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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11397
ICN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628076
- ------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Hyland Avenue
Costa Mesa, California 92626
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(Address of principal executive offices)
(Zip Code)
(714) 545-0100
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(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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
The number of outstanding shares of the registrant's Common Stock, $.01 par
value, as of May 10, 2001 was 80,897,984.
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ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets - March 31, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Income - Three months ended March 31, 2001 and 2000 4
Consolidated Condensed Statements of Comprehensive Income -
Three months ended March 31, 2001 and 2000 5
Consolidated Condensed Statements of Cash Flows - Three months ended March 31, 2001 and 2000 6
Management's Statement Regarding Unaudited Financial Statements 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantatative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2001 and December 31, 2000
(unaudited, in thousands, except per share data)
March 31, December 31,
2001 2000
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 168,939 $ 155,205
Restricted cash 275 380
Accounts receivable, net 194,322 225,639
Inventories, net 159,650 170,263
Prepaid expenses and other current assets 15,793 13,929
-------------- --------------
Total current assets 538,979 565,416
Property, plant and equipment, net 379,119 367,229
Deferred income taxes, net 74,727 75,037
Other assets 38,175 32,300
Goodwill and intangibles, net 436,100 437,090
-------------- --------------
$ 1,467,100 $ 1,477,072
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 45,126 $ 61,741
Accrued liabilities 99,558 91,447
Notes payable and current portion of long-term debt 824 907
Income taxes payable 8,166 4,682
-------------- --------------
Total current liabilities 153,674 158,777
Long-term debt, less current portion 510,643 510,781
Deferred income and other liabilities 35,144 40,988
Minority interest 9,589 9,332
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 200,000 shares authorized; 80,532 (March 31, 2001)
and 80,197 (December 31, 2000) shares outstanding (after deducting shares
in treasury of 814 and 814, respectively) 805 802
Additional capital 974,687 973,157
Accumulated deficit (120,857) (130,087)
Accumulated other comprehensive loss (96,585) (86,678)
-------------- --------------
Total stockholders' equity 758,050 757,194
-------------- --------------
$ 1,467,100 $ 1,477,072
============== ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
For the three months ended March 31, 2001 and 2000
(unaudited, in thousands, except per share data)
Three Months Ended
March 31,
2001 2000
---------------- --------------
Revenues:
Product sales $ 171,419 $ 159,340
Royalties 27,550 33,000
---------------- --------------
Total revenues 198,969 192,340
---------------- --------------
Costs and expenses:
Cost of product sales 69,774 60,766
Selling, general and administrative expenses 73,419 67,435
Research and development costs 6,372 4,001
Amortization of goodwill and intangibles 8,206 7,573
---------------- --------------
Total expenses 157,771 139,775
---------------- --------------
Income from operations 41,198 52,565
Translation and exchange losses, net 400 1,591
Interest income (2,240) (2,695)
Interest expense 13,017 15,221
---------------- --------------
Income before provision for income taxes
and minority interest 30,021 38,448
Provision for income taxes 9,263 11,111
Minority interest (264) (62)
---------------- --------------
Net income $ 21,022 $ 27,399
================ ==============
Basic earnings per share $ 0.26 $ 0.35
================ =============
Shares used in per share computation 80,392 78,975
================ ==============
Diluted earnings per share $ 0.26 $ 0.34
================ ==============
Shares used in per share computation 82,304 81,622
================ ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2001 and 2000
(unaudited, in thousands)
Three Months Ended
March 31,
2001 2000
---------------- --------------
Net income $ 21,022 $ 27,399
Other comprehensive income:
Foreign currency translation adjustments (9,907) (6,358)
---------------- --------------
Comprehensive income $ 11,115 $ 21,041
================ ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2001 and 2000
(unaudited, in thousands)
Three Months Ended
March 31,
2001 2000
---------------- ---------------
Cash flows from operating activities:
Net income $ 21,022 $ 27,399
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,064 15,885
Provision for losses on accounts receivable 152 584
Provision for inventory obsolescence 474 1,449
Translation and exchange losses, net 400 1,591
Loss on sale of assets 177 169
Other non-cash losses 583 583
Deferred income taxes 644 (775)
Minority interest (264) (62)
Change in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable 32,162 6,931
Inventories 8,204 (6,189)
Prepaid expenses and other assets (11,670) (4,039)
Trade payables and accrued liabilities (13,915) 784
Income taxes payable 3,647 7,095
Other liabilities (4,793) 1,576
---------------- ---------------
Net cash provided by operating activities 54,887 52,981
---------------- ---------------
Cash flows from investing activities:
Capital expenditures (21,810) (5,881)
Proceeds from sale of assets 315 37
Decrease in restricted cash 105 71
Acquisition of license rights, product lines and businesses (14,445) (4,712)
---------------- --------------
Net cash used in investing activities (35,835) (10,485)
---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 160 --
Proceeds from issuance of notes payable 22 2,729
Payments on long-term debt (696) (79)
Payments on notes payable -- (2,789)
Proceeds from exercise of stock options 1,284 929
Dividends paid (5,801) (5,580)
---------------- --------------
Net cash used in financing activities (5,031) (4,790)
---------------- --------------
Effect of exchange rate changes on cash and cash equivalents (287) (45)
---------------- --------------
Net increase in cash and cash equivalents 13,734 37,661
Cash and cash equivalents at beginning of period 155,205 177,577
---------------- --------------
Cash and cash equivalents at end of period $ 168,939 $ 215,238
================ ==============
The accompanying notes are an integral part of these consolidated condensed financial statements.
MANAGEMENT'S STATEMENT REGARDING UNAUDITED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared on the basis of
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of the results to be
expected for a full year. Although the Company believes that all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of the interim periods presented are included and that the
disclosures are adequate to make the information presented not misleading, these
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Forms 10-K and 10-K/A for the year ended December 31,
2000.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated condensed financial
statements include the accounts of ICN Pharmaceuticals, Inc. and Subsidiaries
(the "Company") and all of its majority-owned subsidiaries. Investments in 20%
through 50% owned affiliated companies are included under the equity method
where the Company exercises significant influence over operating and financial
affairs. Investments in less than 20% owned companies are recorded at the lower
of cost or fair value. All significant intercompany account balances and
transactions have been eliminated.
Effective November 26, 1998, the Company's equity ownership of ICN Yugoslavia
was effectively reduced from 75% to 35% based upon a decision by the Yugoslavia
Ministry of Economic and Property Transformation. Additionally, representatives
of the Company and ICN Yugoslavia's management have limited access to the
premises and representation as to the management of ICN Yugoslavia. As a result,
the Company had and continues to have no effective control over the operating
and financial affairs of ICN Yugoslavia. Accordingly, the Company has
deconsolidated the financial statements of ICN Yugoslavia as of November 26,
1998, and reduced the carrying value of its investment to fair value, estimated
to be zero. The Company accounts for its ongoing investment in ICN Yugoslavia
under the cost method. The Company did not recognize any income or losses from
ICN Yugoslavia in the quarters ended March 31, 2000 and 2001.
Comprehensive Income: The balance of accumulated other comprehensive loss at
March 31, 2001 and December 31, 2000 consists of accumulated foreign currency
translation adjustments. Other comprehensive loss has not been recorded net of
any tax provision or benefit as the Company does not expect to realize any
significant tax benefit or expense from this item.
Per Share Information: In January 2001, the Company's Board of Directors
declared a fourth quarter 2000 cash dividend of $0.0725 per share, which was
paid in January 2001. In February 2001, the Company's Board of Directors
declared a first quarter cash dividend of $.075 per share, payable on April 25,
2001, to stockholders of record on April 11, 2001.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current period presentation, with no effect on previously reported net
income or stockholders' equity.
2. Acquisitions
On January 1, 2001, the Company acquired certain assets from Medical Alliance,
Inc., a provider of office based surgical services, for $14,445,000 in cash. The
acquisition was accounted for as a purchase and is not material to the financial
position or results of operations of the Company.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended
March 31,
2001 2000
--------- ----------
Income:
Net income $ 21,022 $ 27,399
--------- ----------
Numerator for basic earnings per share--
income available to common stockholders 21,022 27,399
Effect of dilutive securities:
Other dilutive securities (3) (2)
--------- ----------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $ 21,019 $ 27,397
========= ==========
Shares:
Denominator for basic earnings per share--
weighted-average shares outstanding $ 80,392 $ 78,975
Effect of dilutive securities:
Employee stock options 1,891 2,386
Other dilutive securities 21 261
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Dilutive potential common shares 1,912 2,647
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Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 82,304 81,622
========= ==========
Basic earnings per share $ 0.26 $ 0.35
========= ==========
Diluted earnings per share $ 0.26 $ 0.34
========= ==========
4. Detail of Certain Accounts
March 31, December 31,
(in thousands) 2001 2000
---------------- --------------
Accounts receivable, net:
Trade accounts receivable $ 161,631 $ 190,386
Royalties receivable 32,615 39,741
Other receivables 14,584 15,372
---------------- --------------
208,830 245,499
Allowance for doubtful accounts (14,508) (19,860)
---------------- --------------
$ 194,322 $ 225,639
================ ==============
Inventories, net:
Raw materials and supplies $ 54,073 $ 61,623
Work-in-process 23,592 22,701
Finished goods 100,382 103,932
---------------- -----------
178,047 188,256
Allowance for inventory obsolescence (18,397) (17,993)
---------------- --------------
$ 159,650 $ 170,263
================ ==============
Property, plant and equipment, net:
Property, plant and equipment, at cost $ 486,902 $ 471,386
Accumulated depreciation and amortization (107,783) (104,157)
---------------- --------------
$ 379,119 $ 367,229
================ ==============
5. Related Party Transactions
In January 2001, the Company made a loan to Mr. Adam Jerney, Chief
Operating Officer and President of the Company, of $1,197,864 as part of a
program adopted by the Board of Directors of the Company to encourage directors
and officers of the Company to exercise stock options (the "Stock Option
Program"). The loan is secured by 148,537 shares of the Company's Common Stock
and is due in payments through January 2003. As of March 31, 2001, the loan is
included in the accompanying consolidated condensed balance sheet as a reduction
of stockholders' equity. In April 2001, the Company made a loan to Mr. Milan
Panic, Chairman of the Board and Chief Executive Officer of the Company, of
$2,731,519 as part of the Stock Option Program. The loan is secured by 286,879
shares of the Company's Common Stock and is due in April 2004. These loans bear
interest at a rate of 5.61% per annum in the case of Mr. Jerney and 4.63% per
annum in the case of Mr. Panic, compounded annually. Interest is payable
annually. These loans are non-recourse with respect to principal and full
recourse to the obligor with respect to interest.
6. Commitments and Contingencies
On August 11, 1999, the United States Securities and Exchange Commission
filed a complaint in the United States District Court for the Central District
of California captioned Securities and Exchange Commission v. ICN
Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and David C. Watt,
Civil Action No. SACV 99-1016 DOC (ANx) (the "SEC Complaint"). The SEC Complaint
alleges that the Company and the individual named defendants made untrue
statements of material fact or omitted to state material facts necessary in
order to make the statements made, in the light of the circumstances under which
they were made, not misleading and engaged in acts, practices, and courses of
business which operated as a fraud and deceit upon other persons in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The SEC Complaint concerns the status and disposition of the
Company's 1994 New Drug Application for Virazole as a monotherapy treatment for
Hepatitis C (the "NDA"). The SEC Complaint seeks injunctive relief, unspecified
civil penalties, and an order barring Mr. Panic from acting as an officer or
director of any publicly-traded company. A pre-trial schedule has been set which
requires the submission of summary judgment motions in late 2002, the end of
discovery by March 17, 2003, and the commencement of trial on May 6, 2003. The
Company and the SEC are engaged in discussions in an effort to determine whether
the litigation can be resolved by settlement agreement.
Beginning in 1996, the Company received subpoenas from a Grand Jury in the
United States District Court for the Central District of California requesting
the production of documents covering a broad range of matters over various time
periods. The Company understood that the Company, Mr. Panic, two current senior
executive officers, a former senior officer, a current employee, and a former
employee of the Company were targets of the investigation. The Company also
understood that a senior executive officer and a director were subjects of the
investigation. The United States Attorney for the Central District of California
(the "Office") advised counsel for the Company that the areas of its
investigation included disclosures made and not made concerning the 1994
Hepatitis C monotherapy NDA to the public and other third parties; stock sales
for the benefit of Mr. Panic following receipt on November 28, 1994 of a letter
from the FDA informing the Company that the 1994 Hepatitis C monotherapy NDA had
been found not approvable; possible violations of the economic embargo imposed
by the United States upon the Federal Republic of Yugoslavia, based upon alleged
sales by the Company and Mr. Panic of stock belonging to Company employees; and,
with respect to Mr. Panic, personal disposition of assets of entities associated
with Yugoslavia, including possible misstatements and/or omissions in federal
tax filings. The Company has cooperated, and continues to cooperate, in the
Grand Jury investigation. A number of current and former officers and employees
of the Company were interviewed by the government in connection with the
investigation. The Office had issued subpoenas requiring various current and
former officers and employees of the Company to testify before the Grand Jury.
Certain current and former officers and employees testified before the Grand
Jury beginning in July 1998.
On March 15, 2001, the Company was notified by the Office that a decision
had been made to decline prosecution of all of the individual targets and
subjects of the Grand Jury investigation. At the same time, the Company was also
notified that the United States Attorney had authorized the Office to seek an
indictment of the Company based upon alleged false and misleading
misrepresentations concerning the 1994 hepatitis C monotherapy NDA. The Company
and the Office are engaged in discussions in an effort to determine whether the
matter can be settled by plea bargain.
In connection with the Grand Jury investigation and SEC litigation, the
Company recorded a reserve in the fourth quarter of 2000 of $9,250,000 to cover
the potential combined settlement liability and all other related costs. There
can, of course, be no assurance that the Grand Jury investigation will be
settled by plea agreement or that the SEC litigation will be settled by mutual
agreement or what the amount of any settlements may ultimately be. In the event
that a settlement of either matter is not reached, the Company will vigorously
defend any litigation.
The Company is a party to other pending lawsuits or subject to a number of
threatened lawsuits. While the ultimate outcome of pending and threatened
lawsuits and the Grand Jury investigation cannot be predicted with certainty,
and an unfavorable outcome could have a negative impact on the Company, at this
time in the opinion of management, the ultimate resolution of these matters will
not have a material effect on the Company's consolidated financial position,
results of operations or liquidity.
7. Business Segments
The Company's six reportable pharmaceutical segments have been combined
into two geographical groups: ICN Americas (comprised of the Company's
pharmaceutical operations in North America and Latin America) and ICN
International (comprised of the Company's pharmaceutical operations in Western
Europe, Eastern Europe and Asia, Africa and Australia).
Royalty revenues were previously included in the North America
Pharmaceuticals segment in 2000. Due to the proposed restructuring plan, the
Company now evaluates the performance of its North America Pharmaceuticals
segment in a manner consistent with how the Company will be organized subsequent
to the restructuring. All amounts for 2000 have been restated to conform with
the current year presentation.
The following table sets forth the amounts of segment revenues and
operating income of the Company for the three months ended March 31, 2001 and
2000 (in thousands):
Revenues 2001 2000
- -------- ------------ -----------
Product sales
Pharmaceuticals
ICN Americas
North America $ 42,283 $ 29,801
Latin America 26,092 29,227
------------ -----------
Total ICN Americas 68,375 59,028
------------ -----------
ICN International
Western Europe 52,533 46,757
Russia 24,399 26,570
Asia, Africa and Australia 10,638 11,399
------------ -----------
Total ICN International 87,570 84,726
------------ -----------
Total pharmaceuticals 155,945 143,754
Biomedicals 15,474 15,586
------------ -----------
Total product sales 171,419 159,340
Royalties 27,550 33,000
------------ -----------
Consolidated revenues $ 198,969 $ 192,340
============ ===========
Operating Income (Loss)
- ----------------------
Pharmaceuticals
ICN Americas
North America $ 18,310 $ 14,519
Latin America 8,155 8,907
------------ -----------
Total ICN Americas 26,465 23,426
------------ -----------
ICN International
Western Europe 4,322 6,255
Russia (2,175) 1,525
Asia, Africa and Australia 1,261 1,253
------------ -----------
Total ICN International 3,408 9,033
Biomedicals 2,675 2,279
Royalties 27,550 33,000
------------ -----------
Consolidated segment operating income 60,098 67,738
Corporate expenses 18,900 15,173
Interest income (2,240) (2,695)
Interest expense 13,017 15,221
Translation and exchange losses, net 400 1,591
------------ -----------
Income before income taxes and minority interest $ 30,021 $ 38,448
============ ===========
The following table sets forth the segment total assets of the Company
as of March 31, 2001 and December 31, 2000 (in thousands):
Total Assets
2001 2000
----------------- ------------------
Pharmaceuticals
ICN Americas
North America $ 526,254 $ 518,033
Latin America 132,825 127,031
----------------- ------------------
Total ICN Americas 659,079 645,064
----------------- ------------------
ICN International
Western Europe 266,531 271,914
Russia 163,054 169,032
Asia, Africa and Australia 69,041 82,206
----------------- ------------------
Total ICN International 498,626 523,152
----------------- ------------------
Total pharmaceuticals 1,157,705 1,168,216
Biomedicals 58,506 61,938
Corporate 250,889 246,918
----------------- ------------------
Total $ 1,467,100 $ 1,477,072
================= ==================
8. Supplemental Cash Flow Information
Cash paid for income taxes for the three months ended March 31, 2001 and
2000 was $5,432,000 and $4,787,000, respectively. Cash paid for interest for the
three months ended March 31, 2001 and 2000 was $9,038,000 and $13,020,000
respectively.
Other non-cash losses for the three months ended March 31, 2001 and 2000,
included $583,000 and $583,000, respectively, for compensation expense related
to the vesting of restricted stock under the Company's long-term incentive plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain financial information for the Company's business segments is set
forth below. This discussion should be read in conjunction with the consolidated
condensed financial statements of the Company included elsewhere in this
document. For additional financial information by business segment, see Note 7
of Notes to Consolidated Condensed Financial Statements included elsewhere in
this Quarterly Report.
Revenues: Three Months Ended
March 31,
(in thousands) 2001 2000
---------------- --------------
Product sales
Pharmaceuticals
ICN Americas
North America (1) $ 42,283 $ 29,801
Latin America (principally Mexico) 26,092 29,227
---------------- --------------
Total ICN Americas 68,375 59,028
---------------- --------------
ICN International
Western Europe 52,533 46,757
Russia 24,399 26,570
Asia, Africa, Australia 10,638 11,399
---------------- --------------
Total ICN International 87,570 84,726
---------------- --------------
Total pharmaceuticals 155,945 143,754
Biomedicals 15,474 15,586
---------------- --------------
Total product sales 171,419 159,340
Royalty revenues (1) 27,550 33,000
---------------- --------------
Total revenues $ 198,969 $ 192,340
================ ==============
Cost of product sales $ 69,774 $ 60,766
Gross profit margin on product sales 59% 62%
(1) Royalty revenues were previously included in the North America
Pharmaceuticals segment in 2000. All amounts for 2000 have been restated to
conform with the current year presentation.
Royalty Revenues: Royalty revenues represent amounts earned under the Company's
Exclusive License and Supply Agreement (the "License Agreement") with
Schering-Plough Corporation ("Schering-Plough"). Under the License Agreement,
Schering-Plough licensed all oral forms of ribavirin for the treatment of
chronic hepatitis C ("HCV") in combination with Schering-Plough's alpha
interferon (the "Combination Therapy"). In 1998, Schering-Plough received
approval from the United States Food and Drug Administration ("FDA") to market
Rebetron(TM) Combination Therapy. Rebetron(TM) combines Rebetol(R) (ribavirin)
capsules and Intron(R) A (interferon alfa-2b, recombinant) injection, for the
treatment of HCV in patients with compensated liver disease. In May 1999, the
European Union's Commission for the European Communities (the "Commission")
granted marketing authorization to Schering-Plough to market Rebetol(R)
(ribavirin) capsules for use in combination with interferon alfa-2b injection
(marketed as Intron(R) A in certain countries) for the treatment of both
relapsed and previously untreated (naive) HCV patients. The Commission's
approval resulted in a single Marketing Authorization with unified labeling that
is immediately valid in all 15 European Union-Member States. Schering-Plough
commenced marketing Rebetol(R) in Germany (May 1999), the United Kingdom (July
1999), in Italy (October 1999), France (May 2000) and Spain (May 2000). The
Company anticipates that Schering-Plough will introduce Rebetol(R) in the other
EU markets upon receiving pricing approvals, where necessary, from individual EU
countries.
On March 28, 2001, Schering-Plough received notice that the Commission granted
centralized marketing authorization to Peg-Intron(TM) (peginterferon alfa-2b)
Injection and Rebetol(R) (ribavirin) Capsules as combination therapy for the
treatment of both relapsed and naive adult patients with histologically proven
chronic hepatitis C. Commission approval of the centralized Type II variations
to the Marketing Authorization for Peg-Intron(TM) and Rebetol(R) resulted in
unified labeling that was immediately valid in all 15 EU-Member States.
Royalty revenues for the three months ended March 31, 2001 were $27,550,000
compared to $33,000,000 for the same period of 2000, a decrease of $5,450,000
(17%). The decrease is reflective of a slowdown in sales of Rebetron(TM) by
Schering-Plough as physicians await marketing authorization pending FDA review
and clearance for the use of pegylated interferon with ribavirin.
Schering-Plough has informed the Company that they believe that royalties paid
under the license agreement should not include royalties on drugs distributed as
part of certain marketing programs. The Company has not been provided with
appropriate information or documentation, and does not agree with such
adjustment. Should Schering-Plough apply the proposed adjustment retroactively
since the inception of the license agreement, the adjustment would be
approximately $16,000,000. Further, if Schering-Plough were to apply the
proposed adjustment to future royalty payments, royalties could be reduced in
the same proportion as the proposed historical adjustment.
ICN Americas
In the North America Pharmaceuticals segment, revenues for the three months
ended March 31, 2001 were $42,283,000, compared to $29,801,000 for the same
period of 2000, an increase of $12,482,000 (42%). In 2001, revenues include
sales of $8,284,000 attributable to the assets purchased from Medical Alliance
in January 2001. Additionally, sales of Efudex(R) in the first quarter of 2001
were higher by approximately $4,000,000 than in the same period in 2000.
In the Latin America Pharmaceuticals segment, revenues for the three months
ended March 31, 2001 were $26,092,000, compared to $29,227,000 for the same
period of 2000. The decrease of $3,135,000 (11%), is primarily due to a decrease
in sales volume in Mexico related to reduced inventory levels at distributors.
ICN International
In the Western Europe Pharmaceuticals segment, revenue for the three months
ended March 31, 2001 were $52,533,000 compared to $46,757,000 for the same
period of 2000. The increase of $5,776,000 or (12%), includes revenues of
$3,334,000 attributable to the Swiss pharmaceutical company Solco which was
acquired in July 2000 and an increase in sales in Poland of $2,374,000.
In the Russia Pharmaceuticals segment, revenues for the three months ended March
31, 2001 were $24,399,000, compared to $26,570,000 for the same period of 2000.
The decrease of $2,171,000 (8%) is attributable to lower sales volume in 2001,
partially offset by revenues attributable to the Solco acquisition of $1,400,000
included in the three months ended March 31, 2001.
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the
three months ended March 31, 2001 decreased $761,000 compared to the same period
in 2000, primarily reflecting the discontinuance of certain low margin product
sales and the pharmaceutical industry mandated withdrawal from the market of
Eskornade, a cough and cold product, which contains the active ingredient PPA
(phenyl-propanolamin).
Gross Profit: Gross profit margin on product sales decreased to 59% for the
three months ended March 31, 2001, compared to 62% for 2000. The decrease in
gross profit margin is primarily due to decreased margins in the Western Europe
and Russia Pharmaceuticals segments. Gross profit margins in the Western Europe
Pharmaceuticals segment were 46% in 2001 compared to 52% for the first quarter
in 2000, which resulted from higher toll manufacturing costs. The overall gross
margins for the Company's Russian Pharmaceuticals segment were 34% for 2001,
compared to 40% for the 2000 first quarter, which resulted from a decrease in
sales volume of higher margin products.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $73,419,000 for the three months ended March 31,
2001, compared to $67,435,000 for the same period in 2000, an increase of
$5,984,000. The increase reflects additional selling expenses of $5,700,000
related to acquisitions and $2,100,000 of expenses related to employee
reductions in Hungary and Poland partially offset by a $2,313,000 decrease in
compensation expense.
Research and Development: Research and development expenses for the 2001 first
quarter were $6,372,000, compared to $4,001,000 for the same period in 2000. The
increase resulted from the Company's continued expansion of research and
development activities. The Company continues to expect to increase its research
and development spending in 2001.
Translation and Exchange Losses, Net: Translation and exchange losses, net were
$400,000 for the three months ended March 31, 2001 compared to $1,591,000 for
the same period in 2000. In the first quarter of 2001, translation losses
consisted of losses related to the net monetary asset position of the Company's
Russian subsidiaries. In the first quarter of 2000, translation losses
principally consisted of losses of $2,355,000 related to transaction losses and
the net monetary asset position of the Company's Russian subsidiaries partially
offset by transaction gains in North America.
Interest Income and Expense: Interest expense during the three months ended
March 31, 2001 decreased $2,204,000 compared to the same period in 2000. The
decrease was the result of the repurchase of approximately $97,000,000 of Senior
Notes during the fourth quarter of 2000. Interest income decreased to $2,240,000
in 2001 from $2,695,000 in 2000, due to the decrease in cash and lower yields on
investments.
Income Taxes: The Company's effective income tax rate was 31% for 2001 compared
to 29% for 2000. The Company operates in many regions where the tax rate is
lower than the U.S. Federal statutory rate or where it benefits from tax relief.
The increase in the Company's provision for income taxes for the three months
ended March 31, 2001 over the same period of 2000 reflects higher taxable income
in the United States, where tax rates are relatively higher or no such tax
relief is available.
Liquidity and Capital Resources
During the three months ended March 31, 2001, cash provided by operating
activities totaled $54,887,000, compared to $52,981,000 in 2000. Operating cash
flows reflect the Company's net income of $21,022,000, net non-cash charges
(including depreciation, minority interest, and translation and exchange gains
and losses) of $20,230,000, and working capital decreases totaling approximately
$13,635,000. The working capital decrease principally consists of a decrease of
$32,162,000 in accounts receivable and a decrease of $8,204,000 in inventories
offset by a decrease of $13,915,000 in trade payables and accrued liabilities
and an increase of $11,670,000 in prepaid expenses and other assets.
Cash used in investing activities was $35,835,000 for the three months
ended March 31, 2001 compared to $10,485,000 for the same period of 2000. In
2001, net cash used in investing activities consisted of an acquisition totaling
$14,445,000 and payments for capital expenditures of $21,810,000, principally
representing an increase in the investment in research and development in North
America and distribution facilities in Western Europe. In 2000, the Company made
capital expenditures of $5,881,000, principally representing production
equipment in Western Europe and replacement assets in other regions. In
addition, the Company made various product acquisitions in 2000 amounting to
$4,712,000.
Cash used in financing activities totaled $5,031,000 for the three months
ended March 31, 2001, including cash dividends paid on common stock of
$5,801,000, offset by proceeds from the exercise of employee stock options of
$1,284,000. During the first quarter of 2000, cash provided by financing
activities totaled $4,790,000, including cash dividends paid on common stock of
$5,580,000, offset by proceeds from the exercise of employee stock options of
$929,000.
The current economic condition in Russia continues to impact the Company's
operating cash flows in Russia, as some of the Company's Russian customers
continue to experience liquidity shortages. The Company may need to invest
additional working capital in Russia to sustain its operations, to provide
increasing levels of working capital necessary to support renewed growth, and to
fund the purchase or upgrading of facilities. The Company also has several
preliminary acquisition prospects that may require funds through the year 2001.
However, there is no assurance that any such acquisitions will be consummated.
Management believes that the Company's existing cash and cash equivalents
and funds generated from operations will be sufficient to meet its operating
requirements in the near term and to fund anticipated acquisitions and capital
expenditures, including the continued development of its research and
development program. The Company may also seek additional debt financing or
issue additional equity securities to finance future acquisitions.
The Company evaluates the carrying value of its inventories at least
quarterly, taking into account such factors as historical and anticipated future
sales compared with quantities on hand, the price the Company expects to obtain
for its products in their respective markets compared with historical cost, and
the remaining shelf life of goods on hand. The Company also evaluates the
collectibility of its receivables at least quarterly. The Company's methodology
for establishing the allowance for bad debts varies with the regions in which it
operates. With the exception of Russia, the allowance for bad debts is based
upon specific identification of customer accounts and the Company's best
estimate of the likelihood of potential loss, taking into account such factors
as the financial condition and payment history of major customers. In Russia,
the allowance for bad debts is based upon a combination of specific
identification of customer account balances and an overall provision based upon
anticipated developments and historical experience. In Russia, factors such as
the economic crisis in August 1998 and the subsequent stabilization in the
middle of 1999 were utilized in the analysis. As of March 31, 2001, the Company
believes that adequate provision has been made for inventory obsolescence and
for anticipated losses on uncollectible accounts receivable.
The Company is currently self-insured with respect to product liability
claims. While to date no material adverse claim for personal injury resulting
from allegedly defective products has been successfully maintained against the
Company, a substantial claim, if successful, could have a negative impact effect
on the Company's liquidity and financial performance.
In 2000, the Company publicly announced a restructuring plan to split its
business into three separate publicly traded companies: Ribapharm Inc.
(comprised of the Company's royalty stream from ribavirin and the Company's U.S.
research & development operations), ICN International AG (comprised of the
Company's operations in Western Europe, Eastern Europe and Asia, Africa and
Australia) and ICN Americas (comprised of the Company's operations in North
America, Latin America and Biomedicals). The Company can give no assurance as to
whether or when the restructuring will take place. The Company believes that
sale of ICN International would not require the consent of noteholders but that
the sale of Ribapharm Inc. would require the consent of noteholders.
The Company has filed a registration statement with the Securities and
Exchange Commission to sell a minority interest in Ribapharm in an underwritten
public offering. The Company intends to distribute the remaining interest in
Ribapharm to the Company's stockholders on a tax-free basis as soon as possible
after the completion of the Ribapharm public offering. The distribution will be
subject to a ruling from the U.S. Internal Revenue Service, compliance with all
other legal and regulatory provisions, and the required approval by holders of
the Company's outstanding debt. Subject to market conditions, the Company is
planning to complete the Ribapharm offering as soon as possible.
The Company intends to sell up to 40% interest in ICN International in an
offering. The Company intends to apply for listing of the shares of ICN
International on the Budapest Stock Exchange and global depositary receipts on
the London Stock Exchange. Subject to market conditions and regulatory approvals
the Company expects to complete the offering of ICN International as soon as
possible.
In addition to continuing the Company's operations in North America, Latin
America and Biomedicals, ICN Americas will hold the remaining interests in ICN
International and Ribapharm until these interests are disposed of by ICN
Americas, as discussed above.
Foreign Operations
Approximately 63% and 65% of the Company's revenues for the three months
ended March 31, 2001 and 2000, respectively, were generated from operations
outside the United States. All of the Company's foreign operations are subject
to risks inherent in conducting business abroad, including possible
nationalization or expropriation, price and currency exchange controls,
fluctuations in the relative values of currencies, political instability and
restrictive governmental actions. Changes in the relative values of currencies
occur from time to time and may, in some instances, materially affect the
Company's results of operations. The effect of these risks remains difficult to
predict. The Company does not currently provide any hedges on its foreign
currency exposure and, in some countries in which the Company operates, no
effective hedging programs are available.
Russia
While the Russian economy continues to show improvement since the financial
crisis that began in 1998, the economy continues to experience difficulties. In
1998, the ruble fell sharply from a rate of 6.3 to $1 to a rate of 27.5 rubles
to $1 by the end of 1999. To date, the ruble continues to fluctuate, there is
continued volatility in the debt and equity markets, hyperinflation persists,
confidence in the banking sector has yet to be restored and there continues to
be general lack of liquidity in the economy. In addition, laws and regulations
affecting businesses operating within Russia continue to evolve. Russia's return
to economic stability is dependent to a large extent on the effectiveness of the
measures taken by the government, decisions of international lending
organizations, and other actions, including regulatory and political
developments, which are beyond the Company's control.
At March 31, 2001, the ruble exchange rate was 28.8 rubles to $1 as
compared with a rate of 28.2 rubles to $1 at December 31, 2000. As a result of
the change in the ruble exchange rate, the Company recorded translation losses
of $402,000 related to its Russian operations during the first quarter of 2001.
As of March 31, 2001, ICN Russia had a net monetary asset position of
approximately $11,508,000, which is subject to foreign exchange loss as further
declines in the value of the ruble in relation to the dollar occur. Due to the
fluctuation in the ruble exchange rate, the ultimate amount of any future
translation and exchange loss the Company may incur cannot presently be
determined and such loss may have a negative impact on the Company's results of
operations. The Company's management continues to work to reduce its net
monetary exposure. However, there can be no assurance that such efforts will be
successful.
The Company's collections on accounts receivable in Russia have been
adversely affected by the Russian economic situation. Prior to the August 1998
devaluation of the ruble, the Company had favorable experience with the
collection of receivables from its customers in the region. Subsequently, the
Company has taken additional steps to ensure the creditworthiness of its
customers and the collectibility of accounts receivable by tightening its credit
policies in the region. These steps include a shortening of credit periods,
suspension of sales to customers with past-due balances and discounts for cash
sales.
The Company believes that the economic and political environment in Russia
has affected the pharmaceutical industry in the region. Many Russian companies,
including many of the Company's customers, continue to experience liquidity
problems as monetary policy has limited the money supply, and Russian companies
often lack access to an effective banking system. As a result, many Russian
companies have limited ability to pay their debts, which has led to a number of
business failures in the region. In addition, the devaluation has reduced the
purchasing power of Russian companies and consumers, thus increasing pressure on
the Company and other producers to limit price increases in hard currency terms.
Inflation And Changing Prices
The effects of inflation are experienced by the Company through increases
in the costs of labor, services and raw materials. The Company is subject to
price control restrictions on its pharmaceutical products in the majority of
countries in which it operates. While the Company attempts to raise selling
prices in anticipation of inflation, the Company operates in some markets which
have price controls that may limit its ability to raise prices in a timely
fashion. Future sales and gross profit will be reduced if the Company is unable
to obtain price increases commensurate with the levels of inflation.
The Russian government has recently instituted a process for establishing
prices for pharmaceutical products, which may lead to price controls in the
Russian market in the future. Currently, this process requires the Company to
register the prices for some of its products included on the government's list
of "products important for health". The next procedure for registration includes
the negotiation and approval of such prices between the Company and the relevant
state bodies. The Company is currently working with all relevant state bodies to
approve its prices and the Company is not presently able to determine the
effect, if any, that this process may have on its results of operations.
However, such developments could have a negative impact on the Company's results
of operations and cash flows in Russia.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced the "Euro". The conversion rates between the Euro and the
participating nations' existing legacy currencies were fixed irrevocably as of
January 1, 1999. Prior to full implementation of the new currency on January 1,
2002, there will be a transition period during which parties may, at their
discretion, use either the legacy currencies or the Euro for financial
transactions.
The Company expects its affected subsidiaries to continue to operate
primarily in their respective legacy currencies for the remainder of 2001. The
majority of the Company's affected subsidiaries currently can accommodate
transactions for customers or suppliers operating in either the legacy currency
or the Euro. Action plans are currently being implemented which are expected to
result in full compliance with all laws and regulations relating to the Euro
conversion. Such plans include the adaptation of information technology and
other systems to accommodate Euro-denominated transactions as well as the
requirements of the transition period. The Company is also addressing the impact
of the Euro on its currency exchange-rate risk, taxation, contracts, competition
and pricing. While it is not possible to accurately predict the impact the Euro
will have on the Company's business or on the economy in general, management
currently does not anticipate that the Euro conversion will have a negative
impact on the Company's market risk with respect to foreign exchange, its
results of operations, or its financial condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's business and financial results are affected by fluctuations
in world financial markets. The Company evaluates its exposure to such risks on
an ongoing basis, and reviews its risk management policy to manage these risks
to an acceptable level, based on management's judgment of the appropriate
trade-off between risk, opportunity and costs. The Company does not hold any
significant amount of market risk sensitive instruments whose value is subject
to market price risk.
In the normal course of business, the Company also faces risks that are
either non-financial or non-quantifiable. Such risks principally include country
risk, credit risk, and legal risk and are not discussed or quantified in the
following analysis.
Interest Rate Risk: The Company does not hold financial instruments for
trading or speculative purposes. The financial assets of the Company are not
subject to significant interest rate risk due to their short duration. At March
31, 2001, the Company had $10,297,000 of foreign denominated debt that would
subject it to both interest and currency risk. The principal financial
liabilities of the Company that are subject to interest rate risk are its
fixed-rate long-term debt (principally its 8-3/4% Senior Notes due 2008 and its
9-1/4% Senior Notes due 2005) totaling approximately $503,000,000. The Company
does not use any derivatives or similar instruments to manage its interest rate
risk. A 90 basis-point increase in interest rates (approximately 10% of the
Company's weighted-average interest rate on fixed-rate debt) affecting the
Company's financial instruments would have an immaterial effect on the Company's
2001 pretax earnings. However, such a change would reduce the fair value of the
Company's fixed-rate debt instruments (principally its 8-3/4% and 9-1/4% Senior
Notes) by approximately $21,800,000 as of March 31, 2001.
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Quarterly Report on Form 10-Q contains statements that constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those statements appear in a number of places in
this Quarterly Report on Form 10-Q and include statements regarding, among other
matters, the Company's growth opportunities, the Company's acquisition strategy,
the Company's reorganization plans, regulatory matters pertaining to
governmental approval of the marketing or manufacturing of certain of the
Company's products and other factors affecting the Company's financial condition
or results of operations. Stockholders are cautioned that any such forward
looking statements are not guarantees of future performance and involve risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from the future results, performance or
achievements, expressed or implied in such forward looking statements. Such
factors are discussed in this Quarterly Report on Form 10-Q and also include,
without limitation, the Company's dependence on foreign operations (which are
subject to certain risks inherent in conducting business abroad, including
possible nationalization or expropriation, restrictions on the exchange of
currencies, limitations on foreign participation in local enterprises,
health-care regulations, price controls, and other restrictive governmental
conditions); the risk of operations in Eastern Europe, Latin America, as well as
Russia and China in light of the unstable economic, political and regulatory
conditions in such regions; the risk of potential claims against certain of the
Company's research compounds; the Company's ability to successfully develop and
commercialize future products; the limited protection afforded by the patents
relating to ribavirin, and possibly on future drugs, techniques, processes or
products the Company may develop or acquire; the potential impact of the Euro
currency; the Company's ability to continue its expansion plan and to integrate
successfully any acquired companies; the results of lawsuits or the outcome of
investigations pending against the Company; the Company's potential product
liability exposure and lack of any insurance coverage thereof; government
regulation of the pharmaceutical industry (including review and approval for new
pharmaceutical products by the FDA in the United States and comparable agencies
in other countries) and competition.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 of Notes to Consolidated Condensed Financial Statements
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
15.1 Review Report of Independent Accountants
15.2 Awareness Letter of Independent Accountants
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, the following reports on Form
8-K were filed by the Registrant:
1. Current report on Form 8-K dated March 8, 2001 (the date of the
earliest event reported), filed on March 20, 2001, for the purpose of
reporting , under Item 7, the Registrant's restructuring plans.
2. Current report on Form 8-K dated March 22, 2001 (the date of the
earliest event reported), filed on March 22, 2001, for the purpose of
reporting, under Item 7, the filing of initial offering circulars in
London and Budapest.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ICN PHARMACEUTICALS, INC.
Registrant
Date: May 15, 2001 /s/ Milan Panic
--------------------------------------------------------
Milan Panic
Chairman of the Board and Chief Executive Officer
Date: May 15, 2001 /s/ Richard A. Meier
--------------------------------------------------------
Richard A. Meier
Executive Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit Page No
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15.1 Review Report of Independent Accountants 24
15.2 Awareness Letter of Independent Accountants 25
Exhibit 15.1
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ICN Pharmaceuticals, Inc.:
We have reviewed the accompanying consolidated condensed balance sheet of ICN
Pharmaceuticals, Inc. and its subsidiaries as of March 31, 2001 and the related
consolidated condensed statements of income, comprehensive income and cash flows
for each of the three-month periods ended March 31, 2001 and 2000. These
consolidated condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein), and in
our report dated March 1, 2001, except for Note 12, as to which the date is
March 15, 2001, which included an emphasis of matter paragraph related to the
Company's change in method of accounting for ICN Yugoslavia, a previously
consolidated subsidiary, as more fully described in Notes 2 and 14 to those
consolidated statements, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 2000,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/S/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California
May 3, 2001
Exhibit 15.2
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
May 11, 2001
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 3, 2001, on our review of interim
financial information of ICN Pharmaceuticals, Inc. (the "Company") as of and for
the period ended March 31, 2001 and included in the Company's quarterly report
on Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-8 (File Nos. 33-56971 and 333-81383) and Form
S-3 (File No. 333-10661).
Very truly yours,
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California