[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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)
(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 October 30, 2001
--------------------- ----------------
$.50 par value 125,582,061
<page>
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended
September 30, 2001
INDEX
Page
Number
---------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Earnings - Three and
Six Months Ended September 30, 2001, and 2000 2
Consolidated Balance Sheets - September 30, 2001,
and March 31, 2001 3
Consolidated Statements of Cash Flows - Six
Months Ended September 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 14
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
<table>
<caption>
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER
30, 2001, AND 2000 (unaudited; in
thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net revenues $286,328 $207,555 $524,261 $374,810
Cost of sales 122,551 113,559 238,625 207,061
-------- -------- -------- -------
Gross profit 163,777 93,996 285,636 167,749
Operating expenses:
Research and development 16,463 17,263 33,246 33,798
Selling and marketing 14,254 13,399 29,396 28,885
General and administrative 33,822 22,461 59,417 44,835
Tentative litigation settlement - - - 147,000
-------- -------- -------- -------
Earnings (loss) from operations 99,238 40,873 163,577 (86,769)
Equity in loss of Somerset (1,134) (103) (1,776) (2,006)
Other income, net 2,580 11,588 18,021 22,244
------ ------- ------- ------
Earnings (loss) before income taxes 100,684 52,358 179,822 (66,531)
Provision for income taxes 36,548 18,849 65,038 (23,951)
------- ------- ------- --------
Net earnings (loss) $ 64,136 $ 33,509 $114,784 $(42,580)
========= ========= ========= =========
Earnings (loss) per common share:
Basic $ 0.51 $ 0.27 $ 0.92 $(0.34)
======= ======= ======= =======
Diluted $ 0.50 $ 0.27 $ 0.90 $(0.33)
======= ======= ======= =======
Weighted average common shares:
Basic 125,372 124,720 125,202 126,711
======== ======== ======== =======
Diluted 127,338 125,654 126,856 127,674
======== ======== ======== =======
Cash dividends declared per common
share: $ 0.04 $ 0.04 $ 0.08 $ 0.08
======= ======= ======= ======
</table>
See Notes to Consolidated Financial Statements
2
<table>
<caption>
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<s> <c> <c>
September 30, March 31,
2001 2001
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents $200,733 $229,183
Marketable securities 257,070 55,715
Accounts receivable, net 209,337 232,599
Inventories 182,373 161,810
Deferred income tax benefit 76,070 59,474
Deposit - tentative litigation settlement 135,000 135,000
Other current assets 6,306 5,443
------ -----
Total current assets 1,066,889 879,224
Property, plant and equipment, net 164,102 168,396
Intangible assets, net 287,625 296,181
Investment in and advances to Somerset 25,702 27,621
Other assets 103,489 94,551
-------- ------
Total assets $1,647,807 $1,465,973
=========== ==========
Liabilities and shareholders' equity
Liabilities:
Current liabilities:
Trade accounts payable $ 52,383 $ 48,928
Income taxes payable 70,501 34,348
Current portion of long-term obligations 3,260 5,245
Cash dividends payable 5,029 5,007
Tentative litigation settlement 147,000 147,000
Other current liabilities 78,072 50,659
------- ------
Total current liabilities 356,245 291,187
Long-term obligations 26,689 23,345
Deferred income tax liability 18,360 18,905
------- ------
Total liabilities 401,294 333,437
-------- -------
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: 131,262,870 at September 30, 2001, and
130,689,762 at March 31, 2001 65,631 65,345
Additional paid-in capital 331,558 322,987
Retained earnings 945,500 840,741
Accumulated other comprehensive income 5,130 2,983
------ -----
1,347,819 1,232,056
Less treasury stock - at cost
Shares: 5,787,906 at September 30, 2001, and
5,731,913 at March 31, 2001 101,306 99,520
-------- ------
Total shareholders' equity 1,246,513 1,132,536
---------- ---------
Total liabilities and shareholders' equity $1,647,807 $1,465,973
=========== ==========
</table>
3
<page>
<table>
<caption>
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001, AND 2000
(unaudited; in thousands)
<s> <c> <c>
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $114,784 $(42,580)
Adjustments to reconcile net earnings (loss) to net cash
provided from operating activities:
Depreciation and amortization 23,459 19,928
(Gain)loss on disposal or sale of fixed assets (647) 237
Income tax benefit (18,297) (24,934)
Equity in loss of Somerset 1,776 2,006
Cash received from Somerset 143 228
Change in allowances for accounts receivable 34,672 9,288
Write-off of investments and intangibles
to net realizable value 1,510 4,670
Tentative litigation settlement - 147,000
Other noncash items (7,239) (16,777)
Changes in operating assets and liabilities:
Accounts receivable (11,410) 12,561
Inventories (21,214) (52,653)
Trade accounts payable 3,455 5,961
Income taxes 36,153 (7,858)
Other assets and liabilities 25,905 (4,990)
------- -------
Net cash provided from operating activities 183,050 52,087
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,621) (15,764)
Proceeds from sale of fixed assets 1,644 96
(Purchase of) proceeds from intangible and other assets (3,369) 16,182
Proceeds from sale of marketable securities 126,813 100,313
Purchase of marketable securities (324,840) (37,865)
--------- --------
Net cash (used in) provided from investing activities (206,373) 62,962
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations (2,090) (1,190)
Cash dividends paid (10,002) (10,161)
Repurchase of common stock - (91,456)
Proceeds from exercise of stock options 6,965 3,604
------ -----
Net cash used in financing activities (5,127) (99,203)
------- --------
Net (decrease) increase in cash (28,450) 15,846
Cash - beginning of period 229,183 203,493
-------- -------
Cash - end of period $200,733 $219,339
========= ========
Cash paid during the period for:
Interest $ 105 $ 196
====== =====
Income taxes $ 47,180 $8,842
========= ======
</table>
See Notes to Consolidated Financial Statements
4
<page>
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 and six months ended
September 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 for product sales upon shipments to customers,
provided that discounts, rebates, price adjustments, returns, chargebacks,
promotional and other potential adjustments can be reasonably estimated.
During the quarter ended September 30, 2001, we did not recognize revenue
on certain shipments of one of our products because of a unique event which
caused significant uncertainties associated with the marketing of this
product and the ultimate date competitors will be approved by the FDA for
entry into the market, resulting in our inability to reasonably estimate
the related price adjustments that may occur (see Part I, Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further information).
5
<page>
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 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, effective for fiscal years
beginning after December 15, 2001. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting.
Under the provisions of SFAS No. 142, intangible assets with indefinite
lives and goodwill will no longer be amortized, but will be subject to at
least annual impairment tests. Intangible assets with finite lives will
continue to be amortized over their useful lives. We will adopt the
provisions of SFAS No. 142 effective April 1, 2002. We are currently
evaluating the impact the adoption of SFAS No. 142 will have on our
consolidated financial position and results of operations. The amortization
expense for goodwill and certain other intangible assets, as defined in
SFAS No. 142, was $1,645,000 and $1,766,000 for the three months ended
September 30, 2001, and 2000, and $3,290,000 and $3,532,000 for the six
months ended September 30, 2001, and 2000.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets.
This statement is effective for fiscal years beginning after June 15, 2002.
We are currently evaluating the impact, if any, the adoption of this
statement will have on our financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived
assets. This statement is effective for fiscal years beginning after
December 15, 2001. We are currently evaluating the impact the adoption of
this statement will have on our financial position and results of
operations.
6
<page>
5. Marketable Securities
Marketable securities consist of the following (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
September 30, 2001 Cost Gains Losses Value
------------------ ---- ----- ------ -----
Debt securities $ 241,370 $ 848 $ 100 $ 242,118
Equity securities 7,790 8,280 1,118 14,952
--------- ------- -------- ---------
$ 249,160 $ 9,128 $ 1,218 $ 257,070
========= ======= ======== =========
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 September 30, 2001, are
as follows (in thousands):
Mature in one year or less $218,978
Mature after one year through five years 3,318
Mature after five years 19,822
--------
$242,118
--------
6. Balance Sheet Components
Selected balance sheet components consist of the following at September 30,
2001, and March 31, 2001 (in thousands):
September 30, March 31,
2001 2001
---- ----
Inventories:
Raw materials $ 68,008 $ 57,825
Work in process 26,482 23,752
Finished goods 87,883 80,233
--------- --------
$ 182,373 $161,810
========= ========
Other current liabilities:
Payroll and employee benefit plans $ 23,006 $ 12,542
Medicaid 16,358 8,216
Royalties 10,735 8,775
Other 27,973 21,126
--------- --------
$ 78,072 $ 50,659
========= ========
7
<page>
7. Long-Term Obligations
Long-term obligations include accruals for deferred compensation pursuant
to agreements with certain key employees and directors of approximately
$22,149,000 and $16,512,000 at September 30, 2001, and March 31, 2001.
Under these agreements, benefits are to be paid over periods of ten years
to life commencing at retirement.
We have recorded $3,897,000 and $5,845,000 in deferred revenue relating to
a license and supply agreement as of September 30, 2001, and March 31,
2001. Revenue recognized relating to this agreement for the three and six
months ended September 30, 2001, was $974,000 and $1,948,000.
Additionally, we have other obligations of $643,000 and $987,000 as of
September 30, 2001, and March 31, 2001, primarily related to a product
sales agreement.
8. 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 our
stock option plans. The effect of dilutive stock options on the weighted
average common shares outstanding was 1,966,000 and 934,000 for the three
months ended September 30, 2001, and 2000, and 1,655,000 and 963,000 for
the six months ended September 30, 2001, and 2000.
9. Comprehensive Income
Total comprehensive income is as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net earnings (loss) $64,136 $33,509 $114,784 $(42,580)
Other comprehensive (loss) income,
net of tax:
Unrealized (loss) gain on
marketable securities (1,035) 1,437 2,348 (243)
Adjustment for gains included
in net earnings (loss) (67) (66) (201) (748)
------ ------- ------- -------
Comprehensive income (loss) $63,034 $34,880 $116,931 $(43,571)
======== ======== ========= =========
8
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.
10. Segment Reporting
The following table presents comparative operating results for our
operating segments (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Generic:
Net revenues $ 252,817 $ 168,869 $ 462,639 $ 301,382
Segment profit 127,851 47,793 217,256 76,454
Brand:
Net revenues $33,511 $38,686 $61,622 $73,428
Segment (loss) profit (5,666) 6,724 (16,614) 11,522
Corporate/Other, net:
Segment loss $ (21,501) $(2,159) $ (20,820) $(154,507)
Consolidated:
Net revenues $ 286,328 $ 207,555 $ 524,261 $ 374,810
Pretax earnings (loss) 100,684 52,358 179,822 (66,531)
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 six months ended September 30, 2000,
Corporate includes the expense of $147,000,000 for the
tentative FTC settlement (see Note 11).
Effective April 1, 2001, the decision was made that the
Brand Segment would 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 and six months ended September
30, 2000, have been revised to include the net revenues of
$6,417,000 and $10,635,000 and the corresponding costs of
sales of $1,266,000 and $2,160,000, respectively, for EX
phenytoin 100mg previously included in the Generic Segment.
9
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):
September 30, March 31,
2001 2001
---- ----
Generic $ 647,600 $ 625,926
Brand 220,625 250,977
Corporate/Other 779,582 589,070
-------- -------
Consolidated $ 1,647,807 $ 1,465,973
============ ===========
11. Contingencies
In December 1998, the Federal Trade Commission (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 (States Attorneys General) 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.
10
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.
Members of the settlement class, with respect to third party reimbursers,
had until August 31, 2001, to exercise their right to exclude themselves
from the settlement. Seventeen such parties exercised this right. 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 filed a petition with the United
States Court of Appeals for the District of Columbia seeking appellate
review of the district court's order. The appellate court has ordered that
the issues raised in the Company's petition be fully briefed and argued
before the court. Members of the class certified by the district court have
until November 1, 2001, to exercise their right to exclude themselves from
this litigation.
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.
11
The Company filed an Abbreviated New Drug Application (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 U.S. Food and Drug
Administration (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 United States Court of Appeals
for the Federal Circuit, 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.
On October 12, 2001, the Federal Circuit overturned the lower court ruling
and held that the Company did not have standing to challenge the listing of
BMS' patent, which the court viewed as an improper effort to enforce the
Federal Food, Drug and Cosmetic Act. The appellate court did not address
the lower court's determination that the BMS patent does not claim
buspirone or a method of administration of the drug. The Company is
reviewing the appellate opinion and has 45 days in which to ask for
reconsideration by the appellate court. The appellate court's ruling will
not become final prior to the expiration of the 45-day period.
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'
patent and seeks to rescind FDA approval of the Company's 15mg and 30mg
strengths and to block approval of the 5mg and 10mg 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. The Judicial Panel on Multi-District
Litigation recently ordered these cases, along with another patent case and
numerous anti-trust plaintiffs filed against BMS, be consolidated in the
United States District Court for the Southern District of New York. 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.
12
A final decision unfavorable to the Company in the case on appeal or any of
the three cases involving the non-infringement, validity, and
enforceability 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 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 financial position.
The Company has been named as a defendant in five 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. 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 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.
13
Biovail Laboratories Inc. (Biovail Inc.) 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 Inc. The Company terminated the
agreement in March 2001. Biovail Inc.'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 Inc.
and intends to vigorously defend its position. An adverse outcome could
have a material adverse effect on the Company's results of operations and
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
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 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 and the related notes included in Item 1 of this Quarterly Report on
Form 10-Q.
14
The following table presents comparative results of operations for each of
our business segments (in millions):
<table>
<caption>
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
<s> <c> <c> <c> <c> <c> <c>
2001 2000 Change 2001 2000 Change
---- ---- ------ ---- ---- ------
Consolidated:
Net revenues $286.3 $207.6 37.9% $524.3 $ 374.8 39.9%
Gross profit 163.8 94.0 74.3% 285.6 167.7 70.3%
Research and development 16.5 17.3 -4.6% 33.2 33.8 -1.8%
Selling and marketing 14.3 13.4 6.7% 29.4 28.9 1.7%
General and administrative 33.8 22.5 50.2% 59.4 44.8 32.6%
Pretax earnings (loss) 100.7 52.4 179.8 (66.5)
Generic:
Net revenues $252.8 $168.9 49.7% $462.7 $ 301.4 53.5%
Gross profit 145.1 69.1 110.0% 254.2 120.6 110.8%
Research and development 7.4 12.8 -42.2% 16.7 26.6 -37.2%
Selling and marketing 3.2 3.2 0.0% 6.3 6.9 -8.7%
General and administrative 6.6 5.4 22.2% 14.0 10.7 30.8%
Segment profit 127.9 47.8 217.3 76.5
Brand:
Net revenues $ 33.5 $ 38.7 -13.4% $ 61.6 $73.4 -16.1%
Gross profit 18.7 24.9 -24.9% 31.4 47.1 -33.3%
Research and development 9.1 4.5 102.2% 16.5 7.2 129.2%
Selling and marketing 11.1 10.2 8.8% 23.1 22.0 5.0%
General and administrative 4.3 3.5 22.9% 8.4 6.4 31.3%
Segment (loss) profit (5.7) 6.8 (16.6) 11.5
Corporate/Other:
Segment loss $(21.5) $ (2.2) $(20.9) $(154.5)
</table>
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 six months ended September 30, 2000,
Corporate includes the expense of $147.0 million for the
tentative FTC settlement (see Note 11 to the Consolidated
Financial Statements).
Effective April 1, 2001, the decision was made that the
Brand Segment would 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 and six months ended September
30, 2000, have been revised to include the net revenues of
$6.4 million and $10.6 million and the corresponding costs
of sales of $1.3 million and $2.2 million, respectively,
for EX phenytoin 100mg previously included in the Generic
Segment.
15
Results of Operations
---------------------
Three months ended September 30, 2001, compared to three months ended September
30, 2000
Net earnings for the three months ended September 30, 2001, were $64.1 million,
or $.50 per diluted share, compared to $33.5 million, or $.27 per diluted share,
for the same prior year quarter, an increase of $30.6 million or $.23 per
diluted share.
Net Revenues and Gross Profit
Net revenues for the quarter ended September 30, 2001, were $286.3 million
compared to $207.6 million for the prior year quarter, a $78.7 million or 37.9%
increase. Gross profit for the current quarter was $163.8 million, or 57.2% of
net revenues, compared to $94.0 million, or 45.3% of net revenues, for the prior
year quarter, a $69.8 million or 74.3% increase.
Generic net revenues increased $83.9 million or 49.7% to $252.8 million for the
current quarter from $168.9 million for the prior year quarter. This increase,
as well as the increase in gross profit, is primarily due to new products
launched subsequent to September 30, 2000, and an overall increase in other
generic product sales. Product mix, along with previous price increases, also
contributed to the increased net revenues and gross profit. Buspirone net
revenues for the current quarter were $36.8 million.
Our 180-day market exclusivity for buspirone HCl 15mg expired in late September
2001, at which time we expected to experience pricing and volume pressures due
to competition. However, due to pediatric labeling issues surrounding the
branded product Buspar(R), the U.S. Food and Drug Administration (FDA) is
currently withholding additional approvals for generics. Legislation is
currently in the United States Congress that may provide clarity and direction
relating to these issues. As a result, no other manufacturers have been approved
to market this product. Upon resolution of the pediatric labeling issues and
approval of additional generics, we expect to experience the pricing and volume
pressures mentioned above. The 180-day market exclusivity for our buspirone HCl
30mg will expire in early January 2002. See Note 11 to the Consolidated
Financial Statements regarding the current litigation of certain issues relating
to our buspirone ANDAs.
Because of the significant uncertainties regarding the amount of potential price
adjustments that may ultimately occur in connection with these unique market
conditions for our buspirone HCl 15mg product, we are unable to reasonably
estimate the amount of such adjustments and have not recognized revenue on
certain product shipments.
16
We continue to expect 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 are expected to
continue to decrease.
Generic volume, excluding unit dose, increased 16.4% to 2.530 billion doses from
2.173 billion doses for the prior year quarter.
Brand net revenues for the current quarter were $33.5 million compared to $38.7
million for the prior year quarter, a $5.2 million or 13.4% decrease. This
decrease is primarily due to the curtailment of end of quarter promotional
programs in the current period.
Research and Development
Research and development expenses for the quarter ended September 30, 2001, were
$16.5 million, or 5.8% of net revenues, compared to $17.3 million, or 8.3% of
net revenues for the prior year quarter.
Generic expenses decreased primarily due to the timing of studies being
conducted and the inclusion of certain milestone payments in the prior year
quarter. The increase in brand expenses is primarily related to expenses
associated with nebivolol.
We are actively pursuing and are involved in joint development projects in an
effort to complement and broaden both our generic and brand product lines. Many
of these arrangements require us to provide payments upon the attainment of
specified milestones. While these arrangements help to reduce our financial risk
for unsuccessful projects, fulfillment of milestones or the occurrence of other
obligations may result in fluctuations in research and development expenses.
Selling and Marketing
Selling and marketing expenses for the current quarter were $14.3 million, or
5.0% of net revenues, compared to $13.4 million, or 6.5% of net revenues, for
the prior year quarter. This increase is primarily due to increased brand
payroll and payroll related expenses.
17
General and Administrative
General and administrative expenses for the current quarter were $33.8 million,
or 11.8% of net revenues, compared to $22.5 million, or 10.8% of net revenues,
for the prior year quarter, an $11.3 million increase.
This increase is primarily due to increased payroll related expenses in the
Corporate Segment, principally expense associated with retirement benefits for
executives and management employees. Additionally, the increase in brand general
and administrative expenses is primarily due to increased relocation expenses in
the current quarter which were partially offset by the prior year quarter
write-down of intangible assets relating to Zagam(R).
Other Income
Other income for the current quarter was $2.6 million compared to $11.6 million
for the prior year quarter, a $9.0 million decrease. For the current quarter,
results on our investments in limited partnerships were approximately breakeven
compared to income of $11.2 million for the prior year quarter. The prior year
quarter included write-downs of certain investments.
Six months ended September 30, 2001, compared to six months ended September 30,
2000
Net earnings for the six months ended September 30, 2001, were $114.8 million,
or $.90 per diluted share, compared to a net loss of $42.6 million, or $.33 per
diluted share, for the same prior year period. Excluding the tentative FTC
settlement, net earnings for the six months ended September 30, 2000, were $51.5
million, or $.40 per diluted share, representing an increase for the current six
months of $63.3 million, or $.50 per diluted share. See Note 11 to the
Consolidated Financial Statements regarding the tentative FTC settlement.
Net Revenues and Gross Profit
Net revenues for the six months ended September 30, 2001, were $524.3 million, a
$149.5 million or 39.9% increase from the $374.8 million in net revenues for the
prior year's six months. Gross profit for the current six months was $285.6
million, or 54.5% of net revenues, compared to $167.7 million, or 44.7% of net
revenues, for the prior year's six months, a $117.9 million or 70.3% increase.
Generic net revenues for the current six months were $462.7 million compared to
$301.4 million for the prior year's six months, a $161.3 million or 53.5%
increase. This increase, as well as the increase in gross profit, is primarily
due to new products launched subsequent to September 30, 2000, as well as an
overall increase in generic product sales, product mix and prices. The
elimination of prior year's investment buy programs also contributed to the
increase. Buspirone net revenues for the current six months were $70.5 million.
Generic volume, excluding unit dose, for the current six months was 5.139
billion doses compared to 3.864 billion doses for the prior year's six months, a
1.275 billion or 33.0% increase.
18
Brand net revenues for the current six months were $61.6 million compared to
$73.4 million for the prior year's six months, a $11.8 million or 16.1%
decrease. This decrease in brand net revenues, as well as the decrease in gross
profit, is primarily due to fourth quarter fiscal 2001 buy-ins to pre-announced
price increases, the curtailment of end of quarter promotional programs and
higher sales allowances.
Research and Development
Research and development expenses for the current six months were $33.2 million,
or 6.3% of net revenues, compared to $33.8 million, or 9.0% of net revenues, for
the prior year's six months. Decreased generic expenses, primarily due to the
timing of studies being conducted and the inclusion of certain milestone
payments in the prior year period, were partially offset by increased brand
expenses, primarily related to nebivolol.
Selling and Marketing
Selling and marketing expenses for the current six months were $29.4 million, or
5.6% of net revenues, compared to $28.9 million, or 7.7% of net revenues, for
the prior year's six months. Generic selling and marketing expenses were
relatively unchanged for the comparable periods, while brand expenses increased
slightly due to increased advertising and promotional expenses.
General and Administrative
General and administrative expenses for the current six months were $59.4
million, or 11.3% of net revenues, compared to $44.8 million, or 12.0% of net
revenues, for the prior year's six months. This increase is primarily due to
increased Corporate payroll related expense, principally associated with
retirement benefits for executives and management employees, and increased legal
expense.
Tentative Litigation Settlement
In the quarter ended June 30, 2000, we recorded 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 our products (see Note 11 to the Consolidated Financial
Statements).
19
Other Income
Other income for the current six months was $18.0 million compared to $22.2
million for the prior year's six months, a $4.2 million decrease. This decrease
is primarily due to income recognized on our investments in limited partnerships
for the current six months of $12.0 million, down from $16.0 million for the
prior year's six months.
Liquidity, Capital Resources and Financial Condition
----------------------------------------------------
Our cash and cash equivalents and working capital were $200.7 million and $710.6
million at September 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 current six months of fiscal 2002 were $183.1
million versus $52.1 million for the same prior year period.
Our investments in marketable securities increased $201.4 million to $257.1
million at September 30, 2001, from $55.7 million at March 31, 2001. This
increase is primarily attributed to both an increase in cash available to
invest, as well as 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. Such investments
increased to $217.9 million at September 30, 2001, compared to $25.9 million at
March 31, 2001. Additionally, we plan to continue to substantially liquidate our
investment in a limited partnership fund, included in other assets, throughout
the fiscal year.
Capital expenditures continue to be principally funded by our operating
activities. Capital expenditures for the six months ended September 30, 2001,
were $6.6 million compared to $15.8 million for the prior year's six months. The
prior year period 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. During the quarter ended June 30, 2001,
we sold an administration facility in Sugar Land, Texas. We currently have a
contract to sell a liquid pharmaceutical manufacturing facility, a warehouse,
and related assets in Largo, Florida.
We continue to pay quarterly cash dividends of $.04 per common share. Dividend
payments totaled $10.0 million during the first six months of fiscal year 2002.
20
We believe that operating activities from the sale of our pharmaceutical
products will be our principal source of cash. However, to provide us with
additional operating leverage if needed, we have entered into an agreement with
a commercial bank to establish a revolving line of credit up to $50.0 million.
As of September 30, 2001, we did not have any outstanding borrowings under this
line of credit. Additionally, 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 potential
acquisitions which would impact future liquidity and most likely subject us to
various debt covenants.
We have deposited $135.0 million relating to the tentative FTC settlement (see
Part II, Item 1, Legal Proceedings, of this form). 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 $38.4 million during
the six months ended September 30, 2001, to $47.2 million compared to $8.8
million for the six months ended September 30, 2000. Payments during the first
six months of fiscal 2001 were lower as a result of lower taxable income
resulting from the tentative FTC settlement.
Recent Accounting Pronouncements
--------------------------------
In April 2001, we adopted Statement of Financial Accounting Standards (SFAS) No.
133, as amended, Accounting for Derivative Instruments and Hedging Activities,
issued by the Financial Accounting Standards Board (FASB) in June 1998. SFAS No.
133 requires an entity to recognize all derivative instruments as either assets
or liabilities on the balance sheet at fair value and those changes in fair
value to be recognized currently in earnings, unless specific hedge accounting
criteria are met. The adoption of SFAS No. 133 had no material impact on our
results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001, be accounted for using the purchase method of
accounting.
21
Under the provisions of SFAS No. 142, intangible assets with indefinite lives
and goodwill will no longer be amortized, but will be subject to at least annual
impairment tests. Intangible assets with finite lives will continue to be
amortized over their useful lives. We will adopt the provisions of SFAS No. 142
effective April 1, 2002. We are currently evaluating the impact the adoption of
SFAS No. 142 will have on our consolidated financial position and results of
operations. The amortization expense for goodwill and certain other intangible
assets, as defined in SFAS No. 142, was $1,645,000 and $1,766,000 for the three
months ended September 30, 2001, and 2000, and $3,290,000 and $3,532,000 for the
six months ended September 30, 2001, and 2000.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement establishes standards for accounting for obligations
associated with the retirement of tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. We are currently
evaluating the impact, if any, the adoption of this statement will have on our
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. This statement
is effective for fiscal years beginning after December 15, 2001. We are
currently evaluating the impact the adoption of this statement will have on our
financial position and results of operations.
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 or the claims of
the parties that have elected not to participate in this elective settlement,
the failure to favorably litigate or resolve the buspirone cases or the other
cases described in Note 11 to the 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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The information required by Item 3 has been disclosed in Item 7A of our Annual
Report on Form 10-K for the fiscal year ended March 31, 2001. There has been no
material change in the disclosure regarding market risk, except as described
below.
Our marketable securities and cash and cash equivalents of $457.8 million
represent 28% of our total assets. The fair market value of our debt and equity
securities held at September 30, 2001, was $257.1 million, of which $242.1
million is invested in debt securities and the remaining $15.0 million is
invested in public common stock equities and mutual funds. Our investments in
debt securities that mature in one year or less, which are generally less
sensitive to interest rate fluctuations than is the case with longer-term debt
instruments, were $219.0 million, or 85% of the total market value of marketable
securities at September 30, 2001. Collectively, our marketable securities
represent 16% of our total assets. Assuming an instantaneous 10% decrease in the
market value of all of our marketable securities, the change in the fair market
value of these securities would be $25.7 million.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
-------------------------
In December 1998, the Federal Trade Commission (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 (States Attorneys General) 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.
23
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. Members of the settlement class, with respect
to third party reimbursers, had until August 31, 2001, to exercise their right
to exclude themselves from the settlement. Seventeen such parties exercised this
right. 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 filed a petition with the United States Court of Appeals for the
District of Columbia seeking appellate review of the district court's order. The
appellate court has ordered that the issues raised in the Company's petition be
fully briefed and argued before the court. Members of the class certified by the
district court have until November 1, 2001, to exercise their right to exclude
themselves from this litigation.
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.
24
The Company filed an Abbreviated New Drug Application (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 U.S. Food
and Drug Administration (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 United States
Court of Appeals for the Federal Circuit, 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.
On October 12, 2001, the Federal Circuit overturned the lower court ruling and
held that the Company did not have standing to challenge the listing of BMS'
patent, which the court viewed as an improper effort to enforce the Federal
Food, Drug and Cosmetic Act. The appellate court did not address the lower
court's determination that the BMS patent does not claim buspirone or a method
of administration of the drug. The Company is reviewing the appellate opinion
and has 45 days in which to ask for reconsideration by the appellate court. The
appellate court's ruling will not become final prior to the expiration of the
45-day period.
25
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' patent and seeks to rescind FDA approval of the
Company's 15mg and 30mg strengths and to block approval of the 5mg and 10mg
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. The Judicial Panel on Multi-District
Litigation recently ordered these cases, along with another patent case and
numerous anti-trust plaintiffs filed against BMS, be consolidated in the United
States District Court for the Southern District of New York. 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 final decision unfavorable to the Company in the case on appeal or any of the
three cases involving the non-infringement, validity, and enforceability 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 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 financial position.
The Company has been named as a defendant in five 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. 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 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.
26
Biovail Laboratories Inc. (Biovail Inc.) 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 Inc. The Company terminated the agreement in March 2001.
Biovail Inc.'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 Inc. and intends to vigorously defend its
position. An adverse outcome could have a material adverse effect on the
Company's results of operations and 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 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.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
The following provides a summary of votes cast for the proposals on which our
shareholders voted at our Annual Meeting of Shareholders held on July 26, 2001:
Proposal No. 1 - Election of Nine Directors
Nominee For Withheld
------- --- --------
Milan Puskar 82,299,930 30,373,453
Dana G. Barnett 108,005,226 4,668,156
Leslie B. Daniels 107,996,357 4,677,025
Laurence S. DeLynn 107,595,968 5,077,413
John C. Gaisford, MD 107,558,407 5,114,974
Douglas J. Leech 105,249,294 7,424,085
Patricia A. Sunseri 82,278,830 30,394,553
C.B. Todd 108,023,000 4,650,382
Stuart A. Williams 107,203,648 5,469,735
Proposal No. 2 - Approval of an Executive Bonus Plan
For Against Abstain
--- ------- -------
104,844,137 7,014,884 814,339
Proposal No. 3 - Approval of the appointment of Deloitte & Touche LLP as
independent auditors
For Against Abstain
--- ------- -------
111,201,871 1,123,755 347,751
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Salary Continuation Plan with Milan Puskar dated
January 27, 1995, and Patricia Sunseri dated March
14, 1995, as amended to date, filed herewith.
b. Reports on Form 8-K - None.
28
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 quarterly
period ended September 30, 2001, to be signed on its behalf by the undersigned
thereunto duly authorized.
Mylan Laboratories Inc.
(Registrant)
DATE 11/1/01 /s/ Milan Puskar
-------------------- ------------------------------
Milan Puskar
Chairman of the Board and
Chief Executive Officer
DATE 11/1/01 /s/ Gary E. Sphar
-------------------- ------------------------------
Gary E. Sphar
Vice President, Finance
Mylan Pharmaceuticals Inc.
(Principal financial officer and
chief accounting officer)
29