- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
- --------------------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 January 28, 2002
--------------------- ----------------
$.50 par value 125,861,404
<page>
MYLAN LABORATORIES INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended
December 31, 2001
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Earnings - Three and Nine
Months EndedDecember 31, 2001, and 2000 2
Consolidated Balance Sheets - December 31, 2001,
and March 31, 2001 3
Consolidated Statements of Cash Flows - Nine
Months Ended December 31, 2001, and 2000 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 29
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER
31, 2001, AND 2000 (unaudited; in
thousands, except per share amounts)
<table>
<s> <c> <c> <c> <c>
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net revenues $ 297,191 $ 223,238 $ 821,452 $ 598,048
Cost of sales 119,819 120,970 358,444 328,031
--------- --------- --------- ---------
Gross profit 177,372 102,268 463,008 270,017
Operating expenses:
Research and development 13,441 15,816 46,687 49,614
Selling and marketing 15,279 14,852 44,675 43,737
General and administrative 28,705 22,926 88,122 67,761
Tentative litigation settlement -- -- -- 147,000
--------- --------- --------- ---------
Earnings (loss) from operations 119,947 48,674 283,524 (38,095)
Equity in (loss) earnings of Somerset (1,714) 1,255 (3,490) (751)
Other income, net 4,879 8,892 22,900 31,136
--------- --------- --------- ---------
Earnings (loss) before income taxes 123,112 58,821 302,934 (7,710)
Provision for income taxes 44,936 21,176 109,974 (2,775)
--------- --------- --------- ---------
Net earnings (loss) $ 78,176 $ 37,645 $ 192,960 $ (4,935)
========= ========= ========= ==========
Earnings (loss) per common share:
Basic $ 0.62 $ 0.30 $ 1.54 $ (0.04)
========= ========= ========= ==========
Diluted $ 0.61 $ 0.30 $ 1.52 $ (0.04)
========= ========= ========= ==========
Weighted average common shares:
Basic 125,592 124,809 125,332 126,077
========= ========= ========= ==========
Diluted 127,891 126,004 127,153 127,117
========= ========= ========= ==========
Cash dividends declared per common share: $ 0.04 $ 0.04 $ 0.12 $ 0.12
========= ========= ========= ==========
</table>
See Notes to Consolidated Financial Statements
2
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, March 31,
2001 2001
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 153,423 $ 229,183
Marketable securities 432,038 55,715
Accounts receivable, net 165,443 232,599
Inventories 196,777 161,810
Deferred income tax benefit 81,184 59,474
Deposit - tentative litigation settlement 135,000 135,000
Other current assets 7,516 5,443
---------- ----------
Total current assets 1,171,381 879,224
Property, plant and equipment, net 163,460 168,396
Intangible assets, net 280,616 296,181
Investment in and advances to Somerset 23,950 27,621
Other assets 97,267 94,551
---------- ----------
Total assets $1,736,674 $1,465,973
========== ==========
Liabilities and shareholders' equity
Liabilities:
Current liabilities:
Trade accounts payable $ 38,307 $ 48,928
Income taxes payable 89,501 34,348
Current portion of long-term obligations 2,028 5,245
Cash dividends payable 5,036 5,007
Tentative litigation settlement 147,000 147,000
Other current liabilities 81,015 50,659
---------- ----------
Total current liabilities 362,887 291,187
Long-term obligations 25,239 23,345
Deferred income tax liability 21,665 18,905
---------- ----------
Total liabilities 409,791 333,437
---------- ----------
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: 131,448,878 at December 31, 2001, and
130,689,762 at March 31, 2001 65,724 65,345
Additional paid-in capital 338,084 322,987
Retained earnings 1,018,651 840,741
Accumulated other comprehensive income 6,660 2,983
---------- ----------
1,429,119 1,232,056
Less treasury stock - at cost
Shares: 5,813,033 at December 31, 2001, and
5,731,913 at March 31, 2001 102,236 99,520
---------- ----------
Total shareholders' equity 1,326,883 1,132,536
---------- ----------
Total liabilities and shareholders' equity $1,736,674 $1,465,973
========== ==========
See Notes to Consolidated Financial Statements
3
<page>
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001, AND 2000
(unaudited; in thousands)
2001 2000
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 192,960 $ (4,935)
Adjustments to reconcile net earnings (loss) to net ca
provided from operating activities:
Depreciation and amortization 34,906 30,965
(Gain) loss on disposal or sale of fixed assets (711) 363
Income tax benefit (20,930) (25,848)
Equity in loss of Somerset 3,490 751
Cash received from Somerset 181 308
Change in allowances for accounts receivable 79,055 22,704
Write-off of investments and intangibles
to net realizable value 2,482 8,270
Deposit - tentative litigation settlement -- (100,000)
Tentative litigation settlement -- 147,000
Other noncash items (12,670) (14,492)
Changes in operating assets and liabilities:
Increase in accounts receivable (11,899) (32,118)
Increase in inventories (34,102) (32,574)
(Decrease) increase in trade accounts payable (10,620) 20,074
Increase in income taxes 55,153 12,767
Other, net 27,638 (174)
---------- ----------
Net cash provided from operating activities 304,933 33,061
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,980) (19,865)
Proceeds from sale of fixed assets 4,848 82
Proceeds from sale of intangible and other assets 4,882 37,568
Proceeds from sale of marketable securities 251,239 117,360
Purchase of marketable securities (621,922) (55,755)
---------- ----------
Net cash (used in) provided from investing activities (374,933) 79,390
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations (3,342) (1,390)
Cash dividends paid (15,021) (15,151)
Purchase of common stock for treasury -- (91,456)
Proceeds from exercise of stock options 12,603 4,450
---------- ----------
Net cash used in financing activities (5,760) (103,547)
---------- ----------
Net (decrease) increase in cash (75,760) 8,904
Cash - beginning of period 229,183 203,493
---------- ----------
Cash - end of period $ 153,423 $ 212,397
========== ==========
Cash paid during the period for:
Interest $ 150 $ 198
========== ==========
Income taxes $ 72,036 $ 10,306
========== ==========
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 nine months ended
December 31, 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 when
provisions for estimates, including discounts, rebates, price adjustments,
returns, chargebacks, promotional and other potential adjustments, are
determinable. Accounts receivable are presented net of allowances relating
to these provisions, which were $197,432,000 and $118,377,000 at December
31, 2001, and March 31, 2001. During the quarter ended December 31, 2001,
we did not recognize revenue on certain shipments of one of our products
due to a unique event surrounding this particular product. The uniqueness
of this event has 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 and, thus, has resulted in
our inability to reasonably estimate the related price adjustments that may
occur. See Part I, Item 2,
5
<page>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, for further information.
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 June 2001, 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. SFAS No. 142 provides that 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 this adoption 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
$1,641,000 and $1,766,000 for the three months ended December 31, 2001, and
2000, and $4,931,000 and $5,298,000 for the nine months ended December 31,
2001, and 2000.
Also 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
December 31, 2001 Cost Gains Losses Value
----------------- ---- ----- ------ -----
Debt securities $413,354 $ 631 $ 376 $413,609
Equity securities 8,462 10,841 874 18,429
-------- -------- -------- --------
$421,816 $ 11,472 $ 1,250 $432,038
======== ======== ======== ========
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 December 31, 2001, are
as follows (in thousands):
Mature within one year $394,943
Mature in one to five years 2,836
Mature in five years and later 15,830
--------
$413,609
========
6. Balance Sheet Components
Selected balance sheet components consist of the following (in thousands):
December 31, March 31,
2001 2001
---- ----
Inventories:
Raw materials $ 76,553 $ 57,825
Work in process 25,730 23,752
Finished goods 94,494 80,233
-------- --------
$196,777 $161,810
======== ========
Other current liabilities:
Payroll and employee benefit plans $ 31,753 $ 12,542
Other 49,262 38,117
-------- --------
$ 81,015 $ 50,659
======== ========
7
<page>
7. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
December 31, March 31,
2001 2001
---- ----
Deferred compensation $22,201 $16,512
Deferred revenue 2,923 5,845
Other 115 988
------- -------
$25,239 $23,345
======= =======
8. Earnings Per Common Share (EPS)
Basic EPS is computed by dividing net earnings available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed by dividing net earnings
available to common shareholders by the weighted average number of common
shares outstanding during the period adjusted for the dilutive effect of
options granted under our stock option plans. The effect of dilutive stock
options on the weighted average number of common shares outstanding was
2,299,000 and 1,195,000 for the three months ended December 31, 2001, and
2000, and 1,821,000 and 1,040,000 for the nine months ended December 31,
2001, and 2000.
9. Comprehensive Income
Total comprehensive income is as follows (in thousands):
<s> <c> <c> <c> <c>
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Net earnings (loss) $ 78,176 $ 37,645 $ 192,960 $ (4,935)
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
marketable securities 1,540 (1,653) 3,887 (1,895)
Adjustment for (gains) losses
included in net earnings (loss) (10) 44 (210) (704)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 79,706 $ 36,036 $ 196,637 $ (7,534)
========== ========== ========== ==========
Accumulated other comprehensive income, as reflected on the balance sheets,
is comprised solely of the net unrealized gains on marketable securities,
net of deferred income taxes.
8
10. Segment Reporting
The following table presents comparative operating results for our
operating segments (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Generic:
Net revenues $ 261,334 $ 174,214 $ 723,973 $ 475,596
Segment profit 139,229 49,057 356,485 125,511
Brand:
Net revenues $ 35,857 $ 49,024 $ 97,479 $ 122,452
Segment profit (loss) 106 8,113 (16,508) 19,635
Corporate/Other, net $ (16,223) $ 1,651 $ (37,043) $(152,856)
Consolidated:
Net revenues $ 297,191 $ 223,238 $ 821,452 $ 598,048
Pretax earnings (loss) 123,112 58,821 302,934 (7,710)
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 nine months ended December
31, 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 nine months ended December 31, 2000, have been revised
to include the net revenues of $7,644,000 and $18,279,000 and the
corresponding costs of sales of $1,398,000 and $3,558,000,
respectively, 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):
December 31, March 31,
2001 2001
---- ----
Generic $ 607,641 $ 625,926
Brand 214,216 250,977
Corporate/Other 914,817 589,070
---------- ----------
Consolidated $1,736,674 $1,465,973
========== ==========
9
11. Contingencies
Product Litigation
Paclitaxel
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.
Verapamil ER
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. The arbitration hearing is
scheduled to be held in September 2002. An adverse outcome could have a
material adverse effect on the Company's results of operations and
financial position.
Zagam(R)
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
10
manufacture, distribution and sale of Zagam(R). The defendants' answer
includes a counterclaim which alleges nonpayment of royalties and failure
to mitigate.
Nifedipine
In February 2001, Biovail Corporation and Biovail Laboratories Inc.
(Biovail) filed suit against the Company and Pfizer Inc. (Pfizer) in United
States 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 other suits alleging
anti-trust claims based on the settlement entered into by the Company with
Bayer AG, Bayer Corporation and Pfizer 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.
Buspirone
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 for this product then listed in the
U.S. Food and Drug Administration (FDA) publication entitled Approved Drug
Products with Therapeutic Equivalence Evaluations, popularly known as the
Orange Book. 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
11
brief stay by the United States Court of Appeals for the Federal Circuit,
the FDA granted approval of the Company's ANDA with respect to the 15mg
strength. Upon receiving FDA approval, the Company began marketing and
selling the product in March 2001. The Company has also been selling the
30mg buspirone product since August 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 Court of Appeals denied BMS' application
and stayed the Company's motion to dismiss pending the decision of the
Federal Circuit Court of Appeals. 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 a cognizable claim against BMS under
the Declaratory Judgment Act to challenge the listing of BMS' patent, which
the Federal Circuit viewed as an improper effort to enforce the Federal
Food, Drug and Cosmetic Act. The Federal Circuit 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 filed a petition with the
Federal Circuit asking that the court reconsider its holding. The petition
was denied on January 9, 2002.
On January 16, 2002, the Company filed a motion in U.S. District Court for
the District of Columbia seeking a preliminary injunction which, if
granted, would require that the FDA refuse to list the BMS patent should
BMS submit it for re-listing in the Orange Book.
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 District Court for the Southern
District of New York. In each of these cases, BMS asserts that 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 ordered these cases, along with another patent
case and
12
numerous anti-trust suits filed against BMS, be consolidated in the United
States District Court for the Southern District of New York.
BMS has filed a motion to dismiss the Company's anti-trust counterclaims
and the Company has filed a motion for summary judgment of
non-infringement, or in the alternative, invalidity. The FTC filed a brief
in support of the Company's opposition to BMS' motion to dismiss the
anti-trust counterclaims. 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.
Denial of the Company's motion for preliminary injunction against the FDA,
or adverse resolution of 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.
Lorazepam and clorazepate
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 products, lorazepam and clorazepate.
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.
13
<page>
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. A hearing with respect to final approval
was held on November 29, 2001. To date, no decision has been issued by the
court.
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 and four
have filed a separate lawsuit alleging violations of Illinois, Minnesota
and Massachusetts law. A hearing with respect to final approval of the
settlement was held on November 29, 2001. To date, no decision has been
issued by the court.
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 Circuit 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 had until November 1, 2001, to exercise their right to exclude
themselves from this litigation.
14
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 those suits filed by those parties who excluded
themselves from 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.
Other Litigation
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.
15
<page>
The following table presents comparative results of operations for our operating
segments (in millions):
<s> <c> <c> <c> <c> <c> <c>
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2001 2000 Change 2001 2000 Change
---- ---- ------ ---- ---- ------
Consolidated:
Net revenues $ 297.2 $ 223.2 33.2% $ 821.5 $ 598.0 37.4%
Gross profit 177.4 102.3 73.4% 463.0 270.0 71.5%
Research and development 13.4 15.8 -15.2% 46.7 49.6 -5.8%
Selling and marketing 15.3 14.9 2.7% 44.7 43.7 2.3%
General and administrative 28.7 22.9 25.3% 88.1 67.8 29.9%
Pretax earnings (loss) 123.1 58.8 302.9 (7.7)
Generic:
Net revenues $ 261.3 $ 174.2 50.0% $ 724.0 $ 475.6 52.2%
Gross profit 155.9 71.1 119.3% 410.1 191.7 113.9%
Research and development 8.1 12.0 -32.5% 24.8 38.6 -35.8%
Selling and marketing 3.2 3.4 -5.9% 9.5 10.2 -6.9%
General and administrative 5.4 6.7 -19.4% 19.4 17.4 11.5%
Segment profit 139.2 49.1 356.4 125.5
Brand:
Net revenues $ 35.9 $ 49.0 -26.7% $ 97.5 $ 122.4 -20.3%
Gross profit 21.5 31.2 -31.1% 52.9 78.3 -32.4%
Research and development 5.3 3.8 39.5% 21.9 11.0 99.1%
Selling and marketing 12.1 11.5 5.2% 35.2 33.5 5.1%
General and administrative 4.0 7.7 -48.1% 12.3 14.1 -12.8%
Segment profit (loss) 0.1 8.1 (16.5) 19.6
Corporate/Other $ (16.2) $ 1.6 $ (37.0) $ (152.8)
</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 nine months ended December 31, 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 nine months ended
December 31, 2000, have been revised to include the net revenues of
$7.6 million and $18.3 million and the corresponding costs of sales of
$1.4 million and $3.6 million, respectively, for EX phenytoin 100mg
previously included in the Generic Segment.
Results of Operations
- ----------------------
Three months ended December 31, 2001, compared to three months ended December
31, 2000
Net earnings for the quarter ended December 31, 2001, increased $40.6 million or
$0.31 per diluted share to $78.2 million or $0.61 per diluted share from $37.6
million or $0.30 per diluted share for the same prior year quarter.
16
Net Revenues and Gross Profit
Net revenues for the current quarter were $297.2 million compared to $223.2
million for the prior year quarter, a $74.0 million or 33.2% increase. Gross
profit for the current quarter increased 73.4% to $177.4 million from $102.3
million for the prior year quarter.
Generic net revenues increased 50.0% or $87.1 million to $261.3 million for the
current quarter from $174.2 million for the prior year quarter. This increase in
generic net revenues, as well as the increase in generic gross profit, is
primarily attributed to new products launched subsequent to December 31, 2000,
as well as an overall increase in our base generic product line. Buspirone HCl
15mg and 30mg contributed net revenues of $50.9 million for the current quarter.
Our 180-day market exclusivity periods for buspirone HCl 15mg and 30mg expired
in late September 2001 and late January 2002, respectively. Upon the expiration
of the exclusivity periods, we expected to experience pricing and volume
pressures due to competition. However, due to pediatric labeling issues
surrounding the brand product Buspar(R), the U.S. Food and Drug Administration
(FDA) has withheld additional approvals for generics. Legislation signed into
law in January 2002 provided the FDA with further clarity and direction relating
to these issues. Even with such legislation, the FDA has continued to withhold
additional approvals, possibly due to the significant number of legal suits
surrounding the product. Upon the approval of additional generics, we expect to
experience the pricing and volume pressures mentioned above. 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.
Generic volume shipped, excluding unit dose, increased 25.4% to 2.776 billion
doses from 2.214 billion for the prior year quarter. Base generics were the
primary contributor to the quarter-over-quarter increase in volume shipped.
Brand net revenues decreased 26.7% or $13.1 million to $35.9 million for the
current quarter from $49.0 million for the prior year quarter. The decrease in
brand net revenues, as well as gross profit, is primarily attributed to customer
buying patterns and the curtailment of end of quarter promotional programs.
17
Operating Expenses
Research and development expenses (R&D) decreased 15.2% or $2.4 million to $13.4
million (4.5% of net revenues) for the current quarter from $15.8 million (7.1%
of net revenues) for the prior year quarter. The $3.9 million decrease in
generic R&D is primarily due to product license fees recognized in the prior
year quarter, as well as the timing of projects currently in development. The
increase of $1.5 million in brand R&D is primarily attributed to the timing of
clinical studies and related expenses.
Selling and marketing expenses were relatively unchanged quarter-over-quarter at
$15.3 million (5.1% of net revenues) for the current quarter compared to $14.9
million (6.7% of net revenues) for the prior year quarter.
General and administrative expenses (G&A) were $28.7 million (9.7% of net
revenues) compared to $22.9 million (10.3% of net revenues) for the prior year
quarter, a 25.3% or $5.8 million increase. The decreases in brand, primarily
attributed to a $3.6 million write-down of Zagam intangibles in the prior year
quarter, and generic G&A were offset by an increase in corporate expenses. The
increase in corporate G&A is primarily attributed to increased payroll related
expenses, principally associated with retirement benefits for executives and
management employees, and increased legal expenses.
Other Income
Other income, net of nonoperating expenses, decreased 44.9% or $4.0 million to
$4.9 million for the current quarter from $8.9 million for the prior year
quarter. This decrease is primarily attributed to a favorable $9.2 million
litigation settlement recognized in the prior year quarter partially offset by
an increase in income for the current quarter of $5.7 million related to our
investment in certain limited partnerships.
Nine months ended December 31, 2001, compared to nine months ended December 31,
2000
Net earnings for the nine months ended December 31, 2001, were $193.0 million or
$1.52 per diluted share compared to a net loss of $4.9 million or $0.04 per
diluted share. Excluding the impact of the tentative FTC settlement, net
earnings for the prior year's nine months were $89.1 million or $0.70 per
diluted share, representing an increase of 116.6% or $103.9 million
year-over-year. See Note 11 to the Consolidated Financial Statements regarding
the tentative FTC settlement.
18
Net Revenues and Gross Profit
Net revenues for the current nine months increased 37.4% or $223.5 million to
$821.5 million from $598.0 million for the prior year's nine months. Gross
profit for the current nine months was $463.0 million (56.4% of net revenues)
compared to $270.0 million (45.2% of net revenues) for the prior year's nine
months, a 71.5% or $193.0 million increase.
Generic net revenues increased 52.2% or $248.4 million to $724.0 million for the
current nine months from $475.6 million for the prior year's nine months. This
increase in generic net revenues, as well as the increase in generic gross
profit, is primarily attributed to new products launched subsequent to December
31, 2000, as well as an overall increase in our base generic product line.
Buspirone HCl 15mg and 30mg contributed net revenues of $121.4 million for the
current nine months.
Brand net revenues decreased 20.3% or $24.9 million to $97.5 million for the
current nine months from $122.4 million for the prior year's nine months. The
decrease in brand net revenues, as well as gross profit, is primarily attributed
to customer buying patterns and the curtailment of end of quarter promotional
programs.
Operating Expenses
Research and development expenses (R&D) for the current nine months were $46.7
million (5.7% of net revenues) compared to $49.6 million (8.3% of net revenues)
for the prior year's nine months. The $13.8 million decrease in generic R&D,
primarily attributed to decreased product license fees and studies and related
expenses, was partially offset by the $10.9 million increase in brand R&D,
primarily attributed to nebivolol.
Selling and marketing expenses increased slightly to $44.7 million (5.4% of net
revenues) for the current nine months from $43.7 million (7.3% of net revenues)
for the prior year's nine months.
General and administrative expenses for the current nine months increased 29.9%
or $20.3 million to $88.1 million (10.7% of net revenues) from $67.8 million
(11.3% of net revenues) for the prior year's nine months. This increase is
primarily attributed to increases in payroll related expenses, principally
associated with retirement benefits for executives and management employees, and
legal expenses.
19
<page>
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).
Other Income
Other income, net of nonoperating expenses, decreased 26.4% or $8.2 million to
$22.9 million for the current nine months from $31.1 million for the prior
year's nine months. This decrease is primarily attributed to the recognition of
a favorable $9.2 million litigation settlement in the prior year's nine months.
Liquidity, Capital Resources and Financial Condition
- ----------------------------------------------------
Our cash and cash equivalents and working capital were $153.4 million and $808.5
million at December 31, 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
our operating activities for the first nine months of fiscal 2002 were $304.9
million compared to $33.1 million for the same prior year period.
Our investments in marketable securities increased $376.3 million to $432.0
million at December 31, 2001, from $55.7 million at March 31, 2001. This
increase is primarily attributed to our purchases of investments with maturities
greater than 90 days compared to investments with maturity terms of less than 90
days, which are classified as cash and cash equivalents. Such investments
increased $365.7 million to $391.6 million at December 31, 2001, compared to
$25.9 million at March 31, 2001.
We liquidated $9.5 million of our investment in a limited partnership during the
first nine months of fiscal 2002 and $45.8 million during the first nine months
of fiscal 2001. We plan to continue to liquidate this investment in fiscal 2003.
Capital expenditures continue to be principally funded by our operating
activities. Capital expenditures for the nine months ended December 31, 2001,
were $14.0 million compared to $19.9 million for the prior year's nine 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 building in Sugar Land, Texas. Also,
during the quarter ended December 31, 2001, we completed the sale of our liquid
pharmaceutical manufacturing facility and warehouse in Largo, Florida.
20
<page>
We made payments on long-term obligations of $3.3 million during the nine months
ended December 31, 2001, compared to $1.4 million during the same time period of
fiscal 2001. A final payment of $2.0 million related to a product license
agreement was made in January 2002.
We continue to pay quarterly cash dividends of $.04 per common share. Dividend
payments totaled $15.0 million during the first nine months of fiscal 2002. We
received $12.6 million from the exercise of stock options in our stock option
plans for the nine months ended December 31, 2001, compared to $4.5 million for
the same period ended December 31, 2000.
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 necessary, we have entered into an agreement
with a commercial bank to establish a revolving line of credit up to $50.0
million. As of December 31, 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 acquisitions
which would impact future liquidity.
We agreed to pay up to $147.0 million relating to the tentative FTC settlement
(see Part I, Item 1, Contingencies, of this report). This obligation was
recorded in June 2000, and to date, we have deposited into escrow a total of
$135.0 million. Payment is pending for the remaining $12.0 million obligation.
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 $61.7 million during
the nine months ended December 31, 2001, to $72.0 million compared to $10.3
million for the nine months ended December 31, 2000. Payments during the first
nine 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
21
are met. The adoption of SFAS No. 133 had no material impact on our
results of operations or financial position.
In June 2001, 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. SFAS No. 142 provides that 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 this adoption
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 $1,641,000 and $1,766,000 for the three months
ended December 31, 2001, and 2000, and $4,931,000 and $5,298,000 for the nine
months ended December 31, 2001, and 2000.
Also 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
22
<page>
failure to favorably litigate or resolve the remaining cases that are not a part
of the Tentative Settlement and with the parties that have elected not to
participate in the elective settlement, the failure to favorably litigate or
resolve the buspirone cases or the other cases described in Note 11 in the Notes
to Consolidated Financial Statements included in Part I, Item 1 of this Report
on Form 10-Q, 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.
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.
At December 31, 2001, the fair market value of our marketable securities,
including those held indirectly through certain pooled asset funds and included
as part of other assets on the balance sheet, were $466.2 million. The fair
market value of our debt securities held at this date was $413.6 million, with
the remaining $52.6 million invested in public common stock equities and mutual
funds. Our investments in debt securities that mature within one year, which are
generally less sensitive to interest rate fluctuations than is the case with
longer-term debt instruments, were $394.9 million, or 84.7% of the total market
value of marketable securities held at December 31, 2001. Collectively, our
marketable securities represent 26.8% of our total assets and 75.2% of total
marketable securities and cash and cash equivalents. Assuming an instantaneous
10.0% decrease in the market value of all of our marketable securities, the
change in the fair market value of these securities would be $46.6 million.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
Product Litigation
Paclitaxel
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.
23
<page>
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.
Verapamil ER
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. The arbitration hearing is scheduled to be held in September 2002. An
adverse outcome could have a material adverse effect on the Company's results of
operations and financial position.
Zagam(R)
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 includes a
counterclaim which alleges nonpayment of royalties and failure to mitigate.
Nifedipine
In February 2001, Biovail Corporation and Biovail Laboratories Inc.
(Biovail) filed suit against the Company and Pfizer Inc. (Pfizer) in United
States 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
24
<page>
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 other suits alleging
anti-trust claims based on the settlement entered into by the Company with Bayer
AG, Bayer Corporation and Pfizer 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.
Buspirone
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 for this product then listed in the U.S. Food and Drug
Administration (FDA) publication entitled Approved Drug Products with
Therapeutic Equivalence Evaluations, popularly known as the Orange Book. 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 United States Court of
Appeals for the Federal Circuit, the FDA granted approval of the Company's ANDA
with respect to the 15mg strength. Upon receiving FDA approval, the Company
began marketing and selling the product in March 2001. The Company has also been
selling the 30mg buspirone product since August 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 Court of Appeals denied BMS'
application and stayed the Company's motion to dismiss pending the decision of
the Federal Circuit Court of Appeals. 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 a cognizable claim against BMS under the
Declaratory Judgment Act to challenge the listing of BMS' patent, which the
Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug
and Cosmetic Act. The Federal Circuit did not address the lower court's
25
determination that the BMS patent does not claim buspirone or a method of
administration of the drug. The Company filed a petition with the Federal
Circuit asking that the court reconsider its holding. The petition was denied on
January 9, 2002.
On January 16, 2002, the Company filed a motion in U.S. District Court for the
District of Columbia seeking a preliminary injunction which, if granted, would
require that the FDA refuse to list the BMS patent should BMS submit it for
re-listing in the Orange Book.
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
District Court for the Southern District of New York. In each of these cases,
BMS asserts that 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 ordered these cases, along with another patent case and numerous
anti-trust suits filed against BMS, be consolidated in the United States
District Court for the Southern District of New York.
BMS has filed a motion to dismiss the Company's anti-trust counterclaims and the
Company has filed a motion for summary judgment of non-infringement, or in the
alternative, invalidity. The FTC filed a brief in support of the Company's
opposition to BMS' motion to dismiss the anti-trust counterclaims. 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.
Denial of the Company's motion for preliminary injunction against the FDA, or
adverse resolution of 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.
26
Lorazepam and clorazepate
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
products, lorazepam and clorazepate.
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. A hearing with respect to final approval was held on November 29,
2001. To date, no decision has been issued by the court.
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
27
exclude themselves from the settlement. Seventeen such parties exercised this
right and four have filed a separate lawsuit alleging violations of Illinois,
Minnesota and Massachusetts law. A hearing with respect to final approval of the
settlement was held on November 29, 2001. To date, no decision has been issued
by the court.
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 Circuit 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 had 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 those suits filed by those parties who excluded themselves from
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.
Other Litigation
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.
28
<page>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Supplemental Health Insurance Program For Certain Officers of Mylan
Laboratories Inc., effective December 15, 2001, filed herewith.
10.2 Amended and Restated Transition and Succession Agreement dated
November 7, 2001, in the form entered into with Milan Puskar, Patricia
Sunseri, C.B. Todd, Roderick P. Jackson, Louis J. DeBone and John P.
O'Donnell, filed herewith.
b. Reports on Form 8-K - None.
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 December 31, 2001, to be signed on its behalf by the undersigned
thereunto duly authorized.
Mylan Laboratories Inc.
(Registrant)
DATE 2/1/2002 /s/ Milan Puskar
------------- ----------------------------
Milan Puskar
Chairman of the Board and
Chief Executive Officer
DATE 2/1/2002 /s/ Gary E. Sphar
------------- ----------------------------
Gary E.Sphar
Vice President, Finance
Mylan Pharmaceuticals Inc.
(Principal financial officer and
chief accounting officer)