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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-2516
PHARMACIA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 43-0420020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Route 206 North, Peapack,
New Jersey 07977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: 888/768-5501
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $2.00) New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant estimates the aggregate market value of the voting stock held by
non-affiliates of the registrant (based upon the NYSE -- Composite Transactions
closing price on March 18, 2003 as reported in The Wall Street Journal and
treating all executive officers and directors of the Company and all beneficial
owners of 5% or more of the Registrant's voting stock as affiliates) was
approximately $54 billion.
The number of shares of Common Stock, $2.00 par value, outstanding as of March
18, 2003 is 1,295,751,796 shares.
FORWARD-LOOKING INFORMATION
Certain statements contained in this Report, as well as in other documents
incorporating by reference all or part of this Report, are "forward-looking
statements" provided under the "safe harbor" protection of the Private
Securities Litigation Reform Act of 1995. These statements are made to enable a
better understanding of the Company's business, but because these
forward-looking statements are subject to many risks, uncertainties, future
developments and changes over time, actual results may differ materially from
those expressed or implied by such forward-looking statements. Examples of
forward-looking statements are statements about anticipated financial or
operating results, financial projections, business prospects, future product
performance, future research and development results, anticipated regulatory
filings and approvals and other matters that are not historical facts. Such
statements often include words such as: believes, expects, anticipates, intends,
plans, estimates or similar expressions.
These forward-looking statements are based on the information that was currently
available to the Company, and the expectations and assumptions that were deemed
reasonable by the Company, at the time when the statements were made. The
Company does not undertake any obligation to update any forward-looking
statements in this Report or in any other communications of the Company, whether
as a result of new information, future events, changed assumptions or otherwise
and all such forward-looking statements should be read as of the time when the
statements were made, and with the recognition that these forward-looking
statements may not be complete or accurate at a later date.
Many factors may cause or contribute to actual results or events being
materially different from those expressed or implied by such forward-looking
statements. Although it is not possible to predict or identify all such factors,
they may include the following factors discussed below:
Competition for our products: Competitive effects from current and new products,
including generic products, sold by other companies; competition and loss of
patent protection could lead to significant loss of sales.
Pharmaceutical pricing: Price constraints and other restrictions on the
marketing of products imposed by governmental agencies or by managed care
groups, institutions and other purchasing agencies could result in lower prices
for the Company's products.
Product discovery and approval: The Company's ability to discover and license
new compounds, develop product candidates, obtain regulatory approvals and
market new products is risky and uncertain.
Product recalls or withdrawals: Efficacy or safety concerns raised in the
scientific literature, increase in trends of adverse events in the marketplace,
and/or manufacturing quality issues with respect to our products, could lead to
product recalls, withdrawals or declining sales.
Manufacturing facilities: Failure to comply with Current Good Manufacturing
Practices and other applicable regulations and quality assurance guidelines
could lead to temporary manufacturing shutdowns, product shortages and delays in
product manufacturing.
Restrictions on marketing: Restrictions on promotion in patient populations as a
result of the U.S. Food and Drug Administration ("FDA") warning letters on
promotional materials could effect sales of the Company's products and could
lead to holds on current and future New Drug Applications and supplements filed
with the FDA.
Legal claims: The Company's ability to secure and defend its intellectual
property rights; the Company's involvement in numerous lawsuits including
product liability claims, antitrust litigation, environmental concerns,
commercial disputes, any of which could affect the Company's profits or ability
to sell and market its products. In addition, in connection with the separation
of the agricultural business from the pharmaceutical business on September 1,
2000, Monsanto assumed, and agreed to indemnify Pharmacia Corporation for, any
liabilities primarily related to Pharmacia's former agricultural or chemical
businesses, including any liabilities that Solutia Inc. had assumed from
Pharmacia in connection with the spin-off of Solutia on September 1, 1997, to
the extent that Solutia fails to pay, perform or discharge those liabilities.
This includes among other things, litigation, environmental and retiree
liabilities that were assumed by Solutia.
Employees: The Company's ability to attract and retain management and other key
employees.
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External pressures: Social, legal, political and governmental developments,
especially those relating to health care reform, pharmaceutical pricing and
reimbursement, patient privacy, and tax laws.
Economic conditions: Changes in foreign currency exchange rates or in general
economic or business conditions including inflation and interest rates.
Business combinations: Acquisitions, divestitures, mergers, restructurings or
strategic initiatives that change the Company's structure, including the
proposed merger with Pfizer Inc. ("Pfizer") which is subject to regulatory
approval; business combinations among the Company's competitors and major
customers could affect our competitive position.
Accounting policies and estimates: Changes to accounting standards or generally
accepted accounting principles, which may require adjustments to financial
statements and may affect future results.
Such other factors that may be described elsewhere in this Report or in other
Company filings with the U.S. Securities and Exchange Commission.
PART I
Item 1. Business
CORPORATE HISTORY
Pharmacia Corporation (the "Company", which may be referred to as
"Pharmacia", "we", "us" or "our"), a Delaware corporation, was created through
the merger (the "Merger") of Monsanto Company ("former Monsanto") and Pharmacia
& Upjohn, Inc. ("P&U") on March 31, 2000. In the Merger, former Monsanto was
renamed Pharmacia Corporation and is the public company, while P&U became a
subsidiary of Pharmacia. However, the corporate structure has no material effect
on the operation of the Company's business. References to the Company or
Pharmacia prior to March 31, 2000 refer to former Monsanto.
After the Merger, the agricultural operations of former Monsanto were
transferred to a newly created subsidiary of Pharmacia. The subsidiary was named
Monsanto Company ("Monsanto") in order to facilitate recognition of the
continuing business by the Company's agricultural customers. On October 23,
2000, 14.74% of the shares of Monsanto were sold to the public in an initial
public offering and listed on the New York Stock Exchange.
On November 28, 2001, the Company announced plans to spin-off its remaining
interest in Monsanto by means of a special tax-free dividend. The dividend was
paid on August 13, 2002, to holders of record of shares of Pharmacia common
stock that were issued and outstanding as of the close of business on July 29,
2002, the record date. Each such holder of record received 0.170593 of a share
of Monsanto common stock for each outstanding share of Pharmacia common stock.
As a result, Monsanto has been reclassified as discontinued operations in the
consolidated financial statements and notes of Pharmacia and is referred to in
this report as "Discontinued Operations". See the discussion of Discontinued
Operations in Note 8, to our financial statements.
On July 13, 2002, the Company entered into a definitive merger agreement
with Pfizer. In accordance with the agreement, each Pharmacia shareholder of
record on the closing date will receive 1.4 shares of Pfizer stock for each
share of Pharmacia stock owned. It is estimated that the shares of Pfizer
common stock to be issued to Pharmacia shareholders in the merger will represent
approximately 23 percent of the outstanding Pfizer common stock after the merger
on a fully diluted basis. Until the closing date, which is anticipated to occur
in April 2003, Pharmacia will continue to operate independently of Pfizer. The
closing of the transaction is contingent upon approval by certain regulatory
authorities including the U.S. Federal Trade Commission.
SEGMENT DESCRIPTION
The Company's core business is the development, manufacturing and sale of
pharmaceutical products. Prescription Pharmaceuticals is the Company's only
reportable segment and includes general therapeutics, ophthalmology and hospital
products, including oncology and diversified therapeutics. The Company also
operates several business units that do not constitute reportable business
segments. These operating units include, among
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others, consumer health care, animal health, diagnostics and contract
manufacturing and bulk pharmaceutical chemicals. Due to the size of these
operating units, they have been grouped into the Other Pharmaceuticals category.
Comparative segment sales and the percentage change in sales and sales by
business segment for 2002, 2001, and 2000 are given in the table entitled Sales
by Segment in the Management, Discussion and Analysis section on page 14 of
this document. A comparison of the sales and percentage change in sales of our
major products for 2002, 2001 and 2000 are given in the table entitled Sales of
Top Products in the MD&A section on page 15 of this document.
All product names, indicated in CAPS throughout this document, are
trademarks owned by, or licensed to, the Company, except that AMBIEN and KERLONE
are registered trademarks of Sanofi-Synthelabo, Inc.; CAMPTOSAR is a registered
trademark of Yakult Honsha Co., Ltd.; VIOXX is a registered trademark of Merck &
Co.; and PLETAL is a registered trademark of Otsuka America Pharmaceuticals,
Inc.
Prescription Pharmaceuticals
The Company's leading prescription products, include CELEBREX, BEXTRA,
XALATAN, GENOTROPIN, CAMPTOSAR, DETROL / DETROL LA and ZYVOX.
CELEBREX, the first cyclooxygenase-2 (COX-2) specific inhibitor, is a
nonsteroidal anti-inflammatory drug and the world's top selling prescription
arthritis medication. CELEBREX is used for the treatment of osteoarthritis,
adult rheumatoid arthritis, acute pain and primary dysmenorrhea. CELEBREX is now
available in over 70 countries. CELEBREX is co-promoted (or, where required by
law, co-marketed) by Pfizer in the U.S. and Europe, and will be co-promoted by
Yamanouchi when approved in Japan. In December 2002, Yamanouchi and Pharmacia
submitted an NDA in Japan for celecoxib. The principal competitor to CELEBREX is
VIOXX, another COX-2 specific inhibitor, sold by Merck & Co., which competes by
claiming faster onset of relief. In 2001, the FDA issued an approval letter for
revised labeling for CELEBREX in response to a supplemental New Drug Application
(NDA) seeking labeling changes based on a study comparing CELEBREX to other
nonsteroidal anti-inflammatory drugs. In 2001, the FDA issued a "Not Approvable"
letter for parecoxib sodium, the first injectable COX-2 specific inhibitor.
During 2002, parecoxib sodium was launched in the EU and other countries under
the name DYNASTAT.
BEXTRA is an oral, second-generation COX-2 specific inhibitor, for use in
the treatment of the signs and symptoms of osteoarthritis and adult rheumatoid
arthritis, as well as primary dysmenorrhea. BEXTRA was launched in the United
States in April 2002 and is co-promoted (or, where required by law, co-marketed)
by Pfizer in the U.S. and Europe. Approval of BEXTRA for acute pain is being
sought. In 2001, the Company entered into an agreement with Celltech Group plc
for the development and promotion of Celltech's proprietary compound CDP 870.
CDP 870 belongs to a new therapeutic class of medicines that shows promise in
certain autoimmune and inflammatory diseases. CDP 870 is being developed as a
new treatment for rheumatoid arthritis and Crohn's disease.
XALATAN is the number one prescribed medication in the U.S. for the
reduction of elevated eye pressure in open-angle glaucoma and ocular
hypertension. During 2001, XALACOM, a fixed combination of XALATAN and the
beta-blocker timolol, was approved in Sweden and the EU. In December 2002,
XALATAN was approved in the U.S. for use as a first-line treatment of elevated
eye pressure associated with open-angle glaucoma or ocular hypertension. In
January 2003, the FDA advised that XALATAN will have three years of exclusivity
in that indication.
GENOTROPIN is used to treat adults with growth hormone deficiency and to
treat growth failure in children with growth hormone deficiency. In 2000,
GENOTROPIN was also approved for the treatment of growth failure in children
with Prader-Willi Syndrome (PWS), and in 2001 it was approved for use with
children who were born small for gestational age (SGA) who have not caught up in
growth by age two. GENOTROPIN has been granted orphan drug status by the FDA for
both PWS and SGA. Adding to the Company's endocrine treatment business, in early
2001, the Company completed its acquisition of Sensus Drug Development
Corporation, which has filed a NDA with the FDA for pegvisomant, a growth
hormone receptor antagonist. Pegvisomant is being reviewed for the treatment
of acromegaly, a life-threatening disorder caused by overproduction of growth
hormone. In 2001, the FDA issued an approvable letter for pegvisomant as a
second-line therapy. In November 2002, the European Commission granted the
first approval for SOMAVERT, the tradename for pegvisomant.
CAMPTOSAR, a first-line therapy in metastatic colorectal cancer, is the
leading treatment for colorectal cancer in the U.S. The product was in-licensed
from Yakult Honsha Co., Ltd. for marketing in the U.S. In addition to CAMPTOSAR,
the Company markets several other oncology drugs. PHARMORUBICIN is one of the
most commonly used treatments for breast cancer in Europe, and it is marketed
under the trade name ELLENCE in the U.S. for the adjuvant treatment of patients
with breast cancer. AROMASIN, an oral hormonal drug that blocks the
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production of estrogen, was launched during 2000 in the U.S. and in key markets
in Europe and Latin America as a second-line breast cancer treatment. The
Company's subsidiary, Sugen, Inc., has developed proprietary technology
platforms to identify small molecule drugs that target specific cellular signal
transduction pathways and may have oncological or other therapeutic uses.
Pharmacia announced on February 8, 2002, that it was closing its SU5416 clinical
trial program in colorectal cancer because the study will not achieve the
defined trial endpoint. Sugen continues to explore growth factor receptor
targets and anti-angiogenic therapy for the treatment of cancer.
DETROL/DETRUSITOL is the world's leading branded therapy for overactive
bladder. DETROL LA, a once-daily therapy for the treatment of overactive
bladder, was launched in the U.S. in January 2001, and has been launched in
Europe under various brand names including DETRUSITOL SR.
ZYVOX, launched in the U.S. in 2000, in the U.K. in early 2001 and
throughout Europe later in 2001, is indicated for the treatment of patients with
severe gram-positive infections. ZYVOX is the lead compound in the oxazolidinone
class of antibiotics, the first of a completely new class of antibiotics to be
introduced in more than 30 years. ZYVOX augments the Company's existing line of
antibiotics, including the CLEOCIN/DALACIN line. In December 2002, the FDA
approved a supplemental New Drug Application (sNDA) for ZYVOX (linezolid
injection, tablets and for oral suspension) for the treatment of gram-positive
infections in infants and children, which include complicated skin and skin
structure infections and nosocomial (hospital-acquired) pneumonia. These
infections are increasingly caused by resistant bacteria such as
methicillin-resistant Staphylococcus aureus (MRSA) and are becoming a
significant health threat to children and infants both within and outside the
hospital. The FDA approval for ZYVOX also included the treatment of
community-acquired pneumonia, uncomplicated skin and skin structure infections
and vancomycin-resistant Enterococci faecium (VREF) in infants and children.
AMBIEN, the leading short-term treatment for insomnia in the U.S., was
in-licensed from Sanofi-Synthelabo under terms that allowed Sanofi-Synthelabo to
reacquire all rights to the product in April 2002. Commencing January 1, 2002,
Sanofi-Synthelabo assumed sales and marketing responsibility for AMBIEN. On
April 16, 2002, the Company transferred the rights to AMBIEN to
Sanofi-Synthelabo, pursuant to previously existing agreements. In connection
with the transfer, the Company received a one-time payment of approximately $671
million (pre-tax).
The FDA recently approved an NDA for INSPRA (eplerenone tablets) for the
treatment of hypertension. INSPRA is being developed as a once-daily therapy
designed to specifically block the effects of the hormone aldosterone.
Aldosterone is a key component within the RAAS (renin angiotensin aldosterone
system) and plays a significant role in the body's regulation of the
cardiovascular system. In addition, a major clinical study evaluating INSPRA
succeeded in meeting both of its primary endpoints according to results of the
Eplerenone Post-AMI Heart Failure Efficacy and Survival Study (EPHESUS). The
primary endpoints of the study were mortality from any cause and mortality or
hospitalization from cardiovascular causes. Based on the results of EPHESUS, the
Company plans to submit a sNDA to the FDA for INSPRA in the treatment of
post-myocardial infarction heart failure during the first half of 2003.
Other Pharmaceuticals
Consumer Health Care
The consumer health care business consists of self-medication products that
are available to consumers over-the-counter without a prescription, including
the NICOTROL (U.S.) and NICORETTE (ex-U.S.) line of products to treat tobacco
dependency and ROGAINE (REGAINE outside the U.S. and Canada) products for the
treatment of hereditary hair loss.
During the third quarter of 2001, the Company acquired the LUDEN'S throat
drop product and certain related assets from Hershey Foods Corporation. The
acquisition included manufacturing equipment and other assets.
Animal Health
The animal health business produces and markets both pharmaceuticals and
feed additives for livestock (food animals) and pets (companion animals),
including NAXCEL/EXCENEL, an antibiotic used to treat a variety of cattle and
swine infections, and LINCOMIX/LINCO-SPECTIN, an antibiotic used to treat swine
and poultry infections. In the United States, 2002 marked the achievement of a
new metritis indication for EXCENEL RTU and a new ileitis indication for
LINCOMIX. In addition, the animal health business launched the EAZI-BREED CIDR
cattle insert, a device used for pregnancy management in beef cows, beef heifers
and dairy heifers. EAZI-BREED and CIDR are trademarks of InterAg, Hamilton, New
Zealand.
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Diagnostics and Contract Manufacturing
The diagnostics business is the world leader in the sale of in vitro
allergy diagnostic equipment.
Bulk Pharmaceutical Chemicals
The Pharmacia Center Source business develops, manufactures and markets
certain bulk pharmaceutical chemicals and selected specialty chemicals to third
parties.
Biotechnology Investments
The Company's biotechnology investments includes a 19% ownership of
Biovitrum AB. Biovitrum develops protein therapeutics and drugs to treat
metabolic diseases. In addition, the Company holds a 41% ownership of Biacore
International AB, which develops, manufactures and markets advanced scientific
instruments employing affinity-based biosensor technology. The Company also
holds a minority equity position in Active Biotech AB which is developing drugs
to treat multiple sclerosis and cancer.
In March 2002, the Company sold its entire 45% ownership of Amersham
Biosciences Limited to Amersham plc for $1 billion.
Discontinued Operations
The agriculture business conducted by Monsanto consisted of two principal
business units: agricultural productivity and seeds and genomics. On August 13,
2002, the Company distributed its remaining interest in Monsanto to its
shareholders. See the discussion of Discontinued Operations in Note 8, to our
financial statements.
RESEARCH AND DEVELOPMENT
The Company's pharmaceutical research and development ("R&D") efforts focus
on discovering or licensing and developing new innovative pharmaceuticals
offering high therapeutic benefits in areas where the Company believes it can
establish a leading global position.
The Company's total expenses for R&D in all pharmaceutical businesses were:
$2.4 billion in 2002; $2.4 billion in 2001; and $2.2 billion in 2000.
COMPETITION
The pharmaceutical industry is highly competitive. The Company's principal
pharmaceutical competitors consist of major international corporations with
substantial resources. Other competitors include smaller research companies and
generic drug manufacturers. A drug may be subject to competition from
alternative therapies during the period of patent protection and thereafter it
will be subject to further competition from generic products. Generic
competitors do not have to bear the same level of R&D and other expenses
associated with bringing a new branded product to market. As a result, they can
charge much less for a competing version of the Company's product. Managed care
organizations typically favor generics over brand name drugs, and governments
encourage, or under some circumstances mandate, the use of generic products,
thereby reducing the sales of branded products that are no longer patent
protected. The Company is also subject to competition from over-the-counter
products.
The Company's competitive position depends, in part, upon its continuing
ability to discover, acquire and develop innovative, cost-effective new
products, as well as new indications and product improvements protected by
patents and other intellectual property rights. The Company also competes on the
basis of price and product differentiation and through its pharmaceutical sales
and marketing organization that provides information to medical professionals
and launches new products.
Other companies manufacture and sell one or more products in competition
with our consumer products. The Company competes through high product quality,
brand identity, advertising and promotion, among other factors.
GOVERNMENT REGULATION
The pharmaceutical industry is subject globally to significant regulation
by state, local and national and international government agencies. In the U.S.,
the FDA regulates the testing, safety, approval, manufacturing, labeling,
marketing and promotion of our products including prescription products,
consumer products and medical
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devices. The FDA also has the authority to recall products and impose
significant penalties for violations of these laws.
The U.S. Congress is considering several major proposals that could affect
the current pricing structure for our products. Key initiatives in the
legislative arena which could materially affect our business include Medicare
reform to expand prescription drug coverage, reforms to accelerate approval of
generic manufacturers' products, possible reimportation of drugs from other
countries, and possible reforms to the reimbursement system for drugs currently
covered by Medicare.
Under the current law, the Company must provide rebates to state Medicaid
agencies for prescriptions reimbursed by Medicaid in order to allow the states
the benefit of the lowest price at which the Company sold the product. In the
past few years, several states have adopted programs to reduce the drug
component of the state's health costs by increasing the amount of the rebate
required by federal law, and through various programs including imposing
constraints on a patient's ability to obtain higher cost branded pharmaceutical
products without obtaining prior authorization by the physician. While the
industry is currently challenging certain aspects of these programs, the
programs could decrease or restrict the usage of the Company's products.
Similarly, supplemental rebates could lead to significantly lower reimbursement
for our products or potentially lower drug utilization. Additionally, certain
states have sought, or are likely to seek, rebates for drug benefit programs
that include patient populations that are not covered by, or eligible for,
Medicaid, also creating potential downward pressure on profitability or possible
restrictions on drug utilization.
Outside the U.S., the pharmaceutical industry is also heavily regulated and
subject to similar regulatory and legislative issues. The EU has a central
approval process for all member states governed by the European Medicines
Evaluation Agency. Because the legislative and regulatory environment continues
to evolve in the U.S. and abroad, it is difficult to predict the impact of those
changes on the Company.
The Company is also subject to the jurisdiction of several other agencies
including the U.S. Department of Justice and the Office of Inspector General,
which have the ability to impose civil and criminal sanctions. Among other
things, these agencies have jurisdiction over antitrust and anti-kickback laws
that impose additional regulation on the pharmaceutical industry.
EMPLOYEES
The Company has approximately 43,000 employees worldwide. The number of
employees is continually changing based on realignment of operations and
workforce needs.
The Company believes that it has good relations with its employees.
Employees at several non-U.S. locations are represented either by freely elected
unions or by legally mandated workers' councils or similar organizations.
CUSTOMERS AND DISTRIBUTION OF PRODUCTS
The Company's products are sold throughout the world to a wide range of
customers including pharmacies, hospitals, chain warehouses, governments,
physicians, wholesalers and other distributors. Although the majority of the
Company's customers contribute individually immaterial amounts of sales volume,
three U.S. wholesalers individually constitute more than 10 percent in aggregate
of the Company's total sales.
SEASONALITY AND WORKING CAPITAL
Seasonality does not materially affect sales of pharmaceutical products or
working capital.
RAW MATERIALS AND ENERGY RESOURCES
The Company is a significant purchaser of a variety of basic and
intermediate raw materials. The Company is not dependent on any one supplier for
raw materials or energy requirements, but certain important raw materials are
obtained from a few major suppliers. However, additional capacity exists for all
major raw materials either from different suppliers or from alternate
manufacturing locations.
PATENTS AND TRADEMARKS
The Company believes that the patents, trademarks and other intellectual
property owned or licensed by the Company, taken as a whole, are material to its
business.
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The Company's major pharmaceutical products are protected by patents with
substantial remaining life. CELEBREX is protected by a U.S. patent until 2013;
XALATAN until 2011; CAMPTOSAR until 2007; DETROL until 2012; ZYVOX until 2014;
and BEXTRA until 2015. GENOTROPIN is no longer exclusively protected by a
compound patent, but the Company has patented proprietary compositions until
2015 and delivery devices until 2008. In addition, the Company has received
orphan drug exclusively for GENOTROPIN for two indications (PWS and SGA).
See the discussion in Item 3 "Legal Proceedings" below for a description of
litigation relating to the patents for the Company's products.
INTERNATIONAL OPERATIONS
The Company's operations outside the United States are conducted primarily
through subsidiaries. International sales in 2002 amounted to 45% of the
Company's total worldwide sales.
For a geographic breakdown of sales and long-lived assets, see the
discussion of Segment Information in Note 22 to our financial statements.
The Company's international operations are subject to a number of risks and
uncertainties, such as: local economic and business conditions; fluctuations in
currency values and foreign exchange rates; exchange control regulations; import
and trade restrictions, including embargoes; governmental instability;
legislative and regulatory controls on pricing of products; and other
potentially detrimental domestic and foreign governmental practices or policies
affecting U.S. companies doing business abroad.
For a more detailed discussion of the risks relating to the effects of
changes in foreign-currency exchange rates and interest rates and the way we
monitor and manage these risks as an integral part of our overall risk-
management program, please see Note 10 to our financial statements, Derivative
Instruments and Hedging Activities.
ENVIRONMENTAL MATTERS
The Company is subject to extensive environmental legislation and
regulation, requiring substantial environmental compliance costs, including
capital expenditures related to future production. Projects related to the
prevention, mitigation and elimination of environmental effects are implemented
worldwide.
Since several capital projects are undertaken for both environmental
control and other business purposes, such as production process improvements, it
is difficult to estimate the specific capital expenditures for environmental
control. However, estimated capital expenditures for environmental protection in
2002 were $15 million and are estimated to be approximately $33 million in 2003.
Operating expenses for compliance with environmental protection laws and
regulations in 2002 are estimated to have been in excess of $51 million.
Management estimates that such operating expenses will be in excess of $52
million in each of years 2003 and 2004. Upon completion of the merger with
Pfizer in 2003, Pharmacia will be a wholly-owned subsidiary of Pfizer.
With regard to the Company's discontinued industrial chemical facility in
North Haven, Connecticut, the Company will be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency ("EPA"). It is
reasonably possible that a material increase in accrued liabilities will be
required. It is not possible, however, to estimate a range of potential losses
at this time. Accordingly, it is not possible to determine what, if any,
additional exposure exists at this time.
Under the terms of the Separation Agreement between the Company and
Monsanto, Monsanto is responsible for remediation liabilities at existing and
former manufacturing locations and certain off-site disposal and formulation
facilities primarily related to the agricultural business or the former chemical
businesses. This includes, but is not limited to, environmental liabilities that
Solutia Inc., the former chemical business of Pharmacia, assumed from Pharmacia
in connection with its spinoff on September 1, 1997, to the extent that Solutia
fails to pay, perform or discharge those facilities. See the discussion in Item
3 "Legal Proceedings" below for a description of the agreements with Solutia and
Monsanto.
AVAILABILITY OF COMPANY INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports are available, without
charge, on our website, http://www.pharmacia.com/investor/filings.asp, as soon
as reasonably practicable after they are filed electronically with the SEC.
Copies are also available, without charge, from Pharmacia Investor Relations,
100 Route 206 North, Peapack, NJ 07977.
Item 2. Properties
The Company's pharmaceutical businesses operate through a number of
offices, research laboratories and production facilities throughout the world
with principal locations in Kalamazoo, Michigan; Skokie, Illinois; St. Louis,
Missouri; South San Francisco, California; Stockholm and Helsingborg, Sweden;
Milan, Italy; Puurs, Belgium; Japan and Puerto Rico.
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The Company's pharmaceutical headquarters are located in Bedminster,
Bridgewater and Peapack, New Jersey. In 2002, the Company purchased a new site
for its pharmaceutical headquarters from AT&T Corporation, located in Basking
Ridge, New Jersey. In light of the Pfizer acquisition, future use of the new
facility has yet to be determined. The Company believes its properties to be
adequately maintained and suitable for their intended use. The facilities
generally have sufficient capacity for existing needs and expected near-term
growth and expansion projects are undertaken as necessary to meet future needs.
Please see Note 13 to the Company's financial statements, "Properties, Net",
which discloses amounts invested in land, buildings and equipment.
Item 3. Legal Proceedings
References to Pharmacia throughout will include "former Monsanto" when
referring to the pre-merger activities of the former Monsanto Company.
References to "Monsanto" or "new Monsanto" refers to Monsanto Company,
Pharmacia's former agricultural subsidiary which was spun-off by Pharmacia to
its shareholders on August 13, 2002.
Pursuant to the Separation Agreement between Pharmacia and Monsanto, as
amended (the "Separation Agreement"), Monsanto assumed and agreed to indemnify
Pharmacia for liabilities related to the agricultural business. In the
proceedings where the Company is the defendant, Monsanto will indemnify the
Company for costs, expenses and any judgments or settlements; and in the
proceedings where the Company is the plaintiff, Monsanto will pay the fees and
costs of, and receive any benefits from, the litigation. Therefore, Pharmacia
may remain the named party in certain legal proceedings, but Monsanto will
manage the litigation including indemnifying Pharmacia for costs, expenses and
any judgments or settlements.
On November 12, 2002, Monsanto notified the U.S. Securities and Exchange
Commission's staff of certain books and records and compliance irregularities
involving Monsanto's Indonesian affiliate companies and certain of their foreign
national employees.
In connection with the spin-off of Solutia Inc. ("Solutia") on September 1,
1997, Solutia assumed from Pharmacia liabilities related to the Company's
chemical businesses pursuant to the Distribution Agreement, as amended (the
"Distribution Agreement"). As a result, Pharmacia remains the named defendant in
certain legal proceedings, but Solutia manages the litigation and pays all
costs, expenses and any judgments or settlements. Pursuant to the terms of the
Separation Agreement, Monsanto has assumed, and agreed to indemnify Pharmacia
for, any liabilities primarily related to former Monsanto's former chemical
businesses, including any liabilities that Solutia has assumed from Pharmacia in
connection with the spin-off of Solutia, to the extent Solutia fails to pay,
perform or discharge these liabilities. This indemnification obligation applies
to litigation, environmental, retiree and all other liabilities assumed by
Solutia pursuant to the spin-off.
For example, Solutia has assumed responsibility for litigation currently
pending in state and federal court in Alabama brought by several thousand
plaintiffs, alleging property damage, anxiety and emotional distress and
personal injury arising from exposure to polychlorinated biphenyls (PCBs), which
were discharged from an Anniston, Alabama plant site that was owned by former
Monsanto and that was transferred to Solutia as part of the spin-off. This
litigation includes, but is not limited to, the Abernathy litigation referred to
below. Pursuant to the terms of the Distribution Agreement, Solutia is required
to indemnify Pharmacia for liabilities that Pharmacia incurs in connection with
this litigation.
Solutia is defending itself and Pharmacia in connection with Sabrina
Abernathy, et al. v. Monsanto Company, et al., currently pending in state court
in Alabama. The jury has found Solutia and Pharmacia (former Monsanto) liable
with respect to certain claims in this litigation, and proceedings have
commenced to determine damages. Solutia requested that Pharmacia commit to
posting any appeal bond that may be required to stay execution of any judgment
in this litigation pending appeal. Pursuant to a Protocol Agreement dated as of
July 1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does
not post a bond sufficient to stay the execution of any judgment in the
litigation pending an appeal, Pharmacia will post such a bond if it is able to
do so on commercially reasonable terms. Solutia shall pay the expenses incurred
in connection with obtaining any such bond. The agreement also specifies which
party or parties would control any decisions regarding settlement of the
Abernathy litigation, depending upon whether or not collateral must be provided
to secure the bond and, if so, which party provides it. Under the agreement, the
continued defense of the Abernathy litigation and the prosecution of any appeal
will continue to be managed by Solutia, at Solutia's expense.
On April 19, 2002, NeoPharm filed a Demand for Arbitration with the Company
pursuant to the terms of the February 19, 1999 License Agreement. A contractual
dispute has arisen between NeoPharm and Pharmacia
9
involving our partnership to develop LEP (Liposomal Encapsulated Paclitaxel) and
LED (Liposomal Encapsulated Doxorubicin). NeoPharm claims that Pharmacia failed
to use "reasonable efforts" to develop, market and sell LEP/LED. NeoPharm is
seeking specific performance and monetary damages. In May 2002, the Company
filed its response and counter-claim. Discovery has been ongoing and a hearing
is scheduled for May 2003.
The States of New York, Nevada, Montana and Minnesota have sued the
Company, in their respective state courts, alleging that the Company manipulated
the "average wholesale price" ("AWP") of Medicare Part B "Covered Drugs,"
causing the states' respective Medicaid agencies, and their respective Medicare
and Medicaid beneficiaries, among others, to pay artificially inflated prices
for "Covered Drugs." In addition, the Nevada and Montana suits allege that the
Company did not report to the states its "best price" under the Medicaid
Program. Each of the suits alleges various causes of action, including, but not
limited to, deceptive trade practices and Medicaid fraud, purportedly sounding
in state law. The suits seek monetary and other relief, including civil
penalties and treble damages.
The Montana, Minnesota and Nevada suits have been removed to those states'
respective federal courts and transferred to MDL 1456. The magistrate judge in
the Minnesota suit issued a September 2002 Report and Recommendation (Report)
granting plaintiff's motion to remand the suit to state court. The Company has
filed objections to the Report and those objections have not yet been ruled upon
by the district court judge.
In addition, the Company has been named as a defendant in the following
self-styled class action lawsuits, brought by private individuals, public
interest groups and employee welfare benefit plans in which similar allegations
of AWP manipulation have been made: Board of Trustees of Carpenters and
Millwrights of Houston and Vicinity Welfare Trust Fund v. Abbott Laboratories,
Inc., et, al., 5:01 CV 339 (E.D. Tex.), filed December 24, 2001; Citizens for
Consumer Justice, et. seq. v. Abbott Laboratories, et. al., C.A. No. 01-12257
(D. Mass.) ,filed December 19, 2001; Congress of California Seniors, et. al. v.
Abbott Laboratories, et. al., BC282102 (Ca. Sup. Ct., Los Angeles Co.), filed
September 24, 2001; Digel v. Abbott Laboratories, et al., CT-007717-02 (Tenn.
Cir. Ct., 13th District), filed December 18, 2002; Geller v. Abbott
Laboratories, et. al., CV 02-00553 (C.D. Cal.), filed October 26, 2001; Rice v.
Abbott Laboratories, et. al., C 02-3925 (N.D. Cal.), filed July 12, 2002;
Robinson and Hudson v. Abbott Laboratories, et. al, CV02-0493-S (W.D. La.),
filed March 13, 2002; Swanston v. TAP Pharmaceutical Products Inc., et. al.,
CV2002-004988 (Az. Sup. Ct., Maricopa Co.), filed March 15, 2002; Thompson v.
Abbott Laboratories, et. al., CGC-02-411813 (Ca. Sup. Ct., San Francisco Co.),
filed August 23, 2002; Teamsters Health & Welfare Fund of Philadelphia and
Vicinity v. Abbott Laboratories, Inc., et. al., 02 CV 2002 (E.D. Pa.), filed
April 10, 2002; Turner v. Abbott Laboratories, et. al., 412357 (Ca. Sup. Ct.,
San Francisco Co.), filed September 9, 2002; United Food and Commercial Workers
Unions, et. seq. v. Pharmacia Corporation, et. al., 3:01 CV 5427 (D.N.J.), filed
November 19, 2001; and Virag v. Allergan, Inc., et. al, BC282690 (Ca. Sup. Ct.,
Los Angeles Co.), filed October 3, 2002. Typical claims asserted in these suits
include fraud, unfair competition and unfair trade practices. Some of the suits
assert claims under the Racketeer Influenced and Corrupt Organizations Act
("RICO"). Some suits assert antitrust claims. The suits seek various measures of
injunctive, monetary and other relief, including civil penalties and treble
damages.
All of the private plaintiff lawsuits referred to in the preceding
paragraph, with the exception of the Swanston suit in Arizona state court, have
been consolidated for pretrial purposes and transferred to the federal district
court for Massachusetts, in the multidistrict litigation captioned, In re
Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456, Master
File No. 01-CV-12257-PBS (D. Mass.). On November 4, 2002, the Company joined the
other defendants in the MDL 1456 in moving to dismiss all claims asserted
against defendants in the master consolidated complaint. Oral argument of the
motion was held on January 13, 2003. The judge indicated that her ruling would
come in the next 90 days. During this same period, defendants will be providing
limited discovery to the plaintiffs.
On July 15, 2002, a suit was filed in the Chancery Court in Delaware on
behalf of a purported class of Pharmacia's shareholders against the Company,
Pharmacia directors and Pfizer, alleging that the price to be paid for
Pharmacia's shares is inadequate as a result of the Pharmacia's directors'
breach of their fiduciary duties to the shareholders of Pharmacia and that
Pfizer is alleged to have aided and abetted the alleged breach. The complaint,
which Pfizer and Pharmacia believe to be without merit, seeks damages and to
enjoin the merger.
On the same date, a second suit was filed in the Chancery Court in Delaware
against the Company and Pharmacia directors, alleging that the price to be paid
for Pharmacia's shares is inadequate as a result of the
10
Pharmacia directors' breach of their fiduciary duties to the shareholders of
Pharmacia. The complaint, which Pharmacia believes to be without merit, seeks
damages and to enjoin the merger.
On June 7, 2001, the Company, along with Pfizer and Merck, was named as
a defendant in a purported class action complaint in United States District
Court in Brooklyn, New York, styled Cain & Watkins v. Pharmacia, et al.,
alleging cardiovascular safety issues associated with VIOXX and CELEBREX.
Plaintiffs filed an amended complaint on August 1, 2001, alleging, among other
things, that the named plaintiffs have suffered "cardiac illness." The suit
claims that the millions of patients in the U.S. who took VIOXX and CELEBREX are
entitled to a refund for all amounts paid for the purchase of these drugs, their
medical expenses and attorneys' fees. The complaint also makes numerous claims
for injunctive and equitable relief, including emergency notice to class
members, revised labeling and a court-ordered and supervised medical monitoring
program funded by defendants. On September 21, 2001, the Company filed an Answer
and a Motion to Dismiss on a number of grounds. In September 2002, the
defendants' Motion to Dismiss plaintiffs' claim for injunction relief was
granted.
In 2001 and 2002, the Company, G.D. Searle, the pharmaceutical subsidiary
of former Monsanto Company, and Pfizer were named as defendants in a number
of purported class action complaints filed in State and Federal court in New
Jersey (Astin v. Pharmacia, et al., Leonard v. Pharmacia, et al., Plumbers and
Pipefitters Local Health and Welfare Fund v. Pharmacia, et al. and Heindel v.
Pharmacia et al.). Plaintiffs allege, among other claims, that the defendants
misrepresented and over-promoted CELEBREX in violation of the New Jersey
Consumer Fraud Act. The complaints also allege that the defendants have misled
and defrauded the FDA to gain approval of CELEBREX. The complaints seek economic
damages only and claim no specific medical injury. Though two of these cases
were recently dismissed, two cases remain (Plumbers and Pipefitters Local Health
and Welfare Fund v. Pharmacia; and Heindel v. Pharmacia).
On April 11, 2000, the University of Rochester filed suit in U.S. District
Court for the Western District of New York, asserting patent infringement
against the Company and certain of its subsidiaries as well as Pfizer. The
University asserts that its U.S. patent has claims directed to a method of
treating human patients by administering a selective COX-2 inhibitor. The
University sought injunctive relief, as well as monetary compensation for
infringement of the patent. On March 5, 2003, a trial judge in the U.S. District
Court for the Western District of New York dismissed the claims on summary
judgment, holding the University patent to be invalid for lack of written
description and lack of enablement of the alleged invention. The University is
expected to file an appeal on this decision in 2003.
The Company is a defendant in a lawsuit brought by CP Kelco in Federal
Court in Delaware seeking compensatory and punitive damages for alleged breach
of contract, fraud and securities law violations arising out of the purchase of
the Company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the Company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The Company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the Company who were transferred to
CP Kelco. The Company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint. Discovery has been completed in the
lawsuit. A September 2002 Report and Recommendation (September Report) issued by
the magistrate judge in the case granted Lehman's and Hercules' motion for
judgment on the pleadings. The Company has filed objections to the September
Report and those objections have not been ruled upon. An October 2002 Report and
Recommendation (October Report) granted in part and denied in part the Company's
motion for summary judgment. The Company has filed objections to that portion of
the October Report that denied its motion. Those objections have not been ruled
upon. Trial is now scheduled for April 28, 2003.
The Company will be required to submit a corrective measures study report
to the EPA with regard to the Company's discontinued industrial chemical
facility in North Haven, Connecticut. While the Company has existing reserves
designated for remediation, in the light of changing circumstances, it is
reasonably possible that a material increase in accrued liabilities will be
required. However, it is not possible to determine what, if any, additional
exposure exists at this time.
The Company is involved in other legal proceedings arising out of the
ordinary course of its business. The Company believes it has valid defenses to
these matters and the matters identified above and intends to contest them
vigorously.
11
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of shareholders was held on December 9, 2002 in
Wilmington, Delaware to consider and to vote upon a proposal to adopt the
definitive merger agreement with Pfizer.
Of the 1,303,216,310 votes represented by the outstanding shares of common
stock and Series B convertible perpetual preferred stock, 925,230,379 voted FOR;
6,485,035 voted AGAINST; and 6,563,982 ABSTAINED from voting.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is listed and traded on the New York Stock Exchange under
the symbol PHA. As of March 18, 2003, there were 69,346 holders of record of the
Common Stock.
Please see information regarding dividends and related shareholder matters
appearing in Note 17 "Shareholders' Equity" to the financial statements. The
following table reflects quarterly market prices for the Company's Common Stock.
2002 First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------
Market price*
High $43.24 $42.94 $46.25 $46.00
Low $35.25 $34.82 $29.44 $37.90
2001 First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------
Market price*
High $56.40 $49.12 $44.13 $43.72
Low $41.36 $43.19 $35.34 $36.08
* 2001 and 2002 through Q2 have been adjusted for the spin-off of Monsanto.
Item 6. Selected Financial Data
All data presented have been restated to reflect Pharmacia operations with
Monsanto treated as a discontinued operation.
Years Ended December 31, 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Dollars in millions
Net sales $13,993 $13,835 $12,651 $11,176 $ 9,289
Earnings from continuing operations(1) 2,437 1,293 806 1,159 605
Total assets 18,517 22,377 22,776 20,706 19,919
Long-term debt 2,649 2,731 3,624 1,958 2,384
Diluted earnings per share from continuing operations(1) 1.84 .97 .61 .90 .48
Dividends declared per share(2) .54 .525 -- -- --
==========================================================================================================
(1) Comparability of earnings for periods prior to 2000 may be affected due to
the change in accounting principle recorded in 2002 and 2000. Refer to
Note 2 for additional information.
(2) Dividends declared have not been presented for periods prior to 2001
because the information would not be meaningful. For the year ended
December 31, 2000, shareholders received a combination of dividends
declared by post-merger Pharmacia Corp., and former Monsanto Company and
P&U, Inc. For the years prior to 2000, shareholders received amounts
declared by former Monsanto Company and P&U, Inc. For 2002, shareholders
received 0.17 shares of Monsanto Company for each Pharmacia share held.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's sales and earnings performances over the past three years have
been marked by a number of significant events that have the effect of
complicating growth comparisons and analyses. As can be seen from the table
below, sales grew in 2002 by 1 percent contrasted with growth the preceding year
of 9 percent. Earnings from continuing operations grew by 88 percent in 2002
versus 60 percent in 2001 whereas, at the net earnings level, 2002 saw a decline
from 2001 contrasted with over 100 percent growth from 2000 to 2001.
Throughout the discussions that follow, we will identify the impact of the
various events and transactions that have created much of the variability in
sales and earnings during the past three years.
Please note that per-share amounts are presented on a diluted, after-tax basis,
unless otherwise indicated.
Noteworthy among these events and transactions are:
o The transfer of U.S. product rights to AMBIEN to Sanofi as of January 1,
2002, pursuant to prior agreements. AMBIEN was the Company's
second-largest-selling product in recent years, accounting for sales of
$902 million and $705 million in 2001 and 2000, respectively. This adverse
effect on sales also had an impact on earnings as the Company received only
a share of the profits earned by Sanofi during the first quarter of 2002
(recorded in "All other, net"). The profit contribution of AMBIEN was
approximately $.24 per share in 2001, versus $.04 per share in 2002. In
April 2002, upon completion of the transfer, the Company received a
one-time payment of $671 million from Sanofi in connection with the
transfer. The resulting gain of $661 million ($424 million net of tax or
$.32 per share) was also recorded in "All other, net."
o Discontinued operations treatment of the Monsanto agricultural business.
The Company's share of Monsanto earnings for 2001 and 2000 are reported as
"Income from discontinued operations, net of tax" (and net of minority
interest). The line "Loss on disposal of discontinued operations, net of
tax" reflects in 2002 a calculated impairment loss measured as the
difference between Monsanto's fair value at the spin-off date and the
Company's carrying value. This is partially offset by the Company's share
of Monsanto's earnings from the measurement date on November 28, 2001, when
the Company's Board of Directors approved a formal plan to distribute to
its shareholders all the remaining outstanding shares of common stock held
by the Company in Monsanto, to the August 13, 2002 spin-off.
o The implementation of a new accounting standard on goodwill by Monsanto.
Although Monsanto is treated as a discontinued operation for the majority
of the earnings statement presentation, the effect of Monsanto's adoption
of the new accounting rules related to goodwill is reflected as part of the
Company's net earnings. This was a charge of $1.5 billion representing
Pharmacia's portion of Monsanto's charge, net of minority interest.
Pharmacia also implemented the new standard as of January 1, 2002 but did
not incur a charge related to its adoption. Year-to-year trends were
affected, however, since there was no goodwill amortization in 2002,
compared with $103 million and $115 million in 2001 and 2000, respectively.
o The divestiture of the Company's minority stake in Amersham Biosciences in
March 2002. The $653 million net gain was reported as an extraordinary item
thereby favorably affecting net earnings but not earnings from continuing
operations.
o Merger and restructuring charges. Significant activity and related costs
experienced in 2001 and 2000 related to the Merger between former Monsanto
and P&U had diminished substantially by 2002. Restructuring and
merger-related charges in the years 2002, 2001 and 2000 amounted to $68
million, $673 million and $975 million, respectively.
o Other. Comparisons of individual earnings statement line captions such as
"Selling, general and administrative," "Research and development" and "All
other, net" are affected by certain discreet events or transactions such as
large corporate donations, costs of acquisitions or gains on disposal of
intellectual properties and litigation settlements. Where applicable, these
items are identified in the discussions that follow.
13
% %
Consolidated Results 2002 Change 2001 Change 2000
- -------------------------------------------------------------------------------------------------------
Dollars in millions, except per share data
Sales $13,993 1% $13,835 9% $12,651
Earnings from continuing operations before income taxes 3,306 108 1,591 52 1,044
Earnings from continuing operations 2,437 88 1,293 60 806
Net earnings 597 (60) 1,501 109 717
Net earnings per common share (EPS):
-- Basic $ .45 (61) $ 1.14 107 $ .55
-- Diluted $ .44 (61) $ 1.12 107 $ .54
=======================================================================================================
The Company operates in one reportable segment, Prescription Pharmaceuticals,
which includes primary care, hospital care, cancer care, ophthalmology and
endocrine care products. The Company also operates in several businesses that
are discussed collectively below as "Other Pharmaceuticals." These businesses
are consumer health care, animal health, diagnostics and contract manufacturing
and bulk chemical sales. The Company's equity positions in certain biotechnology
firms are also included in Other Pharmaceuticals.
Net Sales
% %
Sales by Segment 2002 Change 2001 Change 2000
- ----------------------------------------------------------------------------
Dollars in millions
Prescription pharmaceuticals $12,037 1% $11,968 11% $10,824
Other pharmaceuticals 1,956 5 1,867 2 1,827
- ----------------------------------------------------------------------------
Net Sales $13,993 1% $13,835 9% $12,651
============================================================================
The Company continued to record strong sales results in 2002 with an overall
increase of 1 percent versus 2001, despite the loss of AMBIEN sales in 2002.
Excluding the impact of the return of product rights to AMBIEN to Sanofi, sales
of the remaining products increased 8 percent in the full year. Prescription
Pharmaceuticals grew by 1 percent and Other Pharmaceuticals by 5 percent.
Foreign exchange had no meaningful impact on the results in 2002. In 2001, sales
were up 9 percent and experienced a 3 percent unfavorable impact from foreign
exchange.
The positive growth continues to be driven by the Company's key prescription
pharmaceutical products including the COX-2 franchise (primarily CELEBREX and
BEXTRA), XALATAN, DETROL/DETROL LA and GENOTROPIN. These products had combined
sales representing 41 percent of total company sales in 2002 and experienced a
combined growth of 14 percent.
The Company's patent position for key prescription pharmaceutical products is
strong compared to the overall pharmaceutical industry. BEXTRA, ZYVOX, CELEBREX,
DETROL/DETROL LA, XALATAN and CAMPTOSAR have patent or marketing exclusivity to
2015, 2014, 2013, 2012, 2011 and 2007, respectively.
Sales in the Company's consumer health care business increased by 13 percent in
2002 following 14 percent growth in 2001 resulting from increases in tobacco
dependency products driven by the launch of NICORETTE in Japan and acquisitions
during 2001. Sales in the animal health business increased by 8 percent versus
the prior year led by growth of NAXCEL/EXCENEL.
Sales in the U.S. represent 55 percent of worldwide sales in 2002, a slight
reduction from 56 percent in 2001. The reduction was due for the most part to
the transfer of U.S. product rights to AMBIEN. U.S. sales represented 55 percent
of sales in 2000. Sales in Japan, the Company's second largest market, were $873
million in 2002 representing 6 percent of total company sales. Sales in Japan in
2001 and 2000 were $893 million and $942 million, respectively. The Company's
geographic composition of sales will continue to result in significant exposure
to the fluctuations of exchange rates in both the translation of financial
results and the underlying transactions that comprise the results.
The 1 percent sales growth in 2002 was attributed to fractional increases in
both price and foreign exchange effects. Excluding the impact of AMBIEN, volume
accounted for 7 percent of the 2002 increase in sales. In 2001, volume drove the
overall 9 percent growth. Volume increases accounted for a 10 percent rise over
2000, whereas, price increased 2 percent and foreign exchange had a negative 3
percent impact.
14
A comparison of the year-to-year consolidated net sales by country is provided
in the table below.
% Change % Change
Percent Excluding Percent Excluding
Net Sales by Country 2002 Change Exchange* 2001 Change Exchange* 2000
- ----------------------------------------------------------------------------------------------
Dollars in millions
United States $ 7,627 (2)% (2)% $ 7,815 13% 13% $ 6,939
Japan 873 (2) -- 893 (5) 7 942
Italy 628 12 6 562 7 10 527
Germany 527 10 4 481 9 13 440
United Kingdom 504 12 8 450 1 6 445
France 488 (3) (7) 502 40 45 359
Rest of world 3,346 7 8 3,132 4 10 2,999
- ----------------------------------------------------------------------------------------------
Net sales $13,993 1% 1% $13,835 9% 12% $12,651
==============================================================================================
* Underlying growth reflects the percentage change excluding currency
exchange effects.
A year-to-year comparison of consolidated net sales of the Company's major
products (including generic equivalents where applicable) is provided in the
table below.
% %
Sales of Top Products 2002 Change 2001 Change 2000
- --------------------------------------------------------------------------
Dollars in millions
CELEBREX $3,050 (2)% $3,114 19% $2,614
BEXTRA 470 N/A -- N/A --
Other 7 N/A -- N/A --
--------------------------------------------
COX-2 Line 3,527 13 3,114 19 2,614
XALATAN 928 14 818 18 693
DETROL / DETROL LA 757 23 617 43 432
CAMPTOSAR 574 (6) 613 39 441
GENOTROPIN 551 8 511 9 467
NICORETTE Line 393 31 299 37 218
DEPO-PROVERA 339 20 283 4 272
PHARMORUBICIN/ELLENCE 333 28 261 31 199
MEDROL 329 2 323 14 284
XANAX 314 (3) 323 (1) 327
CLEOCIN Line 273 (13) 316 (7) 340
FRAGMIN 270 20 226 7 211
ARTHROTEC 241 3 235 (6) 251
CABASER/ DOSTINEX 230 39 165 33 124
MIRAPEX 207 40 148 30 113
ZYVOX 199 85 108 125 48
ALDACTONE/Spiro Line 190 4 183 (2) 187
PLETAL 136 28 106 99 53
COVERA/CALAN 134 (17) 161 5 153
- --------------------------------------------------------------------------
TOTAL $9,925 13% $8,810 19% $7,427
==========================================================================
15
Costs and Expenses
% of % of % of
Consolidated 2002 Sales 2001 Sales 2000 Sales
- ----------------------------------------------------------------------------------------------
Dollars in millions, except per share data
Cost of products sold $3,077 22.0% $2,978 21.5% $2,882 22.8%
Research and development 2,359 16.9 2,361 17.1 2,165 17.1
Selling, general and administrative 6,179 44.2 5,902 42.7 5,486 43.4
Merger and restructuring 68 0.5 673 4.9 975 7.7
==============================================================================================
Cost of products sold for 2002 and 2001 was $3.1 billion and $3.0 billion,
respectively, resulting in an increase of 3 percent in both years. Cost of
products sold as a percentage of net sales increased to 22 percent in 2002
versus 21.5 percent in 2001. This slight increase was primarily due to
additional compliance costs. Cost of products sold as a percentage of net sales
decreased to 21.5 percent in 2001 versus 22.8 percent in 2000. The decrease was
the result of a more favorable product mix and a larger portion of higher margin
prescription pharmaceutical sales to total sales.
Research and development (R&D) spending was $2.4 billion in 2002 and 2001. The
ratio of expense to net sales was lowered fractionally to 16.9 percent in 2002.
Increased development costs offset by fewer one-time payments for R&D agreements
resulted in essentially unchanged spending for the year. The increase in R&D
expense in 2001 versus 2000 was due in part to the acquisition of Sensus Drug
Development Corp. (Sensus) and up-front payments for product development and new
compound agreements.
Selling, general and administrative spending of $6.2 billion in 2002 increased
$277 million or 4.7 percent compared to 2001. The increase is attributable to
promotion payments as well as sales force spending for the Company's new key
product BEXTRA, increased promotion payments related to CELEBREX and an increase
in pension costs. Spending for 2002 also includes a charitable contribution of
$75 million to the Pharmacia Foundation. Selling, general and administrative
spending in 2001 includes increased prescription pharmaceuticals promotion
payments related to CELEBREX and consumer health care tobacco dependence launch
costs.
A more detailed discussion of the above comments is available in the
prescription pharmaceuticals and other pharmaceuticals sections.
Prescription Pharmaceuticals Segment
2002 2001 2000
- -----------------------------------------------------------------
Dollars in millions
Sales $12,037 $11,968 $10,824
Cost of products sold 2,235 2,240 2,112
Research and development 2,230 2,183 1,935
Selling, general and administrative 4,965 4,890 4,484
EBIT * 2,817 2,469 2,195
=================================================================
*Earnings before interest and taxes (EBIT) is presented to provide additional
information about the Company's operations and is in keeping with the manner in
which the Company manages its segments. This item should be considered in
addition to, but not as a substitute for or superior to, net earnings, cash
flows or other measures of financial performance prepared in accordance with
U.S. generally accepted accounting principles. Determination of EBIT may vary
from company to company.
In the U.S. pharmaceutical industry, it is common for trade inventories to
fluctuate as wholesalers anticipate or react to price changes. Accordingly,
sales of individual products can fluctuate from quarter to quarter. At the end
of 2002, Pharmacia's aggregate U.S. trade inventories were estimated to be
slightly below those of year-end 2001.
Prescription pharmaceutical sales, which constitute 86 percent of overall sales,
decreased 3 percent in the U.S. and increased 1 percent on a global basis in
2002, including the loss of AMBIEN sales. Excluding AMBIEN from prior-year data,
prescription sales increased 11 percent in the U.S. and 9 percent globally.
CELEBREX, BEXTRA, XALATAN, CAMPTOSAR, DETROL/DETROL LA AND ZYVOX, known as the
growth driver products, now account for 50 percent of total prescription
pharmaceutical sales, increasing 13 percent to $6.0 billion in 2002. As a result
of a successful launch in the U.S., BEXTRA accounted for over half of the
increase in growth driver product sales. On a combined basis, the growth driver
products grow faster than the overall company, have attractive patent
exclusivity profiles and are expected to make up an increasing percent of total
company sales. In 2001, these
16
products increased by 25 percent and accounted for 44 percent of total
prescription pharmaceutical sales, while in 2000 the growth driver products made
up 39 percent of prescription sales.
Pharmacia's product performance continues to be led by the Company's COX-2
portfolio, primarily CELEBREX and BEXTRA. Sales of COX-2 specific inhibitors
increased 13 percent to $3.5 billion in 2002. Together, CELEBREX and BEXTRA now
account for 62 percent of new prescriptions in the U.S. COX-2 market. With sales
of $470 million, BEXTRA was the most successful new pharmaceutical product
launched in 2002. The successful U.S. launch of BEXTRA in the second quarter of
2002 resulted in increased market share for Pharmacia and contributed to a 2
percent decline in full-year sales of CELEBREX. While sales and trade inventory
levels for the COX-2 products were impacted by a fourth quarter price increase
in both 2002 and 2001, overall U.S. trade inventory levels, as measured in
number of months on hand, at the end of 2002 were estimated to be slightly
below those of 2001.
DYNASTAT is an injectable COX-2 inhibitor that has been launched in Europe,
Latin America and Asia Pacific. Sales of this product totaled $7 million during
2002. Clinical trials of DYNASTAT in the U.S. are ongoing.
Sales of XALATAN, the number-one prescribed agent in the U.S. for lowering
intraocular pressure in the treatment of open-angle glaucoma, increased 14
percent to $928 million in 2002. In the U.S., sales increased 3 percent to $402
million. XALACOM, a fixed combination of XALATAN and timolol, was launched
throughout Europe in late 2001 and 2002. The Company also received approval to
market XALATAN as initial therapy (first-line therapy) for patients with
glaucoma or ocular hypertension in Europe and the U.S. Sales in Europe increased
30 percent due to the successful launch of XALACOM and XALATAN for initial
therapy. The U.S. launch of XALATAN for first-line therapy began in January
2003.
Sales of DETROL/DETROL LA, the world's leading treatment for overactive bladder,
increased 23 percent to $757 million in 2002. Sales in the U.S. increased 19
percent to $580 million for the year. The growth in the U.S. and globally
reflects continued strong demand for the new, once-daily DETROL LA, which
Pharmacia introduced in January 2001. Sales of DETROL/DETROL LA in 2001
increased 43 percent reflecting rapid uptake of DETROL LA during the initial
launch. In the first quarter of 2002, Pharmacia filed a New Drug Application for
DETROL LA in Japan for the treatment of overactive bladder.
CAMPTOSAR, the leading treatment for colorectal cancer in the U.S., recorded
sales of $574 million, a 6 percent decrease compared to 2001. Full-year sales of
CAMPTOSAR were impacted by trade inventory fluctuations associated with a price
increase in the fourth quarter of 2001 and the launch of a competitive product
in the second half of 2002. In 2001, full-year sales of CAMPTOSAR increased by
39 percent as a result of FDA approval of CAMPTOSAR for the initial treatment
of colorectal cancer in 2000 and trade inventory fluctuations in the fourth
quarter of 2001.
GENOTROPIN, a growth hormone, recorded sales of $551 million in 2002, an
increase of 8 percent. The growth of GENOTROPIN continues to be driven by
increasing market penetration in the U.S. where sales totaled $147 million, an
increase of 28 percent. The growth observed in 2002 was similar to the growth
rate observed in 2001 when sales increased 9 percent globally, driven by a 67
percent increase in the U.S.
ZYVOX, the Company's antibiotic for Gram-positive infections, recorded sales of
$199 million in 2002, an increase of 85 percent. ZYVOX sales are growing rapidly
following the U.S. launch in 2000 followed by successful launches in Europe and
Japan. In the fourth quarter of 2002, the FDA approved a new use for ZYVOX in
the treatment of pediatric patients with Gram-positive infections.
Sales of PHARMORUBICIN, a widely used chemotherapeutic agent for breast cancer,
increased 28 percent to $333 million in 2002. Sales of ELLENCE, the trade name
for PHARMORUBICIN in the U.S., increased 83 percent to $111 million, driving the
overall increase in sales of the PHARMORUBICIN brand. A regimen containing
ELLENCE improves survival in the treatment of early breast cancer following
surgery or radiation therapy.
Sales of MIRAPEX and CABASER continued to grow at a rapid pace reflecting
increased adoption of these drugs for the treatment of patients with early
Parkinson's disease. MIRAPEX sales increased 40 percent to $207 million in 2002,
while sales of CABASER/DOSTINEX, for Parkinson's disease and hyperprolactinemia,
grew 39 percent to $230 million. In 2001, MIRAPEX and CABASER sales increased by
30 percent and 33 percent, respectively.
Sales of ARTHROTEC, one of the Company's older arthritis medications, increased
3 percent in 2002, while XANAX, for anxiety, decreased 3 percent. In January
2003, the Company received FDA approval for a once-daily formulation of XANAX
under the brand name, XANAX XR.
17
Sales of FRAGMIN, for the prevention of blood clots after surgery, increased 20
percent in 2002, driven by a 48 percent increase in the U.S., to $87 million.
PLETAL sales in 2002 increased 28 percent in the U.S. and other markets where
Pharmacia co-promotes the product with Otsuka. PLETAL continues to take market
share from older products used in the treatment of intermittent claudication, a
form of peripheral vascular disease, which is characterized by pain in the legs
during walking.
Key prescription pharmaceutical segment operating expenses, stated as a
percentage of net prescription pharmaceutical sales, are provided in the table
below.
Prescription Pharmaceuticals 2002 2001 2000
- ---------------------------------------------------------
Dollars in millions
Cost of products sold 18.6% 18.7% 19.5%
Research and development 18.5 18.2 17.9
Selling, general and administrative 41.3 40.9 41.4
EBIT * 23.4 20.6 20.3
=========================================================
*Earnings before interest and taxes (EBIT) is presented to provide additional
information about the Company's operations and is in keeping with the manner in
which the Company manages its segments. This item should be considered in
addition to, but not as a substitute for or superior to, net earnings, cash
flows or other measures of financial performance prepared in accordance with
U.S. generally accepted accounting principles. Determination of EBIT may vary
from company to company.
COST OF PRODUCTS SOLD for the Prescription Pharmaceuticals segment was $2.2
billion in 2002, or 18.6 percent of sales, which is flat relative to 2001. In
2001, cost of products sold as a percent of sales improved by nearly one
percentage point from 2000 primarily from increased sales of higher margin
products such as CELEBREX, AMBIEN, CAMPTOSAR and XALATAN. Improvements in
product mix more than offset increases in production expenses, compliance
initiatives, support functions and royalty payments.
RESEARCH AND DEVELOPMENT EXPENSE increased 2 percent in 2002 versus 2001 to $2.2
billion. As a percent of sales, R&D expenses were 18.5 percent in 2002 which was
slightly above 2001 at 18.2 percent. The increase was mainly the result of
additional development costs for CDP 870 (rheumatoid arthritis), Phase IV
expenses for BEXTRA and R&D technology acquisition costs. Also impacting the
current year was a $30 million payment to Altana AG in connection with the
acquisition of rights for the development of roflumilast, a new compound being
developed for the treatment of respiratory diseases. Partially offsetting the
impact of these increases in the current year were certain one-time expenses in
2001 that were not present in 2002. These 2001 expenses include costs of $67
million relating to the acquisition of Sensus. Also, during 2001, the Company
entered into an agreement with Celltech Group plc for the development and
promotion of CDP 870. As a result of that agreement, the Company recorded an R&D
expense of $50 million. During the third quarter of 2001, the Company recorded
$30 million of R&D expense for a payment to Orion Corporation in connection with
an agreement to collaborate in the development and commercialization of
deramciclane in the U.S. R&D expenses as a percent of sales were approximately
18 percent in 2001 and 2000 although total R&D expense increased 13 percent in
2001 versus 2000. The main contributors to the increase were the collaboration
agreements and the acquisition of Sensus as well as increases in project
spending and R&D administrative costs.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expenses related to the Prescription
Pharmaceuticals segment increased 2 percent in 2002 versus 2001. As a percent of
sales, SG&A has been relatively constant at approximately 41 percent in 2002,
2001 and 2000. The primary reason for the 2002 increase in spending was
promotion payments relating to CELEBREX and BEXTRA. Additionally, increased
promotional and sales force expenditures were incurred for BEXTRA, INSPRA
(eplerenone tablets) and XALATAN. BEXTRA was launched in April of 2002. SG&A
expenses increased 9 percent in 2001 versus 2000. The dollar growth in 2001 is
largely attributable to increased promotion payments related to CELEBREX.
Increased sales of CELEBREX and the timing of European launches account for the
larger payments. Sales force expansions and marketing support for key products
also contributed to the increase in spending. Additionally, headcount increases
to support key products including CELEBREX, XALATAN, CAMPTOSAR and ZYVOX
contributed to the increased spending.
Other Pharmaceuticals
Other Pharmaceuticals is currently comprised of consumer health care (OTC
products), animal health, contract manufacturing, bulk pharmaceutical chemicals,
diagnostics and certain biotechnology holdings. The plasma
18
business was divested in 2001 (see discussion below). Sales of the remaining
businesses increased over the period 2001 to 2002 by $137 million, or 8 percent,
to $1.9 billion. Sales increases in consumer health care, animal health and
diagnostics were offset in part by a decrease in the contract manufacturing and
bulk pharmaceutical chemicals business.
The consumer health care business experienced strong sales growth in 2002
resulting from increases in tobacco dependency products. Sales were $829
million, $732 million and $644 million in 2002, 2001 and 2000, respectively.
This represents an increase of 13 percent in 2002 and 14 percent in 2001. The
business' leading products are for the treatment of tobacco dependency and hair
therapy. Sales of the tobacco dependency products increased significantly during
2002 and 2001 mainly due to the September 2001 launch of NICORETTE in Japan,
market share growth of NICORETTE in Canada following the 2001 acquisition of the
Canadian rights for NICORETTE and NICODERM, and increased demand of tobacco
dependency products in the U.S. Sales of ROGAINE products declined due to
continuing generic competition partially offset by the re-launch of PROGAINE.
Combined sales of these products for 2002 were $509 million as compared to $422
million in 2001 representing a 21 percent increase. In September 2001, the
Company acquired LUDEN'S throat drop product.
Sales in the animal health business increased 8 percent during 2002 to $506
million. This compares to a 6 percent increase in 2001 versus 2000. Sales in
2001 and 2000 were $469 million and $442 million, respectively. Animal health
sales in 2002 and 2001 were driven by NAXCEL/EXCENEL, an antibiotic used to
treat a variety of animals, and the LINCO franchise, antibiotics used to treat
swine and poultry infections.
During 2002, the Company sold its minority stake in Amersham Biosciences
resulting in a gain of $653 million, net of taxes. This gain has been recorded
as an extraordinary item. See Extraordinary Items below.
During 2001, the Company exited the plasma business. This was accomplished
through the contribution of the plasma operations to Biovitrum AB (Biovitrum),
which is 19 percent owned by the Company. Full year sales relating to plasma in
2000 were $78 million whereas 2001 included $53 million for the partial year.
Corporate/General
Corporate items represent general and administrative expenses of corporate
support functions, restructuring charges and other corporate items such as
litigation expense, merger costs and nonoperating income and expense. Items that
are not assigned to a specific business or are of a non-recurring nature are
designated as corporate. Corporate items are reflected in the earnings statement
principally in "SG&A", "All other, net" and "Merger and restructuring".
Corporate items resulted in a net income amount of $95 million in 2002, as
compared with a net expense amount of $1.1 billion for 2001. The favorable
earnings impact is mainly attributable to the decrease in merger and
restructuring costs in 2002 as compared with 2001 and certain one-time gains
recorded in 2002. Merger and restructuring expenses totaled $68 million in 2002
as compared with $673 million during 2001. Corporate income for 2002 includes
the $661 million gain relating to the return of U.S. product rights of AMBIEN to
Sanofi and a $100 million gain resulting from a legal settlement of an
intellectual property suit in the ophthalmology field. Partially offsetting
these gains are a $75 million charitable contribution to the Pharmacia
Foundation and an increase in pension costs.
Corporate and other expenses predominately consisted of merger and restructuring
charges for the years ended December 31, 2001 and 2000. Merger and restructuring
costs recorded were $673 million and $975 million for the years ended 2001 and
2000, respectively. In 2000, a $100 million charitable contribution was made.
Excluding these costs, corporate expenses primarily relate to administrative
costs.
Merger and Restructuring Charges
2002 2001 2000
- ----------------------------------------------------
Dollars in millions
Merger costs:
Merger integration costs $ 16 $340 $599
Other merger-related costs -- 79 --
Pfizer merger costs 44 -- --
- ----------------------------------------------------
Total merger costs 60 419 599
- ----------------------------------------------------
19
Restructuring costs:
Employee termination costs 8 177 278
Asset write-downs -- 58 88
Other 18 44 25
Reversals (18) (25) (15)
- ----------------------------------------------------
Total restructuring costs 8 254 376
- ----------------------------------------------------
Total merger and restructuring $ 68 $673 $975
====================================================
The Company recorded merger and restructuring charges of $68 million, $673
million and $975 million during 2002, 2001 and 2000, respectively. All of these
charges were recorded on the "Merger and restructuring" line of the consolidated
statements of earnings. In 2002, 2001 and 2000, merger and restructuring charges
comprised $60 million of merger expense and $8 million of net restructuring
expense, $419 million of merger expense and $254 million of net restructuring
expense and $599 million of merger expense and $376 million of net restructuring
expense, respectively.
During 2000, former Monsanto and P&U merged to form Pharmacia Corporation. As
a result of that merger, there were many duplicate functions and locations,
particularly in the prescription pharmaceutical segment and corporate
functions. The Company began a restructuring in order to integrate the two
companies, eliminate duplicate positions and facilities and create a
consolidated headquarters in New Jersey.
The board of directors approved a comprehensive integration and restructuring
plan in the spring of 2000. Due to the comprehensive nature of this
restructuring, the timelines for the various plans were expected to occur over
multiple years and the related restructuring charges also were intended to be
taken over three or four years. As of December 31, 2002, merger charges relating
to this plan are essentially complete.
On July 13, 2002, the Company entered into a definitive merger agreement with
Pfizer. Pharmacia incurred certain costs in 2002 necessary to facilitate the
completion of the merger.
Merger Costs
The $60 million of merger costs recorded in 2002 is comprised of the following:
o $16 million to integrate the former Monsanto and P&U organizations;
comprised largely of costs relating to information technology integration
projects.
o $44 million to facilitate the completion of the merger with Pfizer;
comprised of $10 million relating to legal fees; $12 million relating to
travel, benefits consulting, contract terminations and other merger related
costs and a non-cash charge of $22 million for the accelerated vesting of
certain restricted stock awards as a result of the shareholder approval of
the merger agreement with Pfizer.
The $419 million of merger costs recorded in 2001 is comprised of the following:
o $340 million to integrate the former Monsanto and P&U organizations;
comprised of $139 million of consulting fees for system and process
integration, $52 million relating to information technology integration
projects, $26 million of contract termination fees and employee relocation
costs, $123 million relating to other out-of-pocket merger costs such as
travel, temporary payroll, incentives and other costs necessary to complete
the merger.
o $79 million relating to the formation and partial sale of Biovitrum. The
$79 million is comprised of a noncash charge of $63 million relating to
asset write-downs and $16 million of other related cash expenses. Biovitrum
was established during the second quarter of 2001 as the result of the
Company's plan to exit its Sweden-based metabolic disease research
activities, its biopharmaceutical development unit and the Company's plasma
business. The Company has partially divested of its ownership in Biovitrum
and currently owns less than 20 percent.
The $599 million of merger costs recorded in 2000 is comprised of the following:
20
o $100 million relating to investment bankers, $42 million in connection with
legal and SEC fees, $48 million relating to consultant expense, $11 million
relating to employee moving and relocation costs, $166 million of other
merger costs necessary to integrate the two companies and a noncash charge
of $232 million. This noncash charge related to certain former Monsanto
employee stock options that contained a contractual reset provision that
was triggered upon change-of-control so that, upon consummation of the
merger, the original above-market exercise price was reduced to equal the
fair market value on the date of grant.
Restructuring Costs
The $8 million of net restructuring charges recorded in 2002 is comprised of the
following:
o $21 million associated with restructuring Prescription Pharmaceuticals.
This was necessitated by the combination of G.D. Searle, the pharmaceutical
business of former Monsanto, and P&U operations worldwide. The merger
resulted in duplicate facilities, computer systems and positions around the
world. The charges consist of $5 million relating to the separation of
approximately 45 employees worldwide in R&D, manufacturing, marketing and
administrative functions; $9 million relating to contract and lease
termination fees and $7 million of other exit costs.
o $5 million relating to the consolidation of corporate and administrative
functions and other areas of former Monsanto and P&U and eliminating
duplicative positions. This charge is comprised entirely of costs relating
to the separation of approximately 35 employees.
o $18 million of total reversals. This is comprised of a reversal of $5
million relating to restructuring liabilities established in 1999 and 2000
under the Monsanto restructuring plan that were reversed as a result of
lower actual severance costs than originally estimated and $13 million
relating to a change in a previous restructuring plan for a facility. As
the result of a subsequent restructuring plan, sale of the building
resulted in a gain.
The $254 million of restructuring charges recorded in 2001 is comprised of the
following:
o $225 million associated with restructuring Prescription Pharmaceuticals.
This was necessitated by the combination of G.D. Searle and P&U operations
worldwide. The merger resulted in duplicate facilities, computer systems
and positions around the world. The charges consist of $144 million
relating to the separation of approximately 1,050 employees worldwide in
R&D, manufacturing, marketing and administrative functions; $41 million
relating to asset write-downs resulting from duplicate computer equipment
and facilities; $33 million relating to contract and lease termination fees
and $7 million of other exit costs.
o $29 million, net, relating to the consolidation of corporate and
administrative functions in the Company's New Jersey headquarters and the
elimination of duplicate administrative positions and a reversal of $25
million of prior accruals relating to the previous P&U restructuring plans
due to lower separation payments than initially anticipated. This charge is
comprised of $33 million relating to the separation of approximately 240
employees primarily in corporate and administrative functions, $17 million
relating to asset write-downs of duplicate computer systems and leasehold
improvements in duplicate facilities and $4 million of contract and lease
termination costs.
The $376 million of restructuring charges recorded in 2000 is comprised of the
following:
o $241 million associated with restructuring Prescription Pharmaceuticals.
This was necessitated by the combination of G.D. Searle and P&U operations
worldwide. The merger resulted in duplicate facilities, computer systems
and positions around the world. The charges consist of $165 million
relating to the separation of approximately 1,360 employees worldwide in
R&D, manufacturing, marketing and administrative functions; $51 million
relating to asset write-downs resulting from duplicate computer systems and
facilities; $22 million relating to contract and lease terminations and $3
million of other exit costs.
o $150 million relating to the consolidation of corporate and administrative
functions in New Jersey and the elimination of duplicate administrative
positions. This charge is comprised of $113 million relating to the
separation of approximately 210 employees in corporate and administrative
functions and $37 million
21
relating to asset write-downs (duplicate computer systems and leasehold
improvements in duplicate facilities), lease termination fees and other
exit costs.
o $15 million relating to the reversals of prior P&U restructuring reserves
that resulted from higher than anticipated proceeds on asset sales and
lower than anticipated separation payments.
Restructuring charges and spending associated with the current restructuring
plans relating to the integration of the former Monsanto and P&U companies
follow. The table below does not include activity incurred under previous P&U
restructuring plans, which began in 1995 and 1997. All activities relating to
these plans have been completed.
Workforce Other Exit
Reductions Costs Total
- ------------------------------------------------------------
Dollars in millions
Balance January 1, 2000 $ -- $ -- $ --
Additions 278 25 303
Deductions (119) (15) (134)
- ------------------------------------------------------------
Balance December 31, 2000 159 10 169
Additions 177 37 214
Deductions (221) (37) (258)
- ------------------------------------------------------------
Balance December 31, 2001 $ 115 $ 10 $ 125
Additions 10 16 26
Deductions (113) (9) (122)
Reversals (5) -- (5)
- ------------------------------------------------------------
Balance December 31, 2002 $ 7 $ 17 $ 24
============================================================
As of December 31, 2002, cash payments totaling $453 relating to the separation
of approximately 2,740 employees have been paid and charged against the
liability.
As of December 31, 2002, all activities relating to the restructuring plans
associated with former Monsanto have been substantially completed.
All Other, Net
All other, net consists of income and expense items that are dissimilar to the
other line captions on the consolidated statements of earnings. All other, net
for 2002 was $1,085 million of net gains. "All other, net" for 2001 was $82
million of net expense versus $74 million of net gains in 2000. The change
between 2002, 2001 and 2000 is attributable in large part to transactions with
Sanofi related to AMBIEN. 2002 includes a $661 million gain relating to the
return of U.S. product rights of AMBIEN to Sanofi and $73 million in income
received in the first quarter for the Company's share to AMBIEN earnings. Prior
to January 1, 2002, the Company recorded the sales and expenses of AMBIEN.
Related payments made to Sanofi were included as part of All other, net. 2002
also includes a net $100 million gain resulting from a settlement of an
intellectual property legal suit in the ophthalmology field, $60 million royalty
income, a $28 million gain relating to the sale of clinical study data to
Boehringer Ingelheim, a $45 million gain on the sale and license of
non-strategic product rights and a $71 million gain on the sale of non-strategic
equity investments. The 2001 net expense of $82 million was comprised of
approximately $220 million net costs related to AMBIEN, partly offset by $70
million royalty income and $56 million realized gains on sales of investments.
The 2000 net income of $74 million was comprised of $70 million royalty income,
$48 million gains on sales of assets, $41 million gains on investments and $81
million net gain from other miscellaneous items offset by $166 million AMBIEN
related costs. In addition, the Company periodically makes certain equity
investments and loans in companies with which it has a collaborative agreement.
In 2002 and 2001, certain of these investments were considered impaired on an
other-than-temporary basis. The Company reduced the capitalized value of these
investments and recognized losses of $28 million in 2002 and $40 million in 2001
to bring them to current market value.
22
Income Taxes
The annual effective tax rate in 2002 was 26.3 percent. This compares with 18.7
percent in 2001 and 22.7 percent in 2000. The increase in the rate in 2002 was
attributable to a rise in the proportion of earnings generated in the U.S.
versus jurisdictions with more favorable tax rates, reversing the trend from
2000 to 2001. Contributing significantly to the increased U.S.-based income in
2002 were the gains reported in "All other, net" related to the return of AMBIEN
to Sanofi and the settlement of an intellectual property legal suit in the
ophthalmology field. Also, merger and restructuring charges were significantly
lower in 2002 as compared with 2001. The lower rate in 2001 compared with 2000
was attributable largely to increased income in 2001 derived from operations in
jurisdictions subject to more favorable tax rates.
The noteworthy items and fluctuations in pretax earnings cited above and the tax
jurisdictions in which they arose had a significant effect on the overall
effective tax rate. Absent such items, the annual effective tax rate would have
been 24 percent, 25 percent and 27 percent for 2002, 2001 and 2000,
respectively.
In certain cases, the Company operates under favorable tax agreements with local
jurisdictions that have limited duration.
Comprehensive Income
Comprehensive income is defined as all nonowner changes in equity. It is
calculated as net earnings plus or minus other comprehensive income (loss). For
Pharmacia, other comprehensive income (OCI) consists of currency translation
adjustments, unrealized gains and losses on available-for-sale securities,
unrealized gains and losses on hedging instruments and minimum pension liability
adjustments. OCI also includes Monsanto activity for 2000, 2001 and 2002 through
the spin-off date of August 13, 2002. Comprehensive income for 2002, 2001 and
2000 was $50 million, $1.1 billion and $288 million, respectively.
The primary factor contributing to the difference between net income and
comprehensive income for 2002 was an increase in the minimum pension liability.
Also affecting the difference for the year were increases in unrealized holding
losses offset by favorable changes in currency translation adjustments as a
result of certain foreign currencies strengthening against the dollar.
Unfavorable currency movements in 2001 reduced comprehensive income to an amount
less than net earnings due to the continuing strength of the dollar against
other currencies, particularly with respect to the Japanese yen. Unfavorable
currency movements in 2000 were due to the continuing strength of the dollar
against other currencies and reduced comprehensive income to an amount less than
net earnings. Unrealized investment gains, particularly in equities, partially
offset the unfavorable translation adjustment.
Financial Condition, Liquidity, Capital Resources and Cash Flow
The Company has no off-balance-sheet special purpose entities used for
financing.
As of December 31, 2002 2001 2000
- ----------------------------------------------------------
Dollars in millions
Working capital $ 4,300 $2,674 $ 3,181
Current ratio 1.86:1 1.54:1 1.63:1
Debt to total capitalization 30.5% 20.7% 27.2%
==========================================================
Financial Condition
The Company had A-1+ and P-1 ratings for its commercial paper and AA-and A1
general bond ratings from Standard & Poor's and Moody's, respectively, as of
December 31, 2002.
Working capital and the current ratio improved in 2002 versus the prior year.
The debt-to-total-capitalization ratio deteriorated in 2002 versus the prior
year, less due to an increase in borrowing than because of a decrease in
equity resulting from the spin-off of Monsanto. Working capital increased $1.6
billion, or 61 percent, in 2002 compared to 2001. The significant improvement in
working capital is primarily the result of an increase in cash and cash
equivalents, short-term investments and inventories offset by a decrease in
short-term notes receivable from Monsanto. Cash received from the return of
rights to AMBIEN and the sale of the Amersham Biosciences
23
investment contributed to the increased cash and short-term investments at
December 31, 2002. Also, the short-term notes receivable with Monsanto matured
and were paid. The increase in inventory is a result of a shift in the mix of
inventory towards higher cost products coupled with increases in preparation for
product launches and timing of supplies purchases.
Unlike 2002, working capital and the current ratio decreased in 2001 versus the
prior year while the debt-to-total-capitalization ratio improved. The decrease
in working capital of 16 percent was largely due to a reduction in cash balances
and an increase in accounts and income taxes payable. Cash levels were reduced
versus the prior year due to expenditures relating to the stock buy-back program
and the early extinguishment of debt. The timing of purchases coupled with
increased volume relative to sales account for the increase in accounts payable.
The working capital decline was partially offset by increases in inventory
balances due to a shift in the mix of inventory towards higher cost products.
The repurchase and scheduled maturities of several debt issues accounted for the
substantial decrease in debt of $1.3 billion (28 percent) in 2001 over the prior
year.
Cash Flow
Net cash provided by continuing operations is a major source of funds to finance
working capital, shareholder dividends and capital expenditures. Net cash
provided by continuing operations during 2002 totaled $1.3 billion down
from 2001 in which net cash provided by continuing operations totaled $1.8
billion. This decline was due, in part, to a funding of U.S. pension plans in
the amount of $234 million during 2002. As mentioned above, major sources of
cash during the year from investing activities included the transactions
associated with AMBIEN and Amersham Biosciences (reflected as "Proceeds from
sale of subsidiaries").
On a continuing basis, the Company reinvests a portion of profits into the
business through capital spending. During 2002, capital expenditures for
property, plant and equipment of $1.1 billion were largely for the construction
or expansion of manufacturing and research facilities, as well as the purchase
of land and buildings in New Jersey from AT&T Corporation for a centralized
corporate headquarters. The Company expended $711 million in 2002 for dividends,
made investments of $434 million and reacquired outstanding Company stock of
$620 million.
In 2001, net cash provided by continuing operations totaled $1.8 billion and was
driven by net earnings growth of 109 percent versus 2000. Other major sources of
cash for 2001 included the proceeds received from the issuance of stock of $872
million and the proceeds from the sales of investments and properties of $169
million.
Capital expenditures for property, plant and equipment were $1.0 billion in
2001, dividend payments amounted to $651 million and repurchase of Company stock
amounted to $864 million. Other cash outflows included the repurchase of certain
debt issues. In July 2001, the Company retired debt related to the adjustable
conversion-rate equity securities (ACES) in the amount of $700 million. The
equity portion of the ACES became due during the fourth quarter of 2001. On the
settlement date, the Company issued 16,467,500 shares in accordance with the
contract and received $700 million. In June 2001, the Company initiated the
retirement of certain third-party debt pertaining to the Employee Stock
Ownership Plan (ESOP). The cash impact of the transaction was $26 million.
Net cash provided by continuing operations in 2000 totaled $1.1 billion. During
2000, the Company received proceeds from the sale of investments and properties
of $249 million. Throughout 2000, the Company discontinued several non-core
businesses that generated proceeds of $1.7 billion. These divestitures had been
committed to prior to the merger between former Monsanto and P&U. During 2000,
the Company repaid long-term debt totaling $1.8 billion including the early
repurchases of certain debt instruments of $362 million. Dividends payments in
2000 amounted to $622 million and capital expenditures totaled $773 million.
Contractual Obligations
Less than After
December 31, 2002 Total 1 year 1-3 years 4-5 years 5 years
- -------------------------------------------------------------------------------------------
Dollars in millions
Long-term debt $2,599 $ 14 $ 699 $257 $1,629
ESOP guaranteed debt 119 55 64 -- --
Operating leases 696 148 221 181 146
R&D milestone payments (1) 536 49 36 152 299
Employee compensation agreements (2) 375 375 -- -- --
- -------------------------------------------------------------------------------------------
Total $4,325 $641 $1,020 $590 $2,074
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24
Other Commercial Commitments
Less than After
December 31, 2002 Total 1 year 1-3 years 4-5 years 5 years
- -----------------------------------------------------------------------------------
Lines of credit(3) $1,550 $1,050 $500 $-- $ --
Standby letters of credit(4) 86 51 35 -- --
Construction in process 701 701 -- -- --
- -----------------------------------------------------------------------------------
Total $2,337 $1,802 $535 $-- $ --
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(1) Because of the need for various milestones to be achieved in order to
trigger a payment obligation, not all of these amounts may ultimately be paid.
(2) The Company has various nonqualified benefit and compensation plans that
provide for deferred payout of amounts to plan participants. Due to the change
in control as a result of the planned merger with Pfizer, the majority of the
benefits will become payable to the participants. The accrued benefits under the
plans are estimated to be $375 million. These funds have been contributed to a
trust that will administer payment of these employee benefits subsequent to the
Pfizer merger. As of December 31, 2002, the trust has been fully consolidated in
the Pharmacia balance sheet.
(3) Maturities represent the period in which the lines of credit expire. At
December 31, 2002, $43 million was drawn against these facilities.
(4) Maturities represent the period in which the letters of credit expire.
The stock buy-back program initiated by the Company in 2001 was suspended in
mid-2002 due to the merger negotiations with Pfizer.
The Company's future cash provided by continuing operations and borrowing
capacity is expected to cover normal operating cash flow needs, planned capital
spending and dividends for the foreseeable future.
Litigation and Contingent Liabilities
Various suits and claims are pending against the Company and its subsidiaries
including suits for personal injury alleged to have been caused by the use of
the Company's products, commercial disputes, patent infringement matters and
purported class actions. The Company also is involved in several administrative
and judicial proceedings relating to environmental concerns, including actions
brought by the U.S. Environmental Protection Agency (EPA) and state
environmental agencies for remediation.
The Company is a defendant in a lawsuit brought by CP Kelco in Federal Court in
Delaware seeking compensatory and punitive damages for alleged breach of
contract, fraud and securities law violations arising out of the purchase of the
Company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the Company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The Company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the Company who were transferred to
CP Kelco. The Company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint.
Discovery has been completed in the lawsuit. A September 2002 Report and
Recommendation (September Report) issued by the magistrate judge in the case
granted Lehman's and Hercules' motion for judgment on the pleadings. The Company
has filed objections to the September Report and those objections have not been
ruled upon. An October 2002 Report and Recommendation (October Report) granted
in part and denied in part the Company's motion for summary judgment. The
Company has filed objections to that portion of the October Report that denied
its motion. Those objections have not been ruled upon. Trial is now scheduled
for April 28, 2003.
Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended
(the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia
for liabilities related to the agricultural business. In the proceedings where
the Company is the defendant, Monsanto will indemnify the Company for costs,
expenses and any judgments or settlements; and in the proceedings where the
Company is the plaintiff, Monsanto will pay the fees and costs of, and receive
any benefits from, the litigation. Therefore, Pharmacia may remain the named
party in certain legal proceedings, but Monsanto will manage the litigation
including indemnifying Pharmacia for costs, expenses and any judgments or
settlements.
25
In connection with the spin-off of Solutia Inc. (Solutia) on September 1, 1997,
Solutia assumed from Pharmacia liabilities related to the former Monsanto
chemical businesses pursuant to the Distribution Agreement, as amended (the
"Distribution Agreement"). As a result, Pharmacia remains the named defendant in
certain legal proceedings but Solutia manages the litigation and pays all costs,
expenses and any judgments or settlements.
Pursuant to the terms of the Separation Agreement, Monsanto has assumed, and
agreed to indemnify Pharmacia for, any liabilities primarily related to former
Monsanto's former chemical businesses, including any liabilities that Solutia
has assumed from Pharmacia in connection with the spin-off of Solutia, to the
extent Solutia fails to pay, perform or discharge these liabilities. This
indemnification obligation applies to litigation, environmental, retiree and all
other liabilities assumed by Solutia pursuant to the spin-off.
For example, Solutia assumed responsibility for litigation currently pending in
state and federal court in Alabama brought by several thousand plaintiffs,
alleging property damage, anxiety and emotional distress and personal injury
arising from exposure to polychlorinated biphenyls (PCBs), which were discharged
from an Anniston, Alabama plant site that was owned by former Monsanto and that
was transferred to Solutia as part of the spin-off. This litigation includes,
but is not limited to, the Abernathy litigation referred to below. Pursuant to
the terms of the Distribution Agreement, Solutia is required to indemnify
Pharmacia for liabilities that Pharmacia incurs in connection with this
litigation.
Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy,
et al. v. Monsanto Company, et al., currently pending in state court in Alabama.
The jury has found Solutia and Pharmacia (f