- -----------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- -----------------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OR THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-9114
MYLAN LABORATORIES INC.
(Exact Name of registrant as specified in its charter)
Pennsylvania 25-1211621
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 Seventh Street
1030 Century Building
Pittsburgh, Pennsylvania 15222
(Address of principal executive offices) (Zip Code)
412-232-0100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 twelve 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
Outstanding at
Class of Common Stock February 9, 2001
--------------------- ----------------
$.50 par value 124,934,344
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended
December 31, 2000
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Statements of Earnings - Three and
Nine Months Ended December 31, 2000, and 1999 2
Consolidated Balance Sheets - December 31, 2000,
and March 31, 2000 3
Consolidated Statements of Cash Flows - Nine
Months Ended December 31, 2000, and 1999 4
Notes to Consolidated Financial Statements 5
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 18
ITEM 6: Exhibits and Reports on Form 8-K 21
SIGNATURES 22
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2000, AND 1999
(In thousands except per share amounts)
Unaudited
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
NET SALES $223,238 $203,877 $598,048 $575,461
COST OF SALES 118,148 92,725 321,673 257,250
-------- -------- -------- --------
GROSS PROFIT 105,090 111,152 276,375 318,211
EXPENSES:
RESEARCH AND DEVELOPMENT 15,816 12,387 49,614 35,651
SELLING AND ADMINISTRATIVE 40,600 40,417 117,856 117,411
-------- -------- -------- --------
56,416 52,804 167,470 153,062
LITIGATION SETTLEMENT - - (147,000) -
EQUITY IN EARNINGS (LOSS) OF SOMERSET 1,255 (1,548) (751) (2,619)
OTHER INCOME 8,892 6,878 31,136 9,640
-------- ------- ------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES 58,821 63,678 (7,710) 172,170
INCOME TAXES 21,176 23,244 (2,775) 62,717
-------- ------- -------- --------
NET EARNINGS (LOSS) $ 37,645 $ 40,434 $ (4,935) $ 109,453
======== ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ 0.30 $ 0.31 $ (0.04) $ 0.85
======== ======== ======== =========
DILUTED $ 0.30 $ 0.31 $ (0.04) $ 0.84
======== ======== ======== =========
WEIGHTED AVERAGE COMMON SHARES:
BASIC 124,809 129,232 126,077 129,183
======== ======== ======== =========
DILUTED 126,004 130,026 127,117 130,160
======== ======== ======== =========
The Company has paid regular quarterly cash dividends of $.04
per share since October 1995.
See Notes to Consolidated Financial Statements
2
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share information)
Unaudited
ASSETS
December 31, March 31,
------------ ---------
2000 2000
---- ----
Current assets:
Cash and cash equivalents $ 212,397 $ 203,493
Marketable securities 33,953 99,557
Accounts receivable - net 204,359 197,760
Inventories 178,067 145,869
Income tax benefits 47,158 30,792
Deposit - litigation settlement 100,000 -
Other current assets 7,585 6,471
-------- ------
Total current assets 783,519 683,942
Property, plant and equipment - at cost 292,377 273,581
Less accumulated depreciation 118,742 105,581
--------- --------
173,635 168,000
Investment in and advances to Somerset 28,402 29,461
Intangible assets - net of accumulated amortization 310,367 332,142
Other assets 101,350 127,685
--------- --------
Total assets $ 1,397,273 $ 1,341,230
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 38,054 $ 17,981
Current portion of long-term obligations 11,769 9,874
Income taxes payable 18,051 7,858
Cash dividends payable 5,001 5,194
Litigation settlement 147,000 -
Other current liabilities 46,802 46,863
--------- -------
Total current liabilities 266,677 87,770
Long-term obligations 25,340 30,630
Deferred income tax liability 9,702 19,108
Shareholders' equity:
Preferred stock, par value $.50 per share, authorized
5,000,000 shares, issued and outstanding - none - -
Common stock, par value $.50 per share, authorized 300,000,000 shares, issued
130,581,777 shares at December 31, 2000, and 130,277,568 shares at
March 31,2000 65,291 65,139
Additional paid-in capital 322,017 316,393
Retained earnings 803,677 823,570
Accumulated other comprehensive income 4,337 6,936
--------- ------
1,195,322 1,212,038
Less treasury stock - at cost, 5,746,865 shares at December 31, 2000, and
893,498 shares at
March 31, 2000 99,768 8,316
---------- ------
Total shareholders' equity 1,095,554 1,203,722
---------- ----------
Total liabilities and shareholders' equity $ 1,397,273 $ 1,341,230
=========== ===========
See Notes to Consolidated Financial Statements
3
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2000, AND 1999
(In thousands)
Unaudited
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (4,935) $ 109,453
Adjustments to reconcile net (loss) earnings to net
cash provided from operating activities:
Depreciation and amortization 30,965 27,339
Loss on disposal/sale of equipment 363 186
Deferred income tax benefit (25,848) (13,303)
Equity in the loss of Somerset 751 2,619
Cash received from Somerset 308 335
Allowances on accounts receivable 22,704 32,160
Deposit - litigation settlement (100,000) -
Litigation settlement 147,000 -
Other noncash (income) expenses (6,222) 7,225
Changes in operating assets and liabilities:
Accounts receivable (32,118) (45,901)
Inventories (32,574) (3,669)
Trade accounts payable 20,074 4,727
Income taxes payable 12,767 11,853
Other operating assets and liabilities (174) (8,679)
--------- ---------
Net cash provided from operating activities 33,061 124,345
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (19,783) (21,768)
Decrease (increase) in intangible and other assets 37,568 (11,963)
Proceeds from investment securities 117,360 112,630
Purchase of investment securities (55,755) (135,967)
-------- ---------
Net cash provided from (used in) investing activities 79,390 (57,068)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations (1,390) (6,186)
Cash dividends paid (15,151) (15,494)
Repurchase of common stock (91,456) -
Proceeds from exercise of stock options 4,450 2,082
--------- --------
Net cash used in financing activities (103,547) (19,598)
--------- --------
Net increase in cash and cash equivalents 8,904 47,679
Cash and cash equivalents - beginning of period 203,493 189,849
======== =========
Cash and cash equivalents - end of period $ 212,397 $237,528
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $ 198 $ 646
========== ==========
Income taxes $ 10,306 $ 64,167
========== ==========
See Notes to Consolidated Financial Statements
4
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
A. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of
Mylan Laboratories Inc. and subsidiaries (the "Company") as of December 31,
2000, and March 31, 2000, together with the results of operations and cash
flows for the interim periods ended December 31, 2000, and 1999. The
consolidated results of operations for the three and nine months ended
December 31, 2000, are not necessarily indicative of the results to be
expected for the full year.
B. These interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Company's 2000
Annual Report and Report on Form 10-K.
C. Inventories are as follows: (in thousands)
December 31, March 31,
2000 2000
------- ------
Raw materials $ 61,450 $ 64,020
Work in process 24,304 28,459
Finished goods 92,313 53,390
--------- ---------
$ 178,067 $ 145,869
========= =========
D. Diluted earnings per common share is computed by dividing net earnings
available to common shareholders by the weighted average common shares
outstanding adjusted for the dilutive effect of options granted under the
Company's stock option plans. The effect of dilutive stock options on the
weighted average common shares outstanding was 1,195,000 and 794,000 for
the three months ended December 31, 2000, and 1999, and 1,040,000 and
977,000 for the nine months ended December 31, 2000, and 1999.
5
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
E. Total comprehensive income is as follows: (in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
------ ----- ------ ------
Net earnings (loss) $ 37,645 $ 40,434 $ (4,935) $ 109,453
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on marketable securities (1,653) (27) (1,895) 3,419
Adjustment for loss (gains) included
in net earnings (loss) 44 331 (704) (2,204)
--------- --------- --------- ----------
Comprehensive income (loss) $ 36,036 $ 40,738 $ (7,534) $ 110,668
========= ========= ========= ==========
Accumulated other comprehensive income, as reflected on the balance sheets,
is comprised solely of the unrealized gain on marketable securities, net of
deferred income taxes.
F. The following table presents the comparative operating results for the
Company's operating segments: (in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Generic Segment:
Net sales $ 181,858 $ 168,223 $ 493,875 $ 483,974
Segment profit 55,305 65,495 140,236 193,247
Brand Segment:
Net sales $ 41,380 $ 35,654 $ 104,173 $ 91,487
Segment profit 1,867 5,942 4,914 13,126
Corporate, net:
Income (expense) $ 1,649 $ (7,759) $(152,860) $ (34,203)
Consolidated:
Net sales $ 223,238 $ 203,877 $ 598,048 $ 575,461
Pretax earnings (loss) 58,821 63,678 (7,710) 172,170
Segment net sales represent sales to unrelated third parties. Segment
profit represents segment gross profit less direct research and
development, sales and marketing and administrative expenses. Corporate
includes legal costs, goodwill amortization, other corporate
administrative expenses and other income and expense. For the nine months
ended December 31, 2000, Corporate includes the expense of $147,000,000
for the tentative settlement (as defined in note G).
6
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
G. A subsidiary of the Company was involved in a dispute with KaiGai
Pharmaceuticals, Co., Ltd. ("KaiGai") relating to a license and supply
contract for nitroglycerin transdermal patches which both parties claimed
was breached by the other. KaiGai sought damages in excess of $20,000,000.
The dispute was subject to binding arbitration, and, in November 1999, the
arbitration panel denied KaiGai's request for damages. KaiGai filed an
appeal in U.S. District Court and the Company's motion to dismiss the
appeal was granted based upon untimely and improper service of the appeal.
KaiGai appealed the U.S. District Court's decision to the Court of Appeals.
In January 2001, the appeal was dismissed and withdrawn.
The Company had an agreement with Genpharm Inc. ("Genpharm") where it
benefited from the sale of ranitidine HCl tablets by Novopharm Limited
("Novopharm") under a separate agreement between Genpharm and Novopharm.
Based on an independent audit, Genpharm initiated a lawsuit against
Novopharm to resolve contract interpretation issues and collect additional
funds due. In response to Genpharm's suit, Novopharm filed counterclaims
against both Genpharm and the Company in which Novopharm is claiming
damages of up to $60,000,000. The Company believes the counterclaims
against Genpharm and the Company are without merit and will vigorously
defend its position.
In June 1998, the Company filed suit in the Los Angeles Superior Court
against American Bioscience, Inc. ("ABI"), American Pharmaceutical
Partners, Inc. ("APP") and certain of their directors and officers. The
Company's suit sought various legal and equitable remedies. The Los Angeles
Superior Court issued a preliminary injunction which, among other things,
prohibited the defendants from transferring or disposing of funds, assets,
technology or property without the Company's consent or commingling assets,
property, technology or personnel with those of another company. In June
1999, the defendants filed an answer to and cross-complaint against the
Company. The cross-complaint alleged violations of California state laws,
interference with contractual relations and prospective economic advantage,
fraud, slander, libel and other allegations. The cross-complainants sought
unspecified compensatory and punitive damages.
In August 2000, the Company entered into a settlement agreement with ABI,
APP and certain of their directors and officers. The settlement resulted in
the resolution of all differences, disputes and claims raised in the
complaint and cross-complaint mentioned above. Upon settlement, the Company
received
7
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
G. (contd.) $5,000,000 from ABI for its equity investment in VivoRx Inc. In
December 2000, as required under the terms of the settlement, the Company
received payment from ABI for the transfer to ABI of ABI's common stock
owned by the Company. This payment has been included in other income, net
of expenses, in the amount of $9,200,000.
In December 1998, the FTC filed suit in U.S. District Court for the
District of Columbia against the Company. The FTC's complaint alleges the
Company engaged in restraint of trade, monopolization, attempted
monopolization and conspiracy to monopolize arising out of certain
agreements involving the supply of raw materials used to manufacture two
drugs.
The FTC also sued in the same case the foreign supplier of the raw
materials, the supplier's parent company and its United States distributor.
Under the terms of the agreements related to these raw materials, the
Company has agreed to indemnify these parties. The Company is a party to
other suits involving the Attorneys General from 33 states and more than 25
putative class actions that allege the same conduct alleged in the FTC
suit, as well as alleged violations of state consumer protection laws.
The relief sought by the FTC includes an injunction barring the Company
from engaging in the challenged conduct, recision of certain agreements and
disgorgement in excess of $120,000,000. The states and private parties seek
similar relief, treble damages and attorneys' fees. The Company's motions
to dismiss several of the private actions were granted.
In July 2000, the Company reached a tentative agreement to settle the
actions brought by the FTC and the State Attorneys General regarding raw
material contracts for lorazepam and clorazepate. The Company has agreed to
pay $100,000,000, plus up to $8,000,000 in attorneys' fees incurred by the
States Attorneys General. Based on the FTC commissioners' approval of the
Tentative Settlement with the FTC and State Attorneys General, in December
2000, the Company placed into escrow $100,000,000. Settlement papers have
been executed and filed by the parties, and final court approval is
pending.
In July 2000, the Company also reached a tentative agreement to settle
private class action lawsuits filed on behalf of consumers and third-party
reimbursers related to the same facts and circumstances at issue in the FTC
and States
8
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
G. (contd.)Attorneys General cases. The Company has agreed to pay $35,000,000
to settle the third party reimburser actions, plus up to $4,000,000 in
attorneys' fees incurred by counsel in the consumer actions. The tentative
settlement is subject to court approval.
In total, the Company has agreed to pay up to $147,000,000 to settle these
actions brought by the FTC, State Attorneys General, and certain private
parties ("Tentative Settlement"). The Tentative Settlement also includes
three companies indemnified by the Company - Cambrex Corporation,
Profarmaco S.r.l. and Gyma Laboratories, Inc. Lawsuits not included in this
Tentative Settlement principally involve alleged direct purchasers such as
wholesalers.
A qui tam action was also commenced by a private party in the U.S. District
Court for the District of South Carolina purportedly on behalf of the
United States alleging violations of the False Claims Act and other
statutes. In January 2001, the District Court granted the Company's motion
to dismiss. At this time, no notice of appeal has been filed.
The Company believes that it has meritorious defenses, with respect to the
claims asserted, in those suits which are not part of the Tentative
Settlement and will vigorously defend its position. However, an adverse
result in these cases or, if the Tentative Settlement is not approved by
the court, the continued litigation of those cases could have a material
adverse effect on the Company's financial position and results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Net earnings for the quarter ended December 31, 2000, were $37.6 million,
or $.30 per diluted share, compared to $40.4 million, or $.31 per diluted share,
for the same prior year period. Net loss for the nine month period then ended
was $4.9 million, or $.04 per diluted share, compared to net earnings of $109.5
million, or $.84 per diluted share, for the same prior year period. Excluding
the
9
MYLAN LABORATORIES INC. AND SUBSIDIARIES
$147.0 million effect of the Tentative Settlement ($94.0 million net of tax),
net earnings for the nine months ended December 31, 2000, would have been $89.1
million, or $.70 per diluted share.
In July 2000, the Company reached a tentative settlement with the FTC, State
Attorneys General, and certain private parties ("Tentative Settlement") with
regards to lawsuits filed against the Company relating to raw material contracts
on two of its products.
During the quarter ended June 30, 2000, the Company made a strategic business
decision relating to the sales and marketing of its generic products. Within the
generic industry, the buying patterns of certain classes of customers resulted
in a disproportionate amount of their purchases to occur late in the quarter.
The Company indirectly supported this practice through discount and incentive
programs. The Company decided to no longer support this practice and
discontinued its related incentive programs. While generic volume of products
shipped for the three months ended June 30, 2000, was adversely impacted by this
decision, subsequent quarters have approached more normal levels.
The following table presents the comparative operating results for the Company's
operating segments: (dollars in millions)
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2000 1999 Change 2000 1999 Change
---- ---- ------ ---- ---- ------
Generic Segment:
Net sales $ 181.9 $ 168.2 8% $ 493.9 $ 484.0 2%
Gross profit 77.4 86.0 (10%) 206.5 254.4 (19%)
Segment profit 55.4 65.5 (15%) 140.2 193.2 (27%)
Brand Segment:
Net sales $ 41.3 $ 35.7 16% $ 104.1 $ 91.5 14%
Gross profit 27.7 25.2 10% 69.8 63.8 9%
Corporate, net:
Income (expense) $ 1.6 $ (7.7) $(152.8) $ (34.1)
Consolidated:
Net sales $ 223.2 $ 203.9 9% $ 598.0 $ 575.5 4%
Gross profit 105.1 111.2 (5%) 276.3 318.2 (13%)
Pretax earnings (loss) 58.8 63.7 (8%) (7.7) 172.2 (104%)
10
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Segment net sales represent sales to unrelated third parties. Segment gross
profit represents segment net sales less the corporate-wide costs of
manufacturing, warehousing and shipping associated with such sales. Segment
profit represents segment gross profit less direct research and development,
sales and marketing and administrative expenses. Corporate includes legal costs,
goodwill amortization, other corporate administrative expenses and other income
and expense. For the nine months ended December 31, 2000, Corporate includes the
expense of $147.0 million for the Tentative Settlement (see note G to the
consolidated financial statements).
Results of Operations
Net Sales and Gross Profit
Consolidated net sales for the three months ended December 31, 2000, were
$223.2 million compared to $203.9 million for the same prior year period, a
$19.3 million or 9% increase.
Generic net sales for the current three month period were $181.9 million
compared to $168.2 million for the same prior year period, a $13.7 million or 8%
increase. New products launched subsequent to December 31, 1999, increased net
sales for the current three month period by $57.2 million, with $42.0 million
resulting from nifedipine, over the same prior year period. This increase was
offset by decreased net sales of $32.5 million for products where prices had
been increased in prior years, primarily clorazepate and lorazepam, and other
products of $9.9 million. Generic volume decreased to 2.214 billion doses for
the current three month period from 2.377 billion doses for the same prior year
period, a 7% decrease.
Brand net sales for the current three month period were $41.3 million compared
to $35.7 million for the same prior year period, a $5.6 million or 16% increase.
The increase from the prior year period is primarily attributable to sales of
new products, Clozapine(R) and Digitek(R), marketed by Bertek Pharmaceuticals
Inc. ("Bertek") subsequent to December 31, 1999.
Consolidated net sales for the nine months ended December 31, 2000, were $598.0
million compared to $575.5 million for the same prior year period, a $22.5
million or 4% increase.
11
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Generic net sales for the current nine month period were $493.9 million compared
to $484.0 million for the same prior year period, a $9.9 million or 2% increase.
New products launched subsequent to December 31, 1999, increased net sales for
the current nine month period by $154.3 million, with $110.9 million of the
increase from nifedipine, over the same prior year period. This increase was
offset by decreased net sales of $85.1 million for products where prices had
been increased in prior years, primarily clorazepate and lorazepam, and other
products of $53.6 million. Generic volume for the current nine month period was
6.078 billion doses compared to 6.437 billion doses for the same prior year
period, a 6% decrease. The decrease in generic volume primarily related to the
change in sales and marketing strategy implemented in the quarter ended June 30,
2000.
Brand net sales for the current nine month period were $104.1 million compared
to $91.5 million for the same prior year period, a $12.6 million or 14%
increase. New products marketed by Bertek subsequent to December 31, 1999,
Clozapine(R) and Digitek(R), increased net sales for the current nine month
period by $10.7 million over the same prior year period.
Consolidated gross profit for the three months ended December 31, 2000, was
$105.1 million or 47% of net sales compared to $111.2 million or 55% of net
sales for the same prior year period. For the nine months ended December 31,
2000, gross profit was $276.3 million or 46% of net sales compared to $318.2
million or 55% of net sales for the same prior year period.
Generic gross profit for the current three month period was $77.4 million or 43%
of generic net sales compared to $86.0 million or 51% of generic net sales for
the same prior year period, an $8.6 million or 10% decrease. For the current
nine month period, generic gross profit was $206.5 million or 42% of generic net
sales compared to $254.4 million or 53% of generic net sales for the same prior
year period, a $47.9 million or 19% decrease. In the current three and nine
month periods, gross profit contributed by new product launches subsequent to
December 31, 1999, were offset by decreased gross profit on clorazepate and
lorazepam, products where prices had been increased in prior years and other
core generics as compared to the same prior year periods. Additionally, due to
contractual obligations, net sales of nifedipine are at relatively lower margins
and, consequently, have contributed to the lower overall generic gross profit
realized by the Generic Segment.
12
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Brand gross profit for the current three month period was $27.7 million or 67%
of brand net sales compared to $25.2 million or 71% of brand net sales for the
same prior year period, a $2.6 million or 10% increase. For the current nine
month period, brand gross profit was $69.8 million or 67% of brand net sales
compared to $63.8 million or 70% of brand net sales for the same prior year
period, a $6.0 million or 9% increase. Increases in gross profit for the three
and nine month periods were primarily attributable to new products marketed
subsequent to December 31, 1999.
Research and Development
Consolidated research and development expenses for the three months ended
December 31, 2000, were $15.8 million compared to $12.4 million for the same
prior year period, a $3.4 million increase. For the nine months ended December
31, 2000, consolidated research and development expenses were $49.6 million
compared to $35.7 million for the same prior year period, a $13.9 million
increase.
Generic research and development for the current three month period was $12.0
million compared to $9.7 million for the same prior year period. For the current
nine month period, generic research and development was $38.6 million compared
to $28.8 million for the same prior year period. The increases are primarily due
to increased studies and increased license expense for marketing rights to
certain products in development.
Brand research and development for the current three month period was $3.8
million compared to $2.7 million for the same prior year period. For the current
nine month period, brand research and development was $11.0 million compared to
$6.9 million for the same prior year period. These increases are primarily due
to increased studies expense associated with product line expansions.
The Company is actively pursuing joint development projects in an effort to
broaden its scope of capabilities in bringing to market new innovative products.
Such arrangements generally provide for payments by the Company only upon the
attainment of certain milestones. While such arrangements help to reduce the
Company's financial risk for unsuccessful projects, attainment of milestones may
result in fluctuations in quarterly research and development.
13
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Selling and Administrative Expenses
Consolidated selling and administrative expenses were $40.6 million for the
three months ended December 31, 2000, compared to $40.4 million for the same
prior year period. For the nine months ended December 31, 2000, consolidated
selling and administrative expenses were $117.9 million compared to $117.4
million for the same prior year period.
Generic selling and administrative expenses for the current three month period
were $10.0 million, relatively unchanged from the same prior year period of
$10.8 million. For the current nine month period, generic selling and
administrative expenses decreased $4.7 million to $27.7 million from $32.4
million for the same prior year period. This decrease is primarily attributed to
decreased promotional expenses.
Brand selling and administrative expenses for the current three month period
were $22.1 million compared to $16.6 million for the same prior year period. For
the current nine month period, brand selling and administrative expenses were
$54.0 million compared to $43.8 million for the same prior year period. The
increase for the current three month period relates primarily to the charges
related to the Zagam(R) product license and employee severance and termination
costs related to the restructuring of the Brand Segment. Bertek decreased the
carrying value of the Zagam(R) product license by $3.6 million due to
difficulties related to product supply. Consequently, the carrying value of the
Zagam(R) product license was $3.2 million at December 31, 2000. The Brand
Segment recorded $1.0 million for employee severance and termination costs in
connection with the consolidation of its non-manufacturing operations in
Raleigh, North Carolina. For the current nine month period, the increase relates
primarily to Zagam(R) charges of $4.6 million, employee severance and
termination costs of $1.0 million and product sample expense of $2.8 million.
Other Income
Other income for the three months ended December 31, 2000, was $8.9 million
compared to $6.9 million for the same prior year period, a $2.0 million
increase. Under the terms of the August 2000 settlement with American
Bioscience, Inc. ("ABI"), the Company recognized $9.2 million in the current
three month period for the transfer to ABI of ABI's common stock owned by the
Company (see note G to the consolidated financial statements). This increase in
other income was partially offset by a loss recognized on the Company's
investment in a limited partnership. In addition, in the three month period
ended December 31, 1999, the Company recorded a reduction of the carrying value
of nonoperating assets.
14
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Other income for the nine months ended December 31, 2000, was $31.1 million
compared to $9.6 million for the same prior year period, a $21.5 million
increase. This increase is primarily attributed to increased earnings recognized
in the Company's investment in a limited partnership, the ABI proceeds and
increased interest income.
Somerset
Equity in the earnings of Somerset was $1.3 million for the three months
ended December 31, 2000, compared to a loss of $1.5 million for the same prior
year period. Equity in the loss of Somerset was $0.8 million and $2.6 million
for the nine months ended December 31, 2000, and 1999. The increase in earnings
for the current three month period was primarily attributable to decreased
research and development and a settlement with the Internal Revenue Service.
Income Taxes
The Company's effective tax rate of 36% remained relatively unchanged from
the same prior year periods and is expected to remain at approximately this
level throughout fiscal year 2001.
Other Factors
The Tentative Settlement contributed primarily to the increase in total
current assets and total current liabilities.
The addition of nifedipine to the Company's product line during the current nine
month period resulted in increased finished goods inventories and increased
trade accounts payable.
During the current nine month period, the Company liquidated portions of its
marketable securities and investment in a limited partnership to fund the Stock
Repurchase Program and the Tentative Settlement. Consequently, other assets and
marketable securities have decreased for the current nine month period.
During the three month period ended June 30, 2000, the Company completed the
Stock Repurchase Program authorized and announced by the Board of Directors in
April 1997. The Company repurchased 4,855,100 shares of common stock for
approximately $91.5 million.
The Company has initiated the consolidation of its Brand Segment. In addition to
strengthening the management team, the Brand Segment is in the process of
relocating certain functions from three current locations to one location in
15
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Raleigh, North Carolina. In addition to the $1.0 million in employee severance
and termination costs recorded in the current three month period, the remaining
costs associated with the consolidation are expected to be recognized in fiscal
year 2002.
In February 2001, the Food and Drug Administration approved Biovail
Corporation's ("Biovail") Abbreviated New Drug Application for 30mg nifedipine
extended-release tablets, the generic equivalent of Pfizer Inc.'s Procardia(R)
XL, which the Company currently markets. The Company believes the approval to be
contrary to the statute, case law and the FDA's own publicly announced position
concerning the 180-day exclusivity provision of the statute. If Biovail chooses
to launch its product, the Company would expect to experience decreased net
sales and, to a lesser degree, decreased gross profits. The Company is
evaluating its options and will take such steps as it deems appropriate to
protect its interests.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The effective date of this standard has been delayed to
fiscal years beginning after June 15, 2000. The Company is currently evaluating
the impact of this standard on its financial position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB No. 101").
The implementation date of SAB No. 101 has been delayed to the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company believes
the adoption of SAB No. 101 will not have a material impact on its financial
position or results of operations.
Liquidity, Capital Resources and Financial Condition
Working capital decreased to $516.8 million at December 31, 2000, from
$596.2 million at March 31, 2000. The ratio of current assets to current
liabilities decreased to 2.9 to 1 at December 31, 2000, from 7.8 to 1 at March
31, 2000. Primary causes for the change in the Company's current ratio were the
Tentative Settlement and completion of the Stock Repurchase Program.
The decrease in working capital was primarily attributed to the Tentative
Settlement and its partial funding, along with net fluctuations in accounts
receivable, inventories and income taxes. While the Tentative Settlement, along
with its partial funding, impacted working capital and cash provided from
16
MYLAN LABORATORIES INC. AND SUBSIDIARIES
operating activities, the liquidation of certain investments in anticipation of
the payment has resulted in the increase in cash provided from investing
activities. The cash used for the completion of the Stock Repurchase Program
also reduced working capital.
In December 2000, the Company placed into escrow $100.0 million in accordance
with the terms related to the Tentative Settlement. The remaining balance will
be funded through currently available funds. The entire $147.0 million
settlement remains subject to final court approval.
The Company believes that it has meritorious defenses, with respect to the
claims asserted, in those suits which are not part of the Tentative Settlement
and will vigorously defend its position. However, an adverse result in these
cases or, if the Tentative Settlement is not approved by the court, the
continued litigation of those cases could have a material adverse effect on the
Company's financial position and results of operations.
During the three month period ended June 30, 2000, the Company completed the
Stock Repurchase Program authorized and announced by the Board of Directors in
April 1997. The Company repurchased 4,855,100 shares of common stock for
approximately $91.5 million through the use of currently available funds.
The Company continues to examine opportunities to expand its business through
product and company acquisitions. The Company's capital resources, financial
condition and results of operations could be materially impacted if the Company
were to complete one or more of such acquisitions.
Forward-Looking Statements
The statements set forth in this Report concerning the manner in which the
Company intends to conduct its future operations, potential trends that may
impact future results of operations, and its beliefs or expectations about
future operations are forward-looking statements. The Company may be unable to
realize its plans and objectives due to various important factors, including,
but not limited to, an acceleration in the erosion of prices of the Company's
generic pharmaceutical products, the Company's inability to obtain timely FDA
approval for its new generic or brand products, the failure of the Company's
brand products to find acceptance in the marketplace, continuing litigiousness
by brand manufacturers designed to delay the introduction of the Company's
generic products, the failure of the court to approve the Tentative Settlement,
the failure of the Company to favorably litigate or resolve the remaining cases
that 17
MYLAN LABORATORIES INC. AND SUBSIDIARIES
are not a part of the Tentative Settlement, and the factors described under
"Forward Looking Statements" in Item 7 of the Company's Annual Report on Form
10-K for the year ended March 31, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the
Company's Annual Report on Form 10-K for the year ended March 31, 2000. There
has been no material change in the disclosure regarding market risk, except as
described below.
The fair market value of the debt securities held by the Company at December 31,
2000, was $19.7 million, of which $0.5 million had maturities of less than one
year (the market values of which are generally less sensitive to interest rate
fluctuations than is the case with longer term debt instruments). The fair
market value of equity securities held by the Company at December 31, 2000, was
$41.9 million. Such investments collectively represent 3% of the Company's total
assets as of December 31, 2000, and 15% of the aggregate value of debt and
equity securities and cash and cash equivalents held by the Company at such
date. Assuming an instantaneous 10% decrease in the market value of the
Company's debt and equity securities, the change in the aggregate fair market
value of these securities would be $6.2 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since the date of the filing of the Company's Annual Report on Form
10-K for the year ended March 31, 2000, there have been no material new legal
proceedings involving the Company or any material developments to such
proceedings, except as described below.
A subsidiary of the Company was involved in a dispute with KaiGai
Pharmaceuticals, Co., Ltd. ("KaiGai") relating to a license and supply contract
for nitroglycerin transdermal patches which both parties claimed was breached by
the other. KaiGai sought damages in excess of $20,000,000. The dispute was
subject to binding arbitration, and, in November 1999, the arbitration panel
denied KaiGai's request for damages. KaiGai filed an appeal in U.S. District
Court and the Company's motion to dismiss the appeal was granted based upon
untimely and improper service of the appeal. KaiGai appealed the U.S. District
18
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Court's decision to the Court of Appeals. In January 2001, the appeal was
dismissed and withdrawn.
In June 1998, the Company filed suit in the Los Angeles Superior Court against
American Bioscience, Inc. ("ABI"), American Pharmaceutical Partners, Inc.
("APP") and certain of their directors and officers. The Company's suit sought
various legal and equitable remedies. The Los Angeles Superior Court issued a
preliminary injunction which, among other things, prohibited the defendants from
transferring or disposing of funds, assets, technology or property without the
Company's consent or commingling assets, property, technology or personnel with
those of another company. In June 1999, the defendants filed an answer to and
cross-complaint against the Company. The cross-complaint alleged violations of
California state laws, interference with contractual relations and prospective
economic advantage, fraud, slander, libel and other allegations. The
cross-complainants sought unspecified compensatory and punitive damages.
In August 2000, the Company entered into a settlement agreement with ABI, APP
and certain of their directors and officers. The settlement resulted in the
resolution of all differences, disputes and claims raised in the complaint and
cross-complaint mentioned above. Upon settlement, the Company received
$5,000,000 from ABI for its equity investment in VivoRx Inc. In December 2000,
as required under the terms of the settlement, the Company received payment from
ABI for the transfer to ABI of ABI's common stock owned by the Company. This
payment has been included in other income, net of expenses, in the amount of
$9,200,000.
In December 1998, the FTC filed suit in U.S. District Court for the District of
Columbia against the Company. The FTC's complaint alleges the Company engaged in
restraint of trade, monopolization, attempted monopolization and conspiracy to
monopolize arising out of certain agreements involving the supply of raw
materials used to manufacture two drugs.
The FTC also sued in the same case the foreign supplier of the raw materials,
the supplier's parent company and its United States distributor. Under the terms
of the agreements related to these raw materials, the Company has agreed to
indemnify these parties. The Company is a party to other suits involving the
Attorneys General from 33 states and more than 25 putative class actions that
allege the same conduct alleged in the FTC suit, as well as alleged violations
of state consumer protection laws.
19
MYLAN LABORATORIES INC. AND SUBSIDIARIES
The relief sought by the FTC includes an injunction barring the Company from
engaging in the challenged conduct, recision of certain agreements and
disgorgement in excess of $120,000,000. The states and private parties seek
similar relief, treble damages and attorneys' fees. The Company's motions to
dismiss several of the private actions were granted.
In July 2000, the Company reached a tentative agreement to settle the actions
brought by the FTC and the State Attorneys General regarding raw material
contracts for lorazepam and clorazepate. The Company has agreed to pay
$100,000,000, plus up to $8,000,000 in attorneys' fees incurred by the States
Attorneys General. Based on the FTC commissioners' approval of the Tentative
Settlement with the FTC and State Attorneys General, in December 2000, the
Company placed into escrow $100,000,000. Settlement papers have been executed
and filed by the parties, and final court approval is pending.
In July 2000, the Company also reached a tentative agreement to settle private
class action lawsuits filed on behalf of consumers and third-party reimbursers
related to the same facts and circumstances at issue in the FTC and States
Attorneys General cases. The Company has agreed to pay $35,000,000 to settle the
third party reimburser actions, plus up to $4,000,000 in attorneys' fees
incurred by counsel in the consumer actions. The tentative settlement is subject
to court approval.
In total, the Company has agreed to pay up to $147,000,000 to settle these
actions brought by the FTC, State Attorneys General, and certain private parties
("Tentative Settlement"). The Tentative Settlement also includes three companies
indemnified by the Company - Cambrex Corporation, Profarmaco S.r.l. and Gyma
Laboratories, Inc. Lawsuits not included in this Tentative Settlement
principally involve alleged direct purchasers such as wholesalers.
A qui tam action was also commenced by a private party in the U.S. District
Court for the District of South Carolina purportedly on behalf of the United
States alleging violations of the False Claims Act and other statutes. In
January 2001, the District Court granted the Company's motion to dismiss. At
this time, no notice of appeal has been filed.
The Company believes that it has meritorious defenses, with respect to the
claims asserted, in those suits which are not part of the Tentative Settlement
and will vigorously defend its position. However, an adverse result in these
cases or, if the Tentative Settlement is not approved by the court, the
continued litigation
20
MYLAN LABORATORIES INC. AND SUBSIDIARIES
of those cases could have a material adverse effect on the Company's financial
position and results of operations.
In addition to these cases, in January 1999, a class action suit was filed by
Frank Ieradi on behalf of himself and other similarly situated shareholders in
the U.S. District Court of the Western District of Pennsylvania. In this suit,
the plaintiff alleged violations of federal securities laws by the Company and
certain of its current and former directors and officers and asked for
compensatory damages in an unspecified amount. In December 1999, the District
Court granted the Company's motion to dismiss the case. In August 2000, the U.S.
Court of Appeals for the Third Circuit affirmed the decision of the District
Court. No further appeal of this case has been taken.
The Company is involved in various other legal proceedings that are considered
normal to its business. While it is not feasible to predict the ultimate outcome
of such proceedings, it is the opinion of management that the outcome of these
suits will not have a material adverse effect on the Company's operations,
financial position, or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K - There were no reports on form 8-K filed during the
three months ended December 31, 2000.
MYLAN LABORATORIES INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report filed on Form 10-Q for the quarter ended
December 31, 2000, to be signed on its behalf by the undersigned thereunto duly
authorized.
Mylan Laboratories Inc.
(Registrant)
DATE 2/14/01 /s/ Milan Puskar
---------------------- ----------------------------
Milan Puskar
Chairman of the Board and
Chief Executive Officer
DATE 2/14/01 /s/ Richard F. Moldin
---------------------- ----------------------------
Richard F. Moldin
President and Chief Operating Officer
DATE 2/14/01 /s/ John M. Hanson
---------------------- ----------------------------
John M. Hanson
Vice President of Finance and
Chief Financial Officer
(Principal financial officer)