment for overactive
bladder, reduces the symptoms of increased frequency and urge to urinate, as
well as urge incontinence episodes. DETROL has been launched in 30 countries
throughout the world, generating 1999 sales of $329 million, an increase of $204
million. Despite introduction of a new competitor in the U.S. market, DETROL has
maintained its position as the dominant product in the market. A supplemental
New Drug Application (NDA) was filed in December 1999 to strengthen the DETROL
label for urge incontinence. Management also expects to file with regulatory
agencies in the U.S. and Europe for a once-daily version of DETROL early in the
year 2000. Additionally, Pharmacia & Upjohn recently signed a DETROL
co-promotion agreement with G.D. Searle (Searle), the pharmaceutical division of
the Monsanto Company. As a result, the promotional sales force for DETROL in the
U.S. will consist of over 1,800 representatives.
In 1999, the company increased its efforts to build on its growing presence in
oncology and to capitalize on new opportunities to expand its global cancer care
franchise. Sales of CAMPTOSAR, the company's leading oncology agent, increased
by $100 million to a total of $293 million. Sales of CAMPTOSAR continue to
benefit from new clinical data documenting its ability to improve survival in
patients with colorectal cancer. Pharmacia & Upjohn markets CAMPTOSAR in the
U.S. as a second-line treatment for metastatic colorectal cancer. In 1999, the
company filed a NDA for the use of CAMPTOSAR as a first-line colorectal cancer
and has been granted a priority review by the FDA for this indication.
Management expects to launch the new indication in 2000.
In addition to CAMPTOSAR, the company also markets a number of other widely
prescribed oncology agents including PHARMORUBICIN and ADRIAMYCIN, anthracycline
preparations which are used in the treatment of breast cancer and other solid
tumors.
In 1999, Pharmacia & Upjohn received U.S. FDA approval for two new breast cancer
treatments, ELLENCE and AROMASIN. ELLENCE, the trade name for PHARMORUBICIN in
the U.S., was launched shortly after its approval in September 1999. ELLENCE has
been granted Orphan Drug Status by the FDA for the adjuvant treatment of
patients with breast cancer following surgery or radiation therapy. AROMASIN, an
oral hormonal drug that blocks the production of estrogen, was approved in 1999
for the treatment of patients with metastatic breast cancer. AROMASIN will be
launched during 2000 in the U.S. and key markets in Europe and Latin America.
Central nervous system (CNS) products, including MIRAPEX, CABASER, and EDRONAX
are also contributing to Pharmacia & Upjohn's new product sales growth. New
labeling urges physicians to warn their patients about the potential to develop
drowsiness during activities of daily living. MIRAPEX sales grew 65 percent in
1999 to $81 million. In addition to MIRAPEX, Pharmacia & Upjohn also markets the
dopamine agonist CABASER, for Parkinson's Disease, in Europe and Japan. In
August 1999, CABASER was launched in Japan, the world's second largest market
for Parkinson's Disease. CABASER is marketed in the U.S. under the trade name
DOSTINEX for the treatment of patients with hyperprolactinemia; it is not
approved for Parkinson's Disease in the U.S. EDRONAX, for the treatment of major
depression, has been launched in 18 European and Latin
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<PAGE> 22
American countries since 1997. The FDA issued an approvable letter for VESTRA,
the trade name for EDRONAX in the U.S., in July 1999. The FDA issued a second
approvable letter in February 2000 which will require the completion of an
additional U.S. clinical trial. In the U.S., VESTRA will be co-marketed by
Janssen Pharmaceutica, a division of Johnson & Johnson.
The company also produces the CNS drugs XANAX, HALCION, and SERMION, which are
subject to intense generic competition. XANAX sales remained steady at $320
million, while HALCION sales grew to $97 million on the basis of a 14 percent
increase in non-U.S. markets. SERMION, a treatment for cognitive and behavioral
disorders related to senile dementia, continued to decline in 1999 as it did in
1997 and 1998.
GENOTROPIN, the world's leading recombinant human growth hormone, is Pharmacia &
Upjohn's second-largest selling product. The company recorded GENOTROPIN sales
of $461 million in 1999. GENOTROPIN promotes longitudinal bone growth in
children and adults with growth hormone deficiency. Outside the U.S., GENOTROPIN
is also used in the treatment of growth disturbances associated with Turner's
Syndrome and chronic renal insufficiency. In the U.S., GENOTROPIN sales
increased by 64 percent as the product is capturing one-third of all new
patients who are using growth hormone therapy. Despite intense competition and
declining volume in the growth hormone market due to government imposed
prescribing restrictions, GENOTROPIN sales in Japan increased due to a positive
price effect, a favorable currency impact, and an improving market share after
recovery of full marketing rights in 1998. The launch of GENOTROPIN MiniQuick, a
new delivery system, has resulted in strong growth of the brand in Europe.
GENOTROPIN MiniQuick is being launched on a wide-scale in the U.S. in early
2000.
FRAGMIN, a low-molecular-weight heparin product for the prevention of thrombosis
that is available in more than 50 countries, generated sales of $213 million in
1999. Outside the U.S., FRAGMIN is also used for treatment of deep vein
thrombosis and in hemodialysis. In 1999, the FRAGMIN label in the U.S. was
strengthened with the addition of new indications for the treatment of unstable
coronary artery disease and prevention of thrombosis following hip surgery. In
1999, Pharmacia & Upjohn and Centocor entered into a co-promotion agreement,
whereby Centocor will promote FRAGMIN to cardiovascular specialists in the U.S.
With the more competitive labeling and an increased presence in the
institutional arena, FRAGMIN sales grew 53 percent in the U.S. FRAGMIN also
outpaced the growth of the low-molecular-weight heparin market in Europe.
Pharmacia & Upjohn markets several hormonal products for women. DEPO-PROVERA
Contraceptive Injection is the company's largest selling hormonal product with
1999 sales of $252 million. It is approved in over 100 countries. Although the
patents protecting DEPO-PROVERA have expired, no generic equivalents have been
approved and the company does not foresee the introduction of a generic
equivalent of DEPO-PROVERA in the U.S. within the next 12 months. LUNELLE
(LUNELLA outside the U.S.), a monthly contraceptive injection, is expected to be
approved in 2000. Because of its shorter duration of action and different drug
profile, LUNELLE is targeted to a different patient population than DEPO-PROVERA
and is not expected to cannibalize sales of DEPO-PROVERA. The company also
markets PROVERA, an agent used in progesterone replacement and OGEN, an estrogen
replacement product. In addition, Pharmacia & Upjohn acquired U.S. promotional
rights to three FDA approved products for hormone replacement therapy: VAGIFEM,
ACTIVELLA, and INNOFEM from Novo Nordisk A/S. The company will begin promotion
of these products in 2000.
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<PAGE> 23
The company produces various forms of steroids under the trade names MEDROL,
SOLU-MEDROL, and DEPO-MEDROL, which are used to treat a variety of inflammatory
conditions. In 1999, Pharmacia & Upjohn reported sales of $297 million for the
MEDROL family of products, a 13 percent increase compared to 1998.
Pharmacia & Upjohn also introduced two new in-licensed products in the U.S.
during 1999. PLETAL, generically known as cilostazol, is being co-promoted with
Otsuka of America Pharmaceuticals Inc. PLETAL improves pain-free walking
distance in patients who suffer from intermittent claudication, a form of
peripheral arterial disease. GLYSET, a treatment for patients with Type-II
diabetes, was in-licensed from Bayer AG and introduced in early 1999.
In 1999, the company filed applications in the U.S. and Europe to market ZYVOX
(ZYVOXA) for the treatment of hospitalized patients with severe Gram-positive
infections. ZYVOX has been granted priority review by the FDA and the company
expects to introduce the product in 2000. ZYVOX is the lead compound in the
oxazolidinone class of antibiotics, the first new class of antibiotics to reach
the market in over 30 years. ZYVOX will be an important addition to Pharmacia &
Upjohn's existing line of antibiotics which includes CLEOCIN (or DALACIN),
LINCOCIN, and VANTIN.
Generic price erosion has affected sales of older products including HEALON,
PROVERA, MICRONASE/GLYNASE, ADRIAMYCIN, and LINCOCIN. Competition from generic
drugs is expected to continue to adversely affect future sales of these
products, and may also negatively impact the sales of other products like XANAX,
CLEOCIN and MEDROL, which also face generic competition. Brand name competitive
products negatively influenced the sales of CAVERJECT and VANTIN in 1999.
In the consumer health care or over-the-counter (OTC) products business, the
company's leading products are the NICORETTE line to treat tobacco dependency,
and ROGAINE (REGAINE), the treatment for hereditary hair loss. During 1999, the
company recorded $234 million in NICORETTE sales, an increase in local currency
of 13 percent over 1998. Sales of ROGAINE increased 4 percent to $139 million.
Sales of other OTC products in the U.S. declined in 1999 resulting in a net
overall flat performance for the year in the global OTC business when compared
with the prior year. Sales of NICORETTE in 1999 were led by Europe and
Australia.
OPERATING COSTS AND EXPENSES
Consolidated operating expenses, stated as a percentage of net sales, are
provided in the table below.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cost of products sold 26.1% 30.1% 31.1%
Research and development 19.8 18.3 18.9
Selling, general and
Administrative 38.6 37.7 40.1
Merger and restructuring charges 1.0 1.4 4.8
Interest income (1.1) (1.4) (1.7)
Interest expense 0.9 0.4 0.5
All other, net (1.1) (0.9) (0.3)
Earnings before income taxes 15.8 14.4 6.6
==== ==== ===
</TABLE>
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<PAGE> 24
COST OF PRODUCTS SOLD as a percent of sales improved significantly in 1999
compared to 1998 as a combined result of a number of favorable influences. There
is an increasing percentage of the company's sales made up of higher margin
products due to growth in certain products and divestiture of lower margin
nutrition products. There are also production efficiencies and cost reductions
being experienced. Finally, currency exchange had a modest favorable effect.
Similarly, a favorable comparison in product mix and production costs drove cost
of products sold lower as a percentage of sales in 1998 as compared to 1997. New
products, representing an increasing percentage of sales, contributed a higher
gross profit than older products in price competition with generics.
Improvements in production efficiencies, increased production volumes, and the
favorable effect of currency exchange on costs more than offset the negative
currency impact on sales, further reducing the percentage.
R&D expense increased as a percentage of sales to 19.8 percent surpassing levels
experienced in both of the preceding years. In addition to strong commitments to
the development of new products such as ZYVOX and a combination dosage form of
XALATAN, significant investments were made in technology acquisitions and
license agreements. Also, the Sugen merger and Sensus investment contributed to
higher R&D expense. Approvals are being sought in the U.S. and Europe for ZYVOX,
a new class of antibiotic active against Gram-positive bacteria. In December,
the company filed a NDA for a fixed-dose combination formulation containing
XALATAN, for the treatment of open-angle glaucoma and ocular hypertension, and
timolol. Sugen spending in 1999, combined with the Sensus investment and
termination of certain other projects resulted in charges of $104 million ($75
million after tax or $0.14 per share), a $72 million increase over 1998 ($47
million after tax, or $0.09 per share). Savings from lower infrastructure costs
in 1998 due to efficiencies generated by the 1997 restructuring were reinvested
into strategic licensing agreements, other R&D collaborations to supplement the
company's internal research base, and increased clinical spending on products in
development. Key activities in 1998 included the acquisition of the rights to
almotriptan, an anti-migraine compound; the in-licensing of two new compounds
for the treatment of diabetes and anxiety; and the Hepatitis C virus and
pharmacogenomics collaborations. Spending during 1998 also supported the product
filings of anticancer therapies AROMASIN (exemestane) and epirubicin as well as
the development activities related to filing a New Drug Application for EDRONAX
with the U.S. FDA for depression. Spending levels in 1997 were elevated due to
significant transactions that year such as the purchase of rights to a research
compound and the cancellation of future product rights under a research
agreement for a total of $71 million.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expense increased as a percent of
sales in 1999 due primarily to sales and promotional efforts in the U.S. The
U.S. sales force was expanded to accommodate new product launches and improve
market penetration. Products such as CAMPTOSAR (colorectal cancer), PLETAL
(peripheral arterial disease), DETROL (urinary incontinence), FRAGMIN (coronary
artery disease) and GLYSET (diabetes) were the focus of such marketing efforts.
Outside the U.S., XALATAN was launched in Japan in May. There was likewise
upward pressure in 1998 when compared to 1997 due primarily to sales force
expansions and increased product promotion in the U.S., Europe, and Japan,
particularly for the following brands: DETROL, EDRONAX, MIRAPEX, GENOTROPIN, and
XALATAN. The comparative spending increase was somewhat mitigated by the
favorable effects of exchange and a decrease in general and administrative
expense.
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<PAGE> 25
Overall, SG&A declined as a percentage of sales from 1997 to 1998 due to a
number of major events. In 1998, the company settled a major portion of a
federal class-action lawsuit claiming certain antitrust and pricing violations.
As a result of the settlement, management increased litigation reserves by $61
million that year, however events in 1997 had greater earnings impact. In 1997,
SG&A included $95 million for the termination of a licensing arrangement related
to GENOTROPIN in Japan and $70 million for litigation-related charges.
MERGER AND RESTRUCTURING CHARGES
During 1999, the company recorded $70 million in merger and restructuring
expenses which is comprised of $73 million of merger and restructuring charges
net of a $3 million adjustment to the 1998 turnaround restructuring. The charge
consisted of $16 million in merger transaction costs such as fees for investment
bankers, attorneys, accountants, and other costs to effect the merger with
Sugen, all of which were paid during 1999. The charge also included costs
pertaining to reorganizations that will result in the elimination of certain
research and development (R&D) projects as well as the elimination of 375
employee positions, mainly impacting the prescription pharmaceutical segment and
corporate and administrative functions. The objective of the restructuring is to
eliminate duplicate functions and investments in R&D as well as reorganize the
sales force based on anticipated future requirements of the company. The
adjustment to the prior restructuring liabilities was attributable to lower than
anticipated employee separation costs.
Employee separation benefits included in the 1999 charge are for elimination of
positions in research and development of $26 million, corporate and
administration of $18 million and sales of $6 million. Project termination
costs totaled $4 million and asset write-downs totaled $3 million. During 1999,
$3 million was paid and charged against the liability. These amounts related to
a portion of separation benefits for the approximately 50 employees severed
prior to the end of the year. The company anticipates all activities associated
with this restructuring to be substantially complete at the end of 2000. The
remaining cash expenditures are expected during 2000 with some separation
annuity payments being completed in 2001.
The anticipated savings resulting from 1999 restructuring activities are
expected to be largely offset by increased spending, primarily in refocused R&D
activihes including Sugen.
In 1997, the company announced a comprehensive restructuring and turnaround
program that would result in restructuring charges of approximately $450 million
during 1997 and 1998. The company has structured the turnaround program in two
phases reflecting management development and approval of plans. The turnaround
program was initiated in the third quarter 1997 and was materially complete by
December 31, 1999. The objectives of the turnaround program were to
significantly rationalize infrastructure, establish a global headquarters in New
Jersey, and eliminate duplicate resources in manufacturing, administration, and
R&D. The turnaround program mainly affects the company's core pharmaceutical
segments and corporate administration groups, with minor restructuring of
businesses included in the "all other" grouping. In the third and fourth
quarters of 1997, the company recorded phase one charges totaling $316 million.
The second phase of the turnaround program was finalized in the fourth quarter
of 1998, resulting in an additional restructuring charge of $92 million.
The charge of $92 million recorded in 1998 was comprised of employee separation
costs of $68 million; write-downs of fixed assets and abandoned manufacturing
projects of $8 million; and other costs of $16 million.
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<PAGE> 26
The 1997 restructuring charge of $316 million for the first phase of the
turnaround program primarily related to employee separation costs of $134
million; write-downs of fixed assets and abandoned manufacturing projects of
$162 million; and other costs of $20 million.
The total restructuring charges for 1998 and 1997 included involuntary employee
separation costs for 580 and 1,320 employees worldwide, respectively. The 1998
charge included elimination of positions in marketing and administration of $55
million, R&D of $9 million, and manufacturing of $4 million. These amounts
included an adjustment of $16 million of the phase one accruals, mainly
attributable to lower employee separation costs and, to a lesser extent, changes
in plan estimates. The 1997 charge included elimination of positions in
marketing and administration of $81 million, R&D of $22 million, and
manufacturing of $31 million. As of December 31, 1999, the company had paid $155
million in severance costs in connection with the 1998 and 1997 charges. The
remaining balance for employee separation costs related to the turnaround
program was $44 million at December 31, 1999 comprised mainly of charges related
to the phase two charge and remaining annuity separation payments. The company
expects some annuity payments to continue into 2001.
The 1998 and 1997 restructuring charges included asset write-downs for excess
manufacturing, administration, and R&D facilities totaling $8 million and $162
million, respectively. The 1998 amount included an adjustment of $15 million of
the phase one accruals, mainly attributable to changes in plan estimates,
favorable outcomes on sales of facilities, and actual facility closure costs
below the original estimates. At December 31, 1999, facilities presently being
marketed had a net book value of $47 million. Fixed asset write-downs were based
on appraisals less costs to sell.
Other costs included in the 1998 and 1997 restructuring charges of $16 million
and $20 million, respectively, were primarily comprised of canceled contractual
lease obligations and other costs. Offsetting 1998 charges in this grouping was
an adjustment of $6 million related to all restructuring charges prior to 1997.
As a result of the turnaround restructuring, the company was able to reinvest
the savings achieved into the organization in more strategic ways. Incremental
spending on the sales force and product support was primarily funded by the
savings achieved through the turnaround restructuring. This investment in the
sales force, in conjunction with the efficiencies gained in the turnaround
restructuring, contributed to the sales growth and double-digit earnings growth
achieved by the company during both 1999 and 1998.
OTHER EARNINGS STATEMENT ITEMS
INTEREST EXPENSE in 1999 increased over 1998 mainly due to the timing and amount
of short term debt outstanding. The decline in INTEREST INCOME during 1999 was
due to a change in investment composition and a decline in longer-term
instruments. For the two previous years, the declines in both interest income
and interest expense were due largely to lower average interest-bearing assets
and liabilities in both years and to lower interest rates in 1997, mainly in
Europe.
ALL OTHER, net rose slightly in 1999 as compared to 1998. A combination of
factors led to the rise in All other, net. The third quarter 1999 net gain on
the sale of the nutrition business in Germany was largely offset by relocation
costs associated with the establishment of the new corporate headquarters in New
Jersey. The 1998 amounts were depressed in the fourth quarter by the $52 million
loss ($39
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<PAGE> 27
million after tax or $0.07 per share) recognized on the sale of the
company's nutrition business in most parts of the world other than Germany and
China. The company recorded an offsetting $52 million of income during 1998
primarily for its share of Amersham Pharmacia Biotech's pretax earnings.
In 1997, the company recorded Biotech merger costs of $36 million as well as its
portion 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.
The annual effective tax rate for 1999 improved to 30 percent from 35 percent in
1998 and 41 percent in 1997. The lowering of the rate from year to year was
attributable in part to increasing percentages of income being generated in
jurisdictions with lower statutory rates. The establishment of deferred tax
asset valuation allowances in prior years also had the effect of inflating rates
in those periods.
COMPREHENSIVE INCOME
Effective in 1998, the company adopted SFAS No. 130 which established standards
for reporting comprehensive income and its components. Comprehensive income is
defined as all non-owner changes in equity and equals net earnings plus other
comprehensive income (OCI). For Pharmacia & Upjohn, OCI consists of currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. Comprehensive income
(loss) in millions for 1999, 1998, and 1997 was $537, $614 and $(150),
respectively. Unfavorable currency movements in 1999 reduced comprehensive
income by $267 million resulting in an amount below net earnings. Net favorable
movements in the other components of OCI were not great enough to offset this
result. Comprehensive income was less than net earnings in 1998 because
unrealized losses on available-for-sale securities, coupled with the minimum
pension liability adjustments, more than offset favorable currency translation
adjustments (CTA). Favorable CTA reflected the weaker U.S. dollar at December
31, 1998, relative to its general strength at the prior year-end. In 1997, the
stronger U.S. dollar was responsible for large CTA losses which drove
comprehensive income lower than net income that year.
Additional information regarding OCI is provided in Note 2 to the consolidated
financial statements.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of December 31, 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Dollars in millions
Working capital $ 1,493 $ 1,677 $ 1,693
Current ratio 1.43:1 1.58:1 1.63:1
Debt to total capitalization 21.6% 13.1% 15.8%
</TABLE>
Working capital and the current ratio for 1999 decreased in comparison to the
prior year due to an increase in short term borrowings offset by favorable
changes in other current liabilities. The
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<PAGE> 28
increase in debt was due to larger current maturities and temporary commercial
paper positions at year-end. Increases in cash and cash equivalents, trade
accounts receivables, and inventories offset the effect of the debt. At year-end
1998, the company's working capital and current ratio were generally consistent
with the previous year-end. Both liquidity measures decreased from 1997 to 1998
due to declines in receivables and short-term investments. The decrease in the
percentage of debt to total capitalization from 1997 to 1998 reflects declining
debt levels. Negative currency translation adjustments recorded in equity caused
much of this decline coupled with lower 1997 earnings levels.
<TABLE>
<CAPTION>
As of December 31, 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Dollars in millions
Cash, cash equivalents and
Investments $1,834 $1,710 $1,924
Short-term and long-term debt 1,544 845 1,052
------ ------ ------
Net financial assets $ 290 $ 865 $ 872
</TABLE>
Net cash provided by operations is a major source of funds to finance working
capital, shareholder dividends, and capital expenditures. Cash from operations
totaled $642 million in 1999, $903 million in 1998, and $1,195 million in 1997.
The decrease in 1999 and 1998 was largely attributable to increases in
receivables and inventories. In addition, decreases in liabilities including
amounts paid for restructuring caused added cash outflows for 1999. The 1997
increase was due to a decrease in receivables and an increase in liabilities.
The increase in liabilities resulted from certain significant transactions
previously discussed including the GENOTROPIN rights repurchase and the
litigation-related accruals.
In addition to net flows provided by operations, two major sources of cash in
1999 and 1998 were the proceeds on the sale of the nutrition business of $125
million and $332 million and the proceeds from sales of investments net of
purchases of $328 million and $292 million. The 1998 sources together account
for a $503 million increase compared to 1997.
Over the three-year period from 1997 to 1999, significant uses of cash included
the company's quarterly dividend payment to shareholders and expenditures for
property, plant, and equipment (capital). Capital expenditures in millions were
$589 in 1999, $650 in 1998, and $580 in 1997. Anticipated capital spending for
2000 of approximately $600 million includes expansion and improvements to
research and manufacturing facilities in the U.S., Belgium, Puerto Rico, and
Sweden.
In November 1998, the company announced a $1 billion stock repurchase program.
Due to the merger with Sugen, this program was discontinued in August of 1999.
Shares acquired prior to the merger were used for stock based plans with the
balance being re-sold. Total shares acquired during this program were 3 million
for a cost of $170 million. During the third quarter, approximately 1 million
treasury shares were sold for total proceeds of approximately $50 million.
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<PAGE> 29
The company's future cash provided by operations and borrowing capacity is
expected to cover normal operating cash flow needs, planned capital spending,
and dividends for the foreseeable future. As of December 31, 1999, lines of
credit available for company use totaled $1,442 million, of which $1,000 million
are committed. Lines of credit employed at year-end were $62 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, 1999.
The company utilizes currency exchange forward and option contracts according to
established policies to mitigate the effect of currency exchange rate
fluctuations. Because currency exchange forward and option contracts used to
hedge anticipated transaction exposures are marked to market each period, but
only some of the underlying 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 currency 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 market risk sensitivity analysis that follows.
MARKET RISK
Market risk represents the risk of a change in the value of a financial
instrument, derivative or nonderivative, caused by fluctuations in interest
rates, currency exchange rates, and equity prices. The company handles market
risk 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.
The company is actively managing all portfolios to reduce its cost and increase
its return on investment. To ensure liquidity, the company will only invest in
instruments with high credit quality where a secondary market exists. The
company is in a position to keep all investments until final maturity and
maintains long-term debt at fixed rates.
The following sensitivity analysis presents the hypothetical change in fair
value of those financial instruments held by the company at December 31, 1999,
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 are 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 $226 million. The fair value of debt included in the analysis is $362
million and excludes Employee Stock Ownership Plan (ESOP) guaranteed debt. A
one-percentage point change in the interest rates would change the fair value of
investments over 180 days by $5 million and debt by $7 million.
The company's management of currency exposure is primarily focused on reducing
the negative impact of currency fluctuations on consolidated cash flow and
earnings. The company uses forward
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<PAGE> 30
contracts, cross-currency swaps, and currency options 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 facilities in Sweden, Italy and Belgium. The largest exposures from
these units are against the Japanese yen and the U.S. dollar.
Certain derivatives entered into in order to hedge assets, liabilities, firm
commitments, and forecasted transactions are exposed to currency fluctuations. A
ten-percent decrease in the Swedish krona and U.S. dollar would have a negative
impact on fair value of those derivatives by $20 million and $20 million,
respectively. A ten-percent increase in the euro would have a negative impact of
$9 million and a ten-percent decrease 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 $205 million, the majority of which are listed on a stock exchange or quoted
in an over-the-counter market. If the market price of these securities would
decrease by ten-percent, the fair value of the equities would decrease by $17
million. Further discussion of financial instruments is provided in Notes 9, 14
and 15 to the consolidated financial statements.
LITIGATION AND CONTINGENT LIABILITIES
Various suits and claims arising in the ordinary course of business, primarily
for personal injury alleged to have been caused by the use of the company's
products, are pending against the company and its subsidiaries. The company also
is involved in several administrative and judicial proceedings relating to
environmental concerns, including actions brought by the U.S. Environmental
Protection Agency (EPA) and state environmental agencies for remediation.
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. 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 consolidated
financial position, its results of operations, or liquidity.
The company has been a party, along with many other U.S. drug manufacturers and
wholesalers, in numerous related federal and state civil antitrust lawsuits
brought by U.S. independent and chain retail pharmacies and consumers. These
suits claim violations of antitrust and pricing laws as a result of the
defendants providing discounts and rebates to allegedly favor managed care
customers that were not offered to the plaintiffs. Several of the suits are
class actions. The company announced in 1998 that it reached a settlement with
plaintiffs in the federal class action cases that had been consolidated in
federal court in Chicago, Illinois. The company believes that any potential
remaining liability above amounts accrued will not have a material adverse
effect on the company's consolidated financial position, its results of
operations, or liquidity. Further discussion of current litigation matters is
provided in Note 13 to the consolidated financial statements.
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<PAGE> 31
The company's estimate of the ultimate cost to be incurred in connection with
environmental situations could change due to uncertainties at many sites with
respect to potential clean-up remedies, the estimated cost of clean-up, and the
company's share of a site's cost. With regard to the company's discontinued
industrial chemical facility in North Haven, Connecticut, the company may soon
be required to submit a corrective measures study report to the EPA. As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required. It is not possible, however, to estimate a range
of potential losses. Accordingly, it is not possible to determine what, if any,
exposure exists at this time or when the expenditures might be made.
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.
YEAR 2000 DATE RECOGNITION ISSUE
Through March 2000, the global operations of the company have had no material
interruptions in services received or generated, related to the date recognition
issue. Barring critical failures arising from factors beyond the company's
direct control, management continues to believe that the date recognition
problem should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
OTHER INFORMATION
Effective January 1, 1999, several European countries began operating with a new
common currency, the euro. The euro will completely replace these countries'
national currencies by January 1, 2002. The conversion to the euro will require
changes in the company's operations as systems and commercial arrangements are
modified to deal with the new currency. Management created a project team to
evaluate the impact of the euro conversion on the company's operations and
develop and execute action plans, as necessary, to successfully effect the
change. The cost of this effort is not expected to be material. While
information technology systems are planned to be fully euro-compliant during the
year 2000, a minimum of euro-compliance for strategic locations was achieved in
1999. The conversion to the euro may have competitive implications on pricing
and marketing strategies. However, any such impact is not known at this time.
The introduction of the euro will not significantly change the currency exposure
of the company, but will reduce the number of transactions performed in the
market. At this point in its overall assessment, management believes the impact
of the euro conversion on the company will not be significant. Still,
uncertainty exists as to the effects the euro currency will have on the
marketplace and, as a result, there is no guarantee
-29-
<PAGE> 32
that all problems will be foreseen and corrected, or that no material disruption
of the company's business will occur.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting treatment of gains and losses
resulting from changes in the value of derivatives depends on the use of the
derivative and whether it qualifies for hedge accounting. The company will adopt
SFAS No. 133 as required no later than January 1, 2001, and is currently
assessing the impact of adoption on its financial position, results of
operations, and liquidity.
On December 19, 1999, the company announced it had entered into a definitive
agreement to merge with Monsanto Company (Monsanto) to create a dynamic and
powerful new competitor in the global pharmaceutical industry. The merger,
subject to the approval of both companies' shareholders, is intended to be a
tax-free reorganization accounted for as a pooling-of-interests. The expected
completion of the merger in early 2000 will result in a restatement of financial
statements to reflect the combined entities under pooling-of-interests
accounting. In conjunction with the merger, the company also may incur certain
charges during 2000.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Information regarding Selected Quarterly Financial Information is set forth
under Item 5 "Market for Registrant's Common Equity and Related Stockholder
Matters."
Report of Independent Accountants
to the Shareholders and Board of Directors,
Pharmacia & Upjohn, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of earnings, shareholders' equity, and cash flows present fairly, in
all material respects, the financial position of Pharmacia & Upjohn, Inc. and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of
Pharmacia & Upjohn, Inc.'s management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards in the United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 7, 2000
CONSOLIDATED STATEMENTS OF EARNINGS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Dollar amounts in millions, except per-share data
Net sales $ 7,253 $ 6,758 $ 6,586
Cost of products sold 1,893 2,031 2,047
Research and development 1,434 1,234 1,246
Selling, general and administrative 2,800 2,552 2,642
Merger and restructuring charges 70 92 316
Interest income (80) (92) (113)
Interest expense 63 26 33
All other, net (74) (62) (20)
------- ------- -------
Earnings before income taxes 1,147 977 435
Provision for income taxes 344 346 177
------- ------- -------
NET EARNINGS $ 803 $ 631 $ 258
======= ======= =======
EARNINGS PER COMMON SHARE:
Basic $ 1.53 $ 1.20 $ .48
Diluted $ 1.49 $ 1.17 $ .48
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ---- ----
<S> <C> <C>
Dollar amounts in millions
CURRENT ASSETS:
Cash and cash equivalents $ 1,316 $ 881
Short-term investments 98 375
Trade accounts receivable, less allowance of $104(1998: $103) 1,513 1,417
Inventories 1,177 1,032
Deferred income taxes 436 378
Other 393 469
------- -------
TOTAL CURRENT ASSETS 4,933 4,552
Long-term investments 420 454
Properties, net 3,284 3,234
Goodwill and other intangible assets, net 1,127 1,238
Other noncurrent assets 934 865
------- -------
TOTAL ASSETS $10,698 $10,343
======= =======
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C>
Short-term debt $ 1,212 $ 332
Accounts payable 398 511
Compensation and compensated absences 284 268
Dividends payable 146 141
Income taxes payable 324 389
Other 1,076 1,234
------- -------
TOTAL CURRENT LIABILITIES 3,440 2,875
------- -------
Long-term debt 142 295
Guarantee of ESOP debt 190 218
Postretirement benefit cost 320 344
Deferred income taxes 246 238
Other noncurrent liabilities 775 777
------- -------
TOTAL LIABILITIES 5,113 4,747
======= =======
SHAREHOLDERS' EQUITY:
Preferred stock, one cent par value; authorized 100,000,000 shares, issued
Series A convertible 6,692 shares at stated
value (1998: 6,863 shares) 270 277
Common stock, one cent par value; authorized 1,500,000,000
shares, issued 519,708,701 shares(1998: 518,797,031 shares) 5 5
Capital in excess of par value 1,519 1,531
Retained earnings 5,569 5,334
ESOP-related accounts (248) (254)
Treasury stock (2) (35)
Accumulated other comprehensive income:
Currency translation adjustments (1,513) (1,246)
Unrealized investment gains, net 21 5
Minimum pension liability adjustment (36) (21)
------- -------
TOTAL SHAREHOLDERS' EQUITY 5,585 5,596
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,698 $10,343
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Dollar amounts in millions
PREFERRED STOCK:
Balance at beginning of year $ 277 $ 282 $ 287
Redemptions and conversions (7) (5) (5)
------ ------ ------
Balance at end of year 270 277 282
------ ------ ------
COMMON STOCK:
Balance at end of year 5 5 5
------ ------ ------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 1,531 1,579 1,563
Stock option, incentive and dividend
reinvestment plan (13) (56) (20)
Offering to the public, net of issuance
costs of $2 -- -- 30
Retirements, conversions and other 1 8 6
------ ------ ------
Balance at end of year 1,519 1,531 1,579
------ ------ ------
RETAINED EARNINGS:
Balance at beginning of year 5,334 5,265 5,569
</TABLE>
-31-
<PAGE> 35
<TABLE>
<S> <C> <C> <C>
Net earnings 803 631 258
Dividends declared (555) (549) (549)
Dividends on preferred stock (net of tax) (13) (13) (13)
------ ------ ------
Balance at end of year 5,569 5,334 5,265
------ ------ ------
ESOP-RELATED ACCOUNTS:
Balance at beginning of year (254) (260) (266)
Third-party debt repayment 22 16 11
ESOP expense exceeding cash contributed (6) (2) 5
Additional loan (6) (5) (7)
Rollover of interest on ESOP note receivable (4) (3) (3)
------ ------ ------
Balance at end of year (248) (254) (260)
------ ------ ------
TREASURY STOCK:
Balance at beginning of year (35) (48) (8)
Stock options and incentive plans 156 130 54
Purchases of treasury stock (170) (117) (94)
Sales of treasury stock 47 -- --
------ ------ ------
Balance at end of year (2) (35) (48)
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year (1,262) (1,245) (837)
Other comprehensive loss (266) (17) (408)
------ ------ ------
Balance at end of year (1,528) (1,262) (1,245)
------ ------ ------
TOTAL SHAREHOLDERS' EQUITY $5,585 $5,596 $5,578
====== ====== ======
COMPREHENSIVE INCOME (NET OF TAX):
Currency translation adjustments $ (267) $ 52 $ (443)
Unrealized investment gains (losses) 16 (48) 35
Minimum pension liability adjustments (15) (21) --
------- ------ ------
Other comprehensive loss (266) (17) (408)
Net earnings 803 631 258
------ ------ ------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 537 $ 614 $ (150)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------- ---- ---- ----
<S> <C> <C> <C>
Dollar amounts in millions
CASH FLOWS FROM OPERATIONS:
Net earnings $ 803 $ 631 $ 258
Adjustments to net earnings:
Depreciation 316 321 327
Amortization of intangibles 105 112 116
Loss on sale of nutrition -- 52 --
Net (gains) losses on sales
of noncurrent assets (8) 20 (35)
Write-downs of investments, properties
and intangibles 9 9 43
Deferred income taxes (102) (153) (254)
Net (earnings) loss from equity investments (23) (57) 68
Other (3) (37) 201
Changes in:
Accounts receivable (net) (158) (65) 196
Inventories (185) (91) (127)
</TABLE>
-32-
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
Accounts payable (89) 69 33
Income taxes payable (54) (16) 107
Other current and noncurrent assets
and liabilities 31 108 262
------ ------ ------
NET CASH PROVIDED BY OPERATIONS 642 903 1,195
------ ------ ------
CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT
ACTIVITIES:
Additions of properties (589) (650) (580)
Proceeds from sales of properties 31 37 70
Proceeds from sale of nutrition 125 332 --
Purchases of investments (182) (691) (1,034)
Proceeds from sales of investments 510 983 1,155
Other (145) (3) (48)
------ ------ ------
NET CASH (REQUIRED) PROVIDED BY
INVESTMENT ACTIVITIES (250) 8 (437)
------ ------ ------
CASH FLOWS PROVIDED (REQUIRED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of debt 111 60 58
Repayment of debt and ESOP guaranteed loan (146) (243) (72)
Net increase (decrease) in debt with
initial maturity of 90 days or less 723 (3) 26
Dividend payments (564) (566) (567)
Purchases of treasury stock (170) (117) (94)
Proceeds from stock options exercises 77 80 18
Proceeds from issuance of common stock, net -- 4 31
Proceeds from issuance of treasury stock 47 -- --
Other 9 3 1
------ ------ ------
NET CASH PROVIDED (REQUIRED) BY
FINANCING ACTIVITIES 87 (782) (599)
------ ------ ------
Effect of exchange rate changes on cash (44) (47) (26)
------ ------ ------
Net change in cash and cash equivalents 435 82 133
Cash and cash equivalents, beginning of year 881 799 666
------ ------ ------
Cash and cash equivalents, end of year $1,316 $ 881 $ 799
====== ====== ======
Cash paid during the year for:
Interest (net of amounts capitalized) 58 $ 22 $ 30
Income taxes 410 $ 398 $ 281
Noncash investing activity:
Assets disposed of in exchange
for equity securities $ -- $ 54 $ --
------ ------ ------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA.)
1 POLICIES AND OTHER
BASIS OF PRESENTATION
The consolidated financial statements are presented on the basis of accounting
principles that are generally accepted in the United States (U.S.). All
professional accounting standards that are effective as of December 31, 1999
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 that affect the reported earnings, financial position and various
disclosures. Actual results could differ from those estimates.
-33-
<PAGE> 37
On August 31, 1999, Pharmacia & Upjohn, Inc. (P&U or the company) completed a
merger with SUGEN, Inc. (Sugen). The merger was accounted for as a pooling of
interests. Accordingly, all prior-period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position, and cash flows of both companies as if Sugen had always been
a part of P&U.
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.
REVENUE RECOGNITION
Revenues are recognized when title to products is transferred and goods are
shipped to customers. Where right of return exists, revenues are reduced at the
time of sale to reflect expected returns that are estimated based on historical
experience.
CASH EQUIVALENTS
The company considers all highly liquid debt instruments with an original
maturity of 91 days or less to be cash equivalents.
INVESTMENTS
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 expected to
be held-to-maturity. Investments categorized as available-for-sale are marked to
market based on quoted market values of the securities, with the resulting
adjustments, net of deferred taxes, reported as a component of other
comprehensive income in shareholder's equity until realized (see Note 2).
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
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<PAGE> 38
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
purposes, while accelerated methods are used for income tax purposes where
permitted. Maintenance and repair costs are charged to earnings as incurred
including repair costs associated with the year 2000 date recognition problem.
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. Effective in 1998, internally-developed software is also
capitalized and amortized over its useful life with the adoption of the American
Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Prior to adoption, the company expensed these costs as incurred.
The effect of initially applying the provisions of SOP 98-1 was not material to
the consolidated financial statements.
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. The
company assesses the recoverability of goodwill when events or changes in
circumstances indicate that the carrying amount may be impaired. If an
impairment indicator exists, an estimate of future cash flows is developed and
compared to the carrying amount of the goodwill. If the expected undiscounted
cash flows are less than the carrying amount of the goodwill, an impairment loss
is recognized for the difference between the carrying amount of the goodwill and
discounted cash flows.
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.
PRODUCT LIABILITY
The company is self-insured for product liability exposures up to reasonable
risk retention levels where excess coverages have been obtained. Liability
calculations take into account such factors as specific claim amounts, past
experience with such claims, number of claims reported and estimates of claims
incurred but not yet reported. In addition to this base level of reserves,
individually significant contingent losses are accrued for in compliance with
applicable guidance. Product liability accruals are not reduced for expected
insurance recoveries.
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 records
deferred income taxes on subsidiaries' earnings that are not considered to be
permanently invested in those subsidiaries.
-35-
<PAGE> 39
CURRENCY EXCHANGE CONTRACTS
Forward currency exchange contracts, cross-currency interest-rate swaps, 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 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. Gains or losses from
currency transactions that are designated as hedges of currency net investments
are classified as currency translation adjustments in shareholders' equity.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires companies to record derivatives on
the balance sheet as assets and liabilities measured at fair value. The
accounting treatment of gains and losses resulting from changes in the value of
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. The company will adopt SFAS No. 133 as required, no later than
January 1, 2001, and is currently assessing the impact of adoption on its
consolidated financial statements.
ENVIRONMENTAL REMEDIATION LIABILITIES
The company accrues for environmental remediation liabilities when they are
probable and reasonably estimable based on current law and existing
technologies. The 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. The 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. Accruals for
environmental liabilities are classified in the consolidated balance sheets
primarily as other noncurrent liabilities.
STOCK BASED COMPENSATION
Employee stock options are accounted for pursuant to Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" (see Note 19
for SFAS No. 123 disclosures).
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior periods' data to the
current presentation.
MONSANTO MERGER AGREEMENT
On December 19, 1999, the company and Monsanto Company (Monsanto) announced they
had entered into a definitive agreement to merge. The merger, subject to the
approval of both companies' shareholders, is intended to be a tax-free
reorganization accounted for as a pooling-of-interests. The expected completion
of the merger in early 2000 will result in a restatement of financial statements
to reflect the combined entities under pooling-of-interests accounting.
2 OTHER COMPREHENSIVE INCOME
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<PAGE> 40
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The statement establishes standards for reporting
comprehensive income and its components. Comprehensive income is defined as all
nonowner changes in equity and is equal to net earnings plus other comprehensive
income (OCI). OCI for the company includes three components: changes in currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. The following table shows
the changes in each OCI component. Reclassification adjustments represent items
that are included in net earnings in the current period but previously were
reported in OCI. To avoid double counting these items in comprehensive income,
gains are subtracted from OCI, while losses are added.
<TABLE>
<CAPTION>
TAX
FOR THE YEAR ENDED BEFORE EXPENSE NET OF
DECEMBER 31, 1999 TAX OR (BENEFIT) TAX
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Currency translation adjustments $(267) $ -- $(267)
----- ----- -----
Unrealized investment gains 36 6 30
Less: reclassification adjustments
for gains realized in net earnings 21 7 14
----- ----- -----
Net unrealized investment gains 15 (1) 16
----- ----- -----
Minimum pension
liability adjustments (32) (17) (15)
----- ----- -----
Other comprehensive (loss) $(284) $ (18) $(266)
===== ===== =====
FOR THE YEAR ENDED
DECEMBER 31, 1998
- -----------------
Currency translation adjustments $ 51 $ (1) $ 52
----- ----- -----
Unrealized investment (losses) (52) (20) (32)
Less: reclassification adjustments
for gains realized in net earnings 24 8 16
----- ----- -----
Net unrealized investment (losses) (76) (28) (48)
----- ----- -----
Minimum pension
liability adjustments (33) (12) (21)
----- ----- -----
Other comprehensive (loss) $ (58) $ (41) $ (17)
===== ===== =====
</TABLE>
-37-
<PAGE> 41
<TABLE>
<CAPTION>
TAX
FOR THE YEAR ENDED BEFORE EXPENSE NET OF
DECEMBER 31, 1997 TAX OR (BENEFIT) TAX
- ----------------- --- ------------ ---
<S> <C> <C> <C>
Currency translation adjustments $(446) $ -- $(446)
Less: reclassification adjustments
for (losses) realized in net earnings
from the sales of subsidiaries (3) -- (3)
----- ----- -----
Net currency translation
Adjustments (443) -- (443)
----- ----- -----
Unrealized investment gains 85 40 45
Less: reclassification adjustments
for gains realized in net earnings 23 13 10
----- ----- -----
Net unrealized investment gains 62 27 35
----- ----- -----
Other comprehensive
(loss) income $(381) $ 27 $(408)
===== ===== =====
</TABLE>
3 RESTRUCTURING
During 1999, the company recorded $70 in merger and restructuring expenses which
is comprised of $73 of merger and restructuring charges net of a $3 adjustment
to the 1998 turnaround restructuring. The charge consisted of $16 in merger
transaction costs such as fees for investment bankers, attorneys, accountants,
and other costs to effect the merger with Sugen, all of which were paid during
1999. The charge also included costs pertaining to reorganizations that will
result in the elimination of certain research and development (R&D) projects as
well as the elimination of 375 employee positions, mainly impacting the
prescription pharmaceutical segment and corporate and administrative functions.
The objective of the restructuring is to eliminate duplicate functions and
investments in R&D as well as reorganize the sales force based on anticipated
future requirements of the company. The adjustment to the prior restructuring
liabilities was attributable to lower than anticipated employee separation
costs.
Employee separation benefits included in the 1999 charge are for elimination of
positions in research and development of $26, corporate and administration of
$18 and sales of $6. Project termination costs totaled $4 and asset write-downs
totaled $3. During 1999, $3 was paid and charged against the liability. These
amounts related to a portion of separation benefits for the approximately 50
employees severed prior to the end of the year. The company anticipates all
activities associated with this restructuring to be substantially complete at
the end of 2000. The remaining cash expenditures are expected during 2000 with
some separation annuity payments being completed in 2001.
In 1997, the company announced a comprehensive turnaround program that resulted
in restructuring charges during 1997 and 1998. The company structured the
turnaround program in two phases reflecting management development and approval
of plans. The turnaround program was initiated in the third quarter 1997 and was
materially complete by December 31, 1999. The objectives of the turnaround
program were to significantly rationalize infrastructure, establish a global
headquarters in New Jersey, and eliminate duplicate resources in manufacturing,
administration, and R&D. The turnaround program mainly affected the company's
core pharmaceutical segments and corporate administration groups, with minor
restructuring of businesses included in the "all other" grouping. In the third
and fourth quarters of 1997, the company recorded phase one charges totaling
$316. The
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<PAGE> 42
second phase of the turnaround program was finalized in the fourth quarter of
1998, resulting in an additional restructuring charge of $92.
The charge of $92 recorded in 1998 was comprised of employee separation costs of
$68; write-downs of fixed assets and abandoned manufacturing projects of $8; and
other costs of $16.
The 1997 restructuring charge of $316, for the first phase of the turnaround
program, primarily related to employee separation costs of $134; write-downs of
fixed assets and abandoned manufacturing projects of $162; and other costs of
$20.
The total restructuring charges for 1998 and 1997 included involuntary employee
separation costs for 580 and 1,320 employees worldwide, respectively. The 1998
charge included elimination of positions in marketing and administration of $55,
R&D of $9, and manufacturing of $4. These amounts included an adjustment of $16
of the phase one accruals, mainly attributable to lower employee separation
costs and, to a lesser extent, changes in plan estimates. The 1997 charge
included elimination of positions in marketing and administration of $81, R&D of
$22, and manufacturing of $31. As of December 31, 1999, the company had paid
$155 in severance costs in connection with the 1998 and 1997 charges. The
remaining balance for employee separation costs related to the turnaround
program was $44 at December 31, 1999 comprised mainly of charges related to the
phase two charge and remaining annuity separation payments. The company expects
some annuity payments to continue into 2001.
The 1998 and 1997 restructuring charges included asset write-downs for excess
manufacturing, administration, and R&D facilities totaling $8 and $162,
respectively. The 1998 amount included an adjustment of $15 of the phase one
accruals, mainly attributable to changes in plan estimates, favorable outcomes
on sales of facilities, and actual facility closure costs below the original
estimates. At December 31, 1999, facilities presently being marketed had a net
book value of $47. Fixed asset write-downs were based on appraisals less costs
to sell.
Other costs included in the 1998 and 1997 restructuring charges of $16 and $20,
respectively, were primarily comprised of canceled contractual lease obligations
and other costs. Offsetting 1998 charges in this grouping was an adjustment of
$6 related to all restructuring charges prior to 1997.
The following table displays a roll-forward of the liabilities for business
restructurings from December 31, 1996 to December 31, 1999:
<TABLE>
<CAPTION>
EMPLOYEE
SEPARATION
COSTS OTHER TOTAL
----- ----- -----
<S> <C> <C> <C>
Balance December 31, 1996 $ 201 $ 25 $ 226
Additions 134 20 154
Deductions (182) (25) (207)
----- ----- -----
Balance December 31, 1997 153 20 173
Additions 68 16 84
Deductions (113) (12) (125)
----- ----- -----
Balance December 31, 1998 108 24 132
----- ----- -----
Additions 50 4 54
Deductions (67) (17) (84)
----- ----- -----
</TABLE>
-39-
<PAGE> 43
<TABLE>
<S> <C> <C> <C>
Balance December 31, 1999 $ 91 $ 11 $ 102
===== ===== =====
</TABLE>
4 INCOME TAXES
The provision for income taxes included in the consolidated statements of
earnings consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
CURRENTLY PAYABLE:
U.S. $ 93 $ 68 $ 34
Non-U.S 348 432 429
----- ----- -----
Total currently payable 441 500 463
----- ----- -----
DEFERRED:
U.S. (62) (46) (14)
Non-U.S (35) (108) (272)
----- ----- -----
Total deferred (97) (154) (286)
----- ----- -----
PROVISION FOR INCOME TAXES $ 344 $ 346 $ 177
===== ===== =====
</TABLE>
Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME 1999 1998 1997
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Lower rates in other
jurisdictions, net (3.4) (4.6) (11.7)
Goodwill amortization and other
non-deductible expenses 2.4 3.1 7.2
Valuation allowances associated
with Sugen merger 0.0 3.1 10.6
All other, net (4.0) (1.2) (0.4)
---- ---- ----
EFFECTIVE TAX RATE 30.0% 35.4% 40.7%
==== ==== ====
</TABLE>
The lower rates in other jurisdictions are principally attributable to
manufacturing operations in jurisdictions subject to more favorable tax rates.
Deferred income taxes are in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
1999 1999 1998 1998
DECEMBER 31 ASSETS LIABILITIES ASSETS LIABILITIES
- ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Current $ 436 $ 23 $ 378 $ 49
Noncurrent $ 439 $ 246 $ 408 $ 238
------- ------- ------- -------
Components of deferred taxes were:
Property, plant and
Equipment $ -- $ 253 $ -- $ 210
Inventory 263 -- 172 --
Compensation and
benefit plans 187 45 194 60
</TABLE>
-40-
<PAGE> 44
<TABLE>
<S> <C> <C> <C> <C>
Swedish tax deferrals -- 49 -- 31
Tax loss and tax credit
Carryforwards 386 -- 307 --
Environmental and product
Liabilities 46 -- 59 --
Restructuring 99 -- 111 --
Tax on unremitted earnings -- 106 -- 108
All other 263 63 277 95
------- ------- ------- -------
Subtotal 1,244 516 1,120 504
Valuation allowances (122) -- (117) --
------- ------- ------- -------
Total deferred taxes $ 1,122 $ 516 $ 1,003 $ 504
------- ------- ------- -------
Net deferred tax assets $ 606 $ 499
======= ======= ======= =======
</TABLE>
Valuation allowances have been provided for certain deferred tax assets that are
not likely to be realized. The changes in the valuation allowances were
increases of $5, $34 and $13 for the years ended December 31, 1999, 1998 and
1997, respectively. The increases in the allowance during 1997 and 1998 were
primarily due to certain tax credit carryforwards that were not likely to be
realized as a result of the Sugen merger. The increase in the valuation
allowance during 1999 was primarily attributable to certain tax credit
carryforwards that were not likely to be realized.
Tax loss carryforwards of $203 have various expiration dates through 2018. At
December 31, 1999, undistributed earnings of subsidiaries considered permanently
invested, for which deferred income taxes have not been provided, were
approximately $3,500.
5 SUGEN MERGER
On August 31, 1999, the company completed its merger with Sugen by exchanging
approximately 10 million shares of its common stock for all of the common stock
of Sugen. Each share of Sugen common stock was exchanged for .6091 of one share
of Pharmacia & Upjohn common stock. In addition, terms on outstanding Sugen
stock options, stock warrants, convertible debt, and warrants on convertible
debt were changed to convert Sugen shares to P&U shares using the same exchange
ratio.
The merger, a tax-free reorganization, was accounted for as a pooling of
interests under APB Opinion No. 16. As a result, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position, and cash flows of both companies as
if Sugen had always been a part of P&U. There were no transactions between P&U
and Sugen prior to the combination. Immaterial reclassifications were recorded
to conform Sugen's financial statements to P&U's presentation.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements for the period prior to the
merger follow. The adjustment represents the tax benefit of Sugen's net
operating loss that had been fully reserved for by Sugen.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
-------------
<S> <C>
Net Sales:
Pharmacia & Upjohn $3,534
Sugen --
------
</TABLE>
-41-
<PAGE> 45
<TABLE>
<S> <C>
Combined $3,534
------
Net income:
Pharmacia & Upjohn $ 437
Sugen (47)
Adjustment 14
------
Combined $ 404
======
</TABLE>
6 BIOTECH AND NUTRITION DIVESTITURES
In December 1998, the company sold substantially all of its nutrition business
to Fresenius AG for a loss of $52. To comply with antitrust regulations in
Germany, operations there were not sold to Fresenuis. In the third quarter of
1999, the company completed the sale of the nutrition business in Germany to
Baxter Deutschland GmbH for a gain. As of December 31, 1999, the closing of the
sale of the operations in China was still pending regulatory approval.
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., of
which Pharmacia & Upjohn owns 45 percent which is accounted for using the equity
method. In 1999 and 1998, P&U recorded credits of $38 and $52 respectively,
primarily representing the company's share of Amersham Pharmacia Biotech's
pretax earnings. 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 earnings statement effects
of these events and activities are reported in "All other, net."
7 EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming the exercise of
stock options and warrants, conversion of preferred stock and debt, 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 adjusted by the after-tax interest
effects of convertible debt and reduced by an incremental contribution to the
Employee Stock Ownership Plan (ESOP). This contribution is the after-tax
difference between (1) the income the ESOP would have received in preferred
stock dividends and (2) the dividend on the common shares assumed to have been
outstanding.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1999 1998 1998 1997 1997
BASIC DILUTED BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C>
EPS numerator:
Net earnings $ 803 $ 803 $ 631 $ 631 $ 258 $ 258
Less: Preferred stock dividends, net of tax (13) -- (13) -- (13) --
</TABLE>
-42-
<PAGE> 46
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Less: Interest effects on convertible
instruments net of tax -- -- -- 1 -- --
Less: ESOP contribution, net of tax -- (5) -- (5) -- (5)
----- ----- ----- ----- ----- -----
Income available to common shareholders $ 790 $ 798 $ 618 $ 627 $ 245 $ 253
----- ----- ----- ----- ----- -----
EPS denominator:
Average common shares outstanding 518 518 518 518 516 516
Effect of dilutive securities:
Stock options and stock warrants -- 6 -- 5 -- 3
Convertible instruments and
incentive compensation -- 10 -- 11 -- 11
----- ----- ----- ----- ----- -----
Total shares 518 534 518 534 516 530
----- ----- ----- ----- ----- -----
EARNINGS PER SHARE $1.53 $1.49 $1.20 $1.17 $ .48 $ .48
===== ===== ===== ===== ===== =====
</TABLE>
8 ACCOUNTS RECEIVABLE AND INVENTORIES
The following table displays a roll-forward of allowances for doubtful trade
accounts receivable for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Balance December 31, 1996 $ 95
Additions - charged to expense 11
Deductions (17)
-----
Balance December 31, 1997 89
Additions - charged to expense 43
Deductions (29)
-----
Balance December 31, 1998 103
Additions - charged to expense 14
Deductions (13)
-----
Balance December 31, 1999 $ 104
=====
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $660 at December 31, 1999, and $521 at December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ---- ----
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $ 474 $ 558
Raw materials, supplies and work in process 850 628
------- -------
Inventories (FIFO basis) 1,324 1,186
Less reduction to LIFO cost (147) (154)
------- -------
Inventories $ 1,177 $ 1,032
======= =======
</TABLE>
9 INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ---- ----
<S> <C> <C>
SHORT-TERM INVESTMENTS:
Available-for-sale:
</TABLE>
-43-
<PAGE> 47
<TABLE>
<S> <C> <C>
Certificates of deposit $ 38 $ 5
Kingdom of Sweden debt instruments 23 242
Corporate notes 15 15
U.S. Treasury securities and
other U.S. Government obligations 14 6
Corporate commercial paper -- 17
Other 2 9
---- ----
Total available-for-sale 92 294
Held-to-maturity 6 81
---- ----
TOTAL SHORT-TERM INVESTMENTS $ 98 $375
==== ====
</TABLE>
Amortized cost of short-term investments classified as available-for-sale
approximates fair market value. 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
LONG-TERM INVESTMENTS COST GAINS (LOSSES) VALUE
----- ----- -------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999 Available-for-sale:
Equity securities $184 $ 27 $ (6) $205
Mortgage-backed securities--
guaranteed by the U.S. Government 114 -- (1) 113
Other 16 -- -- 16
---- ---- ---- ----
Total available-for-sale 314 27 (7) 334
Held-to-maturity 86
---- ---- ---- ----
TOTAL LONG-TERM INVESTMENTS $420
---- ---- ---- ----
DECEMBER 31, 1998
Available-for-sale:
Equity securities $164 $ 29 $(23) $170
Mortgage-backed securities--
guaranteed by the U.S. Government 144 4 -- 148
---- ---- ---- ----
Total available-for-sale 308 33 (23) 318
Held-to-maturity 136
---- ---- ---- ----
TOTAL LONG-TERM INVESTMENTS $454
==== ==== ==== ====
</TABLE>
The total of unrealized gains (net of deferred taxes) included in shareholders'
equity amounted to $21 at December 31, 1999, compared to $5 and $53 at December
31, 1998 and 1997, respectively.
The proceeds realized from the sale of available-for-sale debt securities were
$349, $254 and $942 for 1999, 1998 and 1997, respectively. Profits realized on
these sales are recorded as interest income. During 1999, 1998 and 1997, the
proceeds realized from the sale of available-for-sale equity securities amounted
to $33, $53 and $4. Profits realized on these sales are recorded in "All other,
net." Based on original cost, gains of $25, $24 and $23 were realized on all
sales of available-for-sale securities in 1999, 1998 and 1997, respectively.
Long-term investments held-to-maturity are summarized as follows:
-44-
<PAGE> 48
<TABLE>
<CAPTION>
1999 1999 1998 1998
FAIR AMORTIZED FAIR AMORTIZED
DECEMBER 31 VALUE COST VALUE COST
- ----------- ----- ---- ----- ----
<S> <C> <C> <C> <C>
Guaranteed by the
U.S. Government $ 51 $ 51 $ 71 $ 71
Corporate notes 30 30 -- --
Commonwealth of
Puerto Rico debt
Instruments 5 5 35 35
Bank obligations:
Certificates of Deposit -- -- 10 10
Other 20 20
---- ---- ---- ----
Long-term investments held
to maturity $ 86 $ 86 $136 $136
==== ==== ==== ====
</TABLE>
At December 31, 1999, 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 from 2000 to 2022.
10 PROPERTIES, NET
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ---- ----
<S> <C> <C>
Land $ 73 $ 100
Buildings and improvements 1,819 1,872
Equipment 3,142 3,078
Construction in process 682 730
Less allowance for depreciation (2,432) (2,546)
------- -------
Properties, net $ 3,284 $ 3,234
======= =======
</TABLE>
11 LINES OF CREDIT AND LONG-TERM DEBT
The company has committed borrowing facilities amounting to $1,000 that were
unused as of December 31, 1999. The facilities are in amounts of $500 each and
expire in 2000 and 2004, respectively. The facilities exist largely to support
commercial paper borrowings in the U.S. and Europe. While there are no related
compensating balances, the facilities are subject to various fees. The company
also has uncommitted lines of credit amounting to $422 available with various
international banks, of which $62 were used at December 31, 1999.
Long term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- ---- ----
<S> <C> <C>
5.875% Notes due 2000 $ 200 $ 200
12.0% Senior Convertible Notes due 2002 58 --
7.5% Industrial Revenue Bonds due 2023 33 40
0.818-11.85% Italian Government Loans
</TABLE>
-45-
<PAGE> 49
<TABLE>
<S> <C> <C>
due 1999-2004 32 46
6.182-6.843% Medium-Term Notes due 1999 -- 80
Other 35 28
Current maturities (216) (99)
----- -----
TOTAL LONG-TERM DEBT $ 142 $ 295
===== =====
</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: 2001--$19; 2002--$66; 2003--$13; 2004--$5; and,
2005--$39. The company has guaranteed $275 original principal amount of ESOP
9.79% notes due in 2004. At December 31, 1999, the balance of the guarantee was
$218 of which $28 was classified as current. Principal payments that began in
1995 cause the recognition of compensation expense (see Note 18). Annual
aggregate maturities of guaranteed debt through expiration are: 2001--$35;
2002--$44; 2003--$53; 2004--$58.
In March, the company, through its subsidiary, Sugen, facilitated a private
placement of $28 in 12% Senior convertible notes. The notes are convertible into
common stock and have a conversion price of $33.66 per share. In connection with
the issuance of the debt, warrants were issued simultaneously which entitle the
holder to an additional amount of notes with provisions similar to the master
debt. At December 31, 1999, $3 of warrant notes remained unexercised.
Information regarding interest expense and weighted average interest rates
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Interest cost incurred $ 81 $ 62 $ 64
Less: Capitalized on construction (18) (36) (31)
---- ---- ----
Interest expense $ 63 $ 26 $ 33
---- ---- ----
Weighted average interest rate on
short-term borrowings at end
of period 7.04% 6.36% 7.27%
---- ---- ----
</TABLE>
12 COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December 31,
1999, approximately 85 percent real estate and 15 percent equipment, are as
follows: 2000--$78; 2001--$56; 2002--$43; 2003--$39; 2004--$36 and later
years--$156. Capital asset spending committed for construction and equipment but
unexpended at December 31, 1999, was approximately $260.
The consolidated balance sheets include accruals for estimated product
litigation and environmental liabilities. The latter includes exposures related
to discontinued operations, including the industrial chemical facility and
several sites which, under the Comprehensive Environmental Response,
Compensation, and Liability Act, are commonly known as Superfund sites (see Note
13). The company's ultimate liability in connection with Superfund sites depends
on many factors, including the number of other potentially responsible parties,
the financial viability of those parties, and the remediation methods and
technology to be used. Actual costs incurred may vary from the estimates given
the inherent uncertainties in evaluating environmental exposures.
-46-
<PAGE> 50
With regard to its discontinued industrial chemical facility in North Haven,
Connecticut, the company soon may be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required. It is not possible, however, to estimate a range
of potential losses. Accordingly, 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 and administrative and judicial
proceedings at several "Superfund" sites. The company has successfully settled
or otherwise resolved most of the Superfund sites where it has had some alleged
connection.
While it is not possible to predict or determine the outcome of legal actions
brought against the company, or the ultimate cost of environmental matters, the
company continues to believe that any potentially unaccrued costs and
liabilities associated with such matters will not have a material adverse effect
on the company's consolidated financial position. 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 consolidated financial
position, its results of operations or liquidity.
The company has been a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits,
which were consolidated and transferred to the Federal District Court for the
Northern District of Illinois. These suits, brought by independent pharmacies
and chains, generally allege unlawful conspiracy, price discrimination and price
fixing and, in some cases, unfair competition. These suits 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. The company announced in
1998 that it reached a settlement with the plaintiffs in the federal class
action case for $103 that was paid during the first quarter of 1999. Similar
actions by proposed retailer classes have been filed in the state courts of
Alabama, California, Minnesota, Mississippi, and Wisconsin. Twenty-three class
action lawsuits seeking damages based on the same alleged conduct have been
filed in 18 states and the District of Columbia. The plaintiffs claim to
represent consumers who purchased prescription drugs in those jurisdictions and
one other state. Two of the lawsuits have been dismissed. Fifteen have been
settled. The company believes that any potential remaining liability above
amounts accrued will not have a material adverse effect on the company's
consolidated financial position, its results of operations, or liquidity.
-47-
<PAGE> 51
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 exposures
and related hedging programs are managed centrally using forward currency
contracts, cross-currency swaps 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 also has hedged part of its net
investment in Japan. Financial instruments for trading purposes are neither held
nor issued by the company.
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, 1999, the contract amount of the company's
outstanding contracts used to hedge net transaction exposure was $658. The
aggregate net transaction gains and losses included in net income for the years
ended December 31, 1999, 1998 and 1997 related to foreign currency transaction
hedges was $3, $15, and $18, respectively. During 1999, several European
countries began using the euro. This reduces the number of currencies in which
contracts are denominated. Of the total amount of contracts held by the company,
euro-denominated against the U.S. dollar and Swedish krona were 17 percent and
10 percent. U.S. dollar denominated contracts were 19 percent, 6 percent were
denominated in Japanese yen, and 5 percent were denominated in various other
currencies all against the Swedish krona. Of the remaining contracts held by the
company, 36 percent were in U.S. dollars and 7 percent were in euro against
various other currencies in non-significant concentrations.
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, 1999, the contract amount of forward exchange and currency swap
contracts held for balance sheet financial exposure hedging program was $620. Of
these contracts, 75 percent were denominated in U.S. dollars and against
Japanese yen (47 percent), European currencies (11 percent), and various other
currencies (17 percent). Euro denominated contracts amounted to 16 percent of
the total and were against various non-concentrated currencies. The remaining
contracts denominated in other currencies amounted to 9 percent and were against
the Swedish krona and the Japanese yen.
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>
1999 1999 1998 1998
CARRYING FAIR CARRYING FAIR
<S> <C> <C> <C> <C>
</TABLE>
-48-
<PAGE> 52
<TABLE>
<CAPTION>
DECEMBER 31 AMOUNT VALUE AMOUNT VALUE
- ----------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Short-term investments $ 98 $ 98 $ 375 $ 375
Long-term investments 420 420 454 454
Forward currency
exchange contracts
Hedges of loans and deposits (27) (27) (7) (7)
Hedges of anticipated
Transactions (2) (2) (13) (13)
Currency/Interest Swaps
Hedges of loans and deposits (3) (3) -- --
FINANCIAL LIABILITIES:
Short-term debt 1,212 1,212 332 332
Long-term debt 142 155 295 305
Guaranteed ESOP debt $ 190 $ 200 $ 218 $ 241
======= ======= ======= =======
</TABLE>
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 exchange and
currency swap 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. At
December 31, 1999, the company had no financial instruments that represented a
significant concentration of credit risk. The amounts invested in a single
institution are limited to minimize risk. The company has not incurred credit
risk 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
-49-
<PAGE> 53
The number of common shares outstanding at December 31, 1999, 1998, and 1997 was
519,667,495; 518,119,813; and 516,558,279, respectively. On a per-share basis,
dividends were declared on common stock at a rate of $1.08 in 1999, 1998 and
1997. Common stock dividends payable were $141 and $137 at December 31, 1999 and
1998, respectively.
CAPITAL IN EXCESS OF PAR VALUE
Amounts of paid-in capital that exceed the par value ($.01 per share) of the
company's common stock are recorded in this account. The tax benefit related to
the exercise of certain stock options reduces income taxes payable and is
reflected as capital in excess of par. Offsetting this is the difference between
the cost of treasury shares and cash received for them, if any, when used to
satisfy stock option exercises and other employee stock awards.
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 is
added to the note principal. At December 31, 1999, the note principal balance
was $66. Also, upon recognition of the company's guarantee of the debt of the
ESOP Trust, an offsetting amount was recorded in shareholders' equity. As
guaranteed debt is repaid, this amount 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, 1999, was $182.
TREASURY STOCK
The balance at December 31, 1999 and 1998 was $2 and $35, respectively, carried
at cost.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income reflects the cumulative balance of the
following: (1) currency translation adjustments, the adjustments of translating
the financial statements of non-U.S. subsidiaries from local currencies into
U.S. dollars (see Note 1); (2) unrealized gains and losses on investments
categorized as available-for-sale, net of deferred taxes and reclassifications
(see Note 2); and (3) minimum pension liability adjustments, net of deferred tax
(see Notes 2 and 20).
WARRANTS
Certain warrants to purchase shares of common stock were issued in connection
with the Senior Custom Convertible notes, certain collaboration agreements, and
various license, facility and equipment lease financing arrangements. Warrants
to purchase 209,987 shares were outstanding at December 31, 1999 with exercise
prices and expirations ranging between $25.35 and $35.81 and September 2000 and
April 2004, respectively.
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
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<PAGE> 54
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, created in 1989, is a funding vehicle for the Employee Savings Plan
covering essentially all active U.S. employees. As the ESOP Trust makes debt
principal and interest payments, a proportionate amount of preferred stock is
released for allocation to plan participants. The preferred shares are allocated
to participants' accounts based upon their respective savings plan contributions
and the dividends earned on their previously allocated preferred shares. As of
December 31, 1999, 2,097 preferred shares had been released and allocated; 383
shares were released but unallocated; and 4,212 shares remained unreleased, of
which 61 shares are committed to be released. Shares released during 1999, 1998
and 1997 were 421, 391 and 346, respectively.
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,
1999, assets of the ESOP trust consisted primarily of $270 of Pharmacia &
Upjohn, Inc., 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. ESOP expense represents a fringe
benefit and, as such, it attaches to payroll costs that comprise a portion of
all functional expense captions in the earnings statement.
Key measures of the ESOP are presented in the table that follows.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
DOLLARS IN MILLIONS 1999 1998 1997
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Interest expense of ESOP Trust $25 $27 $28
Dividend income of ESOP Trust 17 17 18
Company contribution to
ESOP Trust 22 18 12
Company ESOP expense (net) $14 $13 $14
=== === ===
</TABLE>
19 STOCK COMPENSATION
Incentive and nonqualified stock options are granted to certain employees.
Options granted in 1999 have a ten-year term and vest at the end of three years
or vest pro rata over three years. All options
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<PAGE> 55
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 alternative 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.
Information concerning option activity and balances follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER
EXERCISE PRICE OF SHARES
PER SHARE (000)
--------- -----
<S> <C> <C>
Balance outstanding, December 31, 1996 $27.22 13,089
Granted 35.66 4,879
Exercised 22.63 (1,681)
Canceled 33.45 (236)
------ ------
Balance outstanding, December 31, 1997 30.18 16,051
Granted 39.51 10,285
Exercised 28.44 (4,313)
Canceled 38.02 (683)
------ ------
Balance outstanding, December 31, 1998 34.78 21,340
Granted 54.63 9,188
Exercised 27.27 (3,992)
Canceled 45.10 (731)
------ ------
BALANCE OUTSTANDING, DECEMBER 31, 1999 $42.72 25,805
====== ======
</TABLE>
<TABLE>
<CAPTION>
COMPOSITION OF THE WEIGHTED WEIGHTED
DECEMBER 31, 1999 BALANCE: AVERAGE AVERAGE NUMBER
OPTIONS HAVING A REMAINING EXERCISE PRICE OF SHARES
PER-SHARE EXERCISE PRICE OF: LIFE PER SHARE (000)
- ---------------------------- ---- --------- -----
<S> <C> <C> <C>
$ .62--19.49 3.11 years $ 15.89 622
$19.50--29.99 3.62 years 23.77 2,903
$30.00--39.99 6.44 years 37.09 6,371
$40.00--49.99 7.65 years 41.59 6,889
$50.00--59.99 8.66 years 55.39 8,871
$60.00--65.38 6.46 years 62.64 149
---------- ----- -----
</TABLE>
As of December 31, 1999, 1998 and 1997, the company had exercisable options of
11,296,000, 11,813,000 and 11,392,000, respectively, with weighted average
exercise prices of $35.00, $36.65 and $28.39, respectively.
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 diluted earnings per share would have been reduced by approximately
$55 or $.11 per share for 1999, $47 or $.09 per share for 1998, and $42 or $.08
per share for 1997. 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 1999,
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<PAGE> 56
1998 and 1997, respectively: dividend yield of 1.98, 2.70, and 2.83 percent;
volatility of 24.8, 24.0, and 21.0 percent; risk-free interest rate of 6.64,
4.72, and 5.45 percent; and an expected life of 5.0, 5.1, and 5.3 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 company also provides
nonpension benefits to eligible retirees and their dependents, primarily in the
form of medical and dental benefits. The following tables summarize the changes
in benefit obligations and plan assets during 1998 and 1999.
<TABLE>
<CAPTION>
OTHER RETIREMENT
PENSION BENEFITS BENEFITS
CHANGE IN BENEFIT OBLIGATION: 1999 1998 1999 1998
- ----------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $ 1,455 $ 1,394 $ 406 $ 393
Service cost 59 56 10 10
Interest cost 93 91 28 27
Benefits paid (211) (133) (27) (19)
Actuarial (gain) loss 46 53 10 (10)
Plan amendment and other
Adjustments 3 (14) 1 5
Currency exchange effects 1 8 -- --
------- ------- ------- -------
BENEFIT OBLIGATION AT
END OF YEAR $ 1,446 $ 1,455 $ 428 $ 406
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN PLAN ASSETS: 1999 1998 1999 1998
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $ 1,477 $ 1,387 $ 211 $ 170
Actual return on plan assets 209 184 41 40
Employer contribution 45 38 26 18
Benefits paid (211) (133) (27) (19)
Other adjustments 2 (5) 1 2
Currency exchange effects 5 6 -- --
------- ------- ------- -------
FAIR VALUE OF PLAN ASSETS AT
END OF YEAR $ 1,527 $ 1,477 $ 252 $ 211
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 1998 1999 1998
- --------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status $ 81 $ 22 $(176) $(195)
Unrecognized net actuarial
(gains) losses (62) (11) (115) (115)
Unamortized net transition asset (31) (45) --
Unrecognized prior service cost 38 41 (29) (34)
----- ----- ----- -----
PREPAID (ACCRUED) BENEFIT COST $ 26 $ 7 $(320) $(344)
===== ===== ===== =====
</TABLE>
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<PAGE> 57
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were, $411, $346, and $118 as of December 31, 1999, and
$346, $291, and $90 as of December 31, 1998, respectively. The benefit
obligation and fair value of plan assets for benefit plans with obligations in
excess of plan assets were, $839 and $371 as of December 31, 1999, and $752 and
$301 as of December 31, 1998, respectively.
<TABLE>
<CAPTION>
OTHER RETIREMENT
PENSION BENEFITS BENEFITS
AT DECEMBER 31, 1999 1998 1999 1998
- --------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total accrual balances $(254) $(221) $(320) $(344)
Total prepaid balances 204 190 -- --
Minimum pension liability
offsets:
Intangible assets 11 5 -- --
Shareholders' equity
(pretax) 65 33 -- --
----- ----- ----- -----
PREPAID (ACCRUED) BENEFIT COST $ 26 $ 7 $(320) $(344)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31, 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Discount rate 6.86% 6.66% 6.95%
Salary growth rate 3.67 3.68 4.20
Return on plan assets 9.53 9.21 9.27
Health care cost rate -- initially 5.62 5.83 6.33
trending down to 5.00 5.00 5.00
==== ==== ====
</TABLE>
The consolidated net expense amounts in the following table are exclusive of
curtailments, settlements, and termination benefit costs associated with
restructurings. Net amounts of $4 and $5 before tax were recorded in 1998 and
1997, respectively, within restructuring charges.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER RETIREMENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST: 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 59 $ 56 $ 52 $ 10 $ 10 $ 9
Interest cost 93 91 90 28 27 26
Expected return on plan assets (120) (109) (102) (20) (15) (12)
Amortization of transition amount (8) (9) (9) -- -- --
Amortization of prior service cost 4 5 4 (3) (3) (4)
Recognized actuarial loss (gain) 3 3 4 (4) (2) (1)
----- ----- ----- ----- ----- -----
Net periodic benefit cost 31 37 39 11 17 18
Settlement/curtailment loss (gain) 3 (3) -- -- -- --
----- ----- ----- ----- ----- -----
</TABLE>
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<PAGE> 58
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
NET BENEFIT COST $ 34 $ 34 $ 39 $ 11 $ 17 $ 18
===== ===== ===== ===== ===== =====
</TABLE>
The assumption concerning health care cost trend rate has a significant effect
on the amounts reported. Increasing the rate by one percentage point in each
year would increase the postretirement benefit obligation as of December 31,
1999, by $55 and the total of service and interest cost components of net
postretirement benefit cost for the year by $6. Conversely, decreasing the rate
by one percentage point in each year would decrease the postretirement benefit
obligation as of December 31, 1999, by $49 and the total of service and interest
cost components of net postretirement benefit cost for the year by $5.
The company has recorded an additional minimum liability of $75 for underfunded
plans at December 31, 1999. This liability represents the amount by which the
accumulated benefit obligation exceeds the sum of the fair market value of plan
assets and accrued amounts previously recorded. An intangible asset ($10) to the
extent of previously unrecognized prior service cost offsets the additional
liability. The remaining amount ($65) is recorded, net of tax benefits, as a
reduction to shareholders' equity within accumulated other comprehensive income.
21 SEGMENT INFORMATION
The company's core business is the development, manufacture and sale of
pharmaceutical products. This business is organized in two segments,
prescription pharmaceutical and consumer health care. The prescription
pharmaceutical segment includes general therapeutics, ophthalmology and hospital
products including oncology, and diversified therapeutics. The consumer health
care segment consists of self-medication products that are available to
consumers over the counter without a prescription. This segment includes product
line extensions of key prescription drugs, plus products to treat tobacco
dependency.
The remaining operating units include animal health, diagnostics, nutrition,
plasma, pharmaceutical commercial services and biotechnology. Due to the size of
these operating segments, they have been included in an "all other" grouping.
Animal health produces and markets both pharmaceuticals and feed additives for
livestock and pets. Diagnostics provides services to identify specific allergies
in people. Nutrition sells food replacement products, primarily to hospitals.
Plasma is a therapeutic area that prepares and markets products derived from
blood plasma. Pharmaceutical commercial services develops, manufactures and
markets certain bulk pharmaceutical chemicals and selected high-technology and
specialty chemicals. Biotechnology primarily represents minority equity
positions in biotechnology joint ventures that manufacture and market reagents,
chemicals, and systems for biotechnology companies and academic research
laboratories.
The following tables show revenues and expenses for the company's operating
segments and reconciling items necessary to total to the amounts reported in the
consolidated financial statements. Information about segment assets, interest
income and expense, and income taxes is not provided on a segment level as the
segments are reviewed based on operating income. Corporate support functions and
restructuring charges also are not allocated to segments. There are no
inter-segment revenues. Depreciation is not available on a segmental basis.
-55-
<PAGE> 59
During the fourth quarter of 1999, the company realigned the internal management
organization of the company's operating segments and have appropriately
reflected this change in the reportable segments presented.
SEGMENTS FOR YEAR ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
PRESCRIPTION CONSUMER
PHARMA- HEALTH ALL RECONCILING
CEUTICAL CARE OTHER ITEMS TOTALS
-------- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Net sales $ 5,499 $ 683 $ 1,071 $ -- $ 7,253
------- ------- ------- ------- -------
Earnings from equity
affiliates $ -- $ -- $ 35 $ -- $ 35
------- ------- ------- ------- -------
Amortization expense $ 17 $ 3 $ 6 $ 79 $ 105
------- ------- ------- ------- -------
Operating income (loss)
before corporate $ 1,073 $ 139 $ 311 $ (90) $ 1,433
Corporate and all other (286)
------- ------- ------- ------- -------
Earnings before taxes $ 1,147
</TABLE>
SEGMENTS FOR YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRESCRIPTION CONSUMER
PHARMA- HEALTH ALL RECONCILING
CEUTICAL CARE OTHER ITEMS TOTALS
-------- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Net sales $ 4,752 $ 683 $ 1,323 $ -- $ 6,758
------- ------- ------- ------- -------
Earnings from equity
affiliates $ 1 $ -- $ 56 $ -- $ 57
------- ------- ------- ------- -------
Amortization expense $ 15 $ 6 $ 11 $ 80 $ 112
------- ------- ------- ------- -------
Operating income (loss)
before corporate $ 984 $ 111 $ 324 $ (171) $ 1,248
Corporate and all other (271)
------- ------- ------- ------- -------
Earnings before taxes $ 977
</TABLE>
SEGMENTS FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRESCRIPTION CONSUMER
PHARMA- HEALTH ALL RECONCILING
CEUTICAL CARE OTHER ITEMS TOTALS
<S> <C> <C> <C> <C> <C>
Net sales $ 4,370 $ 642 $ 1,574 $ -- $ 6,586
------- ------- ------- ------- -------
Earnings (loss) from equity
investments 5 -- (73) -- (68)
------- ------- ------- ------- -------
Amortization expense 13 5 11 87 116
------- ------- ------- ------- -------
Operating income (loss)
before corporate $ 765 $ 119 $ 192 $ (125) 951
Corporate and all other (516)
</TABLE>
-56-
<PAGE> 60
<TABLE>
<S> <C> <C> <C> <C> <C>
----- ----- ----- ----- -----
EARNINGS BEFORE TAXES $ 435
</TABLE>
The reconciling item for amortization expense represents goodwill amortization
resulting from acquisitions by Pharmacia AB prior to the 1995 merger with The
Upjohn Company. In addition to amortization, unallocated noncorporate general
and administrative expenses are included in the reconciling item for operating
income (loss) before corporate. Corporate and all other amounts represent
general and administrative expenses of corporate support functions, corporate
items such as restructuring charges and litigation accruals, and nonoperating
income and expenses.
The company's products are sold throughout the world to a wide range of
customers including pharmacies, hospitals, chain warehouses, governments,
physicians, wholesalers, and other distributors. No single customer accounts for
10 percent or more of the company's consolidated sales.
The top selling 20 products in 1999 represent approximately 59 percent of total
sales with no one product constituting more than 7 percent of total sales. The
following table shows the company's sales geographically. U.S. exports to
third-party customers are less than 10 percent of U.S. sales.
<TABLE>
<CAPTION>
GEOGRAPHIC SALES FOR YEARS ENDED DECEMBER 31 1999 1998
- -------------------------------------------- ---- ----
<S> <C> <C>
Sales to customers in:
United States $2,915 $2,498
Japan 738 565
Italy 430 461
Germany 389 412
United Kingdom 329 352
Sweden 257 284
France 274 275
Spain 172 168
Rest of the world 1,749 1,743
------ ------
TOTAL SALES $7,253 $6,758
====== ======
</TABLE>
Long-lived assets include property, plant and equipment, goodwill and other
intangibles, all net of depreciation or amortization.
<TABLE>
<CAPTION>
LONG-LIVED ASSETS, DECEMBER 31 1999 1998
- ------------------------------ ---- ----
<S> <C> <C>
United States $2,104 $1,840
Sweden 971 995
Italy 386 443
Japan 90 186
United Kingdom 103 133
Ireland 122 123
Rest of the world 635 752
------ ------
TOTAL LONG-LIVED ASSETS $4,411 $4,472
====== ======
</TABLE>
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<PAGE> 61
FIVE - YEAR SUMMARY OF OPERATIONS
-----------------------------------------
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ----------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dollar amounts in millions, except per-share data
OPERATING RESULTS
Net sales $ 7,253 $ 6,758 $ 6,586 $ 7,176 $ 6,949
Cost of products sold 1,893 2,031 2,047 2,116 1,967
Research and development 1,434 1,234 1,246 1,283 1,263
Selling, General and
Administrative 2,800 2,552 2,642 2,453 2,622
Merger & Restructuring 70 92 316 585 242
Interest income (80) (92) (113) (161) (218)
Interest expense 63 26 33 56 94
All other(income)/expense, net (74) (62) (20) 26 (146)
-------- -------- -------- -------- --------
Earnings from continuing
operations before income taxes 1,147 977 435 818 1,125
Provision for income taxes 344 346 177 268 392
-------- -------- -------- -------- --------
Earnings from continuing
Operations 803 631 258 550 733
Discontinued operations, net -- -- -- -- --
Cumulative effect of accounting
changes (net of tax) -- -- -- -- --
-------- -------- -------- -------- --------
Net earnings 803 631 258 550 733
-------- -------- -------- -------- --------
Dividends on preferred stock
(net of tax) 13 13 13 13 13
-------- -------- -------- -------- --------
Net earnings on common stock 790 618 245 537 720
-------- -------- -------- -------- --------
Net earnings per common share:
Diluted $ 1.49 $ 1.17 $ 0.48 $ 1.03 $ 1.39
======== ======== ======== ======== ========
FINANCIAL POSITION
Cash and cash equivalents 1,316 881 799 666 849
Short-term investments 98 375 591 727 1,019
Trade accounts receivable, net 1,513 1,417 1,303 1,705 1,535
Inventories 1,177 1,032 958 1,012 976
Other current assets 829 847 745 866 665
-------- -------- -------- -------- --------
Current assets 4,933 4,552 4,396 4,976 5,044
Net assets of discontinued
operations -- -- -- -- --
Properties 3,284 3,234 3,310 3,606 3,398
Goodwill and other intangibles,
net 1,127 1,238 1,287 1,522 1,722
Other noncurrent assets 1,354 1,319 1,464 1,155 1,372
-------- -------- -------- -------- --------
Total assets 10,698 10,343 10,457 11,259 11,536
-------- -------- -------- -------- --------
Short-term debt, including current
maturities of long-term debt 1,212 332 401 235 524
Other current liabilities 2,228 2,543 2,302 2,279 2,128
Long-term debt and ESOP debt 332 513 651 823 870
Other noncurrent liabilities 1,341 1,359 1,525 1,609 1,568
Shareholders' equity 5,585 5,596 5,578 6,313 6,446
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $ 10,698 $ 10,343 $ 10,457 $ 11,259 $ 11,536
======== ======== ======== ======== ========
</TABLE>
Due to the change in the company's presentation of reportable segments during
the fourth quarter of 1999, each of the previously reported quarters of 1999 has
been adjusted to conform to the new presentation.
-58-
<PAGE> 62
SEGMENTS FOR YEAR TO DATE SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRESCRIPTION CONSUMER
PHARMA- HEALTH ALL RECONCILING
CEUTICAL CARE OTHER ITEMS TOTALS
-------- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Net sales $ 4,010 $ 508 $ 792 $ -- $ 5,310
------- ------- ------- ----- -------
Operating income (loss)
before corporate 788 97 232 (87) 1,030
Corporate and all other (186)
------- ------- ------- ----- -------
Earnings before taxes $ 844
======= ======= ======= ===== =======
</TABLE>
SEGMENTS FOR YEAR TO DATE JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRESCRIPTION CONSUMER
PHARMA- HEALTH ALL RECONCILING
CEUTICAL CARE OTHER ITEMS TOTALS
-------- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,650 $ 343 $ 541 $ -- $ 3,534
------- ------- ------- ----- -------
Operating income (loss)
before corporate 547 53 151 (52) 699
Corporate and all other (122)
------- ------- ------- ----- -------
Earnings before taxes $ 577
======= ======= ======= ===== =======
</TABLE>
SEGMENTS FOR YEAR TO DATE MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRESCRIPTION CONSUMER
PHARMA- HEALTH ALL RECONCILING
CEUTICAL CARE OTHER ITEMS TOTALS
-------- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C>
NET SALES $ 1,340 $ 166 $ 268 $ -- $ 1,774
------- ------- ------- ----- -------
Operating income (loss)
before corporate 288 19 69 (32) 344
Corporate and all other (42)
------- ------- ------- ----- -------
Earnings before taxes $ 302
======= ======= ======= ===== =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
-59-
<PAGE> 63
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Frank C. Carlucci, age 69, Chairman, the Carlyle Group, a
merchant bank. Mr. Carlucci served as U.S. Secretary of Defense from
1987 to 1989. Mr. Carlucci is currently on the board of directors of
Ashland, Inc., Kaman Corporation, Neurogen Corporation, Northern
Telecom Limited, The Quaker Oats Company, SunResorts, Ltd., N.V. and
Texas Biotechnology Corporation. He also serves on the board of
trustees for the nonprofit Rand Corporation. He had served as a
director of Upjohn before the combination with Pharmacia. He is a
member of the Executive Committee and the Compensation Committee of the
Board of Directors.
Gustaf Douglas, age 62, Chairman of Investment AB Latour, an
investment holding company. Mr. Douglas is also Chairman of the
Stockholm Chamber of Commerce and AB Fagerhult, Vice Chairman of
Securitas AB and Sveriges Television AB, and a member of the Board of
Directors of Assa Abloy AB, Munksjo AB, Sakl AB and Stiftelsen Svenska
Dagbladet. He had served as a director of Pharmacia before the
combination with Upjohn. He is a member of the Compensation Committee
and the Audit Committee of the Board of Directors.
M. Kathryn Eickhoff, age 60, President, Eickhoff Economics
Incorporated, economic consultants. Ms. Eickhoff is the former
associate director for Economic Policy, United States Office of
Management and Budget. She also serves as a director of AT&T Corp.,
Tenneco Inc. and Fleet Bank, NA. Ms. Eickhoff is a member of several
business organizations including the Conference of Business Economists,
the Economics Club of New York and the National Association of Business
Economists. She had served as a director of Upjohn before the
combination with Pharmacia. She is a member of the Audit Committee of
the Board of Directors. The Company has retained Eickhoff Economics
Incorporated to provide economic consulting services to the Company for
an annual fee of $25,000.
Soren Gyll, age 58, Chairman of the Board of the Company and
former President and Chief Executive Officer of AB Volvo, an automobile
manufacturer. Mr. Gyll had also been Chairman of Pericardia AB, the
predecessor of Pharmacia, from 1992 until 1995, and before that had
served as Procordia's President and Chief Executive Officer. Mr. Gyll
is a member of the Board of Directors of Bilia AB, AB Volvo, SKF AB,
SCA AB, Skanska AB, Oresa Ventures and the Federation of Swedish
Industries. Mr. Gyll is also a member of the Royal Swedish Academy of
Engineering Sciences. He had served as a Director of Pharmacia before
the combination with Upjohn. He is Chairman of the Executive Committee
of the Board of Directors.
Fred Hassan, age 54, President and Chief Executive Officer of
Pharmacia and Upjohn. Mr. Hassan had been Executive Vice President and
a member of the board of directors of American Home Products
Corporation immediately prior to joining Pharmacia & Upjohn in May
1997, and he had been senior vice president of American Home Products
Corporation before that. He joined Pharmacia & Upjohn's board of
directors in 1997. He is a member of the Executive Committee of the
Board of Directors.
Berthold Lindqvist, age 61, former President and Chief
Executive Officer of Gambro AB, a global medical technology company.
Mr. Lindqvist is also a member of the board of directors of Gambro AB,
Trelleborg AB, PLM AB, Munters AB and Securitas AB. Mr. Lindqvist is
also a member of the Royal Swedish Academy of Sciences. He had served
as a
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<PAGE> 64
director of Pharmacia before the combination with Upjohn. He is a
member of the Compensation Committee of the Board of Directors.
Olof Lund, age 69, former President and Chief Executive
Officer of Celsius Industrier AB, a defense manufacturing company. Mr.
Lund is the chairman of Tieto-Enato Corp., SIAR Foundation and the
Swedish Financial Accounting Standards Council, and is a member of the
board of directors of FPG/AMFK, LKAB and the Federation of Swedish
Industries. Mr. Lund is also a member of the Royal Academy of War
Sciences. He had served as a director of Pharmacia before the
combination with Upjohn. He is a member of the Executive Committee and
the Nominating and Corporate Governance Committee of the Board of
Directors.
C. Steven McMillan, age 54, President and Chief Operating
Officer of Sara Lee Corporation, a consumer goods company. Mr. McMillan
previously held other management positions with Sara Lee before
assuming his current position. Mr. McMillan is a member of the board of
directors of Sara Lee Corporation and Illinova Corporation. He also
serves on the boards of several not-for-profit and civic organizations.
He joined Pharmacia & Upjohn's board of directors in 1998. He is a
member of the Nominating and Corporate Governance Committee of the
Board of Directors.
William U. Parfet, age 53, Co-Chairman of MPI Research, LLC, a
preclinical toxicology and clinical pharmaceutical testing laboratory.
Mr. Parfet assumed his current position in November 1995 and had
previously served from October 1993 to January 1996 as president and
chief executive officer of Richard Allan Medical Industries, a medical
device manufacturer. Prior to that, he had served as vice chairman of
the board of directors of Upjohn. Mr. Parfet serves as a member of the
board of directors of CMS Energy Corporation, the Financial Accounting
Foundation, Stryker Corporation and Sybron International. He had served
as a director of Upjohn before the combination with Pharmacia. From
time to time, Pharmacia & Upjohn has retained MPI Research, LLC to
conduct pre-clinical and clinical testing work for independent entities
with whom Pharmacia & Upjohn has contractual and business
relationships. Total fees paid to MPI Research, LLC for 1999 were
approximately $640,367. Mr. Parfet is the brother of Donald R. Parfet,
senior vice president of Pharmacia & Upjohn. He is member of the
Nominating and Corporate Governance Committee of the Board of
Directors.
Ulla Reinius, age 62, President of U. Reinius Finansfakta AB,
a publisher and financial information consultant. Ms. Reinius is also a
member of the board of directors of the Swedish Association for Share
Promotion and a member of the Ethical Advisory Board of the Swedish
County Pension Funds and of the Swedish Royal Opera. She is a former
member of the Swedish Government Ethical Committee. She had served as a
director of Pharmacia before the combination with Upjohn. She is a
member of the Audit Committee of the Board of Directors.
Bengt Samuelsson, M.D., age 65, Professor of Medical and
Physiological Chemistry, and formerly, President, Karolinska
Institutet. Dr. Samuelsson was the Nobel Laureate in Physiology or
Medicine in 1982 and is currently chairman of the Nobel Foundation. He
is also a member of the board of directors of Svenska Handelsbanken,
the Liposome Company and Nicox, S., Valboune, France. Dr. Samuelsson is
a member of the Royald Swedish Academy of Sciences, the American
Academy of Arts and Sciences, the Association of American Physicians,
Adacemie des Sciences, Paris, the U.S. National Academy of Sciences and
the Royal Society, London. He had served as a director of Pharmacia
before the combination with Upjohn. Pharmacia & Upjohn provides
research grants and other business-related funding to the Karolinska
Institutet.
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<PAGE> 65
Morton L. Topfer, age 63, Counselor to the Chief Executive
Officer of Dell Computer Corporation. Mr. Topfer is presently counselor
to the chief executive officer of Dell Computer Corporation. He served
as vice chairman of Dell from 1994 to 1999. For 23 years prior to
joining Dell, Mr. Topfer held various positions with Motorola, Inc.,
last serving as corporate executive vice president and president of the
Land Mobile Products Sector. Before joining Motorola in 1971, Mr.
Topfer spent 11 years with RCA Laboratories in various research and
development and management positions. He began his professional career
as a research engineer with Kollsman Instruments Corporation in New
York. He is a member of the board of directors of Autodesk, Inc.,
Alliance Gaming and Dell. He joined Pharmacia & Upjohn's board of
directors in 1999. He is a member of the Nominating and Corporate
Governance Committee of the Board of Directors.
BOARD OF DIRECTORS COMPENSATION
Annual compensation for non-employee members of the Board of
Directors consists of a retainer fee of $50,000 ($100,000 for the
Chairman of the Board) and either 1,000 shares of the Company's Common
Stock or a stock option for 3,000 shares of the Company's Common Stock
having an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant and a term of ten years.
The chairperson of each Board committee receives an additional annual
fee of $7,500. Directors are permitted to defer all or part of their
fees in stock or cash until they leave the Board. There are no
additional fees for attending regular meetings or serving on regular
Board committees. The Company's Chief Executive Officer does not
receive separate compensation for serving on the Board of Directors.
EXECUTIVE OFFICERS
In addition to Fred Hassan, the following are the Company's executive
officers:
Goran A. Ando, M.D., age 50, 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.
Hakan Astrom, age 52, Senior Vice President, Strategic
Planning and Investor Relations. He had been Group Vice President of
Pharmacia since 1993.
Richard T. Collier, age 46, 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.
Christopher J. Coughlin, age 47, Executive Vice President and
Chief Financial Officer. He had been Executive Vice President and Chief
Financial Officer of Nabisco since 1996 and prior to that, he was Chief
Financial Officer at Sterling Winthrop, Inc.
Paul L. Matson, age 51, Senior Vice President, Human
Resources. He had been Vice President, Human Resources, of Moore
Corporation Limited until 1998. Prior to that he was a senior human
resources executive with Miles, Inc., the U.S. subsidiary of Bayer
Corporation.
Mats G. Pettersson, age 54, Senior Vice President, Business
Development. He had been Group Vice President of Pharmacia since 1993
and prior to that he was Chief Financial Officer of KabiVitrum AB,
Stockholm, Sweden.
Timothy G. Rothwell, age 46, Executive Vice President and
President, Global 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.
Carrie Smith Cox, age 42, Executive Vice President and Head,
Global Business Management. She had been Vice President, Women's Health
Care at Wyeth-Ayerst Laboratories division of American Home Products
until August 1997.
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<PAGE> 66
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table shows the total compensation received for the last three
calendar years (or for such shorter period that the individual has been employed
by the Company) by the current President and Chief Executive Officer of the
Company and by the four other most highly compensated executive officers of the
Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------ --------------------------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER STOCK OPTIONS
BASE ANNUAL AWARDS (# OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) (3)(4)(5)(6) SHARES) COMPENSATION(2)
--------------------------- ---- ------ ----- --------------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
F. Hassan, 1999 $1,114,688 $1,901,400 $ 10,425 $12,012,501 400,000 $50,883
President and Chief 1998 $1,050,000 $1,176,000 $103,116 0 300,000 $37,000
Executive Officer(1)(3)(4) 1997 $ 644,445 $ 636,000 $ 42,280 $10,080,000 500,000 0
G. A. Ando, 1999 $ 695,730 $ 648,170 $ 53,387 0 100,000 $29,320
Executive Vice President 1998 $ 662,600 $ 523,274 $ 69,754 0 250,000 $20,533
and President, Research 1997 $ 598,782 $ 197,000 $ 20,028 0 65,000 0
and Development(1)
T. G. Rothwell, 1999 $ 756,000 $ 756,730 $ 6,000 0 100,000 $51,783
Executive Vice President 1998 $ 676,552 $ 600,300 $325,000 $ 687,969 220,000 $42,333
and President, Global
Pharmaceutical
Operations(1)(5)
C. J. Coughlin, 1999 $ 656,250 $ 574,140 $ 4,591 0 100,000 $29,037
Executive Vice President 1998 $ 520,833 $ 464,750 0 $ 996,290 170,000 $20,833
and Chief Financial
Officer(6)
C. Smith Cox, 1999 $ 491,310 $ 465,870 $ 17,032 0 100,000 $17,808
Executive Vice President 1998 $ 463,500 $ 371,415 $ 79,846 0 75,000 $11,667
and Head, Global Business 1997 $ 155,172 $ 150,000 $ 26,934 0 150,000 0
Management(1)(7)
</TABLE>
- ----------
(1) Includes, among other things, relocation allowance and moving expenses,
amounts for reimbursement of taxes and related gross-ups for income taxes in
excess of those that would have been incurred in the individual's home
country, value of a Company car, and, in the case of T. G. Rothwell, a cash
bonus to compensate for the loss of bonus from his prior employer. In
addition, at the request of the Company for business reasons, F. Hassan
remained in his home country's social security system while he was employed
in the U.K., and the Company paid the resulting taxes of $353,484 on his
behalf.
(2) All other compensation represents the Company match under the Company's
employee savings plans and the premiums paid by the Company for split-dollar
life insurance for the benefit of the named individual.
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<PAGE> 67
(3) F. Hassan commenced employment on May 10, 1997. Under the terms of his
employment agreement, in order to replace equity compensation awards
received from his prior employer that he forfeited by joining the Company,
he received 315,000 restricted shares of the Company's Common Stock, which
are included in the table in accordance with the rules of the United States
Securities and Exchange Commission at the fair market value on date of
grant. All of these shares vested in 1998.
(4) Under the terms of F. Hassan's employment agreement dated November 15,
1999, he received 200,000 restricted shares of the Company's Common Stock
in 1999, which are included in the table at the fair market value on date
of grant and which will vest on the first day of the month following
retirement provided such date is not prior to December 1, 2004. At
year-end, the market value of the 200,000 unvested shares was $9,087,500.
Dividends are paid on the restricted shares.
(5) T.G. Rothwell commenced employment on January 23, 1998. Under the terms of
his employment agreement, in order to replace equity compensation awards
lost from his prior employer, he received 18,500 restricted shares of the
Company's Common Stock in 1998, which are included in the table at the fair
market value on date of grant, 11,200 of which have already vested and 7,300
of which will vest on January 8, 2006. At year-end, the market value of the
7,300 unvested shares was $331,694. Dividends are paid on the restricted
shares.
(6) C.J. Coughlin commenced employment on March 1, 1998. Under the terms of his
employment agreement, in order to replace equity compensation awards lost
from his prior employer, he received 25,000 restricted shares of the
Company's Common Stock in 1998, which are included in the table at the fair
market value on date of grant and which will vest on the third anniversary
of his employment date. At year-end, these shares had a market value of
$1,135,938. Dividends are paid on the restricted shares.
(7) C. Smith Cox commenced employment on August 27, 1997.
STOCK OPTION GRANTS
During 1999, the following officers were granted stock options to purchase
shares of the Company's Common Stock at an exercise price equal to the market
price on date of grant. Stock options provide value to the officers in
proportion to the value provided to all shareholders based on appreciation in
the Company's stock price. Options will vest and can be exercised at the rate of
one-third of the grant after each of the first three years of employment from
the date of grant. Payment for exercising stock options may be made in either
cash or shares of the Company's Common Stock. Upon a stock-for-stock exercise,
the optionee will receive a new, non-qualified reloaded stock option at the then
current market price for the number of shares tendered to exercise the option.
The reloaded stock option will have an exercise term equal to the remaining term
of the exercised option. Options granted in 1999 may only be exercised during
employment, except that following retirement at or after age 65, death,
permanent disability or other termination of employment approved by the
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<PAGE> 68
Compensation Committee of the Board, stock options may be exercised for
periods specified in the option grant up to three years (but not beyond the
original expiration date of the option).
ORIGINAL STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE OR DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR ($/SH) DATE VALUE(1)
---- ------- ----------- ------ ---- --------
<S> <C> <C> <C> <C> <C>
F. Hassan..... 400,000 4.18% $54.625 2/16/09 $6,172,000
G. A. Ando.... 100,000 1.05% $54.625 2/16/09 $1,543,000
T. G. Rothwell(2) 100,000 1.05% $54.625 2/16/09 $1,543,000
C. J. Coughlin 100,000 1.05% $54.625 2/16/09 $1,543,000
C. Smith Cox.. 100,000 1.05% $54.625 2/16/09 $1,543,000
</TABLE>
- ----------
(1) In accordance with the rules of the United States Securities and Exchange
Commission, the Black-Scholes option pricing model was chosen to estimate
the grant date present value of the options set forth in this table. The
Company cannot predict or estimate the future price of the Company's Common
Stock, and neither the Black-Scholes model nor any other model can
accurately determine the value of an option. Accordingly, there is no
assurance that the value realized by an officer, if any, will be at or near
the value estimated in the Black-Scholes model. The Black-Scholes valuation
was determined using the following assumptions: an average volatility of
24.8%, a dividend yield of 1.98%, a risk-free interest rate of 6.64%, a
projected exercise period of 5.0 years and no additional value for reloaded
stock options.
(2) T.G. Rothwell made a stock for stock option exercise in 1999 and received
reloaded stock options for the number of shares tendered in the exercise as
follows: 653 shares with an exercise price of $51.00 and an expiration date
of January 25, 2008.
STOCK OPTION EXERCISES
The following table shows the number of stock options exercised and the
value realized by the named officers during 1999 and the number of unexercised
stock options remaining at year-end and the potential value thereof based on the
year-end closing market price of the Company's Common Stock of $45.4375:
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FY-END(#) FY-END($)
SHARES ------------------------------------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
F. Hassan..... 0 0 433,335/766,665 $ 5,021,009/$3,321,991
G. A. Ando.... 0 0 33,334/316,666 $ 180,337/$ 1,172,163
T. G. Rothwell 40,001 $850,641 33,334/245,529 $ 180,337/$ 1,001,203
C. J. Coughlin 0 0 56,667/213,333 $ 320,735/$ 641,464
C. Smith Cox.. 0 0 125,002/199,998 $ 1,229,266/$ 817,484
</TABLE>
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<PAGE> 69
RETIREMENT BENEFITS
The Company's executive officers participate in the Global Officer Pension
Plan, which supplements the officer's other sources of retirement income to
provide the officer with the actuarial value of an annual life annuity of 65% of
the officer's final three-year average annual salary and cash bonus compensation
prior to retirement from the Company, provided the officer retires at age 65
with at least ten years of service under the Plan. Appropriate adjustments will
be made if the officer has less than ten years of service under the Plan or
retires before age 65. The Global Officer Pension Plan provides that in no event
will the retirement benefit be less than what the officer would have received
had he remained in his home country pension plan for the duration of his
employment with the Company.
Because the Global Officer Pension Plan does not determine benefits solely
by final average compensation and years of service but uses variable accrual
rates to provide the 65% of final average compensation benefit at age 65 after
ten years of service, the benefits under the Plan cannot be illustrated by a
graduated table. However, the following table illustrates the estimated annual
benefits that would be payable under the Company's Global Officer Pension Plan
(before deductions for social security or other governmental retirement income
and before deduction of any other sources of retirement income from the Company,
its predecessors and any prior employers) at year-end and at age 65:
GLOBAL OFFICER PENSION PLAN TABLE (1)
<TABLE>
<CAPTION>
AGE AT ANNUAL BENEFIT AT ANNUAL BENEFIT
DECEMBER 31, 1999 DECEMBER 31, 1999(2)($) AT AGE 65 (3)($)
----------------- ----------------------- ----------------
<S> <C> <C> <C>
F. Hassan..... 54 239,000 1,560,000
G. A. Ando.... 50 221,000 769,000
T. G. Rothwell 48 74,000 860,000
C. J. Coughlin 47 55,000 725,000
C. Smith Cox.. 42 41,000 543,000
</TABLE>
- ----------
(1) For purposes of this table, the individual's final average compensation
under the Plan for both December 31, 1999 and at age 65 is deemed to be the
individual's annualized base salary and targeted incentive compensation at
year-end, which was $2,400,000 for F. Hassan, $1,182,741 for G.A. Ando,
$1,323,000 for T.G. Rothwell, $1,115,625 for C.J. Coughlin, and $835,227
for C. Smith Cox.
(2) Amount payable if individual had terminated employment on such date and
commenced benefits upon reaching age 55.
(3) Amount payable if individual were to continue employment at current
compensation until age 65 and commence benefits upon reaching age 65.
EMPLOYMENT AGREEMENTS AND TERMINATION
AND CHANGE-IN-CONTROL ARRANGEMENTS
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<PAGE> 70
All of the executive officers named in the Summary Compensation Table
(except Mr. Hassan) have employment agreements with the Company providing for
the payment of severance pay equal to twice the officer's annualized cash
compensation (whether or not deferred) and continuation of employee benefits for
up to two years in the event such officer's employment is terminated by the
Company other than for "cause" or by the employee with "good reason" as such
terms are defined in the agreements. Mr. Hassan's employment agreement provides
for the payment of severance pay equal to three times annualized cash
compensation under the circumstances described above, and also provides for
immediate vesting of all stock options in the case of involuntary termination
and for payment of a pension equal to the greater of (i) the amount he would
have received if he had remained employed with his prior employer until he
retires and if his compensation had been the same as that received from the
Company; or (ii) the amount determined under the Company's Global Officer
Pension Plan, offset in either case by any pension benefits actually received
from his prior employer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SHARES OF COMMON STOCK BENEFICIALLY OWNED BY HOLDERS OF FIVE PERCENT OR MORE
Under regulations of the United States Securities and Exchange Commission,
persons who have power to vote or dispose of shares of the Company, either alone
or jointly with others, are deemed to be beneficial owners of such shares.
Set forth in the following table is the beneficial ownership of the holders
of 5% or more of the Company's Common Stock as of December 31, 1999, based on
Schedule 13G filings reported to the Securities and Exchange Commission:
SHARES OF COMMON STOCK BENEFICIALLY OWNED(1)
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP % OF CLASS
------------------- -------------------- ----------
<S> <C> <C>
Wellington Management Company... 40,589,092 7.8%
75 State Street
Boston, Massachusetts 02109 USA
</TABLE>
- ----------
(1) As of December 31, 1998, 35,766,282 shares of the Company's Common Stock,
representing 7% of the class, were held by the Ministry of Industry and
Commerce of the Kingdom of Sweden through Forvaltningsaktiebolaget Stattum,
Fredsgatan 8, S-103 33, Stockholm, Sweden. These shares were sold to the
public in January 1999.
SHARES OF COMMON STOCK BENEFICIALLY OWNED BY DIRECTORS AND EXECUTIVE OFFICERS
Set forth in the following table are the beneficial ownership of the
Company's Common Stock (either as Common Stock or in the form of Swedish
Depositary Shares) as of the close of business on February 17, 2000 of
individual directors and the Company's officers set forth in the Summary
Compensation Table included in this proxy statement, and all such directors and
officers as a group.
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<PAGE> 71
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED
----------------------------------------------------------------
SHARED
TOTAL SOLE VOTING VOTING OPTIONS
AMOUNT OF AND/OR AND/OR EXERCISABLE
BENEFICIAL DISPOSITIVE DISPOSITIVE WITHIN 60 % OF
OWNERSHIP POWER POWER DAYS CLASS
--------- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Goran A. Ando(1)......................... 370,824 20,824 350,000 *
Frank C. Carlucci(2)..................... 27,992 24,992 3,000 *
Christopher J. Coughlin(1)............... 320,251 25,251 295,000 *
Gustaf Douglas........................... 204,917 1,917 200,000 3,000 *
M. Kathryn Eickhoff(2)................... 9,631 6,631 3,000 *
Soren Gyll............................... 10,827 7,827 3,000 *
Fred Hassan(1)........................... 1,753,457 553,457 1,200,000 *
Berthold Lindqvist....................... 4,917 1,917 3,000 *
Olof Lund................................ 5,292 2,292 3,000 *
C. Steven McMillan....................... 5,000 5,000 -- *
William U. Parfet(1)(2)(3)(4)............ 1,321,625 569,089 749,536 3,000 *
Ulla Reinius............................. 4,917 1,917 3,000 *
Timothy G. Rothwell(1)................... 296,377 15,725 280,652 *
Bengt Samuelsson......................... 5,667 2,667 3,000 *
Carrie Smith Cox(1)...................... 326,493 1,493 325,000 *
Morton Topfer............................ 4,680 4,680 -- --
Directors and all Executive Officers
as a Group (19 persons)(1)(2)(3)(4)(5). 5,240,865 1,255,530 949,536 3,035,799 *
</TABLE>
- ----------
* Approximately 1%
(1) Includes the following number of shares or share equivalents credited under
the Company's Employee Savings Plan with respect to which the individual
has sole voting power: G.A. Ando, 607; C.J. Coughlin, 251; F. Hassan, 326;
W.U. Parfet, 6,832; T.G. Rothwell, 498; C. Smith Cox, 178; and directors
and all executive officers as a group, 9,388.
(2) Includes the following number of shares representing deferred directors'
fees payable in stock which are held in trust with respect to which the
individual has shared voting power: F.C. Carlucci, 24,015; M.K. Eickhoff,
2,789; and W.U. Parfet, 419.
(3) Excludes the following share units which were awarded under the Company's
prior Incentive Compensation Plans but payment of which is deferred: W.U.
Parfet, 322; and directors and all executive officers as a group, 322.
(4) Includes shares held in trust over which voting and/or dispositive power is
shared in his capacity as trustee under various trusts.
(5) Excludes 100 shares held by the spouses of directors and all executive
officers as a group.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors to file reports of ownership and changes in ownership of
the Company's stock with the Securities and Exchange Commission and the New York
Stock Exchange. The Company believes that all required reports were timely filed
by its officers and directors during 1999 except that Hakan Astrom, an officer,
filed one late report.
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<PAGE> 72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is set forth under the caption "Directors and
Executive Officers of the Registrant".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents filed as a part of this report. See Item 8
"Financial Statements and Supplementary Data"
(a)1. FINANCIAL STATEMENTS
Report of Independent Accountants - PricewaterhouseCoopers LLP
Consolidated Statements of Earnings, Years ended December 31,
1999, 1998 and 1997.
Consolidated Balance Sheets, December 31, 1999 and 1998.
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows, Years ended December
31, 1999, 1998 and 1997.
Note 7. Earnings Per Common Share, Years ended December 31,
1999, 1998 and 1997.
Note 21. Segment and Geographic Information, Years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(a)2. FINANCIAL STATEMENT SCHEDULES
NOTES:
(1) Schedules are omitted because they are either not required,
are not applicable or because equivalent information has been
included in the financial statements, the notes thereto or
elsewhere herein.
(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
(2) AGREEMENT AND PLAN OF MERGER DATED AS OF DECEMBER 19,
1999 AMONG MONSANTO COMPANY, MP SUB, INCORPORATED AND
PHARMACIA & UPJOHN, INC., AS AMENDED AS OF FEBRUARY
18, 2000 (INCORPORATED BY REFERENCE TO
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<PAGE> 73
THE REGISTRANT'S JOINT PROXY STATEMENT/PROSPECTUS
DATED FEBRUARY 22, 2000.
(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 (incorporated by
referenced to Exhibit (3)(ii) to the registrant's
Form 10-K for the year ending December 31, 1998).
(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).
(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) Form of Employment Agreement with original
executive officers of Registrant, including G.A.
Ando, H. Astrom, and M. Pettersson, 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)(c) Employment Agreement with Fred Hassan dated
November 15, 1999.
-70-
<PAGE> 74
(10)(d) Employment Agreement with Richard T. Collier
(incorporated by reference to Exhibit (10)(h) to
the Registrant's Form 10-K for the year ending
December 31, 1997).
(10)(e) Employment Agreement with Timothy G. Rothwell
(incorporated by reference to Exhibit (10)(i) to
the Registrant's Form 10-K for the year ending
December 31, 1997).
(10)(f) Employment Agreement with Christopher J. Coughlin
dated February 10, 1998 (incorporated by referenced
to Exhibit (10)(f) to the Registrant's Form 10-K
for the year ending December 31, 1998).
(10)(g) Employment Agreement with Carrie Smith Cox dated
August 26, 1997 (incorporated by referenced to
Exhibit (10)(g) to the Registrant's Form 10-K for
the year ending December 31, 1998).
(10)(h) Employment Agreement with Paul L. Matson dated
February 17, 1998 (incorporated by referenced to
Exhibit (10)(h) to the Registrant's Form 10-K for
the year ending December 31, 1998).
(10)(i) Employment Agreement with Steven MacMillan dated
November 18, 1999.,
(10)(j) 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)(k) 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.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(b) REPORTS ON FORM 8-K
Report on Form 8-K dated December 29, 1999 was filed pursuant
to Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits).
Report on Form 8-K dated December 22, 1999 was filed pursuant
to Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits).
Report on Form 8-K dated December 20, 1999 was filed pursuant
to Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits).
-71-
<PAGE> 75
-72-
<PAGE> 76
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 March 17, 2000
- ----------------------------------
Soren Gyll
/s/ Fred Hassan President and Chief Executive Officer and March 17, 2000
- ---------------------------------- Director
Fred Hassan
/s/ Christopher J. Coughlin Executive Vice President (Chief Financial March 17, 2000
- ---------------------------------- Officer)
Christopher J. Coughlin
/s/ Robert G. Thompson Senior Vice President (Chief Accounting March 17, 2000
- ---------------------------------- Officer)
Robert G. Thompson
/s/ Frank C. Carlucci Director March 17, 2000
- ----------------------------------
Frank C. Carlucci
/s/ Gustaf Douglas Director March 17, 2000
- ----------------------------------
Gustaf Douglas
/s/ M. Kathryn Eickhoff Director March 17, 2000
- ----------------------------------
M. Kathryn Eickhoff
/s/ Berthold Lindqvist Director March 17, 2000
- ----------------------------------
Berthold Lindqvist
/s/ Olof Lund Director March 17, 2000
- ----------------------------------
Olof Lund
/s/ C. Steven McMillan Director March 17, 2000
- ----------------------------------
C. Steven McMillan
/s/ William U. Parfet Director March 17, 2000
- ----------------------------------
William U. Parfet
</TABLE>
-73-
<PAGE> 77
<TABLE>
<S> <C> <C>
Director March __, 2000
- ----------------------------------
Ulla Reinius
Director March __, 2000
- ----------------------------------
Bengt Samuelsson
Director March __, 2000
- ----------------------------------
Morton Topfer
</TABLE>
-74-
<PAGE> 1
Exhibit 10(c)
November 15, 1999
Mr. Fred Hassan
Pharmacia & Upjohn
100 Route 206 North
Peapack, NJ 07977
Dear Fred:
As Chairman of the Compensation Committee and on behalf of the Company's Board
of Directors (the "Board"), I am pleased to confirm the terms for your continued
employment as President and Chief Executive Officer of Pharmacia & Upjohn, Inc.
("the Company") as follows:
1. This Agreement will be in effect from the date you sign this Agreement until
November 30, 2004, and thereafter until terminated upon six months' prior
written notice by either party.
2. During the term of this Agreement, you will serve as President and Chief
Executive Officer of the Company. You will also serve as a member of the Board
of Directors and on the Board's Executive Committee. As President and Chief
Executive Officer, you will report directly to the Board and will be responsible
for the general management of the affairs of the Company in accordance with
customary practices for chief executive officers of comparable companies. 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 Board) and boards of trade associations or charitable
organizations; (ii) engaging in charitable activities and community affairs; and
(iii) managing your personal investments and affairs provided that such
activities do not materially interfere with your duties and responsibilities
hereunder.
3. Your annual base salary will be $1,200,000, subject to annual review for
increases and approval by the Compensation Committee of the Board based on your
position, job performance
<PAGE> 2
Mr. Fred Hassan
November 15, 1999
Page 2
and Company policy, as well as consideration of comparable compensation paid by
other major global pharmaceutical companies.
4. You will be entitled to participate in the Company's Annual Incentive Plan,
the Company's equity compensation plan(s) and any other compensation plans
offered to senior executive officers of the Company at a level determined by the
Compensation Committee of the Board to be appropriate based on your position,
job performance and Company policy, as well as consideration of comparable
compensation paid by other major global pharmaceutical companies. Your annual
stock option grant under the Company's Long-Term Incentive Plan (the "Plan")
will be not less than 250,000 shares of the Company's Common Stock, provided,
however, that this amount shall not imply a target for any such stock option
grant.
For the year 2000: (1) your target incentive award under the Company's Annual
Incentive Plan will be 100% of your annual base salary, and will be payable in
accordance with the terms of that plan; (2) your annual stock option grant under
the Plan will be 350,000 shares of the Company's Common Stock and will be made
at the same time as stock options are granted to other executive officers and
will be in accordance with the terms of the Plan; and (3) you will receive a
special stock option grant under the Plan on January 3, 2000, for 150,000 shares
of the Company's Common Stock at an exercise price equal to the Fair Market
Value (as defined in the Plan) of the Company's Common Stock on the date of
grant, which will vest in accordance with the schedule set forth below if the
average closing price of the Company's Common Stock on the New York Stock
Exchange for any 90-day period during your employment reaches the indicated
price:
<TABLE>
<CAPTION>
LEVEL CUMULATIVE NUMBER OF SHARES VESTED AVERAGE 90-DAY PRICE
----- ---------------------------------- --------------------
<S> <C> <C>
Level 1 30,000 Grant date price plus 15%
Level 2 60,000 Level 1 price plus 15%
Level 3 90,000 Level 2 price plus 15%
Level 4 120,000 Level 3 price plus 15%
Level 5 150,000 Level 4 price plus 15%
</TABLE>
<PAGE> 3
Mr. Fred Hassan
November 15, 1999
Page 3
Stock options will vest immediately upon your death or disability, a Change in
Control of the Company (as defined in the Plan), your involuntary termination of
employment other than for Cause (as defined below), or your termination of
employment for Good Reason (as defined below), provided you do not enter into
Competition (as defined below) with the Company within two years after your
employment is terminated.
5. You will receive, on the day following your acceptance of this Agreement, a
grant under the Plan of 200,000 restricted shares of the Company's Common Stock,
provided, however, that notwithstanding any provisions in the Plan, in
consideration of the grant of such restricted shares, you and the Company agree
to irrevocably waive the provision of the Plan providing that such restricted
stock shall be earned in the event of a Change in Control of the Company. You
shall receive all dividends paid on such restricted stock. Such restricted stock
will vest either (i) on the first day of the month following your retirement
provided such date is not prior to December 1, 2004, (ii) on the date your
employment with the Company is terminated on account of your death or disability
or is involuntarily terminated by the Company other than for Cause or you
terminate your employment for Good Reason (within six months after the event
constituting Good Reason), or (iii) on such other date before December 1, 2004,
as the Board may elect in its sole discretion. If prior to December 1, 2004,
your employment is involuntarily terminated by the Company for Cause or you
voluntarily terminate your employment other than for Good Reason (within six
months after the event constituting Good Reason), you will forfeit such
restricted stock unless otherwise elected by the Board in its sole discretion.
However, you will not be required to repay any dividends previously received on
such restricted stock.
6. You will receive employee benefits and perquisites at least as favorable as
those provided to other similarly situated senior executive officers of the
Company, including, without limitation, if offered to such other senior
executives, pension, profit-sharing, savings, deferred compensation and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability, life insurance, accidental death, travel accident,
vacation and any other benefit programs or plans that may be sponsored by the
Company, including any plans that supplement the above-
<PAGE> 4
Mr. Fred Hassan
November 15, 1999
Page 4
listed plans, whether funded or unfunded. You shall be entitled to
post-retirement welfare benefits as are currently made available by the Company
to its senior executive officers, provided that for this purpose your period of
employment shall be deemed to be the period necessary to obtain the maximum
level of such benefits. In the event that adverse tax consequences may result if
medical benefits are provided to you directly, the Company will pay you the
amount necessary to purchase the coverage, adjusted for taxes, on an after-tax
basis.
7. In the event that prior to November 30, 2004, or such later date prior to the
expiration of the term of this Agreement, your employment is involuntarily
terminated by the Company other than for Cause or you terminate your employment
for Good Reason (within six months after your learning of the event constituting
Good Reason), provided (i) you do not enter into Competition (as defined below)
with the Company for a period of two years following the termination of your
employment, and (ii) you execute, and do not revoke, a written release
substantially in the form attached hereto, although the Company reserves the
right to make any changes required to make the release fully effective under the
then applicable law, then, as liquidated damages and in lieu of any other
damages or compensation under this Agreement or otherwise:
(i) you shall receive a lump sum severance payment, payable
within 60 days after termination of your employment, equal to three years' base
salary and annual target incentive compensation (calculated using the amount of
your highest annual base salary and highest annual target incentive compensation
received by you within three years prior to your date of termination);
(ii) you shall have your period of employment service used to
calculate retirement and other employee benefits extended as if you had worked
until November 30, 2004 (or such later date when the term of this Agreement
expires), and the compensation used to calculate your retirement benefits will
be determined as if you had continued to receive until November 30, 2004 (or
such later date when the term of this Agreement expires) salary and incentive
compensation equal to the highest annual base salary and highest annual target
incentive compensation you received within three years prior to your date of
termination (such amounts to be payable from a non-qualified, supplemental
retirement plan);
<PAGE> 5
Mr. Fred Hassan
November 15, 1999
Page 5
(iii) you will be entitled to exercise, in accordance with
their terms, any remaining stock options that had been granted prior to your
termination (all of which will become vested under such circumstances) for the
maximum period permitted under the terms of the Plan;
(iv) the restrictions shall lapse on any remaining restricted
shares granted to you pursuant to paragraph 5 of this Agreement that are not yet
vested;
(v) you will receive a pro-rata annual incentive compensation
award in or around 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;
(vi) you and your dependents shall continue to participate
(with the same level of coverage) for three years in all medical, dental,
hospitalization, accident, disability, life insurance and any other benefit
plans of the Company on the same terms as in effect immediately prior to your
termination unless changed for senior executives generally; provided, however,
that such benefits will be offset to the extent that you or your dependents
receive benefits from another source; and, provided that in the event adverse
tax consequences may result if medical benefits are provided to you directly,
the Company will pay you the amount necessary to purchase the coverage, adjusted
for taxes, on an after-tax basis.
(vii) you shall be entitled to outplacement services, at the
expense of the Company, from a provider selected by you, subject to a maximum
expense of $100,000; and
(viii) you shall receive any other amounts earned, accrued or
owing to you under the plans and programs of the Company.
8. (i) In the event of a Change in Control (as currently defined in the Plan
without regard to any future amendment) of the Company occurring prior to June
1, 2000, your employment with the Company is involuntarily terminated other than
for Cause or you terminate your employment for Good Reason, either within one
year following such Change in Control or within one year preceding a Change in
Control if such termination is in contemplation of the Change in Control, the
Company will assure you that the 500,000 stock options granted under
<PAGE> 6
Mr. Fred Hassan
November 15, 1999
Page 6
paragraph 4 of your initial employment agreement dated May 7, 1997 (even if
previously exercised or if not yet exercisable)("Initial Stock Options") will
have a before-tax value of at least $15 million on the date of such Change in
Control. If they do not have that value, then the Company will pay you, within
sixty days after the date of your involuntary termination without Cause or the
date you terminate your employment for Good Reason, a lump sum cash payment in
an amount equal to the difference between $15 million and the spread between
exercise price and market price on the date of such Change in Control of the
Initial Stock Options.
(ii) In the event that any amount or benefits made or provided to you
above and under all other plans and programs of the Company (the "Covered
Payments") is determined to constitute a Parachute Payment, as such term is
defined in Section 280G(b)(2) of the Internal Revenue Code, the Company shall
pay to you, prior to the time any Internal Revenue Code Section 4999 excise tax
("Excise Tax") is payable with respect to any such Covered Payment, an
additional amount which is equal to the Excise Tax on the Covered Payment (the
"Initial Gross-Up"), plus the amount of income tax and Excise Tax payable by you
with respect to the Initial Gross-Up (the "Second Gross-Up"), the amount of
income tax and Excise Tax payable by you with respect to the Second Gross-Up
(the "Third Gross-Up"), the amount of income tax and Excise Tax payable by you
with respect to the Third Gross-Up (the "Fourth Gross-Up"), and the amount of
income tax and Excise Tax payable by you with respect to the Fourth Gross-Up.
The determination of whether the Covered Payment constitutes a Parachute Payment
and, if so, the amount to be paid to you and the time of payment pursuant to
this Section 8 shall be made by an independent auditor (the "Auditor") jointly
selected by the Company and you and paid by the Company. The Auditor shall be a
nationally recognized United States public accounting firm which has not, during
the two years preceding the date of its selection, acted in any way on behalf of
the Company or any of its subsidiaries. If you and the Company cannot agree on
the firm to serve as the Auditor, then you and the Company shall each select one
accounting firm and those two firms shall jointly select the accounting firm to
serve as the Auditor.
9. In the event that, prior to November 30, 2004 or such later date when the
term of this Agreement expires, your employment is (a) involuntarily terminated
by the Company for Cause, or
<PAGE> 7
Mr. Fred Hassan
November 15, 1999
Page 7
(b) you voluntarily terminate your employment other than (x) for Good Reason
(within six months after the event constituting Good Reason) or (y) due to
permanent disability:
(i) you will forfeit your right to receive any salary,
incentive compensation, severance pay, restricted stock, or other compensation
that has not been fully earned at the time your employment terminates, provided,
however, you will be entitled to receive any benefits or amounts accrued but not
yet paid as of the date of termination;
(ii) you will not be able to exercise any remaining
unexercised stock options, all of which shall be cancelled upon such termination
of your employment; and
(iii) you shall receive any other amounts earned, accrued or
owing to you under the plans and programs of the Company.
10. (a) If your employment with the Company is terminated (i) at the expiration
of this Agreement, or (ii) on account of disability, the Company will pay you
the greater of (I) the amount of (A) qualified and non-qualified retirement
income you would have been entitled to receive under the American Home Products
Corporation ("AHP") retirement benefit formula in effect at the time you left
AHP if you had remained employed by AHP until the later of (x) your attainment
of age 55, or (y) the date your employment with the Company terminates, and if
AHP had paid you the same compensation as you received from the Company, less
(B) the amount of any qualified or non-qualified retirement income you are
actually entitled to receive from AHP; or (II) the amount of retirement income
you would be entitled to receive under the Company's Global Officer Pension Plan
(or any other retirement plan hereafter provided by the Company for its senior
executive officers) using your actual years of service and compensation with the
Company and a straight line accrual rate from the date your employment with the
Company commenced until age 60 to provide a retirement benefit at age 60 equal
to 60% of the highest annual base salary and highest annual target incentive
compensation you received within the three prior years ("Highest Annual Total
Compensation") and an annual 1% accrual rate from age 60 to age 65 to provide a
retirement benefit at age 65 equal to 65% of your Highest Annual Total
Compensation, which will be your maximum retirement benefit under the plan.
<PAGE> 8
Mr. Fred Hassan
November 15, 1999
Page 8
(b) If prior to November 30, 2004, or such later date prior to the
expiration of the term of this Agreement, your employment is involuntarily
terminated by the Company other than for Cause or you terminate your employment
for Good Reason (within six months after your learning of the event constituting
Good Reason), the Company will pay you the greater of (i) the amount of (A)
qualified and non-qualified retirement income you would have been entitled to
receive under the AHP retirement benefit formula in effect at the time you left
AHP if you had remained employed by AHP until the later of (x) your attainment
of age 55, or (y) the date your employment with the Company terminates and if
AHP had paid you the same compensation as you received from the Company, less
(B) the amount of any qualified or non-qualified retirement income you are
actually entitled to receive from AHP; or (ii) the amount of retirement income
you would be entitled to receive under the Company's Global Officer Pension Plan
(or any other retirement plan hereafter provided by the Company for its senior
executive officers) computed using as your period of service the number of years
that you would have been employed by the Company had you remained employed by
the Company until November 30, 2004 (or such later date when the term of this
Agreement expires) and a straight line accrual rate from the date your
employment with the Company commenced until age 60 to provide a retirement
benefit at age 60 equal to 60% of your Highest Annual Total Compensation and an
annual 1% accrual rate from age 60 to age 65 to provide a retirement benefit at
age 65 equal to 65% of your Highest Annual Total Compensation, which will be
your maximum retirement benefit under the plan.
(c) If you voluntarily terminate your employment with the Company other
than for Good Reason (within six months of the event constituting Good Reason),
or if the Company terminates your employment for Cause, the Company will pay you
the greater of (i) the amount of (A) qualified and non-qualified retirement
income you would have been entitled to receive under the AHP retirement benefit
formula in effect at the time you left AHP if you had remained employed by AHP
until the date your employment with the Company terminates and if your
compensation in effect at the time you left AHP had increased at a 5% compounded
rate annually, less (B) the amount of any qualified or non-qualified retirement
income you are actually entitled to receive from AHP; or (ii) the amount of
retirement income you are entitled to receive under the Company's Global Officer
Pension Plan (or any other retirement plan hereafter provided by the
<PAGE> 9
Mr. Fred Hassan
November 15, 1999
Page 9
Company for its senior executive officers) using your actual years of service
and Highest Annual Total Compensation.
(d) The Company's Global Officer Pension Plan is not qualified under
the U.S. Internal Revenue Code. All references to the Global Officer Pension
Plan refer to provisions as they exist on the date of this Agreement.
Modification to the Global Officer Pension Plan may increase your entitlements,
but shall not be used to reduce or eliminate any entitlements. Your entitlement
to pension benefits remain contractual rights under this Agreement and exist
independently from the Global Officer Pension Plan. The benefits payable under
the Company's Global Officer Pension Plan will be offset for any retirement
income from social security or other governmental programs and for any
retirement income from any prior employers, that you may be entitled to receive.
(e) If you die while employed by the Company or thereafter under
circumstances in which (i) a spousal survivor's benefit would have been payable
under the AHP retirement plans had you continued employment with AHP, and/or
(ii) a spousal survivor's benefit becomes payable under the Company's Global
Officer Pension Plan or any other retirement plans of the Company under which
you are covered, then the benefit payable by the Company to your surviving
spouse shall be the greater of (i) the amount which would have been payable as a
spousal survivor's benefit under the AHP retirement plans had you continued
employment with your AHP, or (ii) the amount payable as a spousal survivor's
benefit under the Global Officer Pension Plan or any other retirement plans of
the Company, with each such amount being calculated in accordance with the
assumptions described in and offsets corresponding to those provided for in this
paragraph 10, whichever is applicable to the circumstances of the termination of
your employment with the Company.
(f) For the purpose of the foregoing calculations, alternative forms of
benefits will be made actuarially equivalent using the actuarial assumptions
then applied to all senior executive officers under the Company's Global Officer
Pension Plan (or any successor plan).
(g) Upon termination of your employment, the Company shall fund that
portion, if any, of the pension obligation that is then unfunded by establishing
a trust. Such trust shall be in a form that provides you with the most favorable
tax position that reasonably can be determined at the time it is established and
funded. The formation of such trust or funding thereof shall not cause the
<PAGE> 10
Mr. Fred Hassan
November 15, 1999
Page 10
pension obligation, it if is deemed to be a plan under ERISA, to lose its status
as a "top hat plan" thereunder. The trust shall provide for distribution of
amounts to you in order to pay taxes, if any, that become due prior to payment
of pension amounts pursuant to the trust. The amount of such fund shall equal
the then present value of the pension due as determined by a nationally
recognized firm qualified to provide actuarial services which has not rendered
services to the Company during the two years preceding such determination. The
establishment and funding of such trust shall not affect the obligation of the
Company to provide the pension hereunder.
11. In the event you should terminate employment due to disability prior to
November 30, 2004, you will be entitled to benefits in accordance with the
Company's disability program, provided, however, that notwithstanding any other
levels that may be provided under such program, you shall receive salary
continuation at the rate of at least 100% of base salary for three months, 75%
of base salary for the next three months, and 60% of base salary until age 65
and you shall receive any other amounts earned, accrued or owing to you under
the plans and programs of the Company.
12. In the event you should die while still employed by the Company prior to
November 30, 2004, your spouse or other beneficiary shall receive a lump sum
payment equal to three years' base salary offset by any death benefits payable
under the Company's life insurance plans under which you are covered and any
other amounts earned, accrued or owing to you under the plans and programs of
the Company.
13. 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. The Company
shall pay your reasonable expenses for legal counsel and financial advice in
connection with the negotiation and documentation of this Agreement. In an
effort to make best use of your time and to insure your safety and security for
the benefit of the Company, you will be provided with use of the Company's
aircraft and a chauffeured automobile. You will receive annual assistance from
an independent accounting firm selected by
<PAGE> 11
Mr. Fred Hassan
November 15, 1999
Page 11
the Company but acceptable to you, at Company expense, for financial planning,
including preparation of your income tax returns.
14. To the fullest extent permitted by applicable law, all intellectual property
(including patents, trademarks, copyrights and trade secrets) 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.
15. 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, that 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.
16. Without the written consent of the Board, you agree that during the period
of your employment with the Company and for a period of two years following the
termination of your employment, you will not enter into Competition with the
Company. "Competition" as used in this Agreement means that you commence
employment with, or provide substantial consulting services to, any
pharmaceutical company (except companies where sales from pharmaceutical
products constitute less than 20% of total sales). Anything herein to the
contrary notwithstanding, your service solely as a member of the board of
directors of a company whose annual sales, for its last fiscal year prior to
your becoming a member of its board of directors, are less than $100 million
shall not be deemed to be Competition for purposes of this Agreement. For
purposes of the preceding sentence, if a company is a subsidiary of another
company, the sales of both companies shall be taken into account.
17. Without the written consent of the Board, you agree that during the period
of two years following the termination of your employment for any reason(s)
other than by the Company
<PAGE> 12
Mr. Fred Hassan
November 15, 1999
Page 12
without Cause or by you for Good Reason, you will not knowingly solicit or
encourage the solicitation of any person who was an elected officer of the
Company or a member of the Company's Operations Group (or its equivalent
successor) at any time during your employment with the Company by any employer
other than the Company for any position as an employee, independent contractor,
consultant or otherwise. This covenant will not preclude the solicitation of any
individual after 18 months have elapsed subsequent to the date on which such
individual's employment or engagement by the Company has terminated and will not
preclude your providing a standard reference for a Company employee if requested
to do so by a third party.
18. To the fullest extent permitted by applicable law, the Company will, during
and after termination of your employment, indemnify you (including providing
advancement of reasonable expenses) for any judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, incurred by you
in connection with the defense of any lawsuit or other claim to which you are
made, or threatened to be made, a party by reason of being or having been an
officer, director or employee of the Company or any of its subsidiaries or
affiliates. In addition, you will be covered under any directors and officers'
liability insurance policy for your acts (or non-acts) as an officer or director
of the Company or any of its subsidiaries or affiliates to the extent the
Company provides such coverage for its senior executive officers.
19. Any disputes arising under or in connection with this Agreement shall,
unless other arrangements are agreed upon in writing by you and the Company, be
resolved by binding arbitration to be held in New York, New York, in accordance
with the National Rules for the Resolution of Employment Disputes of the
American Arbitration Association. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction. Each party shall
bear his or its own costs of the arbitration or litigation, including (but not
by way of limitation) his or its attorneys' fees.
20. In the event of termination of your employment with the Company, you will
immediately, unless otherwise requested by the Board, resign from all
directorships, trusteeships, offices,
<PAGE> 13
Mr. Fred Hassan
November 15, 1999
Page 13
employment and any other positions held at that time with the Company or any of
its subsidiaries or affiliates.
21. 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. Furthermore, no termination by the
Company for Cause shall become effective without your being given a written
explanation of the basis for the termination and a hearing before the Board.
22. 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 (or such
successor to the Company following a Change in Control) fails to retain you as
President and Chief Executive Officer, (iii) there is a change in reporting so
that you no longer report to the Board, (iv) the Company fails to nominate you
for election to the Board, (v) the Board fails to elect you Chairman of the
Board by the date of the Annual Meeting of Shareholders in 2001, and at all
times subsequent thereto, provided, however, that this provision shall not apply
to a successor to the Company following a Change in Control unless the Chairman
of the Board of the successor company serves in an executive capacity, (vi)
there is a material diminution in your duties, or the assignment to you of
duties which are materially inconsistent with your duties or materially impair
your ability to function as the President and Chief Executive Officer of the
Company, (vii) the relocation of the Company's principal office, or your own
office location as assigned to you by the Company, to a location more than 75
miles from Peapack, New Jersey that has not been approved by you in advance; or
(viii) the failure of the Company to obtain the assumption in writing of its
obligation to perform this Agreement by any successor to all or
<PAGE> 14
Mr. Fred Hassan
November 15, 1999
Page 14
substantially all of the assets of the Company within 15 days after a merger,
consolidation, sale or similar transaction.
23. 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.
24. 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 shall make such substitution or adjustment, if any, as it
reasonably deems to be equitable to the number or kind of shares of Common Stock
provided for in this Agreement.
25. This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey, U.S.A.
26. (a) No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or pursuant to the sale or transfer of
all or substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company.
(b) This Agreement shall not be terminated by any merger,
consolidation, or transfer of assets referred to above. In the event of any such
merger, consolidation or transfer of assets, the
<PAGE> 15
Mr. Fred Hassan
November 15, 1999
Page 15
provisions of this Agreement shall be binding upon the surviving or resulting
corporation or the person or entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to above, it will cause any successor or
transferee unconditionally to assume, either contractually or as a matter of
law, the liabilities, obligations, and duties of the Company hereunder.
(d) This Agreement shall inure to the benefit of, and be enforceable by
or against, you or your personal or legal representatives, executors,
administrators, successors, heirs, distributees, designees and legatees. None of
your rights or obligations under this Agreement may be assigned or transferred
by you other than your rights to compensation and benefits, which may be
transferred only by will or operation of law. If you should die while any
amounts or benefits have been accrued by you but not yet paid as of the date of
your death and which would be payable to you hereunder had you continued to
live, all such amounts and benefits unless otherwise provided herein shall be
paid or provided in accordance with the terms of this Agreement to such person
or persons appointed in writing by you to receive such amounts or, if no such
person is so appointed, to your estate.
27. No provisions of this Agreement may be waived, modified or discharged unless
such waiver, modification or discharge is specifically 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.
28. 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
<PAGE> 16
Mr. Fred Hassan
November 15, 1999
Page 16
which is a reproduction of a genuine signature of that party shall be conclusive
evidence of execution of this Agreement by that party.
29. 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.
30. You acknowledge that you have been advised to review the terms of this
Agreement with an attorney of your choosing, and that you have had full
opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with your counsel, the reasonable expenses of which will be reimbursed
by the Company.
Very truly yours,
- ------------------------------
FRANK C. CARLUCCI
I accept the terms set forth in this letter and will serve in the capacity, for
the duration and under the conditions stated herein:
- ------------------------------
Fred Hassan
Date: November , 1999
<PAGE> 1
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings from continuing operations before income taxes $ 1,147 $ 977 $ 435 $ 818
Less: Equity in undistributed net income (loss) of companies
owned less than 50% 35 58 (32) 5
------- ------- ------- -------
$ 1,112 $ 919 $ 467 $ 813
Add: Amortization of previously capitalized interest 14 12 13 11
Fixed charges included in the above:
Interest and amortization of debt expense 85 50 59 83
Rental expense representative of an interest factor 19 28 38 37
------- ------- ------- -------
Earnings from continuing operations before income taxes
and fixed charges $ 1,230 $ 1,009 $ 577 $ 944
======= ======= ======= =======
Interest incurred and amortization of debt expense $ 103 $ 86 $ 91 $ 116
Rental expense representative of an interest factor 19 28 38 37
------- ------- ------- -------
Total fixed charges $ 122 $ 114 $ 129 $ 153
======= ======= ======= =======
Ratio of earnings to fixed charges 10.0 8.9 4.5 6.2
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------
1995
-------
<S> <C>
Earnings from continuing operations before income taxes $ 1,124
Less: Equity in undistributed net income (loss) of companies
owned less than 50% 7
-------
$ 1,117
Add: Amortization of previously capitalized interest 10
Fixed charges included in the above:
Interest and amortization of debt expense 121
Rental expense representative of an interest factor 35
-------
Earnings from continuing operations before income taxes
and fixed charges $ 1,283
=======
Interest incurred and amortization of debt expense $ 150
Rental expense representative of an interest factor 35
-------
Total fixed charges $ 185
=======
Ratio of earnings to fixed charges 6.9
=======
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
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, 1998:
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 Ltda. Brazil
Pharmacia & Upjohn Inc. Canada
Sino-Swed Pharmaceutical Corporation 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 Holdings BV Netherlands
Pharmacia & Upjohn International N.V. Netherlands
Pharmacia & Upjohn Financial Services B.V. Netherlands
Pharmacia & Upjohn AS Norway
Pharmacia & Upjohn, Inc. Philippines
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
P&UFSC Inc. (Foreign Sales Corporation) Virgin Islands
Pharmacia & Upjohn ABBV LLC Delaware
Pharmacia & Upjohn Company 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
Sugen, Inc. Delaware
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-82723) and on Form S-8 (Nos. 333-03109,
333-74783, 333-74785, 333-76657, 333-76659 and 333-86893) of Pharmacia &
Upjohn, Inc. of our report dated February 7, 2000, which appears in this Form
10-K. We also consent to the incorporation by reference of such report in the
Registration Statement on Form S-4 (No. 333-30824) of Monsanto Company.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,316
<SECURITIES> 0
<RECEIVABLES> 1,617
<ALLOWANCES> 104
<INVENTORY> 1,177
<CURRENT-ASSETS> 4,933
<PP&E> 5,716
<DEPRECIATION> 2,432
<TOTAL-ASSETS> 10,698
<CURRENT-LIABILITIES> 3,440
<BONDS> 142<F1>
0
270
<COMMON> 5
<OTHER-SE> 5,310
<TOTAL-LIABILITY-AND-EQUITY> 10,698
<SALES> 7,253
<TOTAL-REVENUES> 7,253
<CGS> 1,893
<TOTAL-COSTS> 1,893
<OTHER-EXPENSES> 1,434<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 1,147
<INCOME-TAX> 344
<INCOME-CONTINUING> 803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 803
<EPS-BASIC> 1.53
<EPS-DILUTED> 1.49
<FN>
<F1>Does not include guarantee of ESOP debt of $190.
<F2>Only includes R&D expense
</FN>
</TABLE>
