- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-9114
MYLAN LABORATORIES INC.
(Exact Name of registrant as specified in its charter)
Pennsylvania 25-1211621
(State of incorporation) (I.R.S. Employer 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)
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 August 8, 2001
--------------------- --------------
$.50 par value 125,330,768
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended
June 30, 2001
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Statements of Earnings - Three
Months Ended June 30, 2001, and 2000 2
Consolidated Balance Sheets - June 30, 2001,
and March 31, 2001 3
Consolidated Statements of Cash Flows - Three
Months Ended June 30, 2001, and 2000 4
Notes to Consolidated Financial Statements 5
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3: Quantitative and Qualitative Disclosures About
Market Risk 20
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 20
ITEM 6: Exhibits and Reports on Form 8-K 24
SIGNATURES 25
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30,
2001, AND 2000 (unaudited; in
thousands, except per share amounts)
2001 2000
---- ----
Net revenues ..................................... $ 237,933 $ 167,255
Cost of sales .................................... 116,074 93,502
---------- ----------
Gross profit ..................................... 121,859 73,753
Operating expenses:
Research and development ......................... 16,783 16,535
Selling and marketing ............................ 15,142 15,486
General and administrative ....................... 25,595 22,374
Tentative litigation settlement .................. -- 147,000
---------- ----------
Earnings (loss) from operations .................. 64,339 (127,642)
Equity in loss of Somerset ....................... (642) (1,903)
Other income, net ................................ 15,441 10,656
---------- ----------
Earnings (loss) before income taxes .............. 79,138 (118,889)
Provision for income taxes ....................... 28,490 (42,800)
---------- ----------
Net earnings (loss) .............................. $ 50,648 $ (76,089)
========== ==========
Earnings (loss) per common share:
Basic .......................................... $ 0.41 $ (0.59)
========== ==========
Diluted ........................................ $ 0.40 $ (0.59)
========== ==========
Weighted average common shares:
Basic .......................................... 125,031 128,701
========== ==========
Diluted ........................................ 126,374 129,694
========== ==========
Cash dividends declared per common share: ........ $ 0.04 $ 0.04
========== ==========
See Notes to Consolidated Financial Statements
2
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, March 31,
2001 2001
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 183,819 $ 229,183
Marketable securities 158,990 55,715
Accounts receivable, net 221,477 232,599
Inventories 170,983 161,810
Deferred income tax benefit 71,503 59,474
Deposit - tentative litigation settlement 135,000 135,000
Other current assets 4,946 5,443
---------- ----------
Total current assets 946,718 879,224
Property, plant and equipment, net 166,237 168,396
Intangible assets, net 291,538 296,181
Investment in and advances to Somerset 26,904 27,621
Other assets 103,585 94,551
---------- ----------
Total assets $1,534,982 $1,465,973
========== ==========
Liabilities and shareholders' equity
Liabilities:
Current liabilities:
Trade accounts payable $ 51,944 $ 48,928
Income taxes payable 41,766 34,348
Current portion of long-term obligations 5,241 5,245
Cash dividends payable 5,015 5,007
Tentative litigation settlement 147,000 147,000
Other current liabilities 56,394 50,659
---------- ----------
Total current liabilities 307,360 291,187
Long-term obligations 22,153 23,345
Deferred income tax liability 21,175 18,905
---------- ----------
Total liabilities 350,688 333,437
---------- ----------
Shareholders' equity:
Preferred stock - par value $.50 per share
Shares authorized: 5,000,000
Shares issued: none -- --
Common stock - par value $.50 per share
Shares authorized: 300,000,000
Shares issued: 130,869,454 at June 30, 2001, and
130,689,762 at March 31, 2001 65,434 65,345
Additional paid-in capital 325,764 322,987
Retained earnings 886,384 840,741
Accumulated other comprehensive income 6,232 2,983
---------- ----------
1,283,814 1,232,056
Less treasury stock - at cost
Shares: 5,731,913 at June 30, 2001, and
March 31, 2001 99,520 99,520
---------- ----------
Total shareholders' equity 1,184,294 1,132,536
---------- ----------
Total liabilities and shareholders' equity $1,534,982 $1,465,973
========== ==========
See Notes to Consolidated Financial Statements
3
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001, AND 2000
(unaudited; in thousands)
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 50,648 $ (76,089)
Adjustments to reconcile net earnings (loss) to net cash
provided from operating activities:
Depreciation and amortization 11,070 9,983
Gain on disposal/sale of property, plant and equipment (693) (2)
Income tax benefit (11,509) (40,759)
Equity in loss of Somerset 642 1,903
Cash received from Somerset 74 121
Change in allowance for accounts receivable 35,150 (6,220)
Write-off of investments and intangibles
to net realizable value 1,460 --
Tentative litigation settlement -- 147,000
Other noncash items (11,265) (4,299)
Changes in operating assets and liabilities:
Accounts receivable (24,027) 24,463
Inventories (10,546) (62,537)
Trade accounts payable 3,016 58,091
Income taxes 7,418 (7,858)
Other assets and liabilities 5,587 939
--------- ----------
Net cash provided from operating activities 57,025 44,736
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,195) (8,828)
Proceeds from sale of property, plant and equipment 1,154 52
Proceeds from (purchase of) intangible and other assets 181 (1,099)
Proceeds from sale of marketable securities 43,637 52,322
Purchase of marketable securities (141,914) (14,870)
--------- ----------
Net cash (used in) provided by investing activities (100,137) 27,577
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations (70) (95)
Cash dividends paid (4,997) (5,174)
Repurchase of common stock -- (91,456)
Proceeds from exercise of stock options 2,815 2,223
--------- ----------
Net cash used in financing activities (2,252) (94,502)
--------- ----------
Net decrease in cash (45,364) (22,189)
Cash-beginning of period 229,183 203,493
--------- ----------
Cash-end of period $ 183,819 $ 181,304
========== ==========
Cash paid during the period for:
Interest $ -- $ 37
========== ==========
Income taxes $ 32,578 $ 5,815
========== ==========
See Notes to Consolidated Financial Statements
4
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. General
In the opinion of management, the accompanying unaudited interim
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission for
reporting on Form 10-Q; therefore, as permitted under these rules, certain
footnotes or other financial information required by generally accepted
accounting principles and included in audited financial statements have
been condensed or omitted. The accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly our consolidated results of operations, financial position
and cash flows for the periods presented.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto in
our Annual Report on Form 10-K for the fiscal year ended March 31, 2001.
The consolidated results of operations for the three months ended June
30, 2001, are not necessarily indicative of the results to be expected for
the full fiscal year.
2. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation. Such reclassifications had no impact on reported
net earnings, earnings per share or shareholders' equity.
3. Revenue Recognition
We recognize revenue from product sales upon shipment to customers.
Net revenues consist primarily of gross revenues less provisions for
estimated discounts, rebates, price adjustments, returns, chargebacks,
promotional and other potential adjustments. Accounts receivable are
presented net of allowances relating to these provisions, which were
$153,527,000 and $118,377,000 at June 30, 2001, and March 31, 2001.
4. Recent Accounting Pronouncements
In April 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, as amended, Accounting for Derivative Instruments and
Hedging Activities, issued by the Financial Accounting Standards Board
(FASB) in June
5
1998. SFAS No. 133 requires an entity to recognize all derivative
instruments as either assets or liabilities on the balance sheet at fair
value and those changes in fair value to be recognized currently in
earnings, unless specific hedge accounting criteria are met. The adoption
of SFAS No. 133 had no material impact on our results of operations or
financial position.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations initiated after June 30, 2001, be accounted
for using the purchase method of accounting.
SFAS No. 142 changes the accounting for goodwill and certain other
intangible assets from an amortization method to an impairment only
approach. We will adopt the provisions of SFAS No. 142 effective April 1,
2002. We are currently in the process of evaluating the effect the adoption
of SFAS No. 142 will have on our consolidated financial position, results
of operations and cash flows when adopted. For the quarters ended June 30,
2001, and 2000, amortization expense for goodwill and certain other
intangible assets, as defined in SFAS No. 142, was $1,645,000 and
$1,766,000.
5. Marketable Securities
The amortized cost and estimated market values of marketable
securities are as follows: (in thousands)
Gross Gross
Amortized Unrealized Unrealized Market
June 30, 2001 Cost Gains Losses Value
---- ----- ------ -----
Debt securities $143,629 $ 391 $ 180 $143,840
Equity securities 5,782 9,968 600 15,150
-------- -------- -------- --------
$149,411 $ 10,359 $ 780 $158,990
======== ======== ======== ========
March 31, 2001
Debt securities $ 45,371 $ 698 $ 50 $ 46,019
Equity securities 5,762 4,684 750 9,696
-------- -------- -------- --------
$ 51,133 $ 5,382 $ 800 $ 55,715
======== ======== ======== ========
Maturities of debt securities at market value as of June 30, 2001, are
as follows: (in thousands)
Mature in one year or less $123,680
Mature after one year through five years 2,878
Mature after five years 17,282
--------
$143,840
========
6
6. Inventories
Inventories are as follows: (in thousands)
June 30, March 31,
2001 2001
---- ----
Raw materials $ 65,244 $ 57,825
Work in process 23,941 23,752
Finished goods 81,798 80,233
-------- --------
$170,983 $161,810
======== ========
7. Earnings per Common Share
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 1,343,000 and 993,000 for
the three months ended June 30, 2001, and 2000.
8. Comprehensive Income
Total comprehensive income is as follows: (in thousands)
Three Months Ended
June 30,
--------
2001 2000
---- ----
Net earnings (loss) $ 50,648 $(76,089)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on marketable securities 3,383 (1,679)
Adjustment for gains included
in net earnings (loss) (134) (682)
--------- ---------
Comprehensive income (loss) $ 53,897 $(78,450)
========= =========
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.
7
9. Segment Reporting
The following table presents the comparative operating results for our
operating segments: (in thousands)
Three Months Ended
June 30,
--------
2001 2000
---- ----
Generic:
Net revenues $ 209,822 $ 132,513
Segment profit 89,405 28,661
Brand:
Net revenues $28,111 $34,742
Segment (loss) profit (10,948) 4,798
Corporate/Other, net:
Segment profit (loss) $ 681 $(152,348)
Consolidated:
Net revenues $ 237,933 $ 167,255
Pretax earnings (loss) 79,138 (118,889)
Segment net revenues represent revenues from unrelated third
parties. Segment profit represents segment gross profit less
direct research and development, sales and marketing and general
and administrative expenses. Corporate includes legal costs,
goodwill amortization, other corporate administrative expenses
and other income and expense. For the quarter ended June 30,
2000, Corporate includes the expense of $147,000,000 for the
tentative settlement (see Note 10).
Effective April 1, 2001, the decision was made that the Brand
Segment assume responsibility for the sales and marketing of EX
phenytoin 100mg, which were previously included and evaluated in
the operating results of the Generic Segment. Accordingly, the
operating results of the Brand Segment for the three months ended
June 30, 2000, have been revised to include the net revenues of
$4,218,000 and the corresponding cost of sales of $894,000 for EX
phenytoin 100mg previously included in the Generic Segment.
The following table presents comparative total assets by operating
segment, which includes a revision to the March 31, 2001, amounts to
reflect EX phenytoin 100mg in the Brand Segment: (in thousands)
June 30, March 31,
2001 2001
---- ----
Generic $ 643,251 $ 625,926
Brand 228,743 250,977
Corporate/Other 662,988 589,070
----------- -----------
Consolidated $ 1,534,982 $ 1,465,973
=========== ===========
8
10. Contingencies
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 had agreed to indemnify these parties. The Company is a party to
other suits filed in the same court involving the Attorneys General from
all states and the District of Columbia and more than 25 putative class
actions that allege the same conduct alleged in the FTC suit, as well as
alleged violations of state antitrust and 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 States 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 States Attorneys General, in December
2000, the Company placed into escrow $100,000,000. Settlement papers have
been executed and filed by the parties. The court has preliminarily
approved the tentative settlement. Under the court's current schedule, a
hearing with respect to final approval is scheduled for November 29, 2001.
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 has been preliminarily approved by the court,
pursuant to which the Company placed into escrow $35,000,000 in March 2001.
Under the court's current schedule, a hearing with respect to final
approval is scheduled for November 29, 2001.
9
In total, the Company has agreed to pay up to $147,000,000 to settle
these actions brought by the FTC, States 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 and distributors. In July 2001, the United States District
Court for the District of Columbia certified a litigation class consisting
of these direct purchasers. The Company has petitioned the United States
Court of Appeals for the District of Columbia Circuit to hear an appeal of
this certification.
The Company believes that it has meritorious defenses with respect to
the claims asserted in those anti-trust suits which are not part of the
Tentative Settlement and will vigorously defend its position. However, an
adverse result in the remaining cases, or, if the Tentative Settlement is
not given final approval by the court, the outcome of continued litigation
of these cases, could have a material adverse effect on the Company's
financial position and results of operations.
The Company filed an ANDA seeking approval to market buspirone, a
generic equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company
had filed the appropriate certifications relating to the patents then
listed in the Orange Book for this product. On November 21, 2000, a new
patent claiming the administration of a metabolite of buspirone (which BMS
claims also covers the administration of buspirone itself) was issued to
BMS. The subsequent listing of this patent in the Orange Book prevented the
FDA from granting final approval for the Company's buspirone ANDA. On
November 30, 2000, the Company filed suit against the FDA and BMS in the
United States District Court for the District of Columbia. The complaint
asked the court to order the FDA to immediately grant final approval of the
Company's ANDA for the 15mg buspirone product and require BMS to request
withdrawal of the patent from the Orange Book. Upon the Company's posting a
bond in the amount of $25,000,000, the court entered an order granting the
Company's motion for a preliminary injunction. Following a brief stay by
the court of appeals, the FDA granted approval for the Company's ANDA with
respect to the 15mg strength. Upon receiving FDA approval, the Company
commenced marketing and selling the product in March 2001. BMS appealed the
preliminary injunction order to both the United States Court of Appeals for
the Federal Circuit and the United States Court of Appeals for the District
of Columbia Circuit. The District of Columbia Circuit denied BMS'
application and stayed the Company's motion to dismiss pending the decision
of the Federal Circuit. The Federal Circuit heard oral arguments on July
12, 2001.
10
The Company is involved in three other suits related to buspirone. In
November 2000, the Company filed suit against BMS in the United States
District Court for the Northern District of West Virginia. The suit seeks a
declaratory judgement of non-infringement and/or invalidity of the BMS
patent listed in November 2000. In January 2001, BMS sued the Company for
patent infringement in the United States District Court for the District of
Vermont and also in the United States Court for the Southern District of
New York. In each of these cases, BMS asserts the Company infringes BMS'
recently issued patent and seeks to rescind FDA approval of the Company's
15mg ANDA and to block approval of the 5mg, 10mg and 30mg strengths. It is
expected that BMS will seek to recover damages equal to the profits it has
lost as a result of the Company's sales of this product. The Company
subsequently filed motions to dismiss the Vermont case and to dismiss and
transfer the New York case to the United States District Court for the
Northern District of West Virginia. While these suits are in the early
stages, the Company believes it has meritorious defenses to the claims and
intends to vigorously defend its position.
A decision unfavorable to the Company in the case on appeal or any of
the three cases involving the validity of BMS' patents could prevent the
Company from continuing its sales of buspirone and could result in
forfeiture of its bond (in the case on appeal) or other damages, any of
which could have a material adverse effect on the Company's results of
operations and/or financial position.
In February 2001, Biovail Corporation and Biovail Laboratories Inc.
(Biovail) filed suit against the Company and Pfizer Inc. (Pfizer) in United
States Federal District Court for the Eastern District of Virginia alleging
anti-trust violations with respect to agreements entered into between the
Company and Pfizer regarding nifedipine. The Company filed a motion to
transfer the case to United States Federal District Court for the Northern
District of West Virginia, which was granted. While this suit is in its
early stages, the Company believes it has meritorious defenses to the
claims asserted by Biovail and intends to vigorously defend its position.
An adverse outcome could have a material adverse effect on the Company's
results of operations and/or financial position.
The Company has been named as a defendant in three separate suits
alleging anti-trust claims based on a settlement entered into by the
Company with Bayer AG, Bayer Corporation and Pfizer Inc. regarding
nifedipine: Great Lakes Health Plan Inc. filed suit in the United States
District Court for the Eastern District of Michigan, Southern Division in
May 2001; United Food and Commercial Workers Unions and Employers Midwest
Health Benefits Fund, and other named plaintiffs, filed suit in the Circuit
Court of Cook County, Illinois in July 2001; and Teamsters Local No. 35
Health Plans, and other named plaintiffs, filed suit in the United States
District Court for the Northern District of
11
West Virginia in August 2001. The Company believes it has meritorious
defenses to these claims and intends to vigorously defend its position. An
adverse outcome in any of these suits could have a material adverse effect
on the Company's results of operations and/or financial position.
The Company filed suit against Aventis Pharmaceuticals, Inc.,
successor in interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.;
Rhone-Poulenc Rorer Pharmaceuticals, LTD.; Rorer Pharmaceutical Products,
Inc.; Rhone-Poulenc Rorer, S.A., and their affiliates in United States
Federal District Court for the Western District of Pennsylvania on May 23,
2001. The Complaint sets forth claims of breach of contract, recision,
breach of implied covenant of good faith and fair dealing and unjust
enrichment. The facts substantiating the claims arise from agreements
entered into by the parties relating to the manufacture, distribution and
sale of Zagam(R). The defendants' answer included a counterclaim which
alleges nonpayment of royalties and failure to mitigate.
Biovail Laboratories Inc. (Biovail) has filed a demand for arbitration
against the Company with the American Arbitration Association. The dispute
relates to a supply agreement under which the Company supplied
extended-release verapamil to Biovail. The Company terminated the agreement
in March 2001. Biovail's allegations include breach of contract, breach of
implied covenant of good faith and fair dealing, and unfair competition.
While this matter is in its early stages, the Company believes it has
meritorious defenses to the claims asserted by Biovail and intends to
vigorously defend its position. An adverse outcome could have a material
adverse effect on the Company's results of operations and/or financial
position.
NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories Inc.
(Abbott) filed suit against the Company in United States Federal District
Court for the Western District of Pennsylvania. Plaintiffs allege the
Company's manufacture, use and sale of paclitaxel infringes certain patents
owned by NAPRO and allegedly licensed to Abbott. The Company began selling
paclitaxel on July 25, 2001. Abbott has filed an ANDA seeking approval to
sell paclitaxel. The regulatory review status of the Abbott application is
unknown to the Company. While this suit is in its early stages, the Company
believes it has meritorious defenses to the claims asserted and intends to
vigorously defend its position. An adverse outcome in this suit could have
a material adverse effect on the Company's results of operations and/or
financial position.
We are involved in various other legal proceedings that are considered
normal to our business. While it is not feasible to predict the ultimate
outcome of such other proceedings, it is the opinion of management that the
ultimate outcome of such other proceedings will not have a material adverse
effect on our results of operations or financial position.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements, the related notes to
consolidated financial statements and management's discussion and analysis
of financial condition and results of operations included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2001, and the
unaudited interim consolidated financial statements included in Item 1 of
this Quarterly Report on Form 10-Q.
Overview
For the quarter ended June 30, 2001, net earnings were $50.6 million,
or $.40 per diluted share, compared to a net loss of $76.1 million, or $.59
per diluted share, for the quarter ended June 30, 2000. Excluding the
$147.0 million before tax effect of the tentative FTC settlement (see Note
10 in the Notes to Consolidated Financial Statements), net earnings for the
current quarter increased $32.6 million, or $.26 per diluted share, from
$18.0 million, or $.14 per diluted share, for the prior year quarter.
13
The following table presents comparative results of operations for
each of our business segments: (in millions)
Three Months Ended
June 30,
--------
2001 2000 Change
---- ---- ------
Consolidated:
Net revenues $ 237.9 $ 167.3 42.2%
Gross profit 121.9 73.8 65.2%
Research and development 16.8 16.5 1.8%
Selling and marketing 15.1 15.5 -2.6%
General and administrative 25.6 22.4 14.3%
Pretax earnings 79.1 (118.8)
Generic:
Net revenues 209.8 132.5 58.3%
Gross profit 109.2 51.5 112.0%
Research and development 9.3 13.8 -32.6%
Selling and marketing 3.1 3.7 -16.2%
General and administrative 7.4 5.3 39.6%
Segment profit 89.4 28.7
Brand:
Net revenues 28.1 34.8 -19.3%
Gross profit 12.7 22.3 -43.0%
Research and development 7.5 2.7 177.8%
Selling and marketing 12.0 11.8 1.7%
General and administrative 4.1 3.0 36.7%
Segment (loss) profit (11.0) 4.8
Corporate/Other:
Segment profit (loss) 0.7 (152.3)
Segment net revenues represent revenues from unrelated third parties.
Segment profit represents segment gross profit less direct research
and development, sales and marketing and general and administrative
expenses. Corporate/Other includes legal costs, goodwill amortization,
other corporate administrative expenses and other income and expense.
For the quarter ended June 30, 2000, Corporate/Other includes the
expense of $147.0 million for the tentative FTC settlement (see Note
10 in the Notes to Consolidated Financial Statements).
Effective April 1, 2001, the decision was made that the Brand Segment
assume responsibility for the sales and marketing of EX phenytoin
100mg, which were previously included and evaluated in the operating
results of the Generic Segment. Accordingly, the operating results of
the Brand Segment for the three months ended June 30, 2000, have been
revised to include the net revenues of $4.2 million and the
corresponding cost of sales of $.9 million for EX phenytoin 100mg
previously included in the Generic Segment.
14
Results of Operations
First Quarter Fiscal 2002 vs. First Quarter Fiscal 2001
Net Revenues and Gross Profit
Net revenues for the current quarter were $237.9 million, representing
a $70.6 million or 42.2% increase from the $167.3 million in net revenues
for the prior year quarter.
Generic net revenues for the current quarter were $209.8 million
compared to $132.5 million for the prior year quarter, a $77.3 million or
58.3% increase. New products launched subsequent to June 30, 2000, resulted
in increased net revenues for the current quarter of $37.6 million,
primarily buspirone HCl 15mg which contributed $33.7 million. We currently
have market exclusivity for buspirone HCl 15mg through September 2001.
After such date, we expect to experience pricing and volume pressures due
to competition. Additionally, we are currently litigating certain issues
relating to our buspirone ANDAs (see Note 10 in the Notes to Consolidated
Financial Statements).
The remaining increase in generic net revenues is primarily
attributable to the decision by the Generic Segment during the prior year
quarter to eliminate its participation in end of quarter investment buys,
resulting in significant reductions in net revenues and gross profit for
the prior year quarter. Generic volume, excluding unit dose, increased
0.883 billion doses or 53.6% from 1.647 billion for the prior year quarter
to 2.530 billion for the current quarter.
We have experienced, and expect to continue to experience, pricing and
volume pressures on nifedipine. Due to contractual arrangements, our gross
profit as a percent of net revenues will remain constant, while net
revenues and gross profit dollars will continue to decrease.
Brand net revenues for the current quarter were $28.1 million compared
to $34.8 million for the prior year quarter, a $6.7 million or 19.3%
decrease. Brand net revenues and brand gross profit for the current quarter
decreased primarily due to prior quarter buy-ins to pre-announced price
increases, the curtailment of end of quarter promotional programs,
increases in estimates for reserves and allowances and the removal of two
injection products from the product line and the corresponding write-down
of the related intangible assets.
Based on a number of sales and marketing opportunities with EX
phenytoin 100mg, which may be further enhanced with the expected approval
in fiscal 2002 of the 200mg and 300mg strengths, a decision was made
effective April 1, 2001, that the Brand Segment assume responsibility for
the sales and marketing of EX phenytoin 100mg. Such sales were previously
included and evaluated in the
15
operating results of the Generic Segment. Accordingly, the operating
results for the Brand Segment for the three months ended June 30, 2000,
have been revised to include the net revenues of $4.2 million and the
corresponding cost of sales of $.9 million for EX phenytoin 100mg
previously included in the Generic Segment. EX phenytoin 100mg net revenues
for the current quarter were $8.8 million.
Gross profit for the current quarter was $121.9 million, or 51.2% of
net revenues, compared to $73.8 million, or 44.1% of net revenues, for the
prior year quarter, a $48.1 million or 65.2% increase. Generic gross profit
for the current quarter was $109.2 million, or 52.0% of net revenues,
compared to $51.5 million, or 38.9% of net revenues, for the prior year
quarter, a $57.7 million or 112.0% increase. This increase in generic gross
profit is primarily attributable to the launch of buspirone and the prior
year decision to no longer participate in end of quarter investment buys.
Brand gross profit for the current quarter was $12.7 million, or 45.2% of
net revenues, compared to $22.3 million or 64.1% of net revenues for the
prior year quarter, a $9.6 million or 43.0% decrease. This decrease in
brand gross profit is related to those items identified above as being
attributable to the decrease in brand net revenues.
Research and Development
Research and development expenses for the current quarter were $16.8
million or 7.1% of net revenues compared to $16.5 million or 9.9% of net
revenues for the prior year quarter. The decrease of $4.5 million in
generic research and development expenses is primarily attributable to a
licensing agreement milestone payment recognized in the prior year quarter
and the timing of studies being conducted. The increase of $4.8 million in
brand research and development is primarily attributable to studies
associated with nebivolol and butenafine. We expect quarterly brand
research and development expenses to continue to fluctuate as we begin
nebivolol's clinical phase of development.
We are actively pursuing and are involved in joint development
projects in an effort to broaden our scope of capabilities to market both
generic and brand products. Many of these arrangements provide for payments
by us upon the attainment of specified milestones. While these arrangements
help to reduce our financial risk for unsuccessful projects, fulfillment of
milestones or the occurrence of other obligations may result in
fluctuations in research and development expenses.
Selling and Marketing Expenses
Selling and marketing expenses were relatively unchanged for the
current quarter at $15.1 million or 6.3% of net revenues compared to $15.5
million or 9.3% of net revenues for the prior year quarter.
16
General and Administrative Expenses
General and administrative expenses for the current quarter were $25.6
million or 10.8% of net revenues compared to $22.4 million or 13.4% of net
revenues for the prior year quarter, a $3.2 million increase. Generic
general and administrative expenses increased $2.1 million to $7.4 million
for the current quarter from $5.3 million for the prior year quarter. Brand
general and administrative expenses increased $1.1 million to $4.1 million
for the current quarter from $3.0 million for the prior year quarter.
Corporate expenses, excluding the tentative FTC settlement, were relatively
unchanged quarter to quarter. The increases in general and administrative
expenses are primarily attributable to payroll related expenses and the
relocation of the Brand Segment to Research Triangle Park, NC.
Tentative Litigation Settlement
In June 2000, we reached a tentative settlement with the FTC, States
Attorneys General and certain private parties with regard to lawsuits filed
against the Company relating to pricing issues and raw material contracts
on two of its products (see Note 10 in the Notes to Consolidated Financial
Statements).
Other Income
Other income for the current quarter increased $4.7 million to $15.4
million from $10.7 million for the prior year quarter. Income on our
limited partnership investments increased $7.2 million to $12.0 million for
the current quarter from $4.8 million for the prior year quarter. In fiscal
2001, we began the process of partially liquidating a certain limited
partnership in an effort to reduce our exposure to market fluctuations. We
expect this process to be completed by December 2001. Future performance of
this investment is uncertain. The remaining amount of other income for the
current quarter primarily represents interest income.
Liquidity, Capital Resources and Financial Condition
- ----------------------------------------------------
Our cash and cash equivalents and working capital were $183.8 million
and $639.4 million at June 30, 2001, compared to $229.2 million and $588.0
million at March 31, 2001. The primary source of operating capital used to
grow our business continues to be generated through our product sales. Cash
flows from operating activities for the quarter ended June 30, 2001, was
$57.0 million compared to $44.7 million for the prior year quarter.
17
Our investments in marketable securities increased $103.3 million to
$159.0 million at June 30, 2001, from $55.7 million at March 31, 2001. This
increase is primarily attributable to a shift from investments with
maturity terms of less than 90 days, which are classified as cash and cash
equivalents, to investments with maturities greater than 90 days but less
than one year. Investments with maturities greater than 90 days but less
than one year increased to $123.7 million at June 30, 2001, compared to
$25.9 million at March 31, 2001.
Capital expenditures continue to be purchased with the funds generated
from our operating activities. Capital expenditures for the quarter ended
June 30, 2001, were $3.2 million compared to $8.8 million for the prior
year quarter. The prior year quarter included payments for constructing a
sales and administration building in Morgantown, West Virginia, and an
addition to one of our generic manufacturing facilities in Puerto Rico.
We continue to pay quarterly cash dividends of $.04 per common share.
Dividend payments totaled $5.0 million during the quarter ended June 30,
2001.
We believe that operating activities from the sale of our
pharmaceutical products will be our principal source of cash. However, we
believe that the acquisition of new products, as well as other companies,
will play a strategic role in our growth. Consequently, we may incur
additional indebtedness to finance these acquisitions which would impact
future liquidity.
We have deposited $135.0 million relating to the tentative litigation
settlement (see Note 10 in the Notes to Consolidated Financial Statements).
We have an additional $12.0 million obligation to fund. If the tentative
settlement is not given final court approval, the outcome of continued
litigation of these cases could have a material adverse effect on our
financial position and results of operations.
Our payments for state and federal income taxes increased in the
quarter ended June 30, 2001, to $32.6 million from $5.8 million for the
quarter ended June 30, 2000. Payments in the June 30, 2000 quarter were
lower as a result of lower taxable income resulting from the litigation
settlement charge of $147.0 million.
Recent Accounting Pronouncements
In April 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, as amended, Accounting for Derivative Instruments and
Hedging Activities, issued by the Financial Accounting Standards Board
(FASB) in June 1998. SFAS No. 133 requires an entity to recognize all
derivative instruments as
18
either assets or liabilities on the balance sheet at fair value and those
changes in fair value to be recognized currently in earnings, unless
specific hedge accounting criteria are met. The adoption of SFAS No. 133
had no material impact on our results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations initiated after June 30, 2001, be accounted
for using the purchase method of accounting.
SFAS No. 142 changes the accounting for goodwill and certain other
intangible assets from an amortization method to an impairment only
approach. We will adopt the provisions of SFAS No. 142 effective April 1,
2002. We are currently in the process of evaluating the effect the adoption
of SFAS No. 142 will have on our consolidated financial position, results
of operations and cash flows when adopted. For the quarters ended June 30,
2001, and 2000, amortization expense for goodwill and certain other
intangible assets, as defined in SFAS No. 142, was $1,645,000 and
$1,766,000.
Forward-Looking Statements
The statements set forth in this Report concerning the manner in which
we intend to conduct our future operations, potential trends that may
impact future results of operations, and our beliefs or expectations about
future operations are forward-looking statements. We may be unable to
realize our plans and objectives due to various important factors,
including, but not limited to, an acceleration in the erosion of prices of
our generic pharmaceutical products, the inability to obtain timely FDA
approval for new generic or brand products, the failure to find acceptance
of our brand products in the marketplace, the continued litigiousness by
brand manufacturers designed to delay the introduction of our generic
products, the failure to receive court approval of the Tentative
Settlement, the failure to favorably litigate or resolve the remaining
cases that are not a part of the Tentative Settlement, the failure to
favorably litigate or resolve the buspirone cases or the other cases
described in Note 10 in the Notes to Consolidated Financial Statements, and
the factors described under "Forward Looking Statements" in Item 7 of our
Annual Report on Form 10-K for the fiscal year ended March 31, 2001.
19
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, 2001.
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
June 30, 2001, was $143.8 million, of which $123.7 million mature in one
year or less (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 June 30, 2001, was $15.2 million. Such investments collectively
represent 10% of the Company's total assets as of June 30, 2001, and 46% 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
$15.9 million.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
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 had agreed to indemnify these parties. The Company is a party to
other suits filed in the same court involving the Attorneys General from
all states and the District of Columbia and more than 25 putative class
actions that allege the same conduct alleged in the FTC suit, as well as
alleged violations of state antitrust and 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.
20
In July 2000, the Company reached a tentative agreement to settle the
actions brought by the FTC and the States 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 States Attorneys General, in December
2000, the Company placed into escrow $100,000,000. Settlement papers have
been executed and filed by the parties. The court has preliminarily
approved the tentative settlement. Under the court's current schedule, a
hearing with respect to final approval is scheduled for November 29, 2001.
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 has been preliminarily approved by the court,
pursuant to which the Company placed into escrow $35,000,000 in March 2001.
Under the court's current schedule, a hearing with respect to final
approval is scheduled for November 29, 2001.
In total, the Company has agreed to pay up to $147,000,000 to settle
these actions brought by the FTC, States 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 and distributors. In July 2001, the United States District
Court for the District of Columbia certified a litigation class consisting
of these direct purchasers. The Company has petitioned the United States
Court of Appeals for the District of Columbia Circuit to hear an appeal of
this certification.
The Company believes that it has meritorious defenses with respect to
the claims asserted in those anti-trust suits which are not part of the
Tentative Settlement and will vigorously defend its position. However, an
adverse result in the remaining cases, or, if the Tentative Settlement is
not given final approval by the court, the outcome of continued litigation
of these cases, could have a material adverse effect on the Company's
financial position and results of operations.
The Company filed an ANDA seeking approval to market buspirone, a
generic equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company
had filed the appropriate certifications relating to the patents then
listed in the Orange Book for this product. On November 21, 2000, a new
patent claiming the administration
21
of a metabolite of buspirone (which BMS claims also covers the
administration of buspirone itself) was issued to BMS. The subsequent
listing of this patent in the Orange Book prevented the FDA from granting
final approval for the Company's buspirone ANDA. On November 30, 2000, the
Company filed suit against the FDA and BMS in the United States District
Court for the District of Columbia. The complaint asked the court to order
the FDA to immediately grant final approval of the Company's ANDA for the
15mg buspirone product and require BMS to request withdrawal of the patent
from the Orange Book. Upon the Company's posting a bond in the amount of
$25,000,000, the court entered an order granting the Company's motion for a
preliminary injunction. Following a brief stay by the court of appeals, the
FDA granted approval for the Company's ANDA with respect to the 15mg
strength. Upon receiving FDA approval, the Company commenced marketing and
selling the product in March 2001. BMS appealed the preliminary injunction
order to both the United States Court of Appeals for the Federal Circuit
and the United States Court of Appeals for the District of Columbia
Circuit. The District of Columbia Circuit denied BMS' application and
stayed the Company's motion to dismiss pending the decision of the Federal
Circuit. The Federal Circuit heard oral arguments on July 12, 2001.
The Company is involved in three other suits related to buspirone. In
November 2000, the Company filed suit against BMS in the United States
District Court for the Northern District of West Virginia. The suit seeks a
declaratory judgement of non-infringement and/or invalidity of the BMS
patent listed in November 2000. In January 2001, BMS sued the Company for
patent infringement in the United States District Court for the District of
Vermont and also in the United States Court for the Southern District of
New York. In each of these cases, BMS asserts the Company infringes BMS'
recently issued patent and seeks to rescind FDA approval of the Company's
15mg ANDA and to block approval of the 5mg, 10mg and 30mg strengths. It is
expected that BMS will seek to recover damages equal to the profits it has
lost as a result of the Company's sales of this product. The Company
subsequently filed motions to dismiss the Vermont case and to dismiss and
transfer the New York case to the United States District Court for the
Northern District of West Virginia. While these suits are in the early
stages, the Company believes it has meritorious defenses to the claims and
intends to vigorously defend its position.
A decision unfavorable to the Company in the case on appeal or any of
the three cases involving the validity of BMS' patents could prevent the
Company from continuing its sales of buspirone and could result in
forfeiture of its bond (in the case on appeal) or other damages, any of
which could have a material adverse effect on the Company's results of
operations and/or financial position.
In February 2001, Biovail Corporation and Biovail Laboratories Inc.
(Biovail) filed suit against the Company and Pfizer Inc. (Pfizer) in United
States Federal District Court for the Eastern District of Virginia alleging
anti-
22
trust violations with respect to agreements entered into between the
Company and Pfizer regarding nifedipine. The Company filed a motion to
transfer the case to United States Federal District Court for the Northern
District of West Virginia, which was granted. While this suit is in its
early stages, the Company believes it has meritorious defenses to the
claims asserted by Biovail and intends to vigorously defend its position.
An adverse outcome could have a material adverse effect on the Company's
results of operations and/or financial position.
The Company has been named as a defendant in three separate suits
alleging anti-trust claims based on a settlement entered into by the
Company with Bayer AG, Bayer Corporation and Pfizer Inc. regarding
nifedipine: Great Lakes Health Plan Inc. filed suit in the United States
District Court for the Eastern District of Michigan, Southern Division in
May 2001; United Food and Commercial Workers Unions and Employers Midwest
Health Benefits Fund, and other named plaintiffs, filed suit in the Circuit
Court of Cook County, Illinois in July 2001; and Teamsters Local No. 35
Health Plans, and other named plaintiffs, filed suit in the United States
District Court for the Northern District of West Virginia in August 2001.
The Company believes it has meritorious defenses to these claims and
intends to vigorously defend its position. An adverse outcome in any of
these suits could have a material adverse effect on the Company's results
of operations and/or financial position.
The Company filed suit against Aventis Pharmaceuticals, Inc.,
successor in interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.;
Rhone-Poulenc Rorer Pharmaceuticals, LTD.; Rorer Pharmaceutical Products,
Inc.; Rhone-Poulenc Rorer, S.A., and their affiliates in United States
Federal District Court for the Western District of Pennsylvania on May 23,
2001. The Complaint sets forth claims of breach of contract, recision,
breach of implied covenant of good faith and fair dealing and unjust
enrichment. The facts substantiating the claims arise from agreements
entered into by the parties relating to the manufacture, distribution and
sale of Zagam(R). The defendants' answer included a counterclaim which
alleges nonpayment of royalties and failure to mitigate.
Biovail Laboratories Inc. (Biovail) has filed a demand for arbitration
against the Company with the American Arbitration Association. The dispute
relates to a supply agreement under which the Company supplied
extended-release verapamil to Biovail. The Company terminated the agreement
in March 2001. Biovail's allegations include breach of contract, breach of
implied covenant of good faith and fair dealing, and unfair competition.
While this matter is in its early stages, the Company believes it has
meritorious defenses to the claims asserted by Biovail and intends to
vigorously defend its position. An adverse outcome could have a material
adverse effect on the Company's results of operations and/or financial
position.
23
NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories Inc.
(Abbott) filed suit against the Company in United States Federal District
Court for the Western District of Pennsylvania. Plaintiffs allege the
Company's manufacture, use and sale of paclitaxel infringes certain patents
owned by NAPRO and allegedly licensed to Abbott. The Company began selling
paclitaxel on July 25, 2001. Abbott has filed an ANDA seeking approval to
sell paclitaxel. The regulatory review status of the Abbott application is
unknown to the Company. While this suit is in its early stages, the Company
believes it has meritorious defenses to the claims asserted and intends to
vigorously defend its position. An adverse outcome in this suit could have
a material adverse effect on the Company's results of operations and/or
financial position.
We are involved in various other legal proceedings that are considered
normal to our business. While it is not feasible to predict the ultimate
outcome of such other proceedings, it is the opinion of management that the
ultimate outcome of such other proceedings will not have a material adverse
effect on our results of operations or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits - None.
b.) Reports on Form 8-K - On June 20, 2001, we filed a Current Report on
Form 8-K announcing changes in senior management.
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 June 30, 2001, to be signed on its behalf by the undersigned
thereunto duly authorized. Mylan Laboratories Inc. (Registrant)
DATE 8/14/01 /S/ Milan Puskar
----------------- -----------------------
Milan Puskar
Chairman of the Board and
Chief Executive Officer
DATE 8/14/01 /s/ Gary E. Sphar
----------------- -------------------------
Gary E. Sphar
Vice President, Finance
Mylan Pharmaceuticals Inc.
(Principal financial officer and
chief accounting officer)