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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number 1-1225
September 30, 2004
Wyeth
-----
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
------ --
The number of shares of Common Stock outstanding as of the close of business on
October 29, 2004:
Number of
Class Shares Outstanding
Common Stock, $0.33-1/3 par value 1,334,195,705
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WYETH
INDEX
Page No.
--------
Part I - Financial Information (Unaudited) 2
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 2004 and December 31, 2003 3
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 30, 2004
and 2003 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 6
Notes to Consolidated Condensed Financial Statements 7-27
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28-51
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 52
Item 4. Controls and Procedures 52
Part II - Other Information 53
Item 1. Legal Proceedings 53-59
Item 6. Exhibits and Reports on Form 8-K 60
Signature 61
Exhibit Index EX-1
Items other than those listed above have been omitted because they are not
applicable.
1
Part I - Financial Information
------------------------------
WYETH
The consolidated condensed financial statements included herein have been
prepared by Wyeth (the Company), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, the consolidated
condensed financial statements reflect all adjustments, including those that are
normal and recurring, considered necessary to present fairly the financial
position of the Company as of September 30, 2004 and December 31, 2003, the
results of its operations for the three and nine months ended September 30, 2004
and 2003, and changes in stockholders' equity and cash flows for the nine months
ended September 30, 2004 and 2003. It is suggested that these consolidated
condensed financial statements and management's discussion and analysis of
financial condition and results of operations be read in conjunction with the
financial statements and the notes thereto included in the Company's 2003 Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q for the quarters ended March
31, 2004 and June 30, 2004 and information contained in Current Reports on Form
8-K filed since the filing of the 2003 Form 10-K.
We make available through our Company Internet website, free of charge, our
Company filings with the SEC as soon as reasonably practicable after we
electronically file them with, or furnish them to, the SEC. The reports we make
available include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, proxy statements, registration statements, and any
amendments to those documents. The Company's Internet website is www.wyeth.com.
2
WYETH
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
(Unaudited)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Cash and cash equivalents $4,501,937 $6,069,794
Marketable securities 1,604,109 1,110,297
Accounts receivable less allowances 2,841,429 2,529,613
Inventories:
Finished goods 739,187 821,637
Work in progress 1,312,081 1,141,916
Materials and supplies 333,980 448,631
------------- ------------
2,385,248 2,412,184
Other current assets including deferred taxes 2,721,901 2,840,354
------------- ------------
Total Current Assets 14,054,624 14,962,242
Property, plant and equipment 12,344,109 11,686,252
Less accumulated depreciation 3,373,320 3,025,201
------------- ------------
8,970,789 8,661,051
Goodwill 3,821,152 3,817,993
Other intangibles, net of accumulated amortization
(September 30, 2004-$156,818 and December 31, 2003-$128,137) 225,201 133,134
Other assets including deferred taxes 3,526,946 3,457,502
------------- ------------
Total Assets $30,598,712 $31,031,922
============= ============
LIABILITIES
Loans payable $336,205 $1,512,845
Trade accounts payable 815,211 1,010,749
Dividends payable 306,840 -
Accrued expenses 5,236,305 5,461,835
Accrued federal and foreign taxes 492,458 444,081
------------- ------------
Total Current Liabilities 7,187,019 8,429,510
Long-term debt 7,812,764 8,076,429
Accrued postretirement benefit obligations other than pensions 1,029,339 1,007,540
Other noncurrent liabilities 3,452,839 4,224,062
Contingencies and commitments (Note 7)
STOCKHOLDERS' EQUITY
$2.00 convertible preferred stock, par value $2.50 per share 41 42
Common stock, par value $0.33-1/3 per share 444,685 444,151
Additional paid-in capital 4,782,016 4,764,390
Retained earnings 5,883,159 4,112,285
Accumulated other comprehensive income (loss) 6,850 (26,487)
------------- ------------
Total Stockholders' Equity 11,116,751 9,294,381
------------- ------------
Total Liabilities and Stockholders' Equity $30,598,712 $31,031,922
============= ============
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2004 2003 2004 2003
---------- ---------- ----------- -----------
Net revenue $4,471,836 $4,081,609 $12,709,830 $11,517,222
---------- ---------- ----------- -----------
Cost of goods sold 1,162,664 1,126,356 3,390,613 3,074,555
Selling, general and administrative expenses 1,419,842 1,313,870 4,201,546 3,967,362
Research and development expenses 525,855 502,758 1,815,412 1,517,123
Interest expense, net 26,585 24,304 85,413 77,182
Other expense (income), net 9,941 (5,732) (117,072) (269,299)
Diet drug litigation charge - 2,000,000 - 2,000,000
Gain on sale of Amgen common stock - - - (860,554)
---------- ---------- ----------- --------
Income (loss) before federal and foreign taxes 1,326,949 (879,947) 3,333,918 2,010,853
Provision (benefit) for federal and foreign taxes (94,343) (453,589) 335,578 294,924
---------- ---------- ----------- -----------
Net income (loss) $1,421,292 $(426,358) $2,998,340 $1,715,929
========== ========== =========== ===========
Basic earnings (loss) per share $1.07 $(0.32) $2.25 $1.29
========== ========== =========== ===========
Diluted earnings (loss) per share $1.06 $(0.32) $2.24 $1.29
========== ========== =========== ===========
Dividends paid per share of common stock $0.23 $0.23 $0.69 $0.69
========== ========== =========== ===========
Dividends declared per share of common stock $0.23 $0.23 $0.92 $0.92
========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands Except Per Share Amounts)
(Unaudited)
Nine Months Ended September 30, 2004:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Income (Loss) Equity
----------- -------- ---------- ---------- ------------- -------------
Balance at January 1, 2004 $42 $444,151 $4,764,390 $4,112,285 $(26,487) $9,294,381
Net income 2,998,340 2,998,340
Currency translation adjustments 12,333 12,333
Unrealized gains on derivative contracts, net 31,370 31,370
Unrealized losses on marketable securities, net (10,366) (10,366)
-------------
Comprehensive income, net of tax 3,031,677
-------------
Cash dividends declared (1) (1,226,939) (1,226,939)
Common stock issued for stock options 436 32,992 33,428
Other exchanges (1) 98 (15,366) (527) (15,796)
----------- -------- ---------- ---------- ------------- -------------
Balance at September 30, 2004 $41 $444,685 $4,782,016 $5,883,159 $6,850 $11,116,751
=========== ======== ========== ========== ============= =============
Nine Months Ended September 30, 2003:
$2.00 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
----------- -------- ---------- ---------- ------------- -------------
Balance at January 1, 2003 $46 $442,019 $4,582,773 $3,286,645 $(155,571) $8,155,912
Net income 1,715,929 1,715,929
Currency translation adjustments 413,008 413,008
Unrealized gains on derivative contracts, net 24 24
Unrealized gains on marketable securities, net 2,413 2,413
Realized gain on sale of Amgen stock
reclassified to net income (515,114) (515,114)
-------------
Comprehensive income, net of tax 1,616,260
-------------
Cash dividends declared (2) (1,223,091) (1,223,091)
Common stock issued for stock options 1,807 104,380 106,187
Other exchanges (3) 61 20,177 (2,191) 18,044
----------- -------- ---------- ---------- ------------- -------------
Balance at September 30, 2003 $43 $443,887 $4,707,330 $3,777,292 $(255,240) $8,673,312
=========== ======== ========== ========== ============= =============
(1) Included in cash dividends declared were the following dividends payable at September 30, 2004:
- Common stock cash dividend of $0.23 per share ($306,832 in the aggregate) declared on September 30, 2004 and payable
on December 1, 2004; and
- Preferred stock cash dividends of $0.50 per share ($8 in the aggregate)declared on June 16, 2004 and paid on October 1, 2004.
(2) Included in cash dividends declared were the following dividends payable at September 30, 2003:
- Common stock cash dividend of $0.23 per share ($306,281 in the aggregate) declared on September 25, 2003 and paid
on December 1, 2003; and
- Preferred stock cash dividends of $0.50 per share ($9 in the aggregate) declared on June 25, 2003 and paid on October 1, 2003.
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
WYETH
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months
Ended September 30,
-----------------------------
2004 2003
---------- ----------
Operating Activities
- --------------------
Net income $2,998,340 $1,715,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Diet drug litigation charge - 2,000,000
Gain on sale of Amgen shares - (860,554)
Gains on sales of assets (185,048) (289,561)
Depreciation and amortization 447,564 398,064
Change in deferred income taxes 167,979 (727,809)
Income tax adjustment (407,600) -
Diet drug litigation payments (507,351) (336,059)
Security fund deposit - (535,200)
Changes in working capital, net (631,402) 451,425
Other items, net (24,794) (24,398)
---------- ----------
Net cash provided by operating activities 1,857,688 1,791,837
---------- ----------
Investing Activities
- --------------------
Purchases of property, plant and equipment (869,600) (1,245,673)
Proceeds from sale of Amgen common stock - 1,579,917
Proceeds from sales of assets 348,089 332,956
Proceeds from sales and maturities of marketable securities 1,024,129 775,674
Purchases of marketable securities (1,533,157) (1,059,125)
---------- ----------
Net cash provided by (used for) investing activities (1,030,539) 383,749
---------- ----------
Financing Activities
- --------------------
Net repayments of commercial paper - (2,996,030)
Proceeds from issuance of long-term debt - 1,800,000
Repayments of long-term debt (1,500,000) -
Other borrowing transactions, net (4,899) (25,159)
Dividends paid (920,099) (916,801)
Exercises of stock options 33,428 106,187
---------- ----------
Net cash used for financing activities (2,391,570) (2,031,803)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (3,436) 19,894
---------- ----------
Increase (decrease) in cash and cash equivalents (1,567,857) 163,677
Cash and cash equivalents, beginning of period 6,069,794 2,943,604
---------- ----------
Cash and cash equivalents, end of period $4,501,937 $3,107,281
========== ==========
Supplemental Information
- ------------------------
Interest payments $256,571 $275,940
Income tax payments, net of refunds 552,834 395,371
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
------------------------------------------
The following policies are required interim updates to those disclosed
in Footnote 1 of the 2003 Annual Report on Form 10-K:
Stock-Based Compensation: The Company has three Stock Incentive Plans
that it accounts for using the intrinsic value method in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. All
options granted under these plans have an exercise price equal to the
market value of the underlying common stock on the date of grant.
Accordingly, no stock-based employee compensation cost is reflected in
net income other than for the Company's restricted stock awards. The
following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, Amendment of SFAS No. 123,
to stock-based employee compensation:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
(In thousands except per share amounts) 2004 2003 2004 2003
------------------------------------------ ---------- --------- ---------- ----------
Net income (loss), as reported $1,421,292 $(426,358) $2,998,340 $1,715,929
Add: Stock-based employee compensation
expense included in reported net income,
net of tax 5,237 3,725 11,605 11,804
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
awards, net of tax (73,787) (81,690) (235,115) (245,322)
---------- --------- ---------- ----------
Adjusted net income (loss) $1,352,742 $(504,323) $2,774,830 $1,482,411
========== ========= ========== ==========
Earnings (loss) per share:
Basic - as reported $1.07 $(0.32) $2.25 $1.29
========== ========= ========== ==========
Basic - adjusted $1.01 $(0.38) $2.08 $1.12
========== ========= ========== ==========
Diluted - as reported $1.06 $(0.32) $2.24 $1.29
========== ========= ========== ==========
Diluted - adjusted $1.01 $(0.38) $2.07 $1.11
========== ========= ========== ==========
7
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Other Intangibles: In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the changes in the carrying
amount of goodwill by reportable segment for the nine months ended
September 30, 2004 are as follows:
Consumer Animal
(In thousands) Pharmaceuticals Healthcare Health Total
-------------------------------- --------------- ---------- -------- ----------
Balance at December 31, 2003 $2,691,772 $592,526 $533,695 $3,817,993
Currency translation adjustments 3,190 (63) 32 3,159
---------- -------- -------- ----------
Balance at September 30, 2004 $2,694,962 $592,463 $533,727 $3,821,152
========== ======== ======== ==========
The Company's other intangibles consist primarily of license
agreements and acquired patents, which are being amortized over their
estimated useful lives ranging from three to 10 years. Amortization of
intangibles is predominantly recorded within Selling, general and
administrative expenses in the Consolidated Condensed Statements of
Operations and was $7.3 million and $20.4 million for the 2004 third
quarter and first nine months, respectively. During the 2004 third
quarter, the Company acquired certain licenses and patents related to
a product currently marketed by the Company. The cost of $104.6
million has been recorded within Other intangibles and will be
amortized over the respective lives of the license agreements and
patents.
Recently Issued Accounting Standards: On September 30, 2004, the
Emerging Issues Task Force (EITF) reached a final consensus on Issue
04-08, Accounting Issues Related to Certain Features of Contingently
Convertible Debt and the Effect on Diluted Earnings Per Share (EITF
No. 04-08), which would amend the guidance in SFAS No. 128, Earnings
Per Share currently followed for diluted earnings per share (EPS)
calculations. EITF No. 04-08 will require contingently convertible
debt instruments with a market price contingency, such as the
Company's outstanding $1,020.0 million aggregate principal amount of
Floating Rate Convertible Senior Debentures due 2024, to be treated
the same as traditional convertible debt instruments for EPS purposes
(i.e., using the "if-converted" method). Traditional convertible debt
reflects shares in diluted EPS (if dilutive) even if the stock price
is below the conversion price. EITF No. 04-08 is effective for all
periods ending after December 15, 2004 with restatement of previously
reported diluted EPS calculations. Application of this EITF is
expected to result in the inclusion of an additional 16,890,180 shares
outstanding, or 1.0% to 1.3% of total shares outstanding, for purposes
of calculating the Company's 2004 full year diluted earnings per
share.
8
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Earnings (Loss) per Share
-------------------------
The following table sets forth the computations of basic earnings
(loss) per share and diluted earnings (loss) per share:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
(In thousands except per share amounts) 2004 2003 2004 2003
------------------------------------------ ---------- --------- ---------- ----------
Net income (loss) less preferred dividends $1,421,292 $(426,358) $2,998,316 $1,715,902
Denominator:
Weighted average common shares
outstanding 1,333,866 1,331,958 1,333,434 1,329,492
---------- --------- ---------- ---------
Basic earnings (loss) per share $1.07 $(0.32) $2.25 $1.29
========== ========= ========== ==========
Net income (loss) $1,421,292 $(426,358) $2,998,340 $1,715,929
Denominator:
Weighted average common shares
outstanding 1,333,866 1,331,958 1,333,434 1,329,492
Common stock equivalents of
outstanding stock options and
deferred contingent common stock
awards* 3,082 - 3,848 5,823
---------- --------- ---------- ----------
Total shares* 1,336,948 1,331,958 1,337,282 1,335,315
---------- --------- ---------- ----------
Diluted earnings (loss) per share* $1.06 $(0.32) $2.24 $1.29
========== ========= ========== ==========
* At September 30, 2004 and 2003, approximately 124,261 and 85,809
of common shares, respectively, related to options outstanding
under the Company's Stock Incentive Plans were excluded from the
computation of diluted earnings (loss) per share, as the effect
would have been antidilutive.
9
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Marketable Securities
---------------------
The Company has marketable debt and equity securities, which are
classified as either available-for-sale or held-to-maturity, depending
on management's investment intentions at the time of purchase relating
to these securities.
The cost, gross unrealized gains (losses) and fair value of
available-for-sale and held-to-maturity securities by major security
type at September 30, 2004 and December 31, 2003 were as follows:
Gross Gross
(In thousands) Unrealized Unrealized Fair
At September 30, 2004 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $72,370 $19 $(386) $72,003
Commercial paper 45,508 - (3) 45,505
Certificates of deposit 77,194 6 (89) 77,111
Corporate debt securities 199,308 121 (108) 199,321
Other debt securities 4,373 - (11) 4,362
Equity securities 47,875 7,932 (8,622) 47,185
Institutional fixed income fund 531,427 15,990 - 547,417
---------- ---------- ---------- ----------
Total available-for-sale 978,055 24,068 (9,219) 992,904
---------- ---------- ---------- ----------
Held-to-maturity:
U.S. Treasury securities $6,809 - - $6,809
Commercial paper 560,266 - - 560,266
Certificates of deposit 42,130 - - 42,130
Other debt securities 2,000 - - 2,000
---------- ---------- ---------- ----------
Total held-to-maturity 611,205 - - 611,205
---------- ---------- ---------- ----------
$1,589,260 $24,068 $(9,219) $1,604,109
========== ========== ========== ==========
Gross Gross
(In thousands) Unrealized Unrealized Fair
At December 31, 2003 Cost Gains (Losses) Value
---------------------------------- ---------- ---------- ---------- ----------
Available-for-sale:
U.S. Treasury securities $152,851 $44 $(23) $152,872
Commercial paper 42,964 4 (4) 42,964
Certificates of deposit 63,643 22 (27) 63,638
Corporate debt securities 212,198 252 (32) 212,418
Other debt securities 4,296 - (11) 4,285
Equity securities 21,078 13,158 (188) 34,048
Institutional fixed income fund 522,847 16,868 - 539,715
---------- ---------- ---------- ----------
Total available-for-sale 1,019,877 30,348 (285) 1,049,940
---------- ---------- ---------- ----------
Held-to-maturity:
Commercial paper 60,107 - - 60,107
Certificates of deposit 250 - - 250
---------- ---------- ---------- ----------
Total held-to-maturity 60,357 - - 60,357
---------- ---------- ---------- ----------
$1,080,234 $30,348 $(285) $1,110,297
========== ========== ========== ==========
10
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The contractual maturities of debt securities classified as
available-for-sale at September 30, 2004 were as follows:
Fair
(In thousands) Cost Value
---------------------------------------- -------- --------
Available-for-sale:
Due within one year $220,182 $220,028
Due after one year through five years 161,973 161,699
Due after five years through 10 years 2,598 2,568
Due after 10 years 14,000 14,007
-------- --------
$398,753 $398,302
======== ========
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $611.2 million at September 30, 2004.
Note 4. New Credit Facility
-------------------
In February 2004, the Company replaced its $1,350.0 million, 364-day
credit facility entered into in March 2003 with a $1,747.5 million,
five-year facility. The new facility contains substantially identical
financial and other covenants, representations, warranties, conditions
and default provisions as the replaced facility.
11
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Pensions and Other Postretirement Benefits
------------------------------------------
In accordance with SFAS No. 132 (revised 2003), Employers' Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statement Nos. 87, 88, and 106, the following pension and other
postretirement benefit plan disclosures are now required in interim
financial statements.
Net periodic benefit cost for the Company's defined benefit plans for
the three and nine months ended September 30, 2004 and 2003
(principally for the U.S.) was as follows:
Pensions
-----------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) ------------------- ---------------------
Components of Net Periodic Benefit Cost 2004 2003 2004 2003
--------------------------------------- ------- ------- -------- --------
Service cost $36,980 $29,837 $110,523 $89,217
Interest cost 64,187 62,211 192,376 186,646
Expected return on plan assets (77,607) (67,610) (232,754) (202,656)
Amortization of prior service cost 2,834 2,761 8,511 8,276
Amortization of transition obligation (398) (388) (1,225) (1,140)
Recognized net actuarial loss 25,066 26,071 75,220 78,199
Settlement loss - - - 13,034
------- ------- -------- --------
Net periodic benefit cost $51,062 $52,882 $152,651 $171,576
======= ======= ======== ========
Other Postretirement Benefits
----------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) ------------------- --------------------
Components of Net Periodic Benefit Cost 2004 2003 2004 2003
--------------------------------------- ------- ------- ------- --------
Service cost $8,560 $9,525 $30,255 $28,564
Interest cost 18,256 23,574 64,429 70,692
Amortization of prior service cost (3,325) (562) (11,512) (1,687)
Recognized net actuarial loss 4,144 4,676 15,755 14,023
------- ------- ------- --------
Net periodic benefit cost $27,635 $37,213 $98,927 $111,592
======= ======= ======= ========
As of September 30, 2004, $258.0 million and $77.9 million of
contributions have been made in 2004 to the Company's defined benefit
pension plans and other postretirement benefit plans, respectively.
The Company presently anticipates total contributions to be made
during 2004 to fund its defined benefit pension and other
postretirement benefit plans will approximate $265.0 million and $90.0
million, respectively.
The Financial Accounting Standards Boards (FASB) Staff Position No.
106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, was
recently issued to provide guidance on the accounting for the effects
of the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the Medicare Act). The Medicare Act provides for a federal
subsidy to sponsors of retiree health care benefit plans that provide
a benefit that is at
12
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
least actuarially equivalent to Medicare Part D. The federal subsidy
is based on 28% of an individual beneficiary's annual prescription
drug costs between $250 and $5,000 (subject to indexing and the
provisions of the Medicare Act as to "allowable retiree costs"). Wyeth
provides prescription drug coverage to retirees meeting certain age
and service requirements. For retirees covered under the plan, the
Company's management believes the coverage provided by Wyeth affords
retirees lower out-of-pocket costs than would result if coverage were
provided under Medicare Part D. As such, the Company's management has
concluded that Wyeth's plan is at least actuarially equivalent to
Medicare Part D.
The Company adopted FASB Staff Position No. 106-2 during the 2004
second quarter. Accordingly, the Company's postretirement benefit
obligation has been remeasured as of January 1, 2004 in order to
reflect the impact of the Medicare Act. As a result of the
remeasurement, an unrecognized actuarial gain was realized during the
2004 second quarter, which reduced the Company's accumulated
postretirement benefit obligation by approximately $195.4 million.
This unrecognized actuarial gain is being amortized over the average
working life (which approximates 10 years) of the Company's employees
eligible for postretirement benefits beginning January 1, 2004. The
effect of the Medicare Act decreased the Company's 2004 third quarter
and first nine months postretirement benefits expense by approximately
$7.7 million and $23.1 million, respectively.
Note 6. Restructuring Program
---------------------
2003 Restructuring Charge and Related Asset Impairments
In December 2003, the Company recorded a special charge for
manufacturing restructurings and related asset impairments of $487.9
million. The Company recorded these restructuring charges, including
personnel and other costs, in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, and its asset
impairments in accordance with SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets. The restructuring charges and related
asset impairments impacted only the Pharmaceuticals segment and were
recorded to recognize the costs of closing certain manufacturing
facilities, as well as the elimination of certain positions at the
Company's facilities. Payments of $15.3 million and $38.6 million were
made in the 2004 third quarter and first nine months, respectively. As
of September 30, 2004, the 2003 restructuring reserve balance of $27.2
million consists primarily of contract settlement costs, which, based
on the contractual terms of the agreements, will be paid through 2005.
2002 Restructuring Charge and Related Asset Impairments
In December 2002, the Company recorded a special charge for
restructuring and related asset impairments of $340.8 million to
recognize the costs of closing certain
13
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
manufacturing facilities and two research facilities, as well as the
elimination of certain positions at the Company's facilities. The
Company recorded these asset impairments in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets
and its restructuring charges, including personnel and other costs, in
accordance with EITF No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
The restructuring resulted in the elimination of approximately 3,150
positions worldwide. As of September 30, 2004, the Company is
continuing with the 2002 restructuring program. The timing of the
remaining personnel costs to be paid has been delayed since, in many
instances, the terminated employees elected or were required to
receive their severance payments over an extended period of time.
However, substantially all of the payments are expected to be made
during 2004. The activity in the restructuring accruals was as
follows:
Payments/
Reserve at Non-cash Reserve at
(In thousands) Total December 31, Charges September 30,
2002 Restructuring Charges 2003 in 2004 2004
------------------------ -------- ------------ --------- -------------
Personnel costs $194,600 $36,800 $(20,400) $16,400
Asset impairments 68,700 - - -
Other closure/exit costs 77,500 27,900 (15,000) 12,900
-------- ------------ --------- -------------
$340,800 $64,700 $(35,400) $29,300
======== ============ ========= =============
Note 7. Contingencies and Commitments
-----------------------------
The Company is involved in various legal proceedings, including
product liability and environmental matters, of a nature considered
normal to its business. It is the Company's policy to accrue for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings (other than
the diet drug litigation discussed immediately below) will not have a
material adverse effect on the Company's financial position but could
be material to the results of operations or cash flows in any one
accounting period.
The Company has been named as a defendant in numerous legal actions
relating to the diet drugs PONDIMIN (which in combination with
phentermine, a product that was not manufactured, distributed or sold
by the Company, was commonly referred to as "fen-phen") or REDUX,
which the Company estimated were used in the United States, prior to
their 1997 voluntary market withdrawal, by approximately 5.8 million
people. These
14
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
actions allege, among other things, that the use of REDUX and/or
PONDIMIN, independently or in combination with phentermine, caused
certain serious conditions, including valvular heart disease.
On October 7, 1999, the Company announced a nationwide class action
settlement (the settlement) to resolve litigation brought against the
Company regarding the use of the diet drugs REDUX or PONDIMIN. The
settlement covered all claims arising out of the use of REDUX or
PONDIMIN, except for claims of primary pulmonary hypertension (PPH),
and was open to all REDUX or PONDIMIN users in the United States.
The number of individuals who have filed claims within the settlement
that allege significant heart valve disease (known as "matrix" claims)
has been higher than had been anticipated. The settlement agreement
grants the Company access to claims data maintained by the settlement
trust (the Trust). Based on its review of that data, the Company
understands that, as of October 13, 2004, the Trust had recorded
approximately 117,370 matrix claim forms. Approximately 31,880 of
these forms were so deficient, incomplete or duplicative of other
forms filed by the same claimant that, in the Company's view, it is
unlikely that a significant number of these forms will result in
further claims processing.
The Company's understanding of the status of the remaining
approximately 85,490 forms, based on its analysis of data received
from the Trust through October 13, 2004, is as follows. Approximately
19,775 of the matrix claims had been processed to completion, with
those claims either paid (approximately 3,620 payments, totaling
$1,314.3 million, had been made to approximately 3,430 claimants),
denied or in show cause proceedings (approximately 14,510) or
withdrawn. Approximately 2,415 claims were in some stage of the 100%
audit process ordered in late 2002 by the federal court overseeing the
national settlement. Approximately 17,140 claims alleged conditions
that, if true, would entitle the claimant to receive a matrix award;
these claims had not yet entered the audit process. Another
approximately 23,775 claims with similar allegations have been
purportedly substantiated by physicians or filed by law firms whose
claims are now subject to the outcome of the Trust's Claims Integrity
Program, discussed below. Approximately 22,210 claim forms did not
contain sufficient information even to assert a matrix claim, although
some of those claim forms could be made complete by the submission of
additional information and could therefore become eligible to proceed
to audit in the future. The remaining approximately 175 claims were in
the data entry process and could not be assessed.
In addition to the approximately 117,370 matrix claims filed as of
October 13, 2004, additional class members may progress to the matrix
stage through 2015 if they develop a matrix condition in the future,
have registered with the Trust by May 3, 2003, and have demonstrated
FDA+ regurgitation (i.e., mild or greater aortic regurgitation, or
moderate or greater mitral regurgitation) or mild mitral regurgitation
on an echocardiogram conducted after diet drug use and obtained either
outside of the Trust by January 3, 2003
15
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
or within the Trust's screening program. Once a claimant has
demonstrated a matrix condition, the claimant may progress to advanced
levels of the matrix beyond 2015.
The Company's understanding, based on data received from the Trust
through October 13, 2004, is that audits had produced preliminary or
final results on 4,501 of the claims that had begun the 100% audit
process since its inception. Of these, 1,625 were found to be payable
at the amount claimed and 147 were found to be payable at a lower
amount than had been claimed. The remaining claims were found
ineligible for a matrix payment, although the claimants may appeal
that determination to the federal court overseeing the settlement.
Because of numerous issues concerning the audit process raised in
motions and related proceedings now pending before the federal court,
the Company cannot predict the ultimate outcome of the audit process.
Both the volume and types of claims seeking matrix benefits received
by the Trust to date differ materially from the epidemiological
projections on which the court's approval of the settlement agreement
was predicated. Based upon data received from the Trust, approximately
94% of the approximately 17,140 matrix claimants who allege conditions
that, if true, would entitle them to an award (and approximately 99%
of the approximately 23,775 claims certified by physicians and/or law
firms currently subject to the Trust's Claims Integrity Program) seek
an award under Level II of the five-level settlement matrix. (Level II
covers claims for moderate or severe mitral or aortic valve
regurgitation with complicating factors; depending upon the claimant's
age at the time of diagnosis, and assuming no factors are present that
would place the claim on one of the settlement's reduced payment
matrices, awards under Level II range from $199,872 to $669,497 on the
settlement agreement's current payment matrix.)
An investigation that the Company understands was conducted by counsel
for the Trust and discovery conducted to date by the Company in
connection with certain Intermediate and Back-End opt out cases
(brought by some of the same lawyers who have filed these Level II
claims and supported by some of the same cardiologists who have
certified the Level II claims) cast substantial doubt on the merits of
many of these matrix claims and their eligibility for a matrix payment
from the Trust. Therefore, in addition to the 100% audit process, the
Trust has embarked upon a Claims Integrity Program, which is designed
to protect the Trust from paying illegitimate or fraudulent claims.
Pursuant to the Claims Integrity Program, the Trust has required
additional information concerning matrix claims purportedly
substantiated by 18 identified physicians or filed by two law firms in
order to determine whether to permit those claims to proceed to audit.
Based upon data obtained from the Trust, the Company believes that
approximately 23,775 matrix claims were purportedly substantiated by
the 18 physicians and/or filed by the two law firms covered by the
Claims Integrity Program as of October 13, 2004. It is the Company's
understanding that additional claims substantiated by additional
physicians or filed by additional law firms might be subjected to the
same requirements of the Claims Integrity Program in the future. As an
initial step in the integrity review process, each of the identified
physicians has been asked to complete a
16
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
comprehensive questionnaire regarding each claim and the method by
which the physician reached the conclusion that it was valid. The
ultimate disposition of any or all claims that are subject to the
Claims Integrity Program is at this time uncertain. Counsel for
certain claimants affected by the program have challenged the Trust's
authority to implement the Claims Integrity Program and to require
completion of the questionnaire before determining whether to permit
those claims to proceed to audit. While that motion was denied by the
court, additional challenges to the Claims Integrity Program and to
the Trust's matrix claim processing have been filed.
In late 2003, the Trust adopted a program to prioritize the handling
of those matrix claims that it believed were least likely to be
illegitimate. Under the program, claims under Levels III, IV and V
were to be processed and audited on an expedited basis. (Level III
covers claims for heart valve disease requiring surgery to repair or
replace the valve, or conditions of equal severity. Levels IV and V
cover complications from, or more serious conditions than, heart valve
surgery.) The program also prioritized the processing and auditing of,
inter alia, Level I claims, all claims filed by a claimant without
counsel (i.e., on a pro se basis) and Level II claims substantiated by
physicians who have attested to fewer than 20 matrix claims.
On April 15, 2004, the Trust announced that it would indefinitely
suspend the payment and processing of claims for Level I and Level II
matrix benefits. The Trust stated that it would continue to initiate
audits with respect to Level III, IV and V matrix claims and would
continue to act on the results of audits of Level III, IV and V
claims. It also announced that "[d]ue to concerns about the manner in
which echocardiograms have been taken, recorded and presented, the
Trust is reviewing all echocardiograms and related materials prior to
payment of claims on which they are based and, where possible, prior
to initiation of a medical audit. This will result in a temporary
delay in initiating audits and in payments following audit. Where the
review of the echocardiogram reveals substantial evidence of an
intentional, material misrepresentation that calls into question the
validity of a claim, the Trust will not pay the claim."
In a joint motion filed in the U.S. District Court for the Eastern
District of Pennsylvania on May 4, 2004, the Company, counsel for the
plaintiff class in the nationwide settlement and counsel for a number
of individual class members moved to stay for 60 days the processing
and payment of Level I and Level II matrix claims and certain
associated court proceedings. That motion was granted by the court on
May 10, 2004. The stay was intended to provide the parties with an
opportunity to draft and submit to the court a Seventh Amendment to
the settlement agreement that would create a new claims processing
structure, funding arrangement and payment schedule for these claims.
The stay was eventually extended beyond its original expiration date,
July 9, 2004, until August 10, 2004. On August 10, 2004, the parties
filed a joint motion seeking preliminary approval of the proposed
Seventh Amendment. By the terms of the court's orders, the filing
automatically extended the stay of Level I and Level II claim
processing until the court granted or denied preliminary approval.
17
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
On August 26, 2004, United States District Judge Harvey Bartle III
granted the motion for preliminary approval of the proposed Seventh
Amendment. In addition to other terms of the court's order, the order
directed that notice of the Seventh Amendment be provided to
potentially affected class members beginning on September 10, 2004 (to
be completed by September 15, 2004), established November 9, 2004 as
the date by which class members could opt out of the proposed Seventh
Amendment (and remain bound by the original settlement terms), or
object to it, and scheduled a fairness hearing for January 18, 2005.
Pursuant to the terms of the proposed Seventh Amendment, the Company
retains the right to withdraw from the Seventh Amendment if
participation by class members is inadequate or for any other reason.
The Company must do so within 60 days of the end of the opt
out/objection period (i.e., by January 8, 2005).
If approved by the court following the fairness hearing and upheld on
any appeals that might be taken, the proposed Seventh Amendment would
include the following key terms:
o The amendment would create a new Supplemental Fund, to be
administered by a Fund Administrator who will be appointed
by the District Court and who will process the Level I and
Level II matrix claims;
o After trial court approval, the Company would make initial
payments of up to $50.0 million to facilitate the
establishment of the Supplemental Fund and to begin
reviewing claims. Following approval by the federal court
overseeing the settlement and any appellate courts, the
Company would make an initial payment of $400.0 million to
enable the Supplemental Fund to begin paying claims. The
timing of additional payments would be dictated by the rate
of review and payment of claims by the Fund Administrator.
The Company would ultimately deposit a total of $1,275.0
million, net of certain credits, into the Supplemental Fund;
o All current matrix Level I and II claimants who qualify
under the Seventh Amendment, who pass the Settlement Fund's
medical review and who otherwise satisfy the requirements of
the settlement would receive a pro rata share of the
$1,275.0 million Supplemental Fund, after deduction of
certain expenses and other amounts from the Supplemental
Fund. The pro rata amount would vary depending upon the
number of claimants who pass medical review, the nature of
their claims, their age and other factors. A Seventh
Amendment participant who does not qualify for a payment
after such medical review would be paid $2,000 from the
Supplemental Fund;
o Participating class members who might in the future have
been eligible to file Level I and Level II matrix claims
would be eligible to receive a $2,000 payment from the
settlement Trust; such payments would be funded by the
Company apart from its other funding obligations under the
national settlement;
o If the participants in the Seventh Amendment have heart
valve surgery or other more serious medical conditions on
Matrix Levels III through V by the earlier of fifteen years
from the date of their last diet drug ingestion or by
December 31, 2011, they would remain eligible to submit
claims to the existing settlement Trust
18
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
and be paid the current matrix amounts if they qualify for
such payments under terms modified by the Seventh Amendment.
In the event the existing settlement Trust is unable to pay
those claims, the Company would guarantee payment; and
o All class members who participate in the Seventh Amendment
would give up any further opt out rights. Approval of the
Seventh Amendment would also preclude any lawsuits by the
Trust or the Company to recover any amounts previously paid
to class members by the Trust, as well as terminate the
Claims Integrity Program as to all claimants who do not opt
out of the Seventh Amendment.
There can be no assurance that the Company will ultimately proceed
with the amendment (based upon the level of participation in the
amendment or for other reasons), or that the amendment will be
approved by the court and upheld on appeal.
The Trust has indicated that one of the goals of the Claims Integrity
Program referenced above is to recoup funds from those entities that
caused the Trust to pay illegitimate claims and the Trust has filed
two lawsuits to that end. The Trust has filed a suit alleging
violations of the Racketeer Influenced and Corrupt Organizations
(RICO) Act against a Kansas City cardiologist who attested under oath
to the validity of over 2,500 matrix claims. The suit alleges that the
cardiologist intentionally engaged in a pattern of racketeering
activity to defraud the Trust. The Trust has also filed a lawsuit
against a New York cardiologist who attested under oath to the
validity of 83 matrix claims, alleging that the cardiologist engaged
in, among other things, misrepresentation, fraud, conspiracy to commit
fraud, and gross negligence.
The Trust has filed a number of motions directed at the conduct of the
companies that performed the echocardiograms on which many matrix
claims are based. In a pair of motions related to the activities of a
company known as EchoMotion, the Trust has asked the court to stay
payment of claims already audited and found payable in whole or in
part if the echocardiogram was performed by EchoMotion and to
disqualify all echocardiograms by EchoMotion that have been used to
support matrix claims that have not yet been audited. In addition, the
Trust has filed a motion seeking discovery of 14 specific companies
whose echocardiograms support a large number of claims to determine
whether their practices violate the settlement. The Trust has also
moved to stay and/or disqualify claims brought by claimants
represented by certain law firms or attested to by certain physicians.
The Company has joined in certain of these motions and has filed its
own motions addressing the abuse of the matrix claims process and
seeking an emergency stay of claim processing. All of these motions,
as well as the Trust lawsuits referenced above, have also been stayed
pending the resolution of the outstanding issues involving the
proposed Seventh Amendment. As indicated above, approval of the
Seventh Amendment would result in the withdrawal of these motions as
to claimants who do not opt out of the Seventh Amendment.
The order entered by the District Court on August 26, 2004 that
preliminarily approved the proposed Seventh Amendment also stayed
certain matrix claim processing and certain aspects of the Claims
Integrity Program, as specified in that order. The order stays the
19
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
processing of all claims for Matrix Level I and Level II benefits
(except such claims that have been the subject of a Trust
determination after audit as of a specified date) until the end of the
opt out/objection period (i.e., January 8, 2005), and thereafter for
all claimants who participate in the Seventh Amendment. In addition,
the order stays the Claims Integrity Program as to all Class Members
who are eligible to participate in the Seventh Amendment until the end
of the opt out/objection period (i.e., January 8, 2005), and
thereafter for all such claimants who participate in the Seventh
Amendment. This stay of the Claims Integrity Program does not prohibit
the Trust from investigating whether there have been any material
misrepresentations of fact in connection with claims for Level III
through V Matrix benefits, as described in the order. The order
further stays the motions described in the previous paragraph and the
two lawsuits against physicians brought by the Trust that are
described above, as well as any future legal actions similar to those
two lawsuits, as defined in the Seventh Amendment. All of these stays
will be discontinued if Wyeth decides to withdraw from the Seventh
Amendment or the Seventh Amendment is not approved by the court and
upheld on appeal.
Certain Level I and Level II claims that had been found to have a
reasonable medical basis following a Trust audit that was conducted
prior to May 6, 2004 will continue to be processed as set forth in a
District Court order also dated August 26, 2004. The Claims Integrity
Program is stayed as to these claims, except that the Trust will have
the right to investigate whether there has been intentional
manipulation of the claim, as defined in that order.
The Company continues to monitor the progress of the Trust's audit
process and its Claims Integrity Program. Even if substantial progress
is made by the Trust, through its Claims Integrity Program or other
means, in reducing the number of illegitimate matrix claims, a
significant number of the claims which proceed to audit might be
interpreted as satisfying the matrix eligibility criteria,
notwithstanding the possibility that the claimants may not in fact
have serious heart valve disease. If so, notwithstanding any agreement
to, or approval of, the Seventh Amendment described above, matrix
claims found eligible for payment after audit may cause total payments
to exceed the $3,750.0 million cap of the settlement fund.
Should the settlement fund be exhausted, most of the matrix claimants
who filed their matrix claims on or before May 3, 2003 and who pass
the audit process at a time when there are insufficient funds to pay
their claims may pursue an additional opt out right created by the
Sixth Amendment to the settlement agreement, unless the Company first
elects, in its sole discretion, to pay the matrix benefit after audit.
Sixth Amendment opt out claimants may then sue the Company in the tort
system, subject to the settlement's limitations on such claims. In
addition to the limitations on all Intermediate and Back-End opt outs
(such as the prohibition on seeking punitive damages and the
requirement that the claimant sue only on the valve condition that
gave rise to the claim), a Sixth Amendment opt out may not sue any
defendant other than the Company and may not join his or her claim
with the claim of any other opt out. The Company cannot predict the
ultimate number of individuals who might be in a position to elect a
Sixth Amendment
20
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
opt out or who may in fact elect to do so, but that number could be
substantial. Several class members affected by the terms of the Sixth
Amendment opposed the approval of the amendment on the ground that,
should the settlement fund be exhausted, they should be entitled to
pursue tort claims, including a claim for punitive damages, without
the limitations imposed by the Sixth Amendment. The District Court
overruled those objections and approved the amendment. The District
Court's order approving the Sixth Amendment has been affirmed by the
United States Court of Appeals for the Third Circuit.
Some individuals who registered to participate in the settlement by
May 3, 2003, who had been diagnosed with either FDA+ level
regurgitation or mild mitral regurgitation on an echocardiogram
completed after diet drug use and conducted either outside of the
settlement prior to January 3, 2003 or within the settlement's
screening program, and who subsequently develop (at any time before
the end of 2015) a valvular condition that would qualify for a matrix
payment may elect to pursue a Back-End opt out. Such individuals may
pursue a Back-End opt out within 120 days of the date on which they
first discover or should have discovered their matrix condition. The
Company cannot predict the ultimate number of individuals who may be
in a position to elect a Back-End opt out or who may in fact elect to
do so, but that number could also be substantial.
The Company's current understanding is that approximately 76,000
Intermediate opt out forms were submitted by May 3, 2003, the
applicable deadline for most class members (other than qualified class
members receiving echocardiograms through the Trust after January 3,
2003, who may exercise Intermediate opt out rights within 120 days
after the date of their echocardiogram). The number of Back-End opt
out forms received as of October 27, 2004 is estimated to be
approximately 20,000, although certain additional class members may
elect to exercise Back-End opt out rights in the future (under the
same procedure as described above) even if the settlement fund is not
exhausted. After eliminating forms that are duplicative of other
filings, forms that are filed on behalf of individuals who have
already either received payments from the Trust or settlements from
the Company, and forms that are otherwise invalid on their face, it
appears that approximately 77,000 individuals had filed Intermediate
or Back-End opt out forms as of October 27, 2004.
Purported Intermediate or Back-End opt outs (as well as Sixth
Amendment opt outs) who meet the settlement's medical eligibility
requirements may pursue lawsuits against the Company, but must prove
all elements of their claims - including liability, causation and
damages - without relying on verdicts, judgments or factual findings
made in other lawsuits. They also may not seek or recover punitive,
exemplary or multiple damages and may sue only for the valvular
condition giving rise to their opt out right. To effectuate these
provisions of the settlement, the federal court overseeing the
settlement had issued orders in several cases limiting the evidence
that could be used by plaintiffs in such cases. Those orders, however,
were challenged on appeal and were reversed by a panel of the U.S.
Court of Appeals for the Third Circuit in May 2004. The Company's
petition to the Third Circuit for a rehearing or rehearing en banc was
subsequently
21
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
denied, as was the Company's petition to the United States Supreme
Court for a writ of certiorari. The federal court overseeing the
settlement has issued revised injunctions requiring some of plaintiffs
subject to the earlier injunctions to litigate damages in a separate
initial trial, with a subsequent trial on liability. That court has
declined to impose such a requirement on a class-wide basis, at least
at this time. The plaintiffs affected by those revised injunctions
have filed an appeal with the United States Court of Appeals for the
Third Circuit.
In addition to the specific matters discussed herein, the federal
court overseeing the national settlement has issued rulings concerning
the processing of matrix claims that are being challenged on appeal.
The United States Court of Appeals for the Third Circuit has postponed
deciding those appeals pending decision on whether the proposed
Seventh Amendment would be approved, and the appealing plaintiffs have
agreed to dismiss those appeals in the event of such approval. Certain
class members have also filed a number of motions and lawsuits
attacking both the binding effect of the settlement and the
administration of the Trust, some of which have been decided against
class members and are currently on appeal. The Company cannot predict
the outcome of any of these motions or lawsuits.
As of October 27, 2004, approximately 63,000 individuals who had filed
Intermediate or Back-End opt out forms had served lawsuits on the
Company. The claims of approximately 50% of the plaintiffs in the
Intermediate and Back-End opt out cases served on the Company are
pending in federal court, with approximately 40% pending in state
courts. The claims of approximately 10% of the Intermediate and
Back-End opt out plaintiffs have been removed from state courts to
federal court, but are still subject to a possible remand to state
court. In addition, a large number of plaintiffs have asked the United
States Court of Appeals for the Third Circuit to review and reverse
orders entered by the federal court overseeing the settlement which
had denied the plaintiffs' motions to remand their cases to state
court. The appellate court has not determined whether or not it will
hear that challenge.
The Company expects to vigorously challenge all Intermediate and
Back-End opt out claims of questionable validity or medical
eligibility and a number of cases have already been dismissed on
eligibility grounds. However, the total number of filed lawsuits that
meet the settlement's opt out criteria will not be known for some
time. As a result, the Company cannot predict the ultimate number of
purported Intermediate or Back-End opt outs that will satisfy the
settlement's opt out requirements, but that number could be
substantial. As to those opt outs who are found eligible to pursue a
lawsuit, the Company also intends to vigorously defend these cases. As
of October 27, 2004, approximately 1,700 Intermediate or Back-End opt
out plaintiffs have had their lawsuits dismissed for procedural or
medical deficiencies or for various other reasons.
The Company has resolved the claims of all but a small percentage of
the "initial" opt outs (i.e., those individuals who exercised their
right to opt out of the settlement class)
22
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
and continues to work toward resolving the rest. The Company intends
to vigorously defend those initial opt out cases that cannot be
resolved prior to trial.
In addition to verdicts previously reported, on August 12, 2004, a
Philadelphia jury in the Pennsylvania Court of Common Pleas, First
Judicial District, hearing the Back-End opt out cases of Steward v.
Wyeth, et al., No. 021002340, Ford v. Wyeth, et al., No. 020704036,
Hargrove v. Wyeth, et al., No. 020800684, and Nixon v. Wyeth, et al.,
No. 021101759 returned a defense verdict, finding that plaintiffs had
not been damaged by their use of PONDIMIN and/or REDUX and that the
Company had not been negligent in its marketing of PONDIMIN or REDUX.
On August 20, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the Intermediate opt
out cases of Bernston v. Wyeth, et al., No. 021202304, and Connell v.
Wyeth, et al., No. 021202454, returned a verdict finding that
plaintiff Bernston had not been damaged by her use of PONDIMIN and
that plaintiff Connell had been damaged in the amount of $50,000 by
the use of PONDIMIN and REDUX. The Bernston case was thereupon
dismissed and the parties resolved the Connell case. On October 22,
2004, a Philadelphia jury in the Pennsylvania Court of Common Pleas,
First Judicial District, hearing the Intermediate opt out cases of
Feagins v. Wyeth, et al., No. 021202424, and Dupree v. Wyeth, et al.,
No. 021202429, returned a verdict finding that plaintiff Feagins had
not been damaged by her use of PONDIMIN and that plaintiff Dupree had
been damaged in the amount of $41,195.12 by the use of PONDIMIN. The
Feagins case was thereupon dismissed; the Company agreed not to
contest liability in the Dupree case, but may pursue an appeal. On
October 27, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the Back-End opt out
cases of Fernandez v. Wyeth, et al., No. 020704037, Joel Taylor v.
Wyeth, et al., No. 020802581, and Ruby Taylor v. Wyeth, et al., No.
021102104, returned a verdict finding that plaintiffs Joel Taylor and
Ruby Taylor had not been damaged by their use of PONDIMIN and that
plaintiff Fernandez had been damaged in the amount of $50,000 by her
use of PONDIMIN. The two Taylor cases were thereupon dismissed and the
parties resolved the Fernandez case. On November 2, 2004, a Norwalk,
California jury in the California Superior Court, Los Angeles County,
hearing the Intermediate opt out case of Hines v. Wyeth, et al., No.
DD001645, returned a verdict finding that plaintiff had been damaged
in the amount of $115,000 by his use of PONDIMIN. The
Bernston/Connell, Feagins/Dupree, Fernandez/Taylor, and Hines cases
were tried under a reverse bifurcation procedure, in which the parties
first try the issue of the plaintiff's alleged injury and damages, and
only proceed to a trial of the Company's liability for the jury's
award if any damages are found. Because no damages were found in the
Bernston, Feagins and two Taylor cases, because the Connell,
Fernandez, and Hines cases were resolved after the damages phase and
because the Company did not contest liability in the Dupree case, none
of these cases proceeded to the liability phase.
On October 6, 2004, a Philadelphia jury in the Pennsylvania Court of
Common Pleas, First Judicial District, hearing the combined
Intermediate opt out cases of Hansen v. Wyeth, et al., No. 021201063,
Jensen v. Wyeth, et al., No 0021201202, Hill v. Wyeth, et al., No.
021201207, and McMurdie v. Wyeth, et al., No. 021201386, in a reverse
23
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
bifurcation format found that plaintiffs had been damaged in the
aggregate amount of $2.135 million by their use of PONDIMIN and/or
REDUX. The verdict dealt solely with the issue of damages. The trial
resumed on October 25, 2004 and on November 3, 2004 the jury returned
a verdict finding the Company liable for the damages determined in the
earlier phase. The Company plans to appeal the verdict.
In addition to the Intermediate and Back-End opt out cases that have
gone to verdict, other such cases set for trial have been settled,
dismissed or adjourned to a later date.
On April 27, 2004, a jury in Beaumont, Texas hearing the case of
Coffey, et al. v. Wyeth, et al., No. E-167,334, 172nd Judicial
District Court, Jefferson Cty., TX, returned a verdict in favor of the
plaintiffs for $113.353 million in compensatory damages and $900.0
million in punitive damages for the wrongful death of the plaintiffs'
decedent, allegedly as a result of PPH caused by her use of PONDIMIN.
On May 17, 2004, the trial court entered judgment on behalf of the
plaintiffs for the full amount of the jury's verdict, as well as $4.2
million in pre-judgment interest and $188,737 in guardian ad litem
fees. On July 26, 2004, the trial court denied in their entirety the
Company's motions for a new trial or for judgment notwithstanding the
verdict, including the Company's request for application of Texas's
statutory cap on punitive damage awards. The Company has filed an
appeal from the judgment entered by the trial court and believes that
it has strong arguments for reversal or reduction of the awards on
appeal due to the significant number of legal errors made during trial
and in the charge to the jury and due to a lack of evidence to support
aspects of the verdict. In connection with its appeal, the Company was
required by Texas law to post a bond in the amount of $25.0 million.
The appeal process is expected to take one to two years at a minimum.
As of October 14, 2004, the Company was a defendant in approximately
340 lawsuits in which the plaintiff alleges a claim of PPH, alone or
with other alleged injuries. Almost all of these claimants must meet
the definition of PPH set forth in the national settlement agreement
in order to pursue their claims outside of the national settlement
(payment of such claims, by settlement or judgment, would be made by
the Company and not the Trust). Approximately 70 of these cases appear
to be eligible to pursue a PPH lawsuit under the terms of the national
settlement. In approximately 45 of the approximately 340 cases, the
Company expects the PPH claims to be voluntarily dismissed by the
claimants (although they may continue to pursue other claims). In
approximately 55 of these cases the Company has filed or expects to
file motions under the terms of the national settlement to preclude
plaintiffs from proceeding with their PPH claims. For the balance of
these cases, the Company currently has insufficient medical
information to assess whether or not the claimants meet the definition
of PPH under the national settlement. The Company continues to work
toward resolving the claims of individuals who allege that they have
developed PPH as a result of their use of the diet drugs and intends
to vigorously defend those PPH cases that cannot be resolved prior to
trial.
In 2003, the Company increased its reserves in connection with the
REDUX and PONDIMIN diet drug matters by $2,000.0 million, bringing the
total of the charges
24
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
taken to date to $16,600.0 million. The $3,009.2 million reserve
balance at September 30, 2004 represents management's best estimate of
the minimum aggregate amount anticipated to cover payments in
connection with the Trust, up to its cap, initial opt outs, PPH
claims, Intermediate, Back-End or Sixth Amendment opt outs
(collectively, the "downstream" opt outs), and the Company's legal
fees related to the diet drug litigation. Due to its inability to
estimate the ultimate number of valid downstream opt outs, and the
merits and value of their claims, as well as the inherent uncertainty
surrounding any litigation, the Company is unable to estimate the
amount of any additional financial exposure represented by the
downstream opt out litigation. However, the amount of financial
exposure beyond that which has been recorded could be significant. In
analyzing its reserve requirements, the Company has not considered
final implementation of the proposed Seventh Amendment to be more
likely than not because there can be no assurance that the Company
will ultimately proceed with the amendment (based upon the level of
participation in the amendment or for other reasons), or that the
amendment will be approved by the court and upheld on appeal. However,
if the proposed Seventh Amendment is implemented, it is likely that
additional reserves will be required. Any such additional reserves
cannot be estimated at this time, but the amount of such additional
reserves could be significant.
The Company intends to vigorously defend itself in the diet drug
litigation and believes it can marshal significant resources and legal
defenses to limit its ultimate liability. However, in light of the
circumstances discussed above, including the unknown number of valid
matrix claims and the unknown number and merits of valid downstream
opt outs, and the effect, if any, of the proposed Seventh Amendment
referred to above, it is not possible to predict the ultimate
liability of the Company in connection with its diet drug legal
proceedings. It is therefore not possible to predict whether, and if
so when, such proceedings will have a material adverse effect on the
Company's financial condition, results of operations and/or cash flows
and whether cash flows from operating activities and existing and
prospective financing resources will be adequate to fund the Company's
operations, pay all liabilities related to the diet drug litigation,
pay dividends, maintain the ongoing programs of capital expenditures,
and repay both the principal and interest on its outstanding
obligations without the disposition of significant strategic core
assets and/or reductions in certain cash outflows.
Note 8. Company Data by Segment
-----------------------
The Company has four reportable segments: Wyeth Pharmaceuticals
(Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare),
Fort Dodge Animal Health (Animal Health) and Corporate. The Company's
Pharmaceuticals, Consumer Healthcare and Animal Health reportable
segments are strategic business units that offer different products
and services. Beginning in the 2003 fourth quarter, the Company
changed its reporting structure to include the Animal Health business
as a separate reporting segment. The Animal Health business was
previously reported within the Pharmaceuticals segment. Prior period
information presented herein has been restated to be on a
25
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
comparable basis. The reportable segments are managed separately
because they manufacture, distribute and sell distinct products and
provide services that require various technologies and marketing
strategies. The Company's Corporate segment is responsible for the
treasury, tax and legal operations of the Company's businesses and
maintains and/or incurs certain assets, liabilities, income, expense,
gains and losses related to the overall management of the Company
which are not allocated to the other reportable segments.
Net Revenue
----------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) ------------------------- ---------------------------
Segment 2004 2003 2004 2003
------------------- ---------- ---------- ----------- -----------
Pharmaceuticals $3,622,263 $3,211,615 $10,222,826 $9,166,201
Consumer Healthcare 651,100 660,835 1,830,853 1,745,924
Animal Health 198,473 209,159 656,151 605,097
---------- ---------- ----------- -----------
Total $4,471,836 $4,081,609 $12,709,830 $11,517,222
========== ========== =========== ===========
Income (Loss) Before Taxes
--------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) ------------------------- -------------------------
Segment 2004 2003 2004 2003
------------------- ---------- ---------- ---------- ----------
Pharmaceuticals(1) $1,252,897 $956,365 $3,090,850 $2,919,252
Consumer Healthcare 175,740 191,424 389,833 420,628
Animal Health 32,651 41,298 120,686 105,659
Corporate(2) (134,339) (2,069,034) (267,451) (1,434,686)
---------- ---------- ---------- ----------
Total(3) $1,326,949 ($879,947) $3,333,918 $2,010,853
========== ========= ========== ==========
(1) Pharmaceuticals for the 2004 first nine months included a first
quarter charge of $145,500 within Research and development
expenses related to the upfront payment to Solvay Pharmaceuticals
in connection with the co-development and co-commercialization of
four neuroscience compounds, most notably, bifeprunox, a late
stage compound in Phase 3 development for schizophrenia and other
possible uses.
(2) Corporate for the 2003 first nine months included a first quarter
gain of $860,554 related to the sale of Amgen shares. In
addition, Corporate for the 2003 third quarter and first nine
months included an additional charge of $2,000,000 related to the
litigation brought against the Company regarding the use of the
diet drugs REDUX or PONDIMIN.
(3) Income before taxes for the 2004 and 2003 first nine months
included $165,000 and $293,500, respectively, related to gains
from the divestiture of certain Pharmaceuticals and Consumer
Healthcare products. The 2004 divestitures included product
rights to indiplon, DIAMOX (in Japan), and the Company's
nutritionals products in France. The 2003 divestitures included
product rights in various territories to ATIVAN, ISORDIL, DIAMOX
(excluding Japan), ZIAC, ZEBETA, AYGESTIN, ANACIN and SONATA.
Gains from product divestitures were not significant in the third
quarter of either 2004 or 2003.
26
WYETH
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Immunex/Amgen Transactions
--------------------------
During the first quarter of 2003, the Company completed the sale of
31,235,958 shares of Amgen common stock held by the Company at
December 31, 2002. These shares netted proceeds of $1,579.9 million
and resulted in a gain of $860.6 million ($558.7 million after-tax or
$0.42 per share-diluted).
Note 10. Income Taxes
------------
During the 2004 third quarter, the Company recorded a favorable income
tax adjustment of $407.6 million ($0.30 per share-diluted) within the
Provision (benefit) for federal and foreign taxes as a result of
settlements of audit issues offset, in part, by a provision related to
developments in the third quarter in connection with a prior year tax
matter.
On October 11, 2004, Congress passed the American Jobs Creation Act of
2004 (the Act). The Act includes a temporary incentive for U.S.
multinationals to repatriate foreign earnings, a domestic
manufacturing deduction and international tax reforms designed to
improve the global competitiveness of U.S. businesses. Wyeth is in the
process of evaluating the impact of the Act and has not yet determined
the effects of the Act on its effective tax rate and deferred tax
assets and liabilities.
27
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2004
Item 2. Results of Operations
---------------------
Overview
--------
Wyeth is one of the world's largest research-based pharmaceutical and
health care products companies and is a leader in the discovery,
development, manufacturing and marketing of pharmaceuticals, vaccines,
biopharmaceuticals, non-prescription medicines and animal health care.
The Company has four reportable segments: Wyeth Pharmaceuticals
(Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare),
Fort Dodge Animal Health (Animal Health) and Corporate, which are
managed separately because they manufacture, distribute and sell
distinct products and provide services which require various
technologies and marketing strategies. These segments reflect how
senior management reviews the business, makes investing and resource
allocation decisions, and assesses operating performance.
Our Pharmaceuticals segment, which provided 81% of our consolidated
net revenue for the first nine months of 2004 and 80% for the first
nine months of 2003, manufactures, distributes and sells branded human
ethical pharmaceuticals, biologicals and nutritionals. Principal
products include neuroscience therapies, cardiovascular products,
nutritionals, gastroenterology drugs, anti-infectives, vaccines,
oncology therapies, musculoskeletal therapies, hemophilia treatments,
immunological products and women's health care products. These
products are promoted and sold worldwide primarily to wholesalers,
pharmacies, hospitals, physicians, retailers and other human health
care institutions.
The Consumer Healthcare segment, which provided 14% of our
consolidated net revenue for the first nine months of 2004 and 15% for
the first nine months of 2003, manufactures, distributes and sells
over-the-counter health care products, which include analgesics,
cough/cold/allergy remedies, nutritional supplements, and
hemorrhoidal, asthma and other relief items. These products generally
are sold to wholesalers and retailers and are promoted primarily to
consumers worldwide through advertising.
Our Animal Health segment, which provided 5% of our consolidated net
revenue for the first nine months of both 2004 and 2003, manufactures,
distributes, and sells animal biological and pharmaceutical products,
including vaccines, pharmaceuticals, parasite control and growth
implants. These products are sold to wholesalers, retailers,
veterinarians and other animal health care institutions.
The Corporate segment is responsible for the treasury, tax and legal
operations of the Company's businesses. It maintains and/or incurs
certain assets, liabilities, income, expenses, gains and losses
related to the overall management of the Company that are not
allocated to the other reportable segments.
Wyeth exhibited strong revenue growth for the 2004 first nine months,
achieving a 10% increase in worldwide net revenue compared with the
first nine months of 2003.
28
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2004
Pharmaceuticals had net revenue growth of 12% to $10,222.8 million in
the 2004 first nine months, which was spurred by the strong
performance of several key products:
o EFFEXOR (a neuroscience therapy) - up 33% to $2,500.2 million
o PROTONIX (a gastroenterology drug) - up 9% to $1,177.9 million
o ZOSYN/TAZOCIN (an infectious disease drug) - up 22% to $560.5
million
o ENBREL (a musculoskeletal therapy) - up 140% (internationally,
where the Company has exclusive marketing rights) to $464.4
million
o RAPAMUNE (an immunology product) - up 47% to $182.9 million
Collectively, sales of these products increased 31% for the first nine
months of 2004 compared with the first nine months of 2003.
Other areas of revenue growth for the Pharmaceuticals segment for the
2004 first nine months included ZOTON, BENEFIX and rhBMP-2 and
alliance revenue from sales of ENBREL (in North America) and the
CYPHER* stent.
The combined revenue increase from the Company's growth products more
than offset the loss of revenue from the decline in sales of PREVNAR
and the PREMARIN family of products in the 2004 first nine months. In
September 2004, the U.S. Centers for Disease Control and Prevention
(CDC) issued an updated recommendation for the use of PREVNAR
reinstating the full, four-dose vaccination schedule. Net revenue of
PREVNAR for the 2004 first nine months was $713.3 million, a decrease
of 3% compared with the prior year, however, net revenue for the 2004
third quarter was $320.8 million, an increase of 32% compared with the
2003 third quarter.
Both Consumer Healthcare and Animal Health posted increases in net
revenue for the 2004 first nine months, but posted decreases in the
2004 third quarter. Consumer Healthcare net revenue decreased 1% for
the 2004 third quarter and increased 5% to $1,830.8 million for the
2004 first nine months. Animal Health net revenue decreased 5% for the
2004 third quarter reflecting the impact of the voluntary recall of
PROHEART 6 in the U.S. market in September. For the 2004 first nine
months, however, Animal Health net revenue increased 8% to $656.2
million.
On a combined basis, Pharmaceuticals and Consumer Healthcare realized
aggregate pre-tax gains from product divestitures amounting to
approximately $165.0 million for the first nine months of 2004,
compared with $293.5 million from product divestitures for the first
nine months of 2003.
* The active ingredient in RAPAMUNE, sirolimus, coats the CYPHER
coronary stent marketed by Johnson & Johnson.
29
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 2004
In order to continue to succeed, the Company must overcome some
significant challenges over the next few years. One of the biggest
challenges is to defend the Company in the ongoing diet drug
litigation (see Note 7 to the consolidated condensed financial
statements). In this regard, we continue to support the appropriate
handling of valid claims under the national class action settlement,
which would be impacted by the implementation of the Seventh Amendment
(see Note 7 to the consolidated condensed financial statements). At
the same time, we are committed to vigorously defending the Company
and aggressively eliminating fraud and abuse in the settlement.
In order for us to sustain the growth of our core group of products,
we must continue to meet the global demand of our customers. Two of
our important core products are PREVNAR and ENBREL, both
biopharmaceutical products that are extremely complicated and
difficult to manufacture. We continue to seek to improve manufacturing
processes and overcome production issues. Necessary upgrades and
improvements to the Company's PREVNAR filling line, which extended the
planned plant shutdown in late 2003 and early 2004, have been
completed and that line is now operational. During the 2004 second
quarter, additional vial filling capacity became available through a
third party filler and a second Wyeth bulk vaccine formulation suite
became operational. Overall, the Company expects to meet its
production goal of 20 - 23 million doses.
The construction of the Company's Grange Castle facility in Ireland,
which remains on schedule to begin production in 2005, is critical to
further expand the production of ENBREL and enable this important
product to reach even more patients throughout the world.
In July 2002, the National Institutes of Health (NIH) announced that
it was discontinuing a portion of its Women's Health Initiative (WHI)
study assessing the value of combination estrogen plus progestin
therapy, and in early March 2004, the portion of the study addressing
estrogen-only therapy also was discontinued. The Company remains
committed to women's health care and stands behind the PREMARIN family
of products as the standard of therapy to help women address serious
menopausal symptoms. We have continued our efforts to inform
physicians and patients of the appropriate role of hormone therapy
(HT) for the short-term treatment of menopausal symptoms, concomitant
osteoporosis prevention and introduced low-dose versions of PREMARIN
and PREMPRO in 2003. Despite these efforts, sales of the PREMARIN
family of products declined from approximately $1,025.3 million for
the first nine months of 2003 to $662.8 million for the first nine
months of 2004. The launch of low-dose PREMARIN and PREMPRO has helped
to moderate the decrease in sales.
In November 2004, the Company entered into an agreement with Genzyme
Corp. (Genzyme) for the sale of the Company's marketing rights to
SYNVISC in the U.S. and five European countries. Under the terms of
the agreement, Genzyme will pay upfront payments of $121.0 million as
well as a ser