1
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 SEPTEMBER 30, 1995
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
(Address of principal executive offices)
(Zip Code)
(714) 545-0100
(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 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 October 26, 1995 was 29,840,632.
2
ICN PHARMACEUTICALS, INC.
INDEX
Page
Number
-------
PART I - FINANCIAL INFORMATION (Unaudited):
Consolidated Condensed Balance Sheets -
September 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Income -
Three and nine months ended September 30, 1995 and 1994 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 5
Management's Statement Regarding Unaudited Financial
Statements 6
Notes to Consolidated Condensed Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operation 15
PART II - OTHER INFORMATION
Item 1. Litigation 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
3
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 32,273 $ 42,376
Restricted cash 387 1,425
Receivables, net 136,304 81,951
Inventories, net 114,733 89,448
Prepaid expenses and other current assets 26,668 25,146
---------- ----------
Total current assets 310,365 240,346
Marketable securities (used to collateralize note
payable of $6,624 and $8,103 at September
30, 1995 and December 31, 1994, respectively) 35,696 33,179
Property, plant and equipment, net 137,837 128,623
Goodwill and intangibles, net 6,561 18,043
Other assets and deferred taxes 32,413 21,282
---------- ----------
Total assets $ 522,872 $ 441,473
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Trade payables and accrued liabilities $ 72,522 $ 68,190
Notes payable 13,431 13,757
Current portion of long-term debt 17,465 6,067
Income taxes payable 8,888 14,530
---------- ----------
Total current liabilities 112,306 102,544
Long-term debt, less current portion 170,012 195,181
Deferred license income and other liabilities 31,695 9,960
Minority interest 63,717 44,880
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares
authorized; 29,839 and 28,028 shares
outstanding at September 30, 1995 and
December 31, 1994, respectively 299 282
Additional capital 279,996 251,713
Retained deficit (115,701) (142,946)
Unrealized loss on marketable securities, net (1,793) (3,432)
Foreign currency translation adjustments (17,659) (16,709)
----------- ----------
Total stockholders' equity 145,142 88,908
----------- ----------
Total liabilities and stockholders' equity $ 522,872 $ 441,473
=========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1994
(UNAUDITED - 000'S OMITTED, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------------ ------------------
Net sales $ 137,503 $ 92,796 $398,519 $243,890
Cost of sales 53,531 47,649 164,222 125,432
--------- -------- -------- --------
Gross profit 83,972 45,147 234,297 118,458
Selling, general & administrative expenses 51,844 25,571 140,531 69,568
Royalties to affiliates, net --- 2,566 --- 6,315
Research and development costs 4,413 1,372 13,231 3,848
Translation & exchange (gains) losses,
net (1,974) (736) (324) 1,518
Interest income (824) (1,167) (3,777) (3,373)
Interest expense 6,126 1,348 17,276 4,394
Other expense, net 68 2,071 1,591 3,170
--------- ------- -------- -------
Income before provision for income taxes
and minority interest 24,319 14,122 65,769 33,018
Provision for income taxes 4,328 3,278 6,535 8,132
Minority interest 3,058 787 11,373 1,220
--------- ------- -------- --------
Net income $ 16,933 $ 10,057 $ 47,861 $ 23,666
========= ======== ======== ========
Per share information:
Net income per share $ .53 $ .44 $ 1.60 $ 1.06
========= ======== ======== ========
Shares used in per share computation 32,184 22,654 29,898 22,325
========= ======= ======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
ICN PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED - 000'S OMITTED)
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,861 $ 23,666
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Allowance for doubtful accounts (3,229) 1,222
Depreciation and amortization 11,811 6,149
Translation and exchange (gains) losses, net (324) 1,518
Proceeds from licensing fee 23,000 --
Minority Interest 11,373 1,220
Increase in receivables (48,162) (26,255)
(Increase) decrease in inventories (17,719) 18,478
Changes in other operating assets liabilities, net (3,974) 12,482
--------- ---------
Net cash provided by operating activities 20,637 38,480
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,200) (11,603)
Decrease in restricted cash 1,038 --
Acquisition of foreign license rights (1,088) --
Acquisition of product line (3,000) --
Other 32 --
--------- ---------
Net cash used in investing activities (16,218) (11,603)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under
line of credit arrangements 492 (1,865)
Net payments of long-term debt (18,495) (1,135)
Issuance of common stock 5,753 --
Net payments to parent company -- (22,138)
Proceeds from exercise of stock options 3,313 1,466
Dividends paid (5,788) (1,435)
--------- ---------
Net cash used in financing activities (14,725) (25,107)
Effect of exchange rate changes on cash 203 63
--------- ---------
Net (decrease) increase in cash and cash equivalents (10,103) 1,833
Cash and cash equivalents at beginning of period 42,376 14,777
--------- ---------
Cash and cash equivalents at end of the period $ 32,273 $ 16,610
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
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 in accordance
with generally accepted accounting principles 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 period 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 Form 10-K for the year ended December 31, 1994.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIP
On November 1, 1994, the stockholders of ICN Pharmaceuticals, Inc.
("ICN"), SPI Pharmaceuticals, Inc. ("SPI"), Viratek, Inc. ("Viratek"), and
ICN Biomedicals, Inc. ("Biomedicals") (collectively, the "Predecessor
Companies") approved the Merger of the Predecessor Companies, ("the
Merger"). On November 10, 1994, SPI, ICN and Viratek merged into ICN
Merger Corp., and Biomedicals merged into ICN Subsidiary Corp. a wholly-
owned subsidiary of ICN Merger Corp. In conjunction with the Merger, ICN
Merger Corp. was renamed ICN Pharmaceuticals, Inc. ("the Company").
The Merger was accounted for using the purchase method of accounting.
Additionally, for accounting purposes, SPI was treated as the acquiring
company and as a result, the Company has reported the historical financial
data of SPI in its financial results and includes the results of ICN,
Viratek and Biomedicals since November 1, 1994.
SPI was incorporated on November 30, 1981, as a wholly-owned subsidiary of
ICN and was 39% owned by ICN immediately prior to the Merger. Viratek and
Biomedicals were 63% owned and 69% owned by ICN, respectively, prior to the
Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany account balances and transactions have been eliminated.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common
shares outstanding and the dilutive effect of common share equivalents.
Common share equivalents include shares issuable upon exercise of stock
options, on the assumption that the proceeds would be used to repurchase
shares in the open market and also the shares issuable related to certain
of the Company's convertible debentures. Such convertible debentures are
considered common stock equivalents if they met certain criteria at the
time of issuance and had a dilutive effect, if converted.
On March 3, 1995, the Company's Board of Directors declared a first quarter
cash dividend of $.07 per share and a stock dividend of 1.7%, payable on
March 31, 1995, to stockholders of record on March 17, 1995. On May 17,
1995, the Company's Board of Directors declared a second quarter cash
dividend of $.07 per share and a stock dividend of 1.4%, payable on June
14, 1995 to stockholders of record on May 30, 1995. On August 22, 1995,
the Company's Board of Directors declared a third quarter cash dividend of
$.07 per share and a stock dividend of 1.22% , payable on September 19,
1995 to stockholders of record on September 5, 1995. All relevant share
and per share data have been restated to reflect these stock dividends.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the current
year presentation.
3. RELATED PARTY TRANSACTIONS
ROYALTY AGREEMENTS
As a result of the Merger, the Company is no longer required to pay
royalties on sales of Virazole(R). During the three and nine months ended
September 30, 1994, the Company sold $12,420,000 and $30,270,000, of
Virazole(R), respectively, generating royalties to Viratek of $2,471,000
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and $6,041,000, respectively. These royalties were based on a royalty
agreement whereby 20% of net sales of Virazole were payable to Viratek.
COST ALLOCATIONS
Prior to the Merger, ICN, SPI, Viratek and Biomedicals occupied ICN's
facility in Costa Mesa, California. The cost of common services such as
maintenance, purchasing and personnel were incurred by SPI and allocated to
ICN, Viratek and Biomedicals based on services utilized. As a result of
the Merger, the Company is no longer required to allocate common services
among affiliates.
Common service costs for the three and nine months ended September 30, 1994
were $612,000 and $1,989,000, of which $458,000 and $1,413,000,
respectively, were allocated to ICN, Viratek and Biomedicals.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes was $6,244,000 for the nine months ended
September 30, 1995 and $4,948,000 for the same period in 1994.
Cash paid for interest was $17,193,000 for the nine months ended September
30, 1995 and $2,562,000 for the same period in 1994.
5. GEOGRAPHIC DATA
The following tables set forth the amount of net sales and income before
interest, provision for taxes and minority interest of the Company by
geographical areas for the three and nine months ended September 30, 1995
and 1994 (in thousands):
SALES:
THREE MONTHS NINE MONTHS
ENDED SEPT. 30 ENDED SEPT. 30
1995 1994 1995 1994
------------------- -------------------
North America $ 43,282 $ 24,815 $108,118 $ 65,495
Latin America 11,587 13,386 30,396 42,358
Western Europe 14,191 7,407 43,077 21,629
Eastern Europe 66,784 45,488 211,109 109,314
Asia, Africa, & Australia 1,659 1,700 5,819 5,094
--------- --------- -------- --------
Total $ 137,503 $ 92,796 $398,519 $243,890
========= ========= ========= ========
9
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1995 1994 1995 1994
--------------------- --------------------
North America $ 22,703 $ 10,946 $ 50,808 $ 27,866
Latin America 1,437 454 3,073 4,023
Western Europe 1,312 859 3,633 1,849
Eastern Europe 14,855 3,257 47,357 4,967
Asia, Africa, and Australia 17 200 231 765
Corporate (10,703) (1,413) (25,834) (5,431)
-------- -------- -------- --------
Income before interest,
provision for income taxes
and minority interest 29,621 14,303 79,268 34,039
Net interest expense 5,302 181 13,499 1,021
-------- ------- -------- --------
Income before provision for income
taxes & minority interest $ 24,319 $ 14,122 $ 65,769 $ 33,018
======== ======== ======== ========
IDENTIFIABLE ASSETS:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
North America $ 82,068 $ 77,900
Latin America 25,958 26,787
Western Europe 57,163 52,469
Eastern Europe 272,855 203,357
Asia, Africa, and Australia 2,591 3,773
Corporate 82,237 77,187
----------- ----------
Total $ 522,872 $ 441,473
=========== ==========
6. ICN GALENIKA
ICN Galenika, a 75% owned subsidiary, operates in a highly inflationary
economy and uses the dollar as the functional currency rather than the
Yugoslavian dinar. Before the enactment of the economic stabilization
program in January 1994, the rate of inflation in Yugoslavia was over 1
billion percent per year. The rate of inflation was dramatically reduced
when, on January 24, 1994, the Yugoslavian government enacted a
"Stabilization Program" designed to strengthen its currency. Under this
program, the official exchange rate of the dinar is fixed at a ratio of
one dinar to one Deutsche mark. The Yugoslavian government guarantees the
conversion of dinars to Deutsche marks by exercising restraint in the
amount of dinars that it prints, thereby restricting cash in
circulation to correspond to hard currency reserves in Yugoslavia.
Throughout 1994, this program was successful in reducing inflation to
approximately 5% per year, increasing the availability of hard currency,
stabilizing the exchange rate of the dinar, and improving the overall
economy in Yugoslavia.
10
During the first nine months of 1995, some weakness in the stabilization
program has been experienced. During this period, ICN Galenika experienced
a decline in the availability of hard currency in Yugoslavia and inflation
has increased to an approximate annual rate of 40%. During the third
quarter of 1995, ICN Galenika received a 30% price increase on its
pharmaceutical products. This is the first price increase the government
has allowed since the start of the stabilization program. These events
suggest a trend of a weakening of the stabilization program that could
result in an adverse effect upon the Company through a devaluation in 1995
or early 1996. In the near term, the positive effects of the stabilization
program may not necessarily continue and a return to prior levels of hyper-
inflation could occur.
The net monetary asset position of ICN Galenika has risen to $52,366,000 as
of September 30, 1995 from $25,442,000 at December 31, 1994. The increase
in the net monetary asset position is primarily attributed to increases in
accounts receivable resulting from increased sales of ICN Galenika and the
lengthening of the collection period of receivables resulting from the lack
of availability of dinars in Yugoslavia. This net monetary asset position
would be subject to foreign exchange losses if a devaluation of the dinar
were to occur. In November 1995, newspapers in Yugoslavia reported that
the government approved a devaluation of the dinar which is expected to
become effective before year end, although no date has been announced. The
timing of the devaluation is expected to coincide with the suspension of
sanctions on Yugoslavia. If implemented, based upon information currently
available to the Company, the dinar would devalue from the current rate of
1.4 dinars per $1 U.S. to a rate of 4.2 dinars per $1 U.S. ICN Galenika
is currently endeavoring to reduce its monetary exposure by shortening the
payment terms on its receivables, placing restrictions on future credit
terms, or temporarily suspending or reducing future credit sales and
accelerating the purchase of raw materials and supplies. At this time, it
is unclear the extent to which these actions will be successful in reducing
the net monetary asset position prior to devaluation, and therefore the
ultimate loss upon the currency devaluation. If a devaluation occurs at a
time when the Company has a significant net monetary asset position, a
material charge to the results of operations of the Company will be
recorded.
7. ACQUISITIONS
On May 5, 1995, the Company acquired the radioimmunoassay product line
along with inventory and property from Becton, Dickinson and Company
("B&D"), located in Orangeburg, New Jersey, for a purchase price of
approximately $3,000,000. To fund this acquisition and to provide funds
for working capital of the B&D new product line, the Company sold 400,000
shares of its common stock to a foreign bank for $5,753,000, net of
transactions fees and commissions. The financial results of B&D included
in the consolidated condensed financial statements for the three and nine
months ended September 30, 1995 were not significant.
On July 21, 1995, the Company purchased an additional 34% interest in the
Russian pharmaceutical company, Oktyabr, which raises ICN's ownership from
41% to 75%. In connection with the acquisition of the additional interest,
the Company issued 225,807 shares of its common stock, valued at
approximately $3,500,000, in exchange for the shares in Oktyabr. The
acquisition is not material to the financial position or results of
operations of the Company. The purchase price allocation is preliminary
pending final valuation and analysis of the assets acquired and liabilities
assumed.
11
8. AGREEMENT WITH SCHERING-PLOUGH CORPORATION
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement (the "Agreement") and a Stock Purchase Agreement with a
subsidiary of Schering-Plough Corporation ("Schering") to license the
Company's proprietary anti-viral drug ribavirin as a treatment for chronic
hepatitis C in combination with Schering's alpha interferon. The Agreement
provided ICN an initial non-refundable payment by Schering of $23,000,000,
and will provide royalty payments to the Company for the marketing of
the drug, including certain minimum royalty rates. Schering will have
exclusive marketing rights for ribavirin for hepatitis C world-wide,
except that ICN will retain the right to co-market in the countries of
the European Economic Community. In addition, Schering will purchase up
to $42,000,000 in common stock of the Company upon the achievement of
certain regulatory milestones. Under the Agreement, Schering will be
responsible for all of the development costs worldwide.
The $23,000,000 non-refundable payment has been recorded by the Company as
prepaid royalty income of $10,000,000, a license fee of $8,000,000 and a
liability to Schering for certain cost sharing agreements of $5,000,000.
The prepaid royalty will be amortized to income based upon future sales of
the product and the license fee will be amortized to income over the
exclusive period of the Agreement, fifteen years.
9. COMMITMENTS AND CONTINGENCIES
The Predecessor Companies were parties to a number of lawsuits. As a
result of the Merger, the Company has assumed all of the Predecessor
Companies' liabilities with respect to such lawsuits.
The ultimate outcome of all pending suits cannot be predicted with
certainty and an unfavorable outcome could have a material adverse effect on
the Company. At this time, management believes that none of these matters
will have a material adverse effect on the financial position and results of
operations of the Company.
In February and March 1995, eighteen lawsuits were filed, and a nineteenth
was filed in May, 1995 (the "1995 Actions"), which named the Company, its
Board of Directors, Milan Panic and several other present and former
officers of the Company as defendants. Such lawsuits, filed in February
and March 1995, have been consolidated into one securities complaint and
one derivative complaint.
In general, it is alleged in the securities complaint that the Company and
certain of its officers and directors made various deceptive and untrue
statements of material fact and omitted to state material facts in
connection with the merger of the Company, ICN, Viratek and Biomedicals in
November 1994 and the issuance of convertible debentures in connection
therewith and (ii) information received from the FDA regarding the
Company's NDA for the use of Virazole for the treatment of chronic
hepatitis C. The securities complaint asserts claims for
alleged violations of Sections 11 and 15 of the Securities Act of 1933,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. Plaintiffs seek unspecified compensatory
damages, pre and post-judgment interest, attorneys' fees, expert fees and
other disbursements and costs.
With respect to the derivative complaint, plaintiffs assert purported
claims for intentional breach of fiduciary duty, negligent breach of
fiduciary duty, abuse of control, waste of corporate assets, unjust
enrichment, violation of California Corporations Code 25502.5, constructive
fraud and gross mismanagement. Plaintiffs seek declaratory relief,
unspecified compensatory and punitive damages, prejudgment interest,
attorneys' fees, experts' fees and costs and disbursements.
It is not possible at the present time for the Company to predict the
outcome or the range of potential loss, if any, that might result from the
1995 Actions. The defendants intend to vigorously defend the 1995 Actions.
Four lawsuits have been filed with respect to the Merger in the Court of
Chancery in the State of Delaware which named certain directors and
officers of SPI, ICN and/or Viratek (the "1994 Actions"). These suits
allege that the consideration provided to the public stockholders of SPI
and/or Viratek (as applicable) in the Merger was unfair and inadequate, and
12
that the defendants breached their fiduciary duties in approving the Merger
and otherwise. The Company believes that the 1994 Actions are without
merit and intends to defend them vigorously. It is not possible at the
present time for the Company to predict the outcome or the range of
potential loss, if any, that might result from the 1994 Actions.
ICN, SPI and Viratek and certain of their officers and directors
(collectively, the "ICN Defendants") were named defendants in certain
consolidated class actions pending in the United States District Court for
the Southern District of New York entitled In re Paine Webber Securities
Litigation (Case No. 86 Civ. 6776 (VLB)); In re ICN/Viratek Securities
Litigation (Case No. 87 Civ. 4296 (KMW))(collectively the "1987 Actions").
In the Third Amended Consolidated Class Action Complaint, plaintiffs allege
that the ICN Defendants made, or aided and abetted Paine Webber, Inc.
("Paine Webber") in making, misrepresentations of material fact and omitted
to state material facts concerning the business, financial condition and
future prospects of ICN, Viratek and SPI in certain public announcements,
Paine Webber research reports and filings with the Securities and Exchange
Commission. The alleged misstatements and omissions primarily concern
developments regarding Virazole(R), including the efficacy, safety and
market for the drug. Fact discovery is complete and expert discovery is
virtually complete. Plaintiffs sought the certification of classes of
persons who purchased ICN, Viratek or SPI common stock during the period
January 7, 1986 through April 15, 1987. On July 5, 1995, Magistrate Judge
Fox issued his report and recommendation (the "Report") in which he
recommended conditional certification of the classes as sought by
plaintiffs above. The ICN Defendants filed their appeal of the Report on
September 11, 1995. Plaintiffs' damages expert, utilizing assumptions and
methodologies that the ICN Defendants' damages experts find to be
inappropriate under the circumstances, has testified that assuming
that classes were certified for purchasers of ICN, Viratek and SPI
common stock for the entire class periods alleged by plaintiffs, and
further assuming that all of the plaintiffs' allegations were proven,
potential damages against ICN, Viratek and SPI would, in the aggregate,
amount to $315,000,000. The ICN Defendants' four damages experts have
testified that damages are zero. On May 4, 1994, plaintiffs' counsel
agreed to stipulate to the dismissal of the aiding and abetting claim
asserted against the ICN Defendants, but have yet to execute such a
stipulation. On October 20, 1993, plaintiffs informed the Court that they
had reached an agreement to settle with co-defendant Paine Webber and on
July 27, 1994, the settlement was approved by the court. Management believes
that, having extensively reviewed the issues in the 1987 Actions, there
are strong defenses and the Company intends to defend the 1987 Actions
vigorously. While the ultimate outcome of the 1987 Actions cannot be
predicted with certainty, and an unfavorable outcome could have a material
adverse effect on the Company, at this time management does not expect these
matters will have a material adverse effect on the financial position and
results of operations of the Company. The purchase price allocation related
to the Merger is preliminary, pending resolution of the 1987 Actions.
In January 1995, an action was commenced by Deborah Levy against ICN, SPI,
Viratek and Milan Panic. The complaint asserts causes of action for sex
discrimination and harassment, and for violations of the California
Department of Fair Employment and Housing statute and a provision of the
California Government Code. The complaint seeks injunctive relief and
unspecified compensatory and punitive damages. The defendants intend to
vigorously defend the suit.
In February 1992, an action was filed in California Superior Court for the
County of Orange by Gencon Pharmaceuticals, Inc. ("Gencon") against ICN
Canada Limited ("ICN Canada"), SPI, and ICN alleging breach of contract and
related claims arising out of a manufacturing contract between Gencon and
ICN Canada. ICN and SPI were dismissed from the action based on SPI's
agreement to guarantee any judgment against ICN Canada. Following trial in
1993, the judge granted judgment in favor of Gencon for breach of contract
in the amount of approximately $2,100,000 plus interest, costs and
attorneys' fees (which sums total approximately $650,000). ICN Canada
timely filed its Notice of Appeal and Gencon filed a Notice of Cross-
Appeal, seeking the award of approximately $145,000 in additional claimed
costs. The defendants intend to vigorously defend this action.
13
In October 1994, an action entitled Engelhardt v. ICN Pharmaceuticals, Inc.
(Case No. 94-2-2322) was filed in the United States District Court for the
District of Colorado. The action was commenced by Lauri and Kenneth
Engelhardt on behalf of themselves and their infant daughter, Hannah,
asserting causes of action for products liability and negligence and seek
unspecified damages. The Company believes that the allegations are without
merit and intends to vigorously defend this action.
On April 5, 1993, ICN and Viratek filed suit against Rafi Khan ("Khan") in
the United States District Court for the Southern District of New York.
The complaint alleged, among other things, that Khan violated numerous
provisions of the securities laws and breached his fiduciary duty to ICN
and Viratek by attempting to effectuate a change in control of ICN while
acting as an agent and fiduciary of ICN and Viratek, and are seeking
compensatory and punitive damages in the amount of $25,000,000. Khan filed
counterclaims on April 12, 1993, asserting causes of action for slander,
interference with economic relations, a shareholders' derivative action for
breach of fiduciary duties, violations of the federal securities laws and
tortious interference with economic relations, and is seeking compensatory
damages, interest and exemplary damages of $29,000,000.
Pursuant to an Order Directing Private Investigation and Designating
Officers to Take Testimony, dated May 15, 1995, entitled In the Matter of
ICN Pharmaceuticals, Inc., (P-177) (the "Order"), a private investigation
is being conducted by the SEC with respect to certain matters pertaining to
the status and disposition of the Company's Hepatitis C new drug
application ("NDA"). As set forth in the Order, the investigation concerns
whether, during the period June 1994 through February 1995, the Company,
persons or entities associated with it and others, in the offer and sale or
in connection with the purchase and sale of ICN common stock, engaged in
possible violations of Section 17(a) of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, by having possibly (i) made false or misleading statements or
omitted to state material facts with respect to the status and disposition
of the Hepatitis C NDA, or (ii) purchased or sold ICN common stock while in
possession of material, non-public information concerning the status and
disposition of the Hepatitis C NDA or (iii) conveyed material, non-public
information concerning the status and disposition of the Hepatitis C NDA to
other persons who may have purchased or sold ICN stock. The Company is
cooperating with the SEC in its investigation.
The Company is a party to a number of other pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. In the
opinion of management, these various other pending lawsuits will not have a
material adverse effect on the consolidated financial position or
operations of the Company.
10. DETAIL OF CERTAIN ACCOUNTS (000's omitted)
RECEIVABLES, NET
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
Trade accounts receivable $ 139,307 $ 84,789
Other 5,138 7,198
------------ -----------
144,445 91,987
Allowance for doubtful accounts (8,141) (10,036)
------------ -----------
$ 136,304 $ 81,951
============ ===========
14
INVENTORIES, NET
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
Raw materials and supplies $ 45,264 $ 37,198
Work-in-process 14,025 13,167
Finished goods, net 55,444 39,083
------------ ------------
$ 114,733 $ 89,448
============ ============
PROPERTY, PLANT AND EQUIPMENT, NET:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
Property, plant and equipment, at cost $ 177,717 $ 162,588
Accumulated depreciation (39,880) (33,965)
------------ ------------
$ 137,837 $ 128,623
============ ============
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
INTRODUCTION
- ------------
Since 1981, the ICN group of companies included a pharmaceuticals products
company, SPI Pharmaceuticals, Inc. ("SPI"); a research products company, ICN
Biomedicals, Inc. ("Biomedicals"); a research and development company, Viratek,
Inc. ("Viratek"); and the parent company, ICN Pharmaceuticals, Inc. ("ICN")
(collectively, the "Predecessor Companies"). Until November 1, 1994, the
effective date of the Merger, ICN maintained a controlling interest in the
subsidiary companies.
On November 10, 1994, SPI, ICN and Viratek merged into New ICN, and Biomedicals
merged into ICN Subsidiary Corp., a wholly-owned subsidiary of New ICN. The
Merger was accounted for using the purchase method of accounting. Additionally,
for accounting purposes, SPI was treated as the acquiring company and as a
result, the Company has reported the historical financial data of SPI in its
financial results and the results of ICN, Viratek and Biomedicals have been
included with the results of the Company since the effective date of the Merger.
RESULTS OF OPERATIONS
- ---------------------
For financial reporting purposes, the Company's operations are divided into two
industry segments, the Pharmaceutical segment and the Biomedical segment. Net
Sales for the two industry segments are set forth below (000's omitted).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
---------------------- --------------------
Net Sales:
Pharmaceutical $ 122,102 $ 92,796 $ 351,973 $ 243,890
Biomedical 15,401 -- 46,546 --
---------- ---------- --------- ---------
$ 137,503 $ 92,796 $ 398,519 $ 243,890
========== ========== ========= =========
NET SALES
- ---------
Pharmaceutical net sales for the three and nine months ended September 30,
1995, were $122,102,000 and $351,973,000, respectively, compared to $92,796,000
and $243,890,000 for the same periods in 1994. Compared to 1994, sales
increased $29,306,000 or 32% and $108,083,000 or 44% for the three and nine
months ended September 30, 1995, respectively.
Pharmaceutical net sales at ICN Galenika were $61,390,000 and $199,556,000 for
the three and nine months ended September 30, 1995, respectively, compared to
$45,487,000 and $109,313,000 for the same periods in 1994. Such increases are
primarily due to an increase in unit sales and favorable price increases for
the three and nine months ended September 30, 1995, compared to the same
periods in 1994.
Pharmaceutical net sales in North America were $34,336,000 and $82,116,000 for
the three and nine months ended September 30, 1995, respectively, compared to
$24,625,000 and $64,528,000 for the same periods in 1994. Sales in the third
quarter of 1995 increased due primarily to increased unit sales in the Virazole
and Dermatological product lines in the United States. Sales for the nine
months ended September 30, 1995 compared to the same period in the prior year,
increased primarily due to increased Virazole sales resulting from increased
unit sales.
16
Pharmaceutical net sales in Latin America were $11,174,000 and $29,079,000 for
the three and nine months ended September 30, 1995, respectively, compared to
$13,300,000 and $42,272,000 for the same periods in 1994. The decline in sales
is primarily due to a weakening of the peso compared to the U. S. dollar,
partially offset by price increases.
The Biomedical business that was acquired in the Merger contributed $15,401,000
and $46,546,000 of sales during the three and nine months ended September 30,
1995 or approximately 11% and 12% of total Company net sales, respectively.
GROSS PROFIT
- ------------
Gross profit as a percentage of sales was 61% and 59% for the three and nine
months ended September 30, 1995, respectively, compared to 49% and 49% for the
same periods in 1994. The increase in gross profit is primarily due to
increases in volume and prices at ICN Galenika for the three and nine months
ended September 30, 1995 compared to the same periods in 1994. Additionally,
increased sales of Virazole contributed to the improved gross profit margin for
the three and nine months ended September 30, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses as a percentage of sales were 38%
and 35% for the three and nine months ended September 30, 1995, respectively,
compared to 28% and 29% for the same periods in 1994. These expenses increased
due to increased marketing efforts and selling expenses in all of the Company's
operating units. Additionally, operating expenses at ICN Galenika have risen
due to inflationary pressures on the Yugoslavian dinar. Selling, general and
administrative expenses for the three and nine months ended September 30, 1995
include $7,018,000 and $20,464,000, respectively, of expenses associated with
the Company's Biomedical business that was acquired in the Merger.
ROYALTIES TO AFFILIATES
- ----------------------
As a result of the Merger, the Company is no longer required to pay royalties
to Viratek. During the three and nine months ended September 30, 1994, the
Company sold $12,420,000 and $30,270,000, respectively, of Virazole(R),
generating royalties to Viratek of $2,471,000 and $6,041,000, respectively.
These royalties were based on a royalty agreement whereby 20% of net sales of
Virazole were payable to Viratek.
TRANSLATION AND EXCHANGE LOSSES, NET
- ------------------------------------
Translation and exchange (gains) losses, net were $(1,974,000) and $(324,000),
for the three and nine months ended September 30, 1995 compared to $(736,000)
and $1,518,000, respectively, for the same periods in 1994. In the third
quarter of 1995, the Company's net translation gain was primarily attributed to
a translation gain of $(1,954,000) at ICN Galenika resulting from the exchange
impact on its net monetary position. During the nine months ended September
30, 1995, the Company's net translation gain was primarily attributed to a
translation gain of $(3,339,000) related to ICN Galenika's net positive
monetary asset position, which was partially offset by a translation loss of
$2,819,000 related to the Company's foreign denominated debt which was acquired
in the Merger. Translation gains at ICN Galenika during 1995 are a result of
the strengthening of the Deutsche Mark currency, to which the Dinar is fixed at
a ratio of one to one, against the U.S. Dollar. In the third quarter and first
nine months of 1994, the Company's translation (gains) losses were related to
changes in the exchange rate of the Yugoslavian Dinar.
17
INTEREST EXPENSE
- ----------------
Interest expense for the three and nine months ended September 30, 1995 was
$6,126,000 and $17,276,000, respectively, compared to $1,348,000 and $4,394,000
for the same periods in 1994. This increase is primarily due to higher
interest expense in the United States resulting from debt assumed from the
Predecessor Companies in connection with the Merger and increasing interest
rates in Yugoslavia, resulting in higher interest expense at ICN Galenika.
TAXES
- -----
The Company's effective income tax rate for the three and nine months ended
September 30, 1995, was 18% and 10%, respectively, compared to 23% and 25% for
the same periods last year. The decline in the effective tax rate was due
primarily to a change in the mix of domestic and foreign earnings and other
foreign permanent differences.
RESEARCH AND DEVELOPMENT
- ------------------------
Research and development costs for the three and nine months ended September
30, 1995 were $4,413,000 and $13,231,000, respectively, compared to $1,372,000
and $3,848,000 for the same periods in 1994, primarily due to research and
development efforts acquired in the Merger from Viratek.
EXCHANGE RATES AND STABILIZATION PROGRAM
- ----------------------------------------
ICN Galenika, a 75% owned subsidiary, operates in a highly inflationary economy
and uses the dollar as the functional currency rather than the Yugoslavian
dinar. Before the enactment of the economic stabilization program in January
1994, the rate of inflation in Yugoslavia was over 1 billion percent per year.
The rate of inflation was dramatically reduced when, on January 24, 1994, the
Yugoslavian government enacted a "Stabilization Program" designed to strengthen
its currency. Under this program, the official exchange rate of the dinar is
fixed at a ratio of one dinar to one Deutsche mark (approximately 1.4 dinars
to one $1 U.S.). The Yugoslavian government guarantees the conversion
of dinars to Deutsche marks by exercising restraint in the amount of dinars
that it prints, thereby restricting cash in circulation to correspond to
hard currency reserves in Yugoslavia. Throughout 1994, this program was
successful in reducing inflation to approximately 5% per year, increasing the
availability of hard currency, stabilizing the exchange rate of the Dinar, and
improving the overall economy in Yugoslavia.
During the first nine months of 1995, some weakness in the stabilization
program has been experienced. During this period, ICN Galenika experienced a
decline in the availability of hard currency in Yugoslavia and inflation has
increased to an approximate annual rate of 40%. During the third quarter of
1995, ICN Galenika received a 30% price increase on its pharmaceutical
products. This is the first price increase the government has allowed since
the start of the stabilization program. These events suggest a trend of a
weakening of the stabilization program that could result in an adverse effect
upon the Company through a devaluation in 1995 or early 1996. In the near
term, the positive effects of the stabilization program may not necessarily
continue and a return to prior levels of hyperinflation could occur.
The net monetary asset position of ICN Galenika has risen to $52,366,000 as of
September 30, 1995 from $25,442,000 at December 31, 1994. The increase in the
net monetary asset position is primarily attributed to increases in accounts
receivable resulting from increased sales of ICN Galenika and the lengthening
of the collection period of receivables resulting from the lack of availability
of dinars in Yugoslavia. This net monetary asset position would be subject to
foreign exchange losses if a devaluation of the dinar were to occur. In
November 1995, newspapers in Yugoslavia reported that the government approved
18
a devaluation of the dinar which is expected to become effective before year
end, although no date has been announced. The timing of the devaluation is
expected to coincide with the suspension of sanctions on Yugoslavia. If
implemented, based upon information currently available to the Company,
the dinar would devalue from the current rate of 1.4 dinars per $1 U.S.
to a rate of 4.2 dinars per $1 U.S. ICN Galenika is currently endeavoring
to reduce its monetary exposure by shortening the payment terms on its
receivables, placing restrictions on future credit terms, or temporarily
suspending or reducing future credit sales and accelerating the purchase
of raw materials and supplies. At this time, it is unclear the extent
to which these actions will be successful in reducing the net monetary
asset position prior to devaluation, and therefore the ultimate loss upon
the currency devaluation. If a devaluation occurs at a time when the
Company has a significant net monetary asset position, a material charge to
the results of operations of the Company will be recorded.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the nine months ended September 30, 1995, cash provided by operating
activities totaled $20,637,000 which includes increased earnings and a
$23,000,000 payment received from a subsidiary of Schering-Plough Corporation
pursuant to an Exclusive License and Supply Agreement. Significant amounts
of cash were used to finance sales growth at ICN Galenika and to provide
working capital to support seasonal sales of Virazole(R) in North America.
These factors contributed to increased levels of accounts receivable and
inventories aggregating approximately $65,881,000.
Cash used in investing activities was $16,218,000 for the nine months ended
September 30, 1995, related primarily to capital expenditures at ICN Galenika
for its facility expansion and modernization project. Also included in
investing activities is cash paid for the acquisition of the radioimmunoassay
product line along with inventory and property of Becton Dickinson and Company.
The project at ICN Galenika will include building two new factories; one to
manufacture cephalosporins and the other to manufacture steroids and hormones.
Additionally, ICN Galenika's existing drug plant will be modernized and
upgraded. The total cost of this facility expansion and modernization through
1998 is expected to be approximately $136,000,000. ICN Galenika intends to
fund this program through funds generated from local operations and locally
funded debt.
Cash used in financing activities was $14,725,000 for the nine months ended
September 30, 1995, which includes net payments of long-term debt in the amount
of $18,495,000 and dividend payments of $5,788,000. The Company sold common
stock in the amount of $5,753,000 of which approximately $3,000,000 was
utilized to purchase the radioimmunoassay product line from Becton, Dickinson
and Company and the remainder utilized for working capital purposes. The
increase in 1995 dividend payments compared to 1994 is due primarily to higher
levels of shares outstanding resulting from the Merger. During the nine months
of 1994, cash used in financing included cash payments to the parent company of
$22,138,000 which did not recur in 1995, as a result of the Merger. In order
to reduce future interest expense, the Company elected to call $10,000,000 of
the 12-7/8% Sinking Fund Debentures at par plus accrued interest totaling
$10,368,000 on April 28, 1995. Subsequently, the Company elected to call an
additional $10,000,000 of the 12 7/8 Sinking Fund Debentures at par plus
accrued interest totaling $10,315,000 on October 13, 1995.
On March 3, 1995, the Company's Board of Directors declared a first quarter
cash dividend of $.07 per share and a stock dividend of 1.7% payable March 31,
1995 to shareholders of record on March 17, 1995. On May 17, 1995, the
Company's Board of Directors declared a second quarter cash dividend of $.07
per share and a stock dividend of 1.4% payable June 14, 1995 to shareholders of
record on May 30, 1995. On August 22, 1995, the Company's Board of Directors
declared a third quarter dividend of $.07 per share and a stock dividend of
1.22% payable on September 19, 1995 to shareholders of record on September 5,
1995.
19
Since December 31, 1994, the Mexican peso has experienced a 47% devaluation
that has and will continue to result in lower U.S. dollar sales and gross
margins. This devaluation resulted in an increase in the foreign currency
translation charge included as a component of stockholders' equity of
$3,428,000 during the nine months ended September 30, 1995. Approximately 30%
of the Mexican subsidiary's cost of inventory includes materials purchased
outside of Mexico that creates added pressure on the gross margins for these
products. In addition, inflation continues to increase along with a weakening
of the Mexican peso against the U.S. dollar. The Company will endeavor to
mitigate these effects by seeking price increases, adjusting its product mix,
and seeking local sources for materials that had previously been foreign
sourced. In the third quarter of 1995, the Company's Mexican subsidiary
received a 12% price increase which contributed to improved gross margins and
earnings. However, the implementation of actions to cope with this business
environment may be affected by economic restraint plans by the Mexican
government, which include price controls.
The Company is subject to foreign currency risk on its foreign denominated debt
of approximately $30,889,000 at September 30, 1995, which is primarily
denominated in Swiss francs.
The Company and certain subsidiaries do not maintain product liability
insurance. While the Company has never experienced a material adverse claim
for personal injury resulting from allegedly defective products, a successful
claim could have a material adverse effect on the Company's liquidity and
financial performance.
On July 28, 1995, the Company entered into an Exclusive License and Supply
Agreement (the "Agreement") and a Stock Purchase Agreement with a subsidiary of
Schering-Plough Corporation ("Schering") to license the Company's proprietary
anti-viral drug ribavirin as a treatment for chronic hepatitis C in combination
with Schering's alpha interferon. The Agreement provided ICN an initial non-
refundable payment by Schering of $23,000,000, and will provide royalty
payments to the Company for the marketing of the drug, including certain
minimum royalty rates. Schering will have exclusive marketing rights for
rivavirin for hepatitis C worldwide, except that ICN will retain the right to
co-market in the countries of the European Economic Community. In addition,
Schering will purchase up to $42,000,000 in common stock of the Company
upon the achievement of certain regulatory milestones. Under the Agreement,
Schering will be responsible for all of the development costs worldwide.
The $23,000,000 non-refundable payment has been recorded by the Company as
prepaid royalty income of $10,000,000, a license fee of $8,000,000 and a
liability to Schering for certain cost sharing agreements of $5,000,000. The
prepaid royalty will be amortized to income based upon future sales of the
product and the license fee will be amortized to income over the exclusive
period of the Agreement, fifteen years.
Management believes that funds on hand and to be generated from operations
during the year will be sufficient to meet its normal operating requirements
during the remainder of the year and into 1996.
On July 21, 1995, the Company purchased an additional 34% interest in the
Russian pharmaceutical company, Oktyabr, which raises ICN's ownership from 41%
to 75%. In connection with the acquisition of the additional interest, the
Company issued 225,807 shares of its common stock, valued at approximately
$3,500,000, in exchange for the shares in Oktyabr. The acquisition is not
material to the financial position or results of operations of the Company.
The purchase price allocation is preliminary pending final valuation and
analysis of the assets acquired and liabilities assumed.
20
PART II - OTHER INFORMATION
ITEM 1. LITIGATION
Litigation:
See Notes to Consolidated Condensed Financial Statements Note 9; Commitments
and Contingencies, which is incorporated herein by reference.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10: Exclusive License and Supply Agreement between ICN
Pharmaceuticals, Inc. and Schering Plough, Ltd. dated July 28, 1995.
Pursuant to 17 C.F.R, Subsection 200.80(b) (4), 200.83 and 240.24b-2,
this document has been filed separately with the Securities and
Exchange Commission under a Request for Confidential Treatment.
Exhibit 11: Computation of Per Share Earnings
Exhibit 15: Review Report of Independent Accountants
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
1995.
22
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: November 14, 1995 /s/ Milan Panic
---------------------------------
Milan Panic
President and Chief Executive Officer
Date: November 14, 1995 /s/ John E. Giordani
----------------------------------
John E. Giordani
Executive Vice President and Chief
Financial Officer