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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997 Commission File Number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding as of the close of business on
October 31, 1997:
Number of
Class Shares Outstanding
Common Stock, $0.33-1/3 par value 649,656,383
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AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information 2
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Income -
Three Months Ended and Nine Months Ended
September 30, 1997 and 1996 4
Consolidated Condensed Statements of Retained
Earnings and Additional Paid-in Capital -
Nine Months Ended September 30, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Part II - Other Information 18
Item 1. Legal Proceedings 18-20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index EX-1
- 1 -
Part I - Financial Information
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Company believes that
the disclosures are adequate to make the information presented not misleading.
In the opinion of management, the financial statements include all adjustments
necessary to present fairly the financial position of the Company as of
September 30, 1997 and December 31, 1996, the results of its operations for the
three months and nine months ended September 30, 1997 and 1996, and its cash
flows and the changes in retained earnings and additional paid-in capital for
the nine months ended September 30, 1997 and 1996. It is suggested that these
financial statements and management's discussion and analysis of financial
condition and results of operations be read in conjunction with the financial
statements and the notes thereto included in the Company's 1996 Annual Report
on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1997.
- 2 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
September 30, December 31,
1997 1996
ASSETS
Cash and cash equivalents .................... $1,089,258 $1,322,297
Marketable securities ........................ 53,804 221,820
Accounts receivable less allowances .......... 2,697,693 2,541,714
Inventories:
Finished goods .......................... 1,116,727 1,121,055
Work in progress ........................ 679,124 567,240
Materials and supplies................... 696,915 701,074
2,492,766 2,389,369
Other current assets including deferred taxes. 1,132,390 995,219
Total Current Assets 7,465,911 7,470,419
Property, plant and equipment................. 6,666,300 6,254,666
Less accumulated depreciation ........... 2,450,679 2,217,933
4,215,621 4,036,733
Goodwill and other intangibles, net of
accumulated amortization ................ 8,611,623 8,517,610
Other assets including deferred taxes ........ 881,261 760,581
Total Assets $21,174,416 $20,785,343
LIABILITIES
Loans payable ................................ $53,758 $76,574
Trade accounts payable ....................... 1,114,235 940,076
Accrued expenses ............................. 3,097,959 2,810,223
Accrued federal and foreign taxes ............ 499,554 510,762
Total Current Liabilities 4,765,506 4,337,635
Long-term debt ............................... 5,747,785 6,020,575
Other noncurrent liabilities ................. 2,159,881 2,486,375
Postretirement benefit obligations other
than pensions ........................... 816,969 782,342
Minority interests ........................... 222,603 196,324
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value
$2.50 per share ......................... 73 79
Common stock, par value $0.33-1/3 per share .. 216,401 213,328
Additional paid-in capital ................... 2,371,557 2,034,337
Retained earnings ............................ 5,145,082 4,756,270
Currency translation adjustments ............. (271,441) (41,922)
Total Stockholders' Equity .............. 7,461,672 6,962,092
Total Liabilities and Stockholders'
Equity.................................$21,174,416 $20,785,343
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
- 3 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
Net Sales.............. $3,481,870 $3,470,922 $10,584,647 $10,607,557
Cost of goods sold .... 970,666 1,058,950 3,061,606 3,427,536
Selling, general and
administrative
expenses............. 1,300,736 1,267,663 3,967,288 3,914,852
Research and
development
expenses ............ 378,273 350,823 1,130,081 1,048,471
Interest expense, net.. 93,249 104,577 294,758 341,258
Other income, net ..... (13,160) (4,546) (62,991) (52,538)
Special charges ....... 180,000 - 180,000 -
Income before federal
and foreign taxes ... 572,106 693,455 2,013,905 1,927,978
Provision for taxes ... 136,574 202,330 542,604 556,213
Net Income ............ $435,532 $491,125 $1,471,301 $1,371,765
Net Income per Share
of Common Stock ..... $0.67 $0.77 $2.28 $2.16
Dividends per share
of common stock ..... $0.41 $0.385 $1.23 $1.155
Average number of
common shares
outstanding during
the period used in
the computation of
net income per share
of common stock ..... 649,009 637,410 645,716 633,920
The accompanying notes are an integral part of these consolidated condensed
statements.
- 4 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF RETAINED EARNINGS
AND ADDITIONAL PAID-IN CAPITAL
(In Thousands)
Nine Months Ended September 30,
RETAINED EARNINGS 1997 1996
Balance, beginning of period .....$4,756,270 $3,875,224
Add: Net income ................. 1,471,301 1,371,765
6,227,571 5,246,989
Less: Cash dividends declared .... 1,074,713* 731,383
Cost of treasury stock
acquired (less amounts
charged to capital) and
other items .............. 7,776 3,580
1,082,489 734,963
Balance, end of period............$5,145,082 $4,512,026
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period .... $2,034,337 $1,515,154
Add: Excess over par value
of common stock issued .. 338,185 360,688
Less: Cost of treasury
stock acquired (less
amounts charged to
retained earnings) ....... 965 1,025
Balance, end of period ...........$2,371,557 $1,874,817
* Reflects the 1997 fourth quarter common stock dividend of $0.43
per share ($279,157 in the aggregate) declared on
September 25, 1997 and payable on December 1, 1997.
The accompanying notes are an integral part of these consolidated condensed
statements.
- 5 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended September 30,
1997 1996
Operating Activities
Net income ............................... $1,471,301 $1,371,765
Adjustments to reconcile net income to net
cash provided from operating activities:
Special Charges ....................... 180,000 -
Gains on sales of businesses
and other assets .................... (123,156) (51,069)
Depreciation and amortization ......... 554,301 510,316
Deferred income taxes ................. (291,470) (29,076)
Changes in working capital, net........ (333,330) (107,264)
Other, net ............................ (277,214) 27,792
Net cash provided from operating
activities ............................ 1,180,432 1,722,464
Investing Activities
Purchases of property, plant and
equipment ............................. (579,067) (523,022)
Purchases of businesses, net of
cash acquired ......................... (479,694) -
Proceeds from sales of businesses
and other assets ...................... 279,459 200,424
Proceeds from sales of/(purchases of)
marketable securities, net ............ 168,208 (18,273)
Net cash used for investing activities ... (611,094) (340,871)
Financing Activities
Net repayments of debt ................... (295,637) (1,107,195)
Dividends paid ........................... (795,556) (731,383)
Exercise of stock options ................ 324,440 353,692
Purchases of treasury stock .............. (10,190) (9,887)
Net cash used for financing
activities ............................ (776,943) (1,494,773)
Effects of exchange rates on
cash balances ......................... (25,434) (1,629)
Decrease in cash and cash equivalents .... (233,039) (114,809)
Cash and cash equivalents, beginning
of period ............................. 1,322,297 1,802,397
Cash and cash equivalents, end
of period ............................. $1,089,258 $1,687,588
The accompanying notes are an integral part of these consolidated condensed
statements.
Supplemental Information
Interest payments $366,181 $460,911
Income tax and related interest
payments, net of refunds 845,813 304,405
- 6 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Special Charges
On September 15, 1997, the Company announced the voluntary market
withdrawal of fenfluramine, manufactured and sold
under the name PONDIMIN, and dexfenfluramine, marketed under
the name REDUX. The Company took this action and withdrew
the products on the basis of new, preliminary information
regarding heart valve abnormalities in patients using these
medications. The 1997 third quarter and first nine months
results of operations include special charges aggregating
$180.0 million ($117.0 million after-tax or $0.18 per share).
The special charges reflect the one-time costs associated
with the voluntary market withdrawal and include provisions
for product returns, notification and administrative handling
fees, the writedown of inventory and supplies, and other
related costs. These costs do not include provisions for any
subsequent charges which may result from legal actions
related to these products.
Note 2. Contingencies
The Company is involved in various legal proceedings,
including product liability and environmental matters of a
nature considered normal to its business. It is the Company's
policy to accrue for amounts related to these legal matters if
it is probable that a liability has been incurred and an
amount is reasonably quantifiable.
The Company has been named as a defendant in numerous legal
actions, many of which are purported class actions, relating
to PONDIMIN and/or REDUX, which the Company estimates were
used in the U.S. prior to their voluntary market withdrawal
by approximately six million people (see Note 1). It is
likely that additional legal actions, including purported
class actions, will be filed. These actions typically allege,
among other things, that the use of PONDIMIN and/or REDUX,
independently or in combination with the prescription drug
phentermine (which the Company does not manufacture,
distribute or market), causes certain serious conditions,
including valvular heart disease. The Company believes that it
has meritorious defenses to these actions and that it has
acted properly at all times in dealing with PONDIMIN and
REDUX matters.
In the opinion of the Company, although the outcome of any
legal proceedings cannot be predicted with certainty, the
ultimate liability of the Company in connection with its
legal proceedings will not have a material adverse effect on
the Company's financial position but could be material to the
results of operations in any one accounting period.
- 7 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3. Solvay S.A. Animal Health Acquisition
On February 28, 1997, the Company completed the acquisition of
the worldwide animal health business of Solvay S.A. for
approximately $460 million. The acquisition was financed
partially through the issuance of commercial paper and was
accounted for under the purchase method of accounting. The
purchase price exceeded the net assets acquired by
approximately $328 million which is being amortized over
periods of 20 to 40 years.
Note 4. Derivatives and Other Financial Instruments
Cash and cash equivalents consist primarily of certificates of
deposit, time deposits and other short-term, highly liquid
securities with original maturities of three months or less
and are stated at cost, which approximates fair value.
Long-term debt is stated at face value which approximates fair
value.
The Company enters into interest rate swap and foreign currency
agreements to manage specifically identifiable risks. The
unleveraged interest rate swap agreements convert a portion
of the commercial paper from a floating rate obligation to a
fixed rate obligation. The short-term (approximately 30 days)
foreign exchange forward contracts are part of the Company's
management of foreign currency exposures. The Company does
not speculate on interest or foreign currency exchange rates.
Interest rate swap agreements are accounted for under the
accrual method. Amounts to be paid to the counter-parties of
the agreements are accrued during the period to which the
payments relate and are reflected in interest expense. The
related amounts payable to the counter-parties are included
in accrued expenses. The fair value of the swap agreements is
not recognized in the consolidated condensed financial
statements since the agreements are accounted for as hedges.
If the swap agreements are terminated prior to maturity, any
gains or losses resulting from the termination are deferred
and amortized as an adjustment to interest expense over the
remaining life of the terminated swaps.
Foreign currency agreements are accounted for under the fair
value method. The fair value of the foreign currency
agreements is carried on the balance sheet with changes in
fair value recognized in the results of operations offsetting
any gains and losses recognized on the underlying hedged
transactions.
- 8 -
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 5. Earnings per Share
In February 1997, Statement of Financial Accounting Standards
("SFAS") No. 128 - "Earnings per Share" was issued and is
effective for interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 will require the
presentation of Basic Earnings per Share and Diluted
Earnings per Share in the Company's Consolidated Statements
of Income. Net Income per Share of Common Stock presented in
these financial statements is equivalent to Basic Earnings
per Share. Pro forma Diluted Earnings per Share for the
three months ended September 30, 1997 and 1996 were $0.65 and
$0.75. Pro forma Diluted Earnings per Share for the nine
months ended September 30, 1997 and 1996 were $2.23 and
$2.13.
Note 6. Other Recently Issued Accounting Standards
In June 1997, SFAS No. 130 - "Reporting Comprehensive Income"
and SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information" were issued and are
effective for periods beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting comprehensive
income and its components. SFAS No. 131 establishes standards
for reporting financial and descriptive information regarding
an enterprise's operating segments. These standards increase
financial reporting disclosures only and will have no impact
on the Company's financial position or results of operations.
- 9 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Results of Operations
Management's discussion and analysis of results of operations for the 1997
third quarter and first nine months has been presented on an as-reported basis
except for sales variation explanations which are presented on an as-reported
and pro forma basis. The pro forma sales results reflect businesses acquired
and divested in 1997 and 1996 assuming the transactions occurred as of
January 1, 1996. This activity includes the acquisition of the worldwide
animal health business of Solvay S.A. in 1997 and the divestitures of the
American Home Foods business and the Symbiosis surgical products business in
1996.
On an as-reported basis, worldwide net sales for the 1997 third quarter and
first nine months were comparable to prior year levels. On a pro forma
basis, worldwide net sales increased 6% for both the 1997 third quarter and
first nine months. The increases in pro forma worldwide net sales in both
periods were due primarily to higher domestic sales of pharmaceuticals.
Results for the 1997 first nine months also reflect higher worldwide sales of
agricultural products. Worldwide net sales were impacted by unfavorable
foreign exchange effects of 3% for the 1997 third quarter and 2% for the first
nine months.
The following tables set forth worldwide net sales results by major product
category and industry segment together with the percentage changes in "As-
Reported" and "Pro Forma" worldwide net sales from comparable periods in the
prior year:
Three Months As-Reported Pro Forma
($ in Millions) Ended September 30, % Increase % Increase
Net Sales to Customers 1997 1996 (Decrease) (Decrease)
Health Care Products:
Pharmaceuticals $2,284.4 $2,026.1 13% 9%
Consumer Health Care 558.0 564.6 (1)% (1)%
Medical Devices 321.7 321.2 - -
Total Health Care
Products 3,164.1 2,911.9 9% 6%
Agricultural Products 317.7 304.3 4% 4%
Food Products - 254.8 (100)% -
Consolidated Net Sales $3,481.8 $3,471.0 - 6%
- 10 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Nine Months As-Reported Pro Forma
($ in Millions) Ended September 30, % Increase % Increase
Net Sales to Customers 1997 1996 (Decrease) (Decrease)
Health Care Products:
Pharmaceuticals $6,317.3 $5,705.0 11% 8%
Consumer Health Care 1,499.3 1,496.2 - -
Medical Devices 972.2 995.0 (2)% (1)%
Total Health Care
Products 8,788.8 8,196.2 7% 6%
Agricultural Products 1,795.8 1,707.3 5% 5%
Food Products - 704.1 (100)% -
Consolidated Net Sales $10,584.6 $10,607.6 - 6%
The following sales variation explanations are presented on an as-reported and
pro forma basis:
On an as-reported basis, worldwide pharmaceutical sales increased 13% for
the 1997 third quarter and 11% for the first nine months. On a pro forma
basis, after adjusting for the acquisition of the worldwide animal health
business of Solvay S.A. in February 1997, worldwide pharmaceutical sales
increased 9% for the 1997 third quarter and 8% for the first nine months
due primarily to higher sales of PREMARIN products, EFFEXOR, CORDARONE,
ZOTON, infant nutritionals, ZOSYN (marketed internationally as TAZOCIN),
NAPRELAN (introduced in the 1996 second quarter), BENEFIX (introduced in
the 1997 first quarter) and DURACT (introduced in the 1997 third quarter)
offset, in part, by lower sales of other pharmaceuticals. Worldwide
pharmaceutical results for the 1997 third quarter also reflect lower
sales of antiobesity products and LODINE. On an as-reported basis, U.S.
pharmaceutical sales increased 18% for the 1997 third quarter and 17% for
the first nine months. On a pro forma basis, U.S. pharmaceutical sales
increased 17% for the 1997 third quarter and 16% for the first nine
months. The increase in pro forma U.S. pharmaceutical sales for the 1997
third quarter consisted of unit volume growth of 14% and price increases
of 3%. The increase in pro forma U.S. pharmaceutical sales for the 1997
first nine months consisted of unit volume growth of 13% and price
increases of 3%. On an as-reported basis, international pharmaceutical
sales increased 5% for the 1997 third quarter and 3% for the first nine
months. On a pro forma basis, international pharmaceutical sales
decreased 1% for both the 1997 third quarter and first nine months.
The decrease in pro forma international pharmaceutical sales for the
1997 third quarter consisted of unit volume growth of 5% and price
increases of 2% which were offset by unfavorable foreign exchange of 8%.
The decrease in pro forma international pharmaceutical sales for the
- 11 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
1997 first nine months consisted of unit volume growth of 3% and price
increases of 1% which were offset by unfavorable foreign exchange of 5%.
On an as-reported and pro forma basis, worldwide consumer health care
sales decreased 1% for the 1997 third quarter and were comparable with
prior year results for the first nine months. Worldwide consumer health
care results for the 1997 third quarter and first nine months reflect
higher sales of ADVIL and CENTRUM products offset, in part, by the effect
of the disposal of several non-core products in late 1996 and early 1997.
Worldwide consumer health care results for the 1997 third quarter also
reflect lower sales of cough/cold products. On an as-reported and pro
forma basis, U.S. consumer health care sales decreased 5% for the 1997
third quarter and 3% for the first nine months. The decrease in U.S.
consumer health care sales for the 1997 third quarter consisted of unit
volume declines of 6% offset by price increases of 1%. The decrease in
U.S. consumer health care sales for the 1997 first nine months consisted
of unit volume declines of 5% offset by price increases of 2%. On an
as-reported and pro forma basis, international consumer health care sales
increased 8% for both the 1997 third quarter and first nine months. The
increase in international consumer health care sales for the 1997 third
quarter consisted of unit volume growth of 10% and price increases of 3%
which were offset by unfavorable foreign exchange of 5%. The increase in
international consumer health care sales for the 1997 first nine months
consisted of unit volume growth of 8% and price increases of 3% which
were offset by unfavorable foreign exchange of 3%.
On an as-reported and pro forma basis, worldwide medical devices sales
for the 1997 third quarter were comparable to prior year levels. On an
as-reported basis, worldwide medical devices sales decreased 2% for the
1997 first nine months. On a pro forma basis, after adjusting for the
divestiture of the Symbiosis surgical products business in March 1996,
worldwide medical devices sales decreased 1% for the 1997 first nine
months. Worldwide medical devices results for both periods reflect lower
sales of wound closure products offset, in part, by higher sales of
needles and syringes. Worldwide medical devices sales for the 1997 third
quarter consisted of unit volume growth of 5% which was offset by price
decreases of 2% and unfavorable foreign exchange of 3%. The decrease in
pro forma worldwide medical devices sales for the 1997 first nine months
consisted of unit volume growth of 3% which was offset by price decreases
of 1% and unfavorable foreign exchange of 3%.
On an as-reported and pro forma basis, worldwide agricultural products
sales increased 4% for the 1997 third quarter and 5% for the first nine
months due to higher sales of herbicides resulting primarily from
increased soybean acreage and new product launches offset, in part, by
lower sales of insecticides due primarily to poor weather conditions in
several major European markets during the current growing season. On an
as-reported and pro forma basis, U.S. agricultural products sales
- 12 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
increased 8% for the 1997 third quarter and 5% for the first nine months.
The increase in U.S. agricultural products sales for the 1997 third
quarter consisted of unit volume growth of 6% and price increases of 2%.
The increase in U.S. agricultural products sales for the 1997 first nine
months consisted of unit volume growth of 3% and price increases of 2%.
Due to the seasonality of the U.S. agricultural products business, which
is concentrated primarily in the first six months of the year, U.S.
agricultural products sales and results of operations for the 1997 third
quarter and first nine months are not indicative of the results to be
expected in subsequent fiscal quarters or for the full year. On an
as-reported and pro forma basis, international agricultural products sales
increased 3% for the 1997 third quarter and 5% for the first nine months.
The increase in international agricultural products sales for the 1997
third quarter consisted of unit volume growth of 5% and price increases of
5% which were offset by unfavorable foreign exchange of 7%. The increase
in international agricultural products sales for the 1997 first nine
months consisted of unit volume growth of 7% and price increases of 4%
which were offset by unfavorable foreign exchange of 6%.
Cost of goods sold, as a percentage of net sales, decreased to 27.9% for the
1997 third quarter versus 30.5% for the 1996 third quarter, and decreased to
28.9% for the 1997 first nine months versus 32.3% for the 1996 first nine
months due primarily to favorable pharmaceutical and agricultural products
sales mix, an overall product mix improvement as higher sales of
pharmaceuticals and agricultural products replaced the loss of lower margin
food products sales, and to a lesser extent, cost savings.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 37.4% for the 1997 third quarter versus 36.5% for the 1996 third
quarter, and increased to 37.5% for the 1997 first nine months versus 36.9% for
the 1996 first nine months. Higher marketing and selling expenses related to
recent pharmaceutical and agricultural product introductions were offset by the
elimination of marketing and selling expenses associated with the foods
business. Higher general and administrative expenses were due, in part, to
increased pension costs and additional goodwill amortization related to the
Genetics Institute and Solvay S.A. animal health acquisitions.
Research and development expenses increased 8% for both the 1997 third quarter
and first nine months due primarily to higher pharmaceutical research and
development expenditures and operating costs related to recent pharmaceutical
research and development facility expansions.
Interest expense, net decreased in the 1997 third quarter and first nine months
due primarily to the reduction in long-term debt during 1996. Average
long-term debt outstanding during the 1997 and 1996 third quarter was $5,850.1
million and $7,024.3 million, respectively. Average long-term debt outstanding
during the 1997 and 1996 first nine months was $5,884.2 million and $7,251.6
million, respectively.
- 13 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Other income, net for the 1997 first nine months included the amount paid in
settlement of a lawsuit brought by Johnson & Johnson and its wholly-owned
subsidiary, Ortho Pharmaceutical Corporation. The settlement was offset by a
previously established reserve for this litigation and a gain on the sale of
the Company's investment in the common stock of certain publicly traded
insurance companies.
As discussed in Note 1 to the Consolidated Condensed Financial Statements, on
September 15, 1997, the Company announced the voluntary market withdrawal of
fenfluramine, manufactured and sold under the name PONDIMIN, and
dexfenfluramine, marketed under the name REDUX. The Company took this action
and withdrew the products on the basis of new, preliminary information
regarding heart valve abnormalities in patients using these medications. The
1997 third quarter and first nine months results of operations include special
charges aggregating $180.0 million ($117.0 million after-tax or $0.18 per
share). The special charges reflect the one-time costs associated with the
voluntary market withdrawal and include provisions for product returns,
notification and administrative handling fees, the writedown of inventory and
supplies, and other related costs. These costs do not include provisions for
any subsequent charges which may result from legal actions related to these
products.
As discussed in Note 2 to the Consolidated Condensed Financial Statements and
in Item 1 - Legal Proceedings of Part II - Other Information, the Company has
been named as a defendant in numerous legal actions, many of which are
purported class actions, relating to PONDIMIN and/or REDUX. The Company
believes that it has meritorious defenses to these actions and that it has
acted properly at all times in dealing with PONDIMIN and REDUX matters. In the
opinion of the Company, although the outcome of any legal proceedings cannot be
predicted with certainty, the ultimate liability of the Company in connection
with these proceedings will not have a material adverse effect on the Company's
financial position but could be material to the results of operations in any
one accounting period.
- 14 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
The following table sets forth income before taxes by industry segment:
Three Months Nine Months
($ in Millions) Ended September 30, Ended September 30,
Income before Taxes 1997 1996 1997 1996
Health Care Products $698.7(1) $773.9 $1,979.5(1) $1,911.5
Agricultural Products 9.1 (7.6) 440.3 355.8
Food Products - 53.5 - 113.6
Corporate (135.7) (126.3) (405.9) (452.9)
Consolidated Income
before Taxes $572.1 $693.5 $2,013.9 $1,928.0
(1) 1997 includes special charges of $180.0 associated with the
voluntary market withdrawal of PONDIMIN and REDUX.
The effective tax rate decreased to 23.9% in the 1997 third quarter from 29.2%
in the 1996 third quarter and decreased to 26.9% in the 1997 first nine months
from 28.8% in the 1996 first nine months due primarily to the reinstatement of
the U.S. research tax credit in the 1997 third quarter and the tax impact of
the previously discussed special charges associated with the voluntary market
withdrawal of PONDIMIN and REDUX.
Net income and net income per share decreased 11% and 13% for the 1997 third
quarter compared to the 1996 third quarter results and increased 7% and 6% for
the 1997 first nine months compared to the 1996 first nine months results.
Results for the 1997 third quarter and first nine months reflect the
previously discussed special charges associated with the voluntary market
withdrawal of PONDIMIN and REDUX. Excluding the special charges, net income
and net income per share increased 13% and 10% for the 1997 third quarter
compared to the 1996 third quarter results and increased 16% and 14% for the
1997 first nine months compared to the 1996 first nine months results. The
increases in net income and net income per share for both the 1997 third
quarter and first nine months excluding the special charges were greater than
the results registered for net sales due primarily to improved pharmaceutical
and agricultural products sales mix, higher sales of pharmaceuticals and
agricultural products, cost savings and lower interest expense offset, in part,
by the divestiture of the foods business and higher research and development
expenses.
Competition
The Company is not dependent on any one patent-protected product or line of
products for a substantial portion of its sales or results of operations.
However, PREMARIN, the Company's conjugated estrogens product, which has not
had patent protection for many years, does contribute significantly to sales
and results of operations. PREMARIN is not currently subject to generic
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
competition in the United States and, on May 5, 1997, the U.S. Food and Drug
Administration (FDA) announced that it will not approve synthetic generic
conjugated estrogens products at this time because these products have not
been shown to contain the same active ingredient as PREMARIN. The FDA further
stated that, until the full composition of PREMARIN is determined, a synthetic
generic version cannot be approved, although a generic product derived from the
same natural source could be approved earlier under certain circumstances.
Although the Company believes that, as a result of this announcement, PREMARIN
is not likely to face generic competition in the near term, it cannot predict
the timing or outcome of continued efforts to obtain approval for a generic
conjugated estrogens product.
Liquidity, Financial Condition and Capital Resources
Cash and cash equivalents decreased $233.0 million in the 1997 first nine
months to $1,089.3 million. Cash flows from operating activities of
$1,180.4 million, proceeds from sales of other assets and marketable securities
of $447.7 million and proceeds from the exercise of stock options of $324.4
million were used principally for dividend payments of $795.6 million, capital
expenditures of $579.1 million, the purchase of the worldwide animal health
business of Solvay S.A. for $460.0 million, and long-term debt reduction of
$295.6 million. Cash flows from operating activities for the 1997 first nine
months were impacted by payments of $381.8 million related to certain
previously accrued long-term tax liabilities which were required to be paid
in connection with the filing of a tax claim and a $200.0 million contribution
to the U.S. defined benefit pension plan. Due to seasonality of the U.S.
agricultural products business, a significant portion of the annual U.S.
agricultural products sales are recorded in the first six months of the year;
however, a significant amount of the related accounts receivable are not
collected until the third quarter. As a result, cash flows from operating
activities for the 1997 first nine months are not indicative of the results
to be expected for the full year.
Capital expenditures included strategic investments in manufacturing and
distribution facilities worldwide and the expansion of the Company's research
and development facilities.
On October 22, 1997, the Company entered into a definitive agreement with
Bausch & Lomb Incorporated for the sale of the stock of Storz Instrument
Company and certain other assets relating to the Storz business for $380.0
million in cash. This transaction, which is subject to certain conditions
including the receipt of necessary governmental approvals and the closing of
the acquisition by Bausch & Lomb of Chiron Vision Corporation, is not expected
to have a material impact on the Company's results of operations. The Company
is exploring strategic alternatives for its remaining medical devices business,
including the possible sale of Sherwood-Davis & Geck and Quinton Instrument
Company.
- 16 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Nine Months Ended September 30, 1997
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains certain forward
looking statements, including statements regarding the Company's financial
position, results of operations and potential competition. These forward
looking statements are based on current expectations. Certain factors which
could cause the Company's actual results to differ materially from expected
and historical results have been identified by the Company in Exhibit 99 to the
Company's 1996 Annual Report on Form 10-K which exhibit is hereby incorporated
by reference.
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Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to numerous lawsuits and
claims arising out of the conduct of its business, including those
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and Quarterly Reports on Form 10-Q for the
periods ended March 31, 1997 and June 30, 1997.
In the action for patent infringement pending in U.S. District Court
(E.D., Pa.), McNeilab Inc. has increased the amount of damages it is
seeking from $60 million to approximately $77 million (plus $10
million in interest) against Scandipharm Inc., which would be
entitled to seek indemnification from a subsidiary of the Company,
Eurand Microencapsulation, S.A. This action is expected to proceed
to trial in late 1997 or early 1998.
In the brand name prescription drug litigation that has been
coordinated and consolidated for pretrial purposes under the caption
In re Brand Name Prescription Drug Antitrust Litigation (MDL 997 N.D.
Ill.), the U.S. Court of Appeals for the Seventh Circuit has (i)
dismissed challenges to the settlements of certain defendants,
including the Company, of the class action case; (ii) reversed the
District Court's decision and held that the Supreme Court's
Illinois Brick ruling that indirect purchasers do not have standing
under federal antitrust laws applies to this litigation; (iii)
reversed the District Court's grant of summary judgment to the
wholesaler defendants and to DuPont Merck; and (iv) reversed the
District Court's ruling that the Higgins case brought by Alabama
retailers should not be remanded to Alabama state court. In the
similar litigation pending in state courts, the courts in the Maine,
Michigan and Minnesota indirect consumer purchase cases have denied
motions to certify the cases as class actions.
On September 15, 1997, the Company's Wyeth-Ayerst Laboratories
division, the manufacturer of PONDIMIN (fenfluramine hydrochloride)
tablets C-IV and the distributor of REDUX (dexfenfluramine
hydrochloride capsules) C-IV, announced a voluntary and immediate
market withdrawal of these antiobesity medications. The Company took
this action on the basis of new, preliminary information provided to
the Company on September 12, 1997 by the U.S. Food and Drug
Administration (FDA) regarding heart valve abnormalities in patients
using these medications. The Company estimates that approximately
six million people used these medications in the U.S.
As of November 12, 1997, the Company has been served or is aware
that it has been named as a defendant in 303 lawsuits as the
manufacturer of PONDIMIN and/or the distributor of REDUX. These
lawsuits have been filed on behalf of individuals who claim to have
been injured as a result of their use of PONDIMIN and/or REDUX,
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either individually or in combination with the prescription drug
phentermine (which the Company does not manufacture, distribute or
market). The lawsuits also often name as defendants other
distributors and/or retailers of PONDIMIN and/or REDUX, the
manufacturers, distributors and/or retailers of phentermine and
physicians or other health care providers. Based on media reports
and other sources, the Company anticipates that it will be named as
a defendant in a significant number of additional PONDIMIN and/or
REDUX lawsuits in the future.
Of the 303 lawsuits naming the Company as a defendant, 141 are
actions that seek certification of a class, some on a national and
others on a statewide basis. Of these 141 lawsuits, 101 are
pending in various federal district courts and 40 are pending in
various state courts. A number of the actions brought in state
courts have been removed to federal courts. In addition, plaintiffs
in various federal court actions have filed motions before the
Judicial Panel on Multidistrict Litigation to transfer and
consolidate all federal litigation of a similar nature for pretrial
proceedings. Individual plaintiffs and two associations have filed
the remaining lawsuits: 96 individual lawsuits and the
associations' lawsuits are pending in various federal district
courts and 66 individual lawsuits have been brought in various
state courts.
Plaintiffs' allegations of liability are based on various theories of
recovery, including, but not limited to, product liability, strict
liability, negligence, various breaches of warranty, conspiracy,
fraud, misrepresentation and deceit. These lawsuits typically allege
that the short or long-term use of PONDIMIN and/or REDUX,
independently or in combination (including the combination of
PONDIMIN and phentermine popularly known as "fen/phen"), causes,
among other things, primary pulmonary hypertension, valvular heart
disease and/or neurological dysfunction. In addition, some lawsuits
allege severe emotional distress caused by the knowledge that
ingestion of these drugs, independently or in combination, could
cause such injuries. Plaintiffs typically seek relief in the form
of monetary damages (including general damages, medical care and
monitoring expenses, loss of earnings and earnings capacity,
compensatory damages and punitive damages), generally in unspecified
amounts, on behalf of the individual or the class. In addition, some
actions seeking class certification ask for certain types of
purportedly equitable relief, including, but not limited to,
declaratory judgments and the establishment of a research or medical
surveillance program.
On September 18, 1997, a securities fraud putative class action was
commenced in U.S. District Court in which the plaintiff alleges that
the Company (and certain officers and directors named as controlling
persons under the Securities Exchange Act of 1934) violated the
Securities Exchange Act of 1934 by failing to disclose material facts
or making material misstatements of fact regarding alleged adverse
events associated with REDUX and/or PONDIMIN. Oran v. American Home
Products Corporation, et al. (D.N.J.). The plaintiff seeks to
represent a class of individuals who purchased shares of the
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Company's common stock on the open market between March 1, 1997 and
September 16, 1997 and seeks compensatory damages in an unspecified
amount.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate
liability of the Company in connection with its legal proceedings
will not have a material adverse effect on the Company's financial
position but could be material to the results of operations in any
one accounting period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
(10.1)* Deferred Compensation Plan.
(10.2)* Executive Retirement Plan.
(11) Computation of Earnings Per Share.
(27) Financial Data Schedule.
*Denotes management contract or compensatory plan or arrangement
to be filed as an exhibit hereto.
(b) Reports on Form 8-K
A report on Form 8-K regarding the Company's announcement of
the voluntary market withdrawal of fenfluramine, manufactured
and sold under the name PONDIMIN, and dexfenfluramine,
marketed under the name REDUX, was filed on September 15, 1997.
- 20 -
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME PRODUCTS CORPORATION
(Registrant)
By /s/
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: November 14, 1997
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Exhibit Index
Exhibit No. Description
(10.1)* Deferred Compensation Plan.
(10.2)* Executive Retirement Plan.
(11) Computation of Earnings Per Share.
(27) Financial Data Schedule.
*Denotes management contract or compensatory plan or arrangement required
to be filed as an exhibit hereto.
EX-1