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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934For the Fiscal Year Ended March 31, 2002
Commission File No. 1-9114
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MYLAN LABORATORIES INC. (Exact name of registrant as specified in its charter)
Pennsylvania 25-1211621
(State of Incorporation) (IRS Employer Identification No.)
1030 Century Building
130 Seventh Street
Pittsburgh, Pennsylvania 15222(412) 232-0100
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- --------------------
Common Stock, par value $.50 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark 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 checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The number of outstanding shares of Common Stock of the registrant as of
June 10, 2002, was 125,591,429. The aggregate market value of voting stock held
by non-affiliates of the registrant as of June 10, 2002, was $ , based upon the
closing price of the Common Stock on that date, as reported by the New York
Stock Exchange. Shares of Common Stock known to be owned by directors and
executive officers of the registrant subject to Section 16 of the Securities
Exchange Act of 1934 are not included in the computation. No determination has
been made that such persons are "affiliates" within the meaning of Rule 12b-2
under the Exchange Act.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into this Report is the Proxy Statement for
the 2002 Annual Meeting of Shareholders, Part III, Items 10-13.
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1
MYLAN LABORATORIES INC.
INDEX TO FORM 10-K
For the Fiscal Year Ended March 31, 2002
Page
PART I ----
ITEM 1. Business ------------------------------------------------------- 3
Overview of Our Business ------------------------------------ 3
Generic Segment --------------------------------------------- 3
Brand Segment ----------------------------------------------- 5
Product Development ----------------------------------------- 6
Generic Product Development --------------------------------- 7
Brand Product Development ----------------------------------- 8
Patents, Trademarks and Licenses----------------------------- 10
Customers and Marketing ------------------------------------- 10
Competition ------------------------------------------------- 11
Product Liability ------------------------------------------- 13
Raw Materials ----------------------------------------------- 13
Government Regulation --------------------------------------- 14
Seasonality ------------------------------------------------- 15
Environment ------------------------------------------------- 16
Employees --------------------------------------------------- 16
Backlog ----------------------------------------------------- 16
ITEM 2. Properties ----------------------------------------------------- 17
ITEM 3. Legal Proceedings ---------------------------------------------- 17
ITEM 4. Submission of Matters to a Vote of Security Holders ------------ 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters ------------------------------------------------------- 21
ITEM 6. Selected Financial Data ---------------------------------------- 22
ITEM 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition ----------------- 23
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk --- 36
ITEM 8. Financial Statements and Supplementary Data -------------------- 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure -------------------------------------- 64
PART III
ITEM 10. Directors and Executive Officers of the Registrant ------------- 65
ITEM 11. Executive Compensation ----------------------------------------- 65
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholders Matters ------------------------------ 65
ITEM 13. Certain Relationships and Related Transactions ----------------- 65
PART IV
ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K 65
Signatures --------------------------------------------------------------- 68
2
PART I
ITEM 1. Business
Mylan Laboratories Inc. (the Company or Mylan) is engaged in developing,
licensing, manufacturing, marketing and distributing generic and brand
pharmaceutical products. The Company was incorporated in Pennsylvania in 1970.
References herein to a fiscal year shall mean the fiscal year ended March 31.
Overview of Our Business
We conduct business through our generic (Generic Segment) and brand (Brand
Segment) pharmaceutical operating segments. For fiscal 2002, the Generic Segment
represented approximately 88% of net revenues, and the Brand Segment represented
approximately 12% of net revenues. For fiscal 2001 and 2000, the Generic Segment
represented approximately 80% and 82% of net revenues, and the Brand Segment
represented approximately 20% and 18% of net revenues. The financial information
for our operating segments required by this Item is provided in Note 14 to
Consolidated Financial Statements under Part II, Item 8, of this Report.
Prescription pharmaceutical products in the United States (US) are
generally marketed as either brand or generic drugs. Brand products are marketed
under brand names through programs that are designed to generate physician and
consumer loyalty. Brand products generally are patent protected or benefit from
other non-patent, market exclusivities. This market exclusivity generally
provides brand products with the ability to maintain their profitability for
relatively long periods of time. Brand products generally have a significant
role in the market after the end of patent protection or other market
exclusivities due to physician and customer loyalties.
Generic pharmaceutical products are the chemical and therapeutic equivalent
of a reference brand drug, which is an approved drug product listed in the US
Food and Drug Administration (FDA) publication entitled Approved Drug Products
with Therapeutic Equivalence Evaluations, popularly known as the "Orange Book."
The Drug Price Competition and Patent Term Restoration Act of 1984 (Waxman-Hatch
Act) provides that generic drugs may enter the market after the approval of an
Abbreviated New Drug Application (ANDA) and the expiration, invalidation or
circumvention of any patents on the corresponding brand drug or the end of any
other market exclusivity periods related to the brand drug. Generic drugs are
bioequivalent to their brand name counterparts. Accordingly, generic products
provide a safe, effective and cost-efficient alternative to users of these brand
products. Growth in the generic pharmaceutical industry has been driven by the
increased acceptance of generic drugs as bioequivalent substitutes for brand
name products, as well as the number of brand drugs for which patent terms
and/or other market exclusivities have expired.
Generic Segment
We are recognized as a leader in the generic pharmaceutical industry. The
Generic Segment consists of two principal business units, Mylan Pharmaceuticals
Inc. (Mylan Pharm) and UDL Laboratories, Inc.(UDL), which are wholly-owned
subsidiaries. Mylan Pharm is our primary generic pharmaceutical development,
manufacturing, marketing and distribution division. Mylan Pharm's net revenues
are derived primarily from the sale of solid oral dosage products. UDL packages
and markets generic products, either obtained from Mylan Pharm or purchased from
third parties, in unit dose formats, for use primarily in hospitals and other
institutions. The Generic Segment is augmented by transdermal patch products
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developed and manufactured by Mylan Technologies Inc.(Mylan Tech), a
wholly-owned subsidiary.
We obtain new products primarily through internal product development.
However, we license or co-develop other products through arrangements with other
companies. Generic products are generally introduced to the marketplace at the
expiration of patent protection for the brand product. The FDA may extend the
period of brand product marketing exclusivity under certain circumstances,
primarily through pediatric exclusivity. New generic product approvals are
obtained from the FDA through the ANDA process. The ANDA process requires us to
demonstrate bioequivalence to a reference brand product. In addition, we must
develop formulations of the reference product that will result in demonstrating,
to the FDA's satisfaction, that our product is bioequivalent to the referenced
product. Even with the uncertainties related to formulation development, the
ANDA process often results in the FDA granting a number of ANDA approvals for a
given product at the time the brand product patent or other market exclusivity
expires. Consequently, we often face a number of competitors when we introduce a
new generic product into the market. Additionally, ANDA approvals often continue
to be granted for a given product subsequent to the initial launch of the
generic product. These circumstances generally result in significantly lower
prices, as well as reduced margins, for generic products compared to brand
products. New generic market entrants generally cause continued price and margin
erosion over the generic product life cycle. In part, our continued growth is
dependent upon our ability to successfully develop or acquire profitable new
generic pharmaceuticals.
The Waxman-Hatch Act provides for a period of 180 days of generic marketing
exclusivity for those ANDA applicants that are first to file an ANDA containing
a certification of invalidity, non-infringement or unenforceability with respect
to the listed patent(s). Such certifications are commonly referred to as
Paragraph IV certifications. The 180-day period of generic market exclusivity
generally results in higher market share, net revenues and gross margin. Generic
manufacturers may also enjoy longer periods of relatively high, stable margins
through the introduction of difficult-to-develop generic pharmaceuticals.
We have attained a position of leadership in the generic industry through
our ability to obtain ANDA approvals, our uncompromising quality control and our
devotion to customer service. We have bolstered our traditional solid oral dose
products with unit dose, transdermal and extended release products. We have
entered into strategic alliances with several pharmaceutical companies through
product development, distribution and licensing agreements that provide us with
additional opportunities to broaden our product line.
We manufacture and market approximately 111 generic pharmaceuticals in
capsule or tablet form in an aggregate of approximately 264 dosage strengths. We
also manufacture and distribute two generic transdermal patch pharmaceutical
products in six dosage strengths. In addition, we are marketing 73 generic
products in 130 dosage strengths under supply and distribution agreements with
other pharmaceutical companies. We have been successful in developing a number
of extended-release products with approximately nine extended-release products
in 19 dosage strengths in our portfolio. In fiscal 2002, Mylan held the first or
second market position in new and refilled prescriptions dispensed among all
pharmaceutical companies in the US with respect to 97 of the 126 generic
pharmaceutical products we marketed, excluding unit-dose products.
Sales of our antianxiety products, primarily buspirone in fiscal 2002,
represented approximately 19%, 4% and 14% of our net revenues in fiscal 2002,
2001 and 2000, respectively. Lorazepam and clorazepate represented a significant
portion of our net revenues in fiscal 2000. Approximately 19%, 26% and 9% of our
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net revenues in fiscal 2002, 2001 and 2000, respectively, were contributed by
calcium channel blockers, primarily nifedipine in fiscal 2002 and 2001.
We expect that the future growth of our Generic Segment will result from:
(1) increasing generic substitution rates for existing products, (2) emphasizing
the development or acquisition of new products that may attain FDA first-to-file
status, (3) targeting products that are difficult to formulate and (4) pursuing
products for which the active pharmaceutical ingredient is difficult to obtain.
In addition, we intend to continue to seek complementary or strategic
acquisitions.
Brand Segment
The Brand Segment consists of two principal business units, Bertek
Pharmaceuticals Inc. (Bertek) and Mylan Tech, which are wholly-owned
subsidiaries. The Brand Segment operations are conducted primarily through
Bertek. Bertek's principal therapeutic areas of concentration include neurology,
dermatology and cardiology. The Brand Segment includes pharmaceutical products
that have patent protection, have achieved brand recognition in the marketplace
or represent branded generic pharmaceutical products that are responsive to
promotional efforts.
In fiscal 2002, the Brand Segment curtailed its end-of-quarter promotional
programs. As our customers adjusted their buying patterns and inventory levels,
the Brand Segment experienced a decrease in net revenues and gross profits.
Customer orders have subsequently become more consistent and predictable.
We expect that the growth of the Brand Segment will be driven through
internal development of unique and innovative products, product or business
acquisitions, licensing arrangements and our ability to increase prescriptions
for our current products. In late fiscal 2002, the Brand Segment launched
Phenytek(R), an internally developed, once-daily form of extended phenytoin
sodium, used in the treatment of seizure disorders. Phenytek(R) is a unique
product in that it may enhance medication compliance.
Bertek anticipates FDA approval for isotretinoin in fiscal 2003. Obtained
through a licensing agreement, isotretinoin is the generic equivalent of
Accutane(R), which is used in the treatment of severe acne. The significant
marketing barriers surrounding this product will require extensive promotional
efforts and are expected to limit the number of competitors who will enter this
market.
Nebivolol, which we licensed in fiscal 2001, is a beta blocker for which we
intend to pursue a New Drug Application (NDA) for the indication of
hypertension. We believe that we will be able to demonstrate clinically the
unique beta 1-receptor blockade selectivity characteristics of this product,
which could result in providing certain competitive advantages. The nebivolol
compound has patent protection in the US through March 2004, which may be
extended under the terms of the Waxman-Hatch Act. An additional patent
application has been filed that, if approved by the FDA, could further extend
patent protection on this compound. We anticipate expending significant funds to
support the nebivolol clinical development program for hypertension through
fiscal 2004.
The Brand Segment sales force consists of approximately 175 sales
representatives who promote our products to primary care physicians,
dermatologists, neurologists and pharmacists. We expect our sales force to
increase as the Brand Segment introduces new products to its product line.
5
Product Development
Our research and development strategy focuses on the following product
development areas:
o development of controlled-release technologies and the application of
these technologies to reference products;
o development of NDA and ANDA transdermal products;
o development of drugs technically difficult to formulate or manufacture
because of unusual factors that affect their bioequivalence or because
of unusually stringent regulatory requirements;
o development of drugs that target smaller, specialized or under-served
markets;
o expansion of our existing solid oral dosage products with respect to
additional dosage strengths; and
o successful completion of nebivolol clinical trials and the filing of
the related NDA.
Our future results of operations will depend in part upon our ability to
develop and successfully commercialize new brand and generic pharmaceutical
products in a timely manner. These new products must be continually developed,
tested and manufactured. In addition, they must meet regulatory standards and
receive regulatory approvals (see "Government Regulation"). The development and
commercialization process is time-consuming and costly. If products that we
develop cannot be successfully or timely launched, our operating results could
be adversely affected.
FDA approval is required before any drug product, including a generic, can
be marketed. The process of obtaining FDA approval to manufacture and market
pharmaceutical products is rigorous, time-consuming, costly and largely
unpredictable. The rate, timing and cost of obtaining FDA approvals can
adversely affect our product introduction plans and results of operations (see
"Government Regulation").
All applications for FDA approval must contain information relating to
product formulation, raw material suppliers, stability, manufacturing processes,
packaging, labeling and quality control. There are generally two types of
applications used for obtaining FDA approval of new products:
New Drug Application (NDA). An NDA is filed when approval is sought to
market a drug with active ingredients that have not been previously approved by
the FDA. NDAs are filed for our newly developed brand products and, in certain
instances, for a new dosage form of previously approved drugs.
Abbreviated New Drug Application (ANDA). An ANDA is filed when approval is
sought to market a generic equivalent of a drug product previously approved
under an NDA.
6
One requirement for FDA approval of ANDAs and NDAs is that our
manufacturing procedures and operations conform to FDA requirements and
guidelines, generally referred to as current Good Manufacturing Practices
(cGMP). The requirements for FDA approval encompass all aspects of the
production process, including validation and record keeping, and involve
changing and evolving standards. Compliance with cGMP regulations requires
substantial expenditures of time, money and effort in such areas as production
and quality control to ensure full technical compliance. The evolving and
complex nature of these regulatory requirements, the broad authority and
discretion of the FDA and the generally high level of regulatory oversight
result in a continuing possibility that we may be adversely affected by
regulatory actions despite our efforts to comply with regulatory requirements.
Research and development expenses were $58.8 million, $64.4 million and
$49.1 million in fiscal 2002, 2001 and 2000, respectively. Research and
development efforts are conducted primarily to enable us to manufacture and
market FDA-approved pharmaceuticals in accordance with FDA regulations.
Typically, research expenses related to the development of innovative compounds
and the filing of NDAs are significantly greater than those expenses associated
with ANDAs. As the Brand Segment continues to develop brand products, our
research expenses will likely increase.
Generic Product Development
FDA approval of an ANDA is required before marketing a generic equivalent
of a drug approved under an NDA or a previously unapproved dosage strength of a
drug approved under an ANDA. The ANDA approval process is generally less
time-consuming and complex than the NDA approval process. It does not require
new preclinical and clinical studies because it relies on the studies
establishing safety and efficacy conducted for the drug previously approved
through the NDA process. The ANDA process does, however, require one or more
bioequivalency studies to show that the ANDA drug is bioequivalent to the
previously approved drug. Bioequivalence compares the bioavailability of one
drug product with that of another formulation containing the same active
ingredient. When established, bioequivalency confirms that the rate of
absorption and levels of concentration in the bloodstream of a formulation of
the previously approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
Supplemental ANDAs are required for approval of various types of changes to
an approved application, and these supplements may be under review for six
months or more. In addition, certain types of changes may only be approved once
new bioequivalency studies are conducted or other requirements are satisfied.
During fiscal 2002, Mylan received 18 application approvals, including 11
final ANDA approvals: Famotidine Tablets, Buspirone Tablets, Paclitaxel
Injection, Oxaprozin Tablets, Spironolactone Tablets, Enalapril and
Hydrochlorothiazide Tablets, Diclofenac Sodium Extended-Release Tablets,
Lovastatin Tablets, Metformin Tablets, Fluoxetine Capsules, and Ketoprofen
Extended-Release Capsules; two supplemental ANDAs for Extended Phenytoin Sodium
Capsules USP, 200mg and 300mg and Buspirone Tablets, 5mg and 10mg; three
tentative ANDA approvals: Lisinopril Tablets, Lisinopril and Hydrochlorothiazide
Tablets and Mirtazapine Tablets; one approvable ANDA for Tramadol Tablets and
one amendment for additional strengths for Ciprofloxacin.
7
We have a total of 20 ANDAs pending approval, which represent products with
2001 brand sales of approximately $18.0 billion. Eight of these have approvable
or tentative approvable status, representing $6.7 billion in 2001 brand sales.
Over the next few years, patent protection on a large number of brand drugs
are expected to expire. These patent expirations should provide additional
generic product opportunities. We intend to concentrate our generic product
development activities on brand products with significant US sales in
specialized or growing markets, in areas that offer significant opportunities
and other competitive advantages. In addition, we intend to continue to focus
our development efforts on technically difficult-to-formulate products or
products that require advanced manufacturing technology. When evaluating which
drug development projects to undertake, we also consider whether the product
would complement other products in our portfolio or would otherwise assist in
making our product line more complete. During fiscal 2003, we plan to invest in
a significant number of bioequivalency studies for development of generic
products or dosage forms.
Brand Product Development
The process required by the FDA before a previously unapproved
pharmaceutical product may be marketed in the US generally involves the
following:
o laboratory and preclinical tests;
o submission of an investigational new drug application (IND), which
must become effective before clinical trials may begin;
o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed product for its intended use;
o submission of an NDA containing the results of the clinical trials
establishing the safety and efficacy of the proposed product for its
intended use, as well as extensive data addressing such matters as
manufacturing and quality assurance; and
o FDA approval of an NDA.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as toxicology studies to assess
the potential safety and efficacy of the product. The results of these studies
are submitted to the FDA as part of the IND. They must demonstrate that the
product delivers sufficient quantities of the drug to the bloodstream to produce
the desired therapeutic results before human clinical trials may begin. The IND
automatically becomes effective 30 days after receipt by the FDA unless the FDA,
during that 30-day period, raises concerns or questions about the conduct of the
proposed trials as outlined in the IND. In such cases, the IND sponsor and FDA
must resolve any outstanding concerns before clinical trials may begin. In
addition, an independent institutional review board must review and approve any
clinical study prior to initiation.
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Human clinical trials are typically conducted in three sequential phases,
which may overlap:
o Phase I: The drug is initially introduced into a relatively small
number of healthy human subjects or patients and is tested for safety,
dosage tolerance, absorption, metabolism, distribution and excretion.
o Phase II: Studies are performed with a limited patient population to
identify possible adverse effects and safety risks, to assess the
efficacy of the product for specific targeted diseases or conditions
and to determine dosage tolerance and optimal dosage.
o Phase III: When Phase II evaluations demonstrate that a dosage range
of the product is effective and has an acceptable safety profile,
Phase III trials are undertaken to evaluate further dosage, clinical
efficacy and to test further for safety in an expanded patient
population at geographically dispersed clinical study sites.
The results of the product development, preclinical studies and clinical
studies are then submitted to the FDA as part of the NDA. The NDA drug
development and approval process could take from 3 to 10 or more years.
Our brand product development continues to emphasize areas where we have an
existing sales and marketing presence, namely dermatology, cardiology and
neurology. Products currently in development and/or pending approval include:
Expected
Submission/Submitted
Compound Indication Phase (fiscal year)
________ __________ _____ _____________
Neurology
Apomorphine "Off" or "Freeze" episodes III 2003
in late stage Parkinson's disease
MT110 Pain management I 2005
Dermatology
Topical Butenafine Gel Onychomycosis (nail fungus) III 2003
Topical High Strength Retinoic Acid Actinic keratosis (pre-cancerous II *
skin lesions)
Sertaconazole Tinea pedis (athlete's foot) 2002
Mentax TC Tinea versicolor (skin fungal 2002
infection)
Cardiology
Nebivolol Hypertension (high blood pressure) III 2004
*To be determined
Additionally, we have in development ANDA products, as well as pending
submissions, that upon FDA approval, may require significant promotional efforts
and, therefore, may be marketed by the Brand Segment.
Product development is inherently risky, especially when the development
relates to new products for which safety and efficacy are not established and
the market is not yet proven. The development process also requires substantial
time, effort and financial resources. We cannot be certain that we will be
successful in commercializing any of the products we are developing on a timely
basis, if at all. We also cannot be certain that any investment made in
developing products will be recovered, even if we are successful in
commercialization.
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The Company owns a 50% interest in Somerset Pharmaceuticals, Inc.
(Somerset), a joint venture with Watson Pharmaceuticals, Inc. Currently,
Somerset's only marketed product is Eldepryl(R), a drug for the treatment of
Parkinson's disease, which lost its Orphan Drug exclusivity in 1996. In recent
years, Somerset has increased its research and development spending to develop
additional indications for selegiline, the active ingredient of Eldepryl(R),
using a transdermal delivery system. Somerset filed an NDA related to a
selegiline transdermal delivery system for the treatment of depression in May
2001. In March 2002, the FDA issued a not-approvable letter citing certain
deficiencies. Somerset is currently working with the FDA to support further this
submission. Any additional requirements by the FDA will determine when, or if,
this application may be approved.
Patents, Trademarks and Licenses
We own or license a number of patents in the US and foreign countries
covering certain products and have also developed brand names and trademarks for
other products. Generally, the brand pharmaceutical business relies upon patent
protection to ensure market exclusivity for the life of the patent. Following
patent expiration, brand products often continue to have market viability based
upon the goodwill of the product name, which typically benefits from trademark
protection. We consider the overall protection of our patents, trademarks and
license rights to be of material value and act to prevent these rights from
infringement; however, our business in the Brand Segment is not dependent upon
any single patent, trademark or license. Our patents on branded products may not
prevent other companies from developing functionally equivalent products or from
challenging the validity of our patents, which could adversely affect our
ability to commercially promote patented products. We could be required to
enforce our patent or other intellectual property rights through litigation,
which can be protracted, involves significant expense and for which the outcome
is inherently uncertain.
Intellectual property rights also affect our generic pharmaceutical
business. Companies that produce branded pharmaceutical products routinely bring
litigation against ANDA applicants seeking approval to manufacture and market
generic forms of their branded products. These companies allege patent
infringement or other violations of intellectual property rights as the basis
for filing suit against the ANDA applicant. Litigation often involves
significant expense and can delay or prevent introduction of generic products.
Patent validity and infringement litigation may also impact the ANDA process, as
discussed under "Government Regulation" in this Item.
Customers and Marketing
We market our generic products directly to wholesalers, distributors,
retail pharmacy chains, mail order pharmacies and group purchasing organizations
within the US. We also market our generic products indirectly to independent
pharmacies, managed care organizations, hospitals, nursing homes and pharmacy
benefit management companies. These indirect customers purchase our products
primarily through our wholesale customers. Approximately 60 employees are
engaged in servicing Generic Segment customers.
Brand pharmaceutical products are marketed directly to healthcare
professionals in order to increase brand awareness and prescriptions written for
the product. However, these products are generally sold through the same
channels and customers as generic products. Approximately 240 employees are
10
engaged in marketing and selling the Brand Segment's products, as well as
servicing Brand Segment customers.
Consistent with industry practice, we have a return policy that allows our
customers to return product within a specified period of the expiration date. We
provide credit, at our discretion, to our customers for decreases that we make
to our selling price for the value of the inventory that is owned by our
customers as of the date of the price reduction. We also have arrangements with
certain customers establishing prices for our products for which they
independently select a wholesaler from which to purchase. Such parties are
referred to as indirect customers. We provide a chargback credit to our
wholesale customers for the difference between our invoice price to the
wholesaler and the indirect customer's contract price.
McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen
Corporation represented approximately 15%, 14% and 14% of net revenues in fiscal
2002. Two of our customers represented approximately 14% and 11% of net revenues
in fiscal 2001. Four of our customers accounted for approximately 15%, 15%, 11%,
and 10% of net revenues in fiscal 2000.
Competition
The pharmaceutical industry is very competitive. Our competitors vary
depending upon therapeutic and product categories. Primary competitors include
the major manufacturers of brand name and generic pharmaceuticals, including
Bristol-Myers Squibb Company, Eli Lilly and Company, Geneva Pharmaceuticals,
GlaxoSmithKline, IVAX Corporation, Merck & Co., Inc., Novartis Corporation, Teva
Pharmaceutical Industries, Ltd. and Watson Pharmaceuticals, Inc.
The primary means of competition are innovation and development, timely FDA
approval, manufacturing capabilities, product quality, marketing, customer
service, reputation and price. Price is a key competitive factor in the generic
pharmaceutical business. To compete effectively on the basis of price and remain
profitable, a generic drug manufacturer must manufacture its products in a
cost-effective manner. Additionally, we maintain adequate levels of inventories
to meet customer demand. In addition to generic manufacturers, we also have
experienced competition from brand companies that have purchased generic
companies or license their products prior to or as relevant patents expire. No
further regulatory approvals are required for a brand manufacturer to sell its
pharmaceutical products directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market.
Our competitors may be able to develop products and processes competitive
with or superior to our own for many reasons, including that they may have:
o significantly greater financial resources;
o larger research and development and marketing staffs;
o larger production capabilities; or
o extensive experience in preclinical testing and human clinical trials.
The pharmaceutical market is undergoing, and is expected to continue to
undergo, rapid and significant technological changes, and we expect competition
to intensify as technological advances are made. We intend to compete in this
marketplace by developing or licensing brand pharmaceutical products that are
11
either patented or proprietary and that are primarily for indications having
relatively large patient populations or that have limited or inadequate
treatments available and by developing therapeutic equivalents to brand products
that offer unique marketing opportunities. Developments by others could make our
pharmaceutical products or technologies obsolete or noncompetitive.
Net revenues and gross profit derived from generic pharmaceutical products
tend to follow regulatory and competitive patterns unique to the generic
pharmaceutical industry. The first generic manufacturer to file an ANDA
containing Paragraph IV certification for a generic equivalent to a brand
product may be entitled to a 180-day period of marketing exclusivity under the
Waxman-Hatch Act. During this exclusivity period, the FDA cannot grant final
approval to any other generic equivalent. The first generic equivalent on the
market is thus able to initially achieve a relatively significant market share.
As competing generic products receive regulatory approvals, market share, net
revenues and gross profit typically decline. Accordingly, the level of market
share, net revenues and gross profit attributable to generic products developed
and maintained by us is normally related to:
o our ability to maintain a pipeline of products in development;
o our ability to develop and rapidly introduce new products;
o the timing of regulatory approval for such products;
o the number and timing of regulatory approvals for competing products;
and
o our ability to manufacture such products efficiently.
Because of the regulatory and competitive factors discussed above, our net
revenues and results of operations have historically experienced some
fluctuation from period to period. We expect this fluctuation to continue.
Brand companies also pursue other strategies to prevent or delay generic
competition. These strategies include:
o seeking to establish regulatory and legal obstacles that would make it
more difficult to demonstrate bioequivalence;
o initiating legislative efforts in various states to limit the
substitution of generic versions of certain types of brand
pharmaceuticals;
o instituting legal action that automatically delays approval of generic
products, the approval of which requires certifications that the brand
drug's patents are invalid or unenforceable;
o introducing "second generation" products prior to the expiration of
market exclusivity for the reference product;
o obtaining extensions of market exclusivity by conducting trials of
brand drugs in pediatric populations as discussed below;
o persuading the FDA to withdraw the approval of brand name drugs, for
which the patents are about to expire, thus allowing the brand name
company to obtain new patented products serving as substitutes for the
products withdrawn; and
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o seeking to obtain new patents on drugs for which patent protection is
about to expire.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity for indications of new or currently marketed drugs if certain agreed
upon pediatric studies are completed by the applicant. Brand companies are
utilizing this provision to extend periods of market exclusivity.
Some companies have lobbied Congress for amendments to the Waxman-Hatch
legislation that would give them additional advantages over generic competitors.
For example, although the term of a company's drug patent can be extended to
reflect a portion of the time an NDA is under regulatory review, some companies
have proposed extending the patent term by a full year for each year spent in
clinical trials, rather than the one-half year that is currently permitted. If
proposals like these become effective, our entry into the market and our ability
to generate revenues associated with these products will be delayed.
A significant amount of the Generic Segment's sales are made to a
relatively small number of drug wholesalers and retail drug chains. These
customers represent an essential part of the distribution chain of generic
pharmaceutical products. Drug wholesalers and retail drug chains have undergone,
and are continuing to undergo, significant consolidation, which has resulted in
customers gaining more purchasing leverage and consequently increasing the
pricing pressures facing our generic pharmaceutical business. Further
consolidation among our customers may result in even greater pricing pressures
and correspondingly reduce our net revenues and gross margins.
Other competitive factors affecting our business include the emergence of
large buying groups representing independent retail pharmacies and the
prevalence and influence of managed care organizations and similar institutions,
which are able to extract price discounts on pharmaceutical products. The
influence of these entities continues to grow, and we may continue to face
pricing pressure on the products we market.
The Brand Segment, in addition to generic competition, faces competition
from other brand pharmaceutical companies that offer products which, while
having different properties, are intended to provide similar benefits to
consumers. These competitors tend to have more products, a longer history in the
industry, more marketing and sales representatives and significantly more
financial resources than Mylan does. Each of these factors and others could
prevent us from achieving profitable results in the Brand Segment.
Product Liability
Product liability suits represent a continuing risk to firms in the
pharmaceutical industry. We strive to minimize such risks by adherence to
stringent quality control procedures. Although we carry insurance, we believe
that no reasonable amount of insurance can fully protect against all such risks
because of the potential liability inherent in the business of producing
pharmaceuticals for human consumption.
Raw Materials
The active pharmaceutical ingredients and other materials and supplies used
in our pharmaceutical manufacturing operations are generally available and
purchased from many different foreign and domestic suppliers. However, in some
13
cases, the raw materials used to manufacture pharmaceutical products are only
available from a single FDA-approved supplier. Even when more than one supplier
exists, we may elect to list, and in some cases have only listed, one supplier
in our applications with the FDA. Any change in a supplier not previously
approved must then be submitted through a formal approval process with the FDA.
Government Regulation
All pharmaceutical manufacturers are subject to extensive, complex and
evolving regulation by the federal government, principally the FDA, and to a
lesser extent, state government agencies. The Federal Food, Drug and Cosmetic
Act, the Controlled Substances Act, the Waxman-Hatch Act, the Generic Drug
Enforcement Act and other federal government statutes and regulations govern or
influence the testing, manufacturing, packaging, labeling, storing, record
keeping, safety, approval, advertising, promotion, sale and distribution of
products.
FDA approval is required before any new drug can be marketed. The FDA
requires extensive testing of new pharmaceutical products to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. Testing in humans may not be commenced until after an IND
exemption is granted by the FDA. An NDA or supplemental NDA must be submitted to
the FDA both for new drugs that have not been previously approved by the FDA and
for new combinations of, new indications of or new delivery methods for
previously approved drugs.
FDA approval of an ANDA is required before a generic equivalent of an
existing or reference brand drug can be marketed. The ANDA process is
abbreviated in that the FDA waives the requirement of conducting complete
preclinical and clinical studies and, instead, relies on bioequivalence studies.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
A sponsor of an NDA is required to identify in its application any patent
that claims the drug or a use of the drug, which is the subject of the
application. Upon NDA approval, the FDA lists the approved drug product and
these patents in the Orange Book. Any applicant who files an ANDA seeking
approval of a generic equivalent version of a reference brand drug before
expiration of the referenced patent(s) must certify to the FDA that the listed
patent is either not infringed or that it is invalid or unenforceable (a
Paragraph IV certification). If the holder of the NDA sues claiming
infringement, the FDA may not approve the application until a court decision
favorable to the ANDA applicant has been rendered or the expiration of a
30-month period beginning on the date the ANDA applicant is sued for
infringement.
The holder of the NDA for the listed drug may be entitled to a non-patent,
exclusivity period before the FDA can approve an application for a bioequivalent
product. If the listed drug is a new chemical entity, the FDA may not accept an
ANDA for a bioequivalent product before the expiration of five years. If it is
not a new chemical entity but the holder of the NDA conducted clinical trials
essential to approval of the NDA or a supplement thereto, the FDA may not
approve an ANDA for a bioequivalent product before the expiration of three
years. Certain other periods of exclusivity may be available if the listed drug
is indicated for treatment of a rare disease or is studied for pediatric
indications.
14
Facilities, procedures, operations and/or testing of products are subject
to periodic inspection by the FDA, the Drug Enforcement Administration and other
authorities. In addition, the FDA conducts pre-approval and post-approval
reviews and plant inspections to determine whether our systems and processes are
in compliance with cGMP and other FDA regulations. Among other things, the FDA
may withhold approval of NDAs, ANDAs or other product applications of a facility
if deficiencies are found at that facility. Certain suppliers are subject to
similar regulations and periodic inspections.
Failure to comply with FDA and other governmental regulations can result in
fines, unanticipated compliance expenditures, recall or seizure of products,
total or partial suspension of production and/or distribution, suspension of the
FDA's review of NDAs, ANDAs or other product applications, enforcement actions,
injunctions and criminal prosecution. Under certain circumstances, the FDA also
has the authority to revoke previously granted drug approvals. Although we have
internal compliance programs and have had a favorable compliance history, if
these programs were not to meet regulatory agency standards in the future or if
our compliance were deemed deficient in any significant way, it could have a
material adverse effect.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels and require all pharmaceutical manufacturers to rebate a
percentage of their revenues arising from Medicaid-reimbursed drug sales to
individual states. The required rebate is currently 11% of the average
manufacturer's price for sales of Medicaid-reimbursed products marketed under
ANDAs. Sales of Medicaid-reimbursed products marketed under NDAs require
manufacturers to rebate the greater of approximately 15% of the average
manufacturer's price or the difference between the average net sales price and
the lowest net sales price during a specific period. We believe that federal or
state governments may continue to enact measures aimed at reducing the cost of
drugs to the public. For example, the extension of prescription drug coverage to
all Medicare recipients has gained significant political support. We cannot
predict the nature of any measures that may be enacted or their impact on our
profitability.
We must also comply with federal, state and local laws of general
applicability, such as laws regulating working conditions. Additionally, we are
subject, as are generally all manufacturers, to various federal, state and local
environmental protection laws and regulations, including those governing the
discharge of materials into the environment. We do not expect the costs of
complying with such environmental provisions to have a material adverse effect
on our earnings, cash requirements or competitive position in the foreseeable
future. However, if changes to such environmental provisions are made that
require significant changes in our operations or the expenditure of significant
funds, such changes could have a material adverse effect on our earnings, cash
requirements or competitive position.
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the industry, government agencies
and others. Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and efficacy of
previously marketed products. In some cases, these studies have resulted, and
may in the future result, in the discontinuance of product marketing.
Seasonality
Our business is not materially affected by seasonal factors.
15
Environment
We believe that our operations comply in all material respects with
applicable laws and regulations concerning the environment. While it is
impossible to predict accurately the future costs associated with environmental
compliance and potential remediation activities, compliance with environmental
laws is not expected to require significant capital expenditures and has not
had, and is not expected to have, a material adverse effect on our earnings or
competitive position.
Employees
We employ approximately 2,200 persons, approximately 1,150 of whom serve in
clerical, sales and management capacities. The remaining are engaged in
production and maintenance activities.
The production and maintenance employees at our manufacturing facility in
Morgantown, West Virginia, are represented by the Paper, Allied-Industrial
Chemical and Energy Workers International Union (P.A.C.E.)-AFL-CIO and its Local
Union 5-957-AFL-CIO under a contract that expires on April 15, 2007.
Backlog
At March 31, 2002, open orders were approximately $43.9 million as compared
to $22.1 million at March 31, 2001, and $28.2 million at March 31, 2000. Because
of the relatively short lead time required in filling orders for our products,
we do not believe these backlog amounts bear a significant relationship to sales
or income for any full 12-month period.
16
ITEM 2. Properties
We maintain various facilities in the US and Puerto Rico. These facilities
are used for research and development, manufacturing, warehousing, distribution
and administrative functions and consist of both owned and leased properties.
The following summarizes the properties used to conduct our operations:
Primary Segment Location Status Primary Use
--------------- -------- ------ -----------
Generic: North Carolina Own Distribution
Warehousing
West Virginia Own Manufacturing
Warehousing
Research and
Development
Administrative
Illinois Own Manufacturing
Warehousing
Administrative
Lease Warehousing
Puerto Rico Own Manufacturing
Warehousing
Administrative
Brand: North Carolina Lease Administrative
Texas Own Manufacturing
Warehousing
Vermont Own Manufacturing
Research and
Development
Administrative
Lease Warehousing
Corporate/Other: Pennsylvania Lease Administrative
All facilities are in good operating condition. The machinery and equipment
are well maintained, and the facilities are suitable for their intended purposes
and have capacities adequate for current operations.
ITEM 3. Legal Proceedings
Product Litigation
While it is not possible to determine with any degree of certainty the
ultimate outcome of the following legal proceedings, we believe that we have
meritorious defenses with respect to the claims asserted against the Company,
and we intend to defend vigorously our position. An adverse outcome in any one
of these proceedings could have a material adverse effect on our financial
position and results of operations.
17
Paclitaxel
In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories
Inc. (Abbott) filed suit against the Company in the US District Court for the
Western District of Pennsylvania. Plaintiffs allege the Company's manufacture,
use and sale of its paclitaxel product infringes certain patents owned by NAPRO
and allegedly licensed to Abbott. The Company began selling its paclitaxel
product in July 2001. Abbott's ANDA seeking approval to sell paclitaxel has been
approved.
Verapamil ER
In July 2001, Biovail Laboratories Inc. (Biovail) filed a demand for
arbitration against the Company with the American Arbitration Association. In
response to such demand, the Company filed its answer and counterclaims. The
dispute relates to a supply agreement under which the Company supplied
extended-release verapamil to Biovail. The Company terminated the agreement in
March 2001. Biovail's allegations include breach of contract, breach of implied
covenant of good faith and fair dealing and unfair competition. The Company's
allegations as set forth in its counterclaims include breach of obligations of
good faith and fair dealing, fraud and unjust enrichment. The arbitration
hearing is scheduled to be held in September 2002.
Zagam(R)
The Company filed suit against Aventis Pharmaceuticals, Inc., successor in
interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.; Rhone-Poulenc Rorer
Pharmaceuticals, LTD.; Rorer Pharmaceutical Products, Inc.; Rhone-Poulenc Rorer,
S.A., and their affiliates in the US Federal District Court for the Western
District of Pennsylvania in May 2001. The complaint sets forth claims of breach
of contract, rescission, breach of implied covenant of good faith and fair
dealing and unjust enrichment. The defendant's answer includes a counterclaim,
which alleges nonpayment of royalties and failure to mitigate.
Nifedipine
In February 2001, Biovail filed suit against the Company and Pfizer Inc.
(Pfizer) in the US District Court for the Eastern District of Virginia alleging
antitrust violations with respect to agreements entered into between the Company
and Pfizer regarding nifedipine. The Company filed a motion to transfer the case
to the US District Court for the Northern District of West Virginia, which was
granted. The Company's motion to dismiss Biovail's complaint was denied, and the
Company's motion to dismiss certain claims by other plaintiffs was granted in
part and denied in part.
The Company has been named as a defendant in five other putative class
action suits alleging antitrust claims based on the settlement entered into by
the Company with Bayer AG, Bayer Corporation and Pfizer regarding nifedipine.
Buspirone
The Company filed an ANDA seeking approval to market buspirone, a generic
equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company filed the
appropriate certifications relating to the patents for this product that were
then listed in the FDA publication entitled Approved Drug Products with
Therapeutic Equivalence Evaluations, popularly known as the "Orange Book." In
November 2000, a new patent claiming the administration of a metabolite of
buspirone (which BMS claims also covers the administration of buspirone itself)
18
was issued to BMS. The subsequent listing of this patent in the Orange Book
prevented the FDA from granting final approval for the Company's buspirone ANDA.
In November 2000, the Company filed suit against the FDA and BMS in the US
District Court for the District of Columbia. The complaint asked the court to
order the FDA to grant immediately final approval of the Company's ANDA for the
15mg buspirone product and require BMS to request withdrawal of the patent from
the Orange Book. Upon the Company's posting a bond in the amount of $25 million,
the court entered an order granting the Company's motion for a preliminary
injunction. Following a brief stay by the US Court of Appeals for the Federal
Circuit, the FDA granted approval of the Company's ANDA with respect to the 15mg
strength. Upon receiving FDA approval, the Company began marketing and selling
the 15mg tablet in March 2001. The Company has also been selling the 30mg
buspirone tablet since August 2001. BMS appealed the preliminary injunction
order to both the US Court of Appeals for the Federal Circuit and the US Court
of Appeals for the District of Columbia Circuit. The District of Columbia Court
of Appeals denied BMS' application and stayed the Company's motion to dismiss
pending the decision of the Federal Circuit Court of Appeals. The Federal
Circuit heard oral arguments in July 2001.
In October 2001, the Federal Circuit overturned the lower court ruling and
held that the Company did not have a cognizable claim against BMS under the
Declaratory Judgment Act to challenge the listing of BMS' patent, which the
Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug
and Cosmetic Act. The Federal Circuit did not address the lower court's
determination that the BMS patent does not claim buspirone or a method of
administration of the drug. The Company filed a petition with the Federal
Circuit asking that the court reconsider its holding. The petition was denied in
January 2002. A petition for review by the United States Supreme Court is
pending.
In January 2002, the Company filed a motion in the US District Court for
the District of Columbia seeking a preliminary injunction which, if granted,
would require that the FDA refuse to list the BMS patent should BMS submit it
for re-listing in the Orange Book. The District of Columbia Court has entered an
order staying further proceedings in this case pending appeal of the order
entered in the US District Court for the Southern District of New York granting
the Company's motion for summary judgment of non-infringement.
The Company is involved in three other suits related to buspirone. In
November 2000, the Company filed suit against BMS in the US District Court for
the Northern District of West Virginia. The suit seeks a declaratory judgment of
non-infringement and/or invalidity of the BMS patent listed in November 2000. In
January 2001, BMS sued the Company for patent infringement in the US District
Court for the District of Vermont and also in the US District Court for the
Southern District of New York. In each of these cases, BMS asserts that the
Company infringes BMS' patent and seeks to rescind approval of the Company's
ANDA. It is expected that BMS will seek to recover damages equal to the profits
it has lost as a result of the Company's sales of this product.
The Company subsequently filed motions to dismiss the Vermont case and
dismiss and transfer the New York case to the US District Court for the Northern
District of West Virginia. The Judicial Panel on Multi-District Litigation
ordered these cases, along with another patent case and numerous antitrust suits
filed against BMS, be consolidated in the US District Court for the Southern
District of New York. The New York Court has granted the Company's motion for
summary judgment that the BMS patent is not infringed or, alternatively, is
invalid. BMS has appealed this decision to the Court of Appeals for the Federal
Circuit. The New York Court also denied the BMS motion to dismiss the Company's
antitrust counterclaims.
19
Lorazepam and Clorazepate
In December 1998, the Federal Trade Commission (FTC) filed suit in US
District Court for the District of Columbia against the Company. The FTC's
complaint alleged that the Company engaged in restraint of trade,
monopolization, attempted monopolization and conspiracy to monopolize arising
out of certain agreements involving the supply of raw materials used to
manufacture two products, lorazepam and clorazepate.
In July 2000, the Company reached a tentative agreement to settle the
actions brought by the FTC, the States Attorneys General and suits brought by or
on behalf of third party reimbursers. The Company agreed to pay up to $147
million, including attorneys' fees. This tentative settlement became final in
February 2002. Included in this settlement were three companies indemnified by
the Company - Cambrex Corporation, Profarmaco S.r.I. and Gyma Laboratories, Inc.
Lawsuits not included in this settlement principally involve alleged direct
purchasers, such as wholesalers and distributors. In July 2001, the United
States Court for the District of Columbia certified a litigation class
consisting of these direct purchasers. The Company filed a petition with the
United States Court of Appeals for the District of Columbia Circuit seeking
appellate review of the district court's order. The appellate court denied the
Company's appeal of the lower court's class certification order. In addition,
four third party reimbursers opted-out of the class action settlement and have
filed separate, non-class actions against the Company. The Company has filed
motions to dismiss those claims.
Other Litigation
The Company is involved in various other legal proceedings that are
considered normal to its business. While it is not feasible to predict the
ultimate outcome of such other proceedings, it is the opinion of management that
the ultimate outcome of such other proceedings will not have a material adverse
effect on our results of operations or financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
20
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange under the
symbol MYL. The following table sets forth the quarterly high and low common
share price information for the periods indicated:
Fiscal 2002 High Low
----------- ---- ----
First quarter.........................................$31.81 $24.02
Second quarter........................................ 35.65 28.30
Third quarter......................................... 37.91 31.35
Fourth quarter........................................ 36.20 29.46
Fiscal 2001
-----------
First quarter.........................................$32.25 $17.00
Second quarter........................................ 27.94 18.06
Third quarter......................................... 30.00 22.50
Fourth quarter........................................ 25.85 21.00
As of April 30, 2002, there were approximately 99,021 holders of common
stock, including those who held in street or nominee name.
We have paid dividends since April 1992. For both fiscal 2002 and 2001, we
paid quarterly cash dividends of $.04 per common share. We expect to continue
the practice of paying regular cash dividends.
21
ITEM 6. Selected Financial Data
The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the Consolidated Financial Statements and
the Notes to Consolidated Financial Statements included elsewhere in this
report.
(in thousands, except per share data)
Fiscal year ended March 31, 2002 2001 2000 1999 1998
Statements of Earnings: ---- ---- ---- ---- ----
Net revenues $ 1,104,050 $ 846,696 $ 790,145 $ 721,123 $ 555,423
Cost of sales 480,111 464,521 369,377 339,342 288,290
----------- ----------- ----------- ----------- -----------
Gross profit 623,939 382,175 420,768 381,781 267,133
Operating expenses:
Research and development 58,847 64,385 49,121 61,843 46,278
Selling and administrative 169,913 151,212 148,688 122,468 96,708
Acquired in-process research
and development -- -- -- 29,000 --
Litigation settlement -- 147,000 -- -- --
----------- ----------- ----------- ----------- -----------
Earnings from operations 395,179 19,578 222,959 168,470 124,147
Equity in (loss) earnings of Somerset (4,719) (1,477) (4,193) 5,482 10,282
Other income, net 17,863 39,912 23,977 18,342 13,960
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 408,323 58,013 242,743 192,294 148,389
Provision for income taxes 148,072 20,885 88,497 76,885 47,612
Net earnings =========== =========== =========== =========== ===========
$ 260,251 $ 37,128 $ 154,246 $ 115,409 $ 100,777
At Fiscal Year End
Selected balance sheet data:
Total assets $ 1,616,710 $ 1,469,312 $ 1,342,470 $ 1,207,252 $ 847,748
Working capital 886,935 588,037 598,976 475,398 379,726
Long-term obligations 21,854 23,345 30,630 26,827 26,218
Total shareholders' equity 1,402,239 1,132,536 1,203,722 1,059,905 744,465
Per common share data:
Net earnings
Basic $ 2.07 $ 0.30 $ 1.19 $ 0.92 $ 0.83
Diluted $ 2.04 $ 0.29 $ 1.18 $ 0.91 $ 0.82
Shareholders' equity - diluted $ 11.01 $ 8.94 $ 9.24 $ 8.34 $ 6.05
Cash dividends declared and paid $ $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
Weighted average common shares outstanding:
Basic 125,525 125,788 129,220 125,584 122,094
Diluted 127,368 126,749 130,224 127,156 123,043
In July 2000, we reached a tentative settlement with the Federal Trade
Commission, States Attorneys General and certain private parties with
regard to lawsuits filed against the Company relating to pricing issues and
raw material contracts on two products. Excluding the litigation settlement
of $147,000, net earnings for fiscal 2001 were $131,208, or $1.04 per
diluted share. This settlement was approved by the court and made final in
February 2002 (see Note 17 to Consolidated Financial Statements).
In June 2000, we completed the Stock Repurchase Program authorized and
announced by the Board of Directors in April 1997. In fiscal 2001, we
purchased 4,855 shares for $91,456.
In October 1998, we acquired 100% of the common stock of Penederm Inc. The
above financial data reflects Penederm's results of operations from the
date of acquisition.
In fiscal 1998, net revenues include $26,822 relating to a supply agreement
with Genpharm Inc.
22
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion and analysis should be read in conjunction with
the fiscal 2002 Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere in this report. All
references to fiscal years shall mean the 12-month period ended March 31.
Overview
Mylan Laboratories Inc. and its subsidiaries (the Company or Mylan)
develop, manufacture, market and distribute generic and brand pharmaceutical
products. Fiscal 2002 was the most financially successful year in Mylan's
history. Net revenues exceeded the $1.0 billion mark reaching $1.1 billion
compared to $846.7 million in fiscal 2001. This revenue growth was driven by the
Generic Segment, which represented 88% of total net revenues for fiscal 2002.
The Generic Segment's growth in net revenues, as well as gross profit and
operating income, was primarily driven by the marketing exclusivity for
buspirone, the introduction of new products and a relatively stable pricing
environment for the core generic products. The US Food and Drug Administration
(FDA) withheld competitor approvals for buspirone 15mg until late February 2002.
This delay extended Mylan's original 180-day marketing exclusivity by
approximately five months, which resulted in increased net revenues and gross
profits. With the approval and launch of additional buspirone products, the
Company experienced substantial price erosion by the end of fiscal 2002. Price
and volume erosion are considered normal in the generic industry as competitors
launch their products.
During fiscal 2002, the Generic Segment's net revenues were also enhanced
by certain changes in the competitive environment, which resulted in relatively
stable pricing for the core generic products. These changes, such as the
consolidation in both customer and competitor bases, the withdrawal from the
market of a competitor and the manufacturing and supply issues experienced by
certain competitors, along with Mylan's ability to consistently manufacture and
supply quality products, made a substantial contribution to the Generic
Segment's net revenue growth.
The Brand Segment's product line consists of both brand and branded generic
products which are sensitive to promotional efforts. Mylan continues its efforts
to build upon this platform of products through internal development,
in-licensing agreements and/or acquisitions. With the addition of executive
management and the consolidation of non-manufacturing operations to Research
Triangle Park complete, Mylan remains committed to the implementation and
execution of its brand strategic plan.
23
The following table presents the results of operations for each of our
business segments:
FISCAL CHANGE
--------------------------------------------- -----------------------
(in thousands) 2002 2001 2000 2002/2001 2001/2000
---- ---- ---- --------- ---------
Consolidated:
Net revenues $ 1,104,050 $ 846,696 $ 790,145 30% 7%
Gross profit 623,939 382,175 420,768 63% (9%)
Research and development 58,847 64,385 49,121 (9%) 31%
Selling and marketing 59,913 59,238 56,854 1% 4%
General and administrative 110,000 91,974 91,834 20% 0%
Pretax earnings 408,323 58,013 242,743 604% (76%)
Generic Segment:
Net revenues 971,075 675,118 650,890 44% 4%
Gross profit 552,736 273,111 332,222 102% (18%)
Research and development 33,814 47,204 39,255 (28%) 20%
Selling and marketing 12,430 14,342 18,753 (13%) (24%)
General and administrative 23,424 24,450 26,111 (4%) (6%)
Segment profit 483,068 187,115 248,103 158% (25%)
Brand Segment:
Net revenues 132,975 171,578 139,255 (22%) 23%
Gross profit 71,203 109,064 88,546 (35%) 23%
Research and development 25,033 17,181 9,866 46% 74%
Selling and marketing 47,483 44,896 38,101 6% 18%
General and administrative 14,899 20,841 11,814 (29%) 76%
Segment (loss) profit (16,212) 26,146 28,765 (162%) (9%)
Corporate/Other Segment:
Segment loss (58,533) 155,248 (34,125) 62% (355%)
Segment net revenues represent revenues from unrelated third parties. For
the Generic and Brand Segments, segment profit represents segment gross
profit less direct research and development, selling and marketing and
general and administrative expenses. Segment loss for Corporate/Other
includes legal costs, goodwill amortization, other corporate administrative
expenses and other income and expense.
Effective April 1, 2001, the Brand Segment assumed responsibility for the
sales and marketing of EX phenytoin 100mg, which were previously included
and evaluated in the operating results of the Generic Segment. Accordingly,
the operating results of the Brand Segment for fiscal 2001 and 2000 have
been revised to include the net revenues of $26,317 and $16,917 and the
corresponding costs of sales of $5,247 and $3,782 for EX phenytoin 100mg
previously included in the Generic Segment.
In fiscal 2001, Corporate/Other includes the expense of $147,000 for the
settlement with the Federal Trade Commission and related litigation (see
Note 17 to Consolidated Financial Statements).
Results of Operations
The following discussion excludes the $147.0 million before tax effect of
the Federal Trade Commission (FTC) settlement recognized in fiscal 2001 (see
Note 17 to Consolidated Financial Statements). Excluding the impact of the FTC
settlement, net earnings for fiscal 2001 were $131.2 million, or $1.04 per
diluted share. Including the FTC settlement, net earnings were $37.1 million, or
$.29 per diluted share.
24
Fiscal 2002 compared to Fiscal 2001
Financial Highlights
o Net revenues increased 30% or $257.4 million to $1.1 billion from
$846.7 million.
o Gross profit increased 63% or $241.7 million to $623.9 million from
$382.2 million.
o Gross margin increased to 57% from 45%.
o Operating income increased 137% or $228.6 million to $395.2 million
from $166.6 million.
o Net earnings increased 98% or $129.1 million to $260.3 million from
$131.2 million.
o Earnings per diluted share increased 96% to $2.04 per share from $1.04
per share.
Net Revenues and Gross Profit
Net revenues for fiscal 2002 were $1.1 billion compared to $846.7 million
for fiscal 2001, an increase of 30% or $257.4 million. This increase in net
revenues is attributed to increased net revenues for the Generic Segment of
$296.0 million, which was partially offset by a decrease in net revenues for the
Brand Segment of $38.6 million.
Generic Segment net revenues for the current year increased 44% to $971.1
million from $675.1 million for fiscal 2001. This increase is primarily
attributed to sales of our buspirone products, as well as the launch of new
products (excluding buspirone 5mg, 10mg and 30mg) in fiscal 2002. The buspirone
products contributed net revenues of $167.7 million or 57% of fiscal 2002's
growth, while new products contributed net revenues of $69.7 million or 24% of
fiscal 2002's growth. The remaining increase is attributed to the growth of core
generic products of $77.8 million, which was partially offset by lost revenues
of $19.2 million due to the sale of the liquids facility in Florida. The growth
of core generic products is partially attributed to the elimination of
end-of-quarter promotional programs in the prior year.
The 180-day market exclusivity period, as provided by the Waxman-Hatch Act,
for buspirone 15mg expired in late September 2001. However, the FDA withheld
additional approvals for generics until late February 2002. Generic Segment net
revenues in fiscal 2002 benefited significantly from the extended exclusivity
period. Since other generic pharmaceutical companies entered the buspirone
market, the Generic Segment has experienced substantial pricing and volume
pressures. See Note 17 to Consolidated Financial Statements regarding litigation
of certain issues relating to our buspirone Abbreviated New Drug Application
(ANDA).
Because of the significant uncertainties surrounding when the FDA would
approve additional buspirone 15mg ANDAs, we could not reasonably estimate the
amount of potential price adjustments that would occur as a result of the
additional approvals. For the quarterly periods ended September 2001 and
December 2001, revenues on certain shipments were deferred until such
25
uncertainties were resolved. Such uncertainties were resolved either upon our
customers' sale of this product or when the FDA approved additional generics in
late February 2002. For the quarterly period ended March 2002, we were able to
estimate potential price adjustments on the remaining deferred shipments and,
therefore, recognized revenue related to such shipments.
Brand Segment net revenues for fiscal 2002 decreased 22% to $133.0 million
from $171.6 million for the prior year. This decrease is primarily attributed to
the decision to discontinue end-of-quarter promotional programs in an effort to
normalize our customer buying patterns and more effectively manage our business.
Given the upward trends in the prescription activity of the Brand Segment's
product line, Brand Segment net revenues for fiscal 2003 are anticipated to
reflect a similar trend.
Gross profit for fiscal 2002 was $623.9 million, or 57% of net revenues,
compared to $382.2 million, or 45% of net revenues, for fiscal 2001. This
increase of 63% or $241.7 million is attributed to increased gross profit for
our Generic Segment of $279.6 million, primarily contributed by buspirone and
new products, which was partially offset by decreased gross profit for our Brand
Segment of $37.9 million.
Research and Development
Research and development expenses for fiscal 2002 were $58.8 million, or 5%
of net revenues, compared to $64.4 million, or 8% of net revenues, in fiscal
2001, a decrease of 9% or $5.6 million. This decrease is largely due to the
timing of projects currently in development by our Generic Segment, as well as a
decrease in in-licensing milestones compared to the prior year.
The Brand Segment is currently incurring significant research and
development expenses related to nebivolol, a hypertension treatment product. As
the clinical development program for nebivolol progresses, we anticipate that
the Brand Segment research and development expenses will continue to increase.
Additionally, potential milestone payments related to this product may
significantly increase Brand Segment research and development expenses in future
periods.
We are actively pursuing, and are involved in, joint development projects
in an effort to broaden our scope of capabilities to market both generic and
brand products. Many of these arrangements provide for payments by us upon the
attainment of specified milestones. While these arrangements help to reduce our
financial risk for unsuccessful projects, fulfillment of milestones or the
occurrence of other obligations may result in fluctuations in research and
development expenses.
Selling and Marketing
Selling and marketing expenses for fiscal 2002 were $59.9 million, or 5% of
net revenues, relatively unchanged compared to $59.2 million, or 7% of net
revenues, in fiscal 2001.
General and Administrative
General and administrative expenses were $110.0 million, or 10% of net
revenues, for fiscal 2002, compared to $92.0 million, or 11% of net revenues,
for fiscal 2001. This increase is attributed to an increase in Corporate general
and administrative expenses of $25.0 million, partially offset by a decrease of
$5.9 million in the Brand Segment general and administrative expenses.
26
Corporate general and administrative expenses for fiscal 2002 were $71.7
million compared to $46.7 million in fiscal 2001. This increase is largely due
to increases in expenses relating to retirement benefits for executives and
management employees of $10.6 million, as well as the expense associated with
the funding of a charitable foundation of $5.0 million. As a result of certain
one-time expenses in fiscal 2002, we anticipate general and administrative
expenses for the Corporate/Other Segment to be lower in fiscal 2003.
Brand general and administrative expenses for fiscal 2002 were $14.9
million compared to $20.8 million in fiscal 2001. This decrease is largely due
to fiscal 2001 including a $7.8 million impairment charge for the intangible
assets associated with our brand product Zagam(R), partially offset by increased
relocation expenses as our Brand Segment completed its move to Research Triangle
Park, North Carolina.
Other Income, Net
Other income, net of other expenses, was $17.9 million in fiscal 2002
compared to $39.9 million in fiscal 2001. This decrease of $22.0 million is
primarily attributed to fiscal 2001 including a $9.2 million favorable
litigation settlement and a $4.4 million gain from the sale of certain
intangible assets. Also contributing to this decrease, investment income from
our limited liability partnership investments decreased $6.8 million in fiscal
2002 compared to income recognized in fiscal 2001. In fiscal 2002 and 2001, we
liquidated $9.5 million and $52.2 million in our investment in a certain limited
liability partnership. In an effort to limit our exposure to market risk, we
intend to continue to liquidate this investment.
Equity in Loss of Somerset
We own a 50% equity interest in Somerset Pharmaceuticals, Inc. (Somerset)
and account for this investment using the equity method of accounting. The
recorded loss in Somerset for fiscal 2002 was $4.7 million compared to a loss of
$1.5 million in fiscal 2001. This $3.2 million increase in loss is primarily
attributed to decreased sales, which were partially offset by reduced operating
expenses, and the prior year loss being reduced by a recapture of income tax
expenses as a result of a favorable Internal Revenue Service (IRS) audit.
Somerset is engaged in the manufacturing and marketing of Eldepryl(R)
(selegiline), its sole commercial product, which is used for the treatment of
Parkinson's disease. Somerset continues to conduct research and development
activities related to new indications and delivery technologies for selegiline
and other products. As Somerset continues these research and development
activities, earnings may continue to be adversely affected.
Income Taxes
The effective tax rate for fiscal 2002 was 36.3% compared to 36.0% for
fiscal 2001. This increase in the effective tax rate was due to increased
domestic taxable income partially offset by favorable increases in certain tax
credits.
For fiscal 2003, we expect the tax rate to decrease slightly due to the
favorable impact Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, will have on tax related purchase
accounting adjustments.
27
Fiscal 2001 compared to Fiscal 2000
Financial Highlights
o Net revenues increased 7% or $56.6 million to $846.7 million from
$790.1 million.
o Gross profit decreased 9% or $38.6 million to $382.2 million from
$420.8 million.
o Gross margin decreased to 45% from 53%.
o Operating income decreased 25% or $56.4 million to $166.6 million from
$223.0 million.
o Net earnings decreased 15% or $23.0 million to $131.2 million from
$154.2 million.
o Earnings per diluted share decreased 12% to $1.04 per share from $1.18
per share.
Net Revenues and Gross Profit
Net revenues for fiscal 2001 were $846.7 million compared to $790.1 million
for fiscal 2000, an increase of $56.6 million. This 7% increase in net revenues
is attributable to increased net revenues for both the Generic and Brand
Segments, with 43% or $24.2 million of the growth from the Generic Segment and
57% or $32.4 million of the increase contributed by the Brand Segment.
Fiscal 2001 Generic Segment net revenues benefited from the addition of
eight new products to the generic product line that resulted in an aggregate net
revenue increase of $22.9 million. Nifedipine, launched in late fiscal 2000
through a license and supply agreement, increased net revenues by $136.3 million
in fiscal 2001 as compared to fiscal 2000. Additional net revenue increases were
derived from sales of carbidopa/levodopa, which increased by $36.9 million as
compared to the prior year. The net revenue increase provided from these and
other products was partially offset by reduced prices and volumes related to
sales of lorazepam and clorazepate, which declined $82.7 million as compared to
fiscal 2000. Other products for which we had increased prices in prior years had
price and volume erosion that totaled $27.6 million in fiscal 2001 compared to
fiscal 2000.
Brand Segment net revenues increased largely due to the result of increases
from clozapine, Kristalose(R), Digitek(R), Avita(R) and Mentax(R) as compared to
fiscal 2000. No individual product represented a significant portion of the net
revenue increase. These increases in net revenues were partially offset by a
$6.0 million decrease in Zagam(R) sales due to product supply issues resulting
from our contract supplier, as well as decreases in various nonpromoted brand
products, including the wound and burn care product line. The Zagam(R) supply
issues impaired our ability to market this product. Consequently, related
inventories were reduced to net realizable value and the related product license
intangible was written off.
Gross profit for fiscal 2001 was $382.2 million, or 45% of net revenues,
compared to $420.8 million, or 53% of net revenues, for fiscal 2000, a $38.6
28
million or 9% decrease. Generic Segment gross profit decreased largely due to
both price and volume erosion on lorazepam and clorazepate, as well as decreases
related to other products that also had price increases in prior years. These
decreases, coupled with the lower gross profit resulting from contractual
obligations associated with nifedipine, resulted in a lower overall generic
gross profit in fiscal 2001. Brand Segment gross profit was also lower due to
the absence of Zagam(R) sales, a $2.4 million write-down of Zagam(R) inventories
and an overall change in product sales mix.
Research and Development
Research and development expenses for fiscal 2001 were $64.4 million, or 8%
of net revenues, compared to $49.1 million, or 6% of net revenues in fiscal
2000. The increase of $15.3 million is primarily attributed to increased studies
expenses for both generic and brand product development projects, as well as
increased licensing expenses associated with joint development opportunities.
Generic Segment research and development expenses increased $7.9 million to
$47.2 million in fiscal 2001 compared to fiscal 2000. The increase was primarily
due to milestone payments for in-licensed products and increased expenses due to
biostudies and raw materials, as well as payroll and payroll related expenses.
Brand Segment research and development expenses were $17.2 million in
fiscal 2001, an increase of $7.3 million as compared to fiscal 2000. The
increase was due largely to additional clinical trial expenses and milestone
payments under product licensing arrangements. In the latter part of fiscal
2001, we obtained the rights to develop and, upon FDA approval, to market
nebivolol in the US and Canada.
Selling and Marketing
Selling and marketing expenses for fiscal 2001 were $59.2 million, or 7% of
net revenues, relatively unchanged compared to $56.9 million, or 7% of net
revenues, in fiscal 2000.
Generic Segment selling and marketing expenses were $14.3 million in fiscal
2001, which represented a $4.4 million decrease from the prior year. The
decrease was primarily due to lower promotions and advertising expenses.
Brand Segment selling and marketing expenses increased $6.8 million to
$44.9 million in fiscal 2001 compared to fiscal 2000. This increase was
primarily due to increased payroll and payroll related expenses, product sample
expenses and expenses associated with the consolidation of the Brand Segment
non-manufacturing operations.
General and Administrative
General and administrative expenses for fiscal 2001 were $92.0 million, or
11% of net revenues, relatively unchanged from $91.8 million, or 12% of net
revenues, in fiscal 2000.
Generic Segment general and administrative expenses were $24.5 million in
fiscal 2001, compared to $26.1 million in fiscal 2000. The decrease was
primarily due to lower professional service fees.
Brand Segment general and administrative expenses increased $9.0 million to
$20.8 million in fiscal 2001 from $11.8 million in fiscal 2000. The increase was
largely the result of a $7.8 million write-off of the Zagam(R) product license
intangible.
29
Corporate administrative expenses for fiscal 2001 were $46.7 million
compared to $53.9 million for fiscal 2000, a decrease of $7.2 million. Lower
legal expenses accounted for the majority of the decrease.
Litigation Settlement
In July 2000, a settlement was reached with the FTC, States Attorneys
General and certain private parties with regard to lawsuits filed against the
Company relating to pricing issues and raw material contracts on two products.
As a result, a litigation settlement charge of $147.0 million was recognized.
This settlement was approved by the court and made final in February 2002 (see
Note 17 to Consolidated Financial Statements).
Equity in Loss of Somerset
In fiscal 2001, equity in the loss of Somerset was $1.5 million compared to
a loss of $4.2 million in fiscal 2000. The decrease in fiscal 2001 is primarily
attributable to decreased research and development expenses and the favorable
outcome of an IRS audit.
Other Income, Net
Other income for fiscal 2001 was $39.9 million compared to $24.0 million
for fiscal 2000. The $15.9 million increase is primarily attributed to gains of
$9.2 million and $4.4 million related to a litigation settlement and the sale of
certain intangible assets. Other income recognized in fiscal 2001 also included
income from our investment in a certain limited liability partnership of $14.9
million as compared to $15.4 million in fiscal 2000.
Income Taxes
The effective tax rate for fiscal 2001 was 36.0%, relatively unchanged from
36.5% for fiscal 2000.
Liquidity and Capital Resources
Cash provided from operations continues to be the primary source of funds
to operate and expand our business. This is reflected in cash flows from
operations that reached $346.5 million during fiscal 2002. Our business relies
on new product approvals to generate significant future cash flows. An inability
to introduce new products to the marketplace could cause a decline in operating
cash flows.
As a result of our cash flows from operations during fiscal 2002, working
capital increased $298.9 million to $886.9 million from $588.0 million in fiscal
2001. We believe that our working capital and cash provided by operating
activities are sufficient to meet operating needs. Of the $1.6 billion in total
assets, 38% or $617.1 million is held in cash, cash equivalents and marketable
securities. The table below summarizes cash and cash equivalents and marketable
securities at March 31, 2002 and 2001:
(in thousands) 2002 2001
---- ----
Cash and cash equivalents $ 160,790 $ 229,183
Marketable securities 456,266 55,715
----------- -----------
$ 617,056 $ 284,898
=========== ===========
30
Investments in marketable securities are primarily high quality government
and commercial paper that generally mature within one year. These investments
are highly liquid and available for operating needs. Upon maturity, they are
generally reinvested in instruments with similar characteristics.
In fiscal 2001, a deposit of $135.0 million was placed into escrow and a
liability of $147.0 million was recorded as a result of a tentative settlement
of the FTC litigation. With the final court approval in February 2002, the
amount held in escrow and the liability were relieved from the consolidated
balance sheet. Final payments representing attorneys' fees of $8.0 million and
$4.0 million were made in March 2002 and May 2002 (see Note 17 to Consolidated
Financial Statements).
In May 2002, the Board of Directors (Board) approved a Stock Repurchase
Program that authorized the purchase of up to 10,000,000 shares of the Company's
outstanding common stock. Such purchases could have a material effect on cash,
cash equivalents and marketable securities. Through May 29, 2002, 1,000,000
shares of common stock have been purchased for $29.0 million. In fiscal 2001,
4,855,100 shares of common stock were purchased for $91.5 million under a
program approved by the Board in April 1997.
In fiscal 2002, payments of $8.1 million were made on long-term
obligations. However, to provide additional operating leverage if necessary, a
commercial bank has extended a revolving line of credit of up to $50.0 million
(see Note 8 to Consolidated Financial Statements). As of March 31, 2002, no
funds have been advanced under this line of credit. Additionally, the
acquisition of new products, as well as other companies, will play a strategic
role in our growth. Consequently, such acquisitions may require additional
indebtedness which would impact future liquidity.
Capital expenditures during fiscal 2002 were $20.6 million compared to
$24.7 million during fiscal 2001. These expenditures in the current year were
primarily made to acquire machinery and equipment for our production facilities.
Fiscal 2001 payments were made to expand the manufacturing facility in Puerto
Rico and finalize the construction of a sales and administration building in
Morgantown, West Virginia. Also, during the quarter ended December 31, 2001, we
completed the sale of our liquid pharmaceutical manufacturing facility and
warehouse in Largo, Florida. In fiscal 2003, capital expenditures, primarily for
the expansion of our manufacturing capacity, are anticipated to approximate
amounts expended in previous years.
A limited liability partnership investment is being liquidated in an effort
to reduce market risk. In fiscal 2002 and 2001, $9.5 million and $52.2 million
were liquidated. This liquidation is expected to continue.
The Company continues to pay quarterly cash dividends of $.04 per common
share. Dividend payments totaled $20.2 million during fiscal 2002 and $20.1
million during fiscal 2001. In fiscal 2002, we received $20.9 million from the
exercise of stock options issued through our stock option plans compared to $5.7
million in fiscal 2001.
Payments for state and federal income taxes increased to $152.1 million
during fiscal 2002 compared to $20.1 million for fiscal 2001. Payments during
fiscal 2001 were lower as a result of lower taxable income resulting from the
FTC settlement.
The Company is involved in various legal proceedings (see Note 17 to
Consolidated Financial Statements). While it is not feasible to predict the
31
outcome of such proceedings, an adverse outcome in any of these proceedings
could materially affect our cash flows.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to Consolidated
Financial Statements, which were prepared in accordance with accounting
principles generally accepted in the United States. Included within these
policies are our "critical accounting policies." Critical accounting policies
are those policies that are most important to the preparation of our
consolidated financial statements and require management's subjective and
complex judgments due to the need to make estimates about the effect of matters
that are inherently uncertain. The Company's critical accounting policies are
the determination of revenue provisions, useful lives and impairment of
intangibles and the impact of existing legal matters. These critical accounting
policies affect each of the operating segments. The application of these
accounting policies involves the exercise of judgment and the use of assumptions
as to future uncertainties and, as a result, actual results could differ
materially from these estimates. We are currently not aware of any reasonably
likely event or circumstance which would result in different amounts being
reported that would have a material impact on our results of operations or
financial condition.
The development and selection of these critical accounting policies have
been discussed with the Audit Committee. Such policies are reviewed quarterly by
the Audit Committee.
Revenue Provisions
Revenue is recognized for product sales upon shipment when title and risk
of loss has transferred to the customer and when provisions for estimates,
including discounts, rebates, price adjustments, returns, chargebacks,
promotional and other potential adjustments are reasonably determinable.
Accruals for these provisions are presented in the consolidated financial
statements as reductions to net revenues and accounts receivable and within
other current liabilities. Accounts receivable are presented net of allowances
relating to these provisions, which were $221.3 million and $132.4 million at
March 31, 2002 and 2001. Other current accrued liabilities include approximately
$21.6 million and $13.1 million at March 31, 2002 and 2001, for certain rebates
and other adjustments that are paid to indirect customers.
Provisions for estimated discounts, returns, rebates, promotional and other
credits require a limited degree of subjectivity and are simple in nature, yet
combined represent a significant portion of the provisions. These provisions are
estimated based on historical payment experience, historical relationship to
revenues, estimated customer inventory levels and contract terms. Such
provisions are determinable due to the limited number of assumptions and
consistency of historical experience.
The provisions for chargebacks are the most significant and complex
estimates used in the recognition of revenue. The Company is a party to
arrangements with other parties establishing prices for products for which they
independently select a wholesaler from which to purchase. Such parties are
referred to as indirect customers. A chargeback represents the difference
between our invoice price to the wholesaler and the indirect customer's contract
price. Provisions for estimating chargebacks are calculated primarily using
historical chargeback experience and estimated wholesaler inventory levels. We
continually monitor our assumptions giving consideration to wholesaler buying
patterns and current pricing trends and make adjustments to these provisions
when we believe that the actual chargeback credits will differ from the
estimated provisions.
32
Useful Lives and Impairment of Intangibles
As of March 31, 2002 and 2001, recorded goodwill, net of accumulated
amortization, was $100.9 million and $107.3 million. Goodwill is reviewed for
impairment when events or other changes in circumstances may indicate that the
carrying amount of the goodwill may not be recoverable. Goodwill associated with
the Brand Segment was reviewed in fiscal 2002. Impairment is determined when the
undiscounted future cash flows, based on estimated sales volumes, pricing and
the anticipated cost environment, are less than the carrying value of the
goodwill. The carrying value of the goodwill reviewed was not impaired. If these
projections do not properly reflect future activity, results of operations could
be negatively impacted.
As of March 31, 2002 and 2001, recorded intangible assets, excluding
goodwill, net of accumulated amortization, were $171.6 million and $187.1
million. Other intangible assets consist of product rights purchased from other
companies, product rights acquired through acquisition and internally developed
patents and technologies. Amortization periods for these assets were established
based on estimates of the periods the assets would generate revenue, not to
exceed 20 years. Intangible assets are reviewed for impairment when the carrying
amount of an asset may not be recoverable. Certain product rights associated
with the Brand Segment were reviewed for impairment in fiscal 2002. Impairment
is determined when the undiscounted cash flow value, based on estimated sales
volume, anticipated pricing and estimated product costs, is less than the
carrying value of the intangible asset. The carrying values of the product
rights reviewed were not impaired. If these projections do not properly reflect
future activity, results of operations could be negatively impacted.
Legal Matters
The Company is involved in various legal proceedings, some of which involve
claims for substantial amounts. An accrual for a loss contingency relating to
any of these legal proceedings is made if it is probable that a liability was
incurred at the date of the financial statements and the amount of loss can be
reasonably estimated. After review, it was determined, at March 31, 2002, that
for each of the various legal proceedings in which we are involved, the
conditions mentioned above were not met. However, if any of these legal
proceedings would result in an adverse outcome for the Company, the impact could
have a material adverse effect on our financial position and results of
operations.
Recent Accounting Pronouncements
In April 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, as amended, Accounting for Derivative Instruments and Hedging
Activities, issued by the Financial Accounting Standards Board (FASB) in June
1998. SFAS No. 133 requires an entity to recognize all derivative instruments as
either assets or liabilities on the balance sheet at fair value and those
changes in fair value to be recognized currently in earnings, unless specific
hedge accounting criteria are met. The adoption of SFAS No. 133 had no material
impact on our results of operations or financial position.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. We adopted the provisions
of SFAS No. 141 as of July 1, 2001, and, accordingly, all future business
33
combinations consummated by us must be recorded at fair value using the purchase
method of accounting.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. SFAS No.
142 provides that goodwill and intangible assets with indefinite lives will no
longer be amortized, but will be subject to at least annual impairment tests.
Intangible assets with finite lives will continue to be amortized over their
useful lives. Furthermore, SFAS No. 142 requires that the useful lives of
intangible assets acquired before June 30, 2001, be reassessed and the remaining
amortization periods adjusted accordingly.
We are required to adopt the provisions of SFAS No. 142 effective April 1,
2002, and are in the process of preparing for its adoption. This process
includes evaluating the useful lives of assets, making determinations as to what
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. We will no
longer record approximately $6.4 million in annual amortization of goodwill.
Until the above process, including the required initial impairment evaluation,
is complete, we are unable to determine any further impact SFAS No. 142 will
have on our consolidated financial position and results of operations.
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.
This statement establishes standards for accounting for obligations associated
with the retirement of tangible long-lived assets. This statement is effective
for us on April 1, 2003. We are currently evaluating the impact, if any, this
statement will have on our financial position and results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued by the FASB in August 2001. This statement addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. For long-lived assets to be held and used, the new rules continue
previous guidance to recognize impairment when the undiscounted future cash
flows do not exceed the asset's carrying amount. The impairment to be recognized
will continue to be measured as the difference between the carrying amount and
fair value of the asset. The computation of fair value now removes goodwill from
consideration. Assets that are to be disposed of by sale are required to be
evaluated using the same measurement approach as those assets to be held and
used. Additionally, assets qualifying for discontinued operations treatment have
been expanded beyond the former operating segment approach. We will now
recognize impairment of long-lived assets to be disposed by other than sale at
the date of disposal, but will consider such assets to be held and used until
that time. This statement is effective for us as of April 1, 2002, and we
believe that the adoption of SFAS No. 144 will not have a material impact on our
financial position and results of operations.
Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
became effective for us as of January 1, 2002. It states that consideration paid
by a vendor to a reseller is to be classified as a reduction of revenue in the
income statement unless an identifiable benefit is or will be received from the
reseller that is sufficiently separable from the purchase of the vendor's
products and the vendor can reasonably estimate the fair value of the benefit.
We have adopted the provisions of EITF Issue No. 00-25, and it had no material
effect on our financial statements.
EITF Issue No. 01-09, Accounting for Consideration Given to a Customer or a
Reseller of a Vendor's Products, reconciles EITF Issue No. 00-14, Issue No. 3 of
EITF Issue No. 00-22 and EITF Issue No. 00-25. EITF Issue No. 01-09 became
34
effective for us as of January 1, 2002, and it had no material effect on our
financial statements.
Fluctuating Results of Operations and Liquidity
In the past, results of operations have fluctuated on both an annual and a
quarterly basis. These fluctuations have resulted from several timing factors,
including, among others, new product approvals, new product launches, as well as
those of our competitors, product and business acquisitions, in-house research
and development projects, milestone payments related to in-licensing of research
and development projects and litigation settlements.
We believe we will continue to experience fluctuations in net revenues,
gross profit, net earnings and liquidity. Such fluctuations will result from,
among other things, the timing of regulatory approvals and market introduction
of our new products, as well as those of our competitors, downward pricing
pressure on products available from multiple approved sources and the timing of
milestone payments related to in-licensing of research and development projects.
Risk of Product Liability Claims
The testing, manufacturing and marketing of pharmaceutical products subject
the Company to the risk of product liability claims. The Company is a defendant
in a number of product liability cases, none of which we believe will have a
material adverse effect on our business, results of operations or financial
condition. We believe that we maintain an adequate amount of product liability
insurance, but no assurance can be given that our insurance will cover all
existing and future claims or that we will be able to maintain existing coverage
or obtain additional coverage at reasonable rates.
Forward-Looking Statements
The statements set forth in this Annual Report concerning the manner in
which we intend to conduct our future operations, potential trends that may
impact future results of operations, and our beliefs or expectations about
future operations are forward-looking statements. The following statements that
we make in this Annual Report, in other filings made with the SEC, in press
releases, on our website, or in other contexts (including statements made by our
authorized representatives, either orally or in writing), are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995:
(i) any statement regarding possible or assumed future results of
operations of our business, the markets for our products, anticipated
expenditures, regulatory developments or competition;
(ii) any statement preceded by, followed by or that includes the words
"intends," "estimates," "believes," "expects," "anticipates,"
"should," "could," or the negative or other variations of these or
other similar expressions; and
(iii) other statements regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to:
35
o uncertainties regarding our ability to successfully develop and
introduce new products on a timely basis in relation to competing
product introductions;
o our ability to obtain required FDA approvals for new products on a
timely basis;
o the affects of vigorous competition on commercial acceptance of our
products and their pricing;
o uncertainties regarding continued market acceptance of and demand for
our core products;
o potential legislative or regulatory changes affecting the
pharmaceutical industry;
o uncertainties associated with the licensing of products developed by
others and the successful integration of acquired businesses;
o our periodic dependence on one or a few products as a significant
source of our revenues;
o the periodic expiration of patent or regulatory market exclusivity on
some of our products;
o the effects of consolidation of our customer base;
o uncertainties regarding patent and other intellectual property
protection of our proprietary products;
o the cost and management time associated with litigation involving
patent or other intellectual property protection of competing
products;
o our exposure to product liability and other lawsuits and contingencies
associated with our products;
o our ability to attract and retain key personnel; and
o changes in accounting and related standards promulgated by the
accounting profession or regulatory agencies.
The cautionary statements contained or referred to above should be
considered in connection with any subsequent written or oral forward-looking
statements that may be made by us or by persons acting on our behalf. We
undertake no duty to update these forward-looking statements, even though our
situation may change in the future.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk primarily from changes in the
market values on investments in marketable debt and equity securities, including
marketable securities owned indirectly through pooled asset funds that are
classified as other assets on our balance sheet. Additional investments are made
in overnight deposits, money market funds and marketable securities with
maturities of less than three mon