FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
Commission File Number 1-09623
IVAX CORPORATION
FLORIDA 16-1003559
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33137
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 575-6000
--------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
197,368,921 SHARES OF COMMON STOCK, $.10 PAR VALUE, OUTSTANDING AS OF OCTOBER
31, 2001.
IVAX CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 2
Consolidated Statements of Operations
for the three months and nine months ended September 30, 2001 and 2000 3
Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 2001 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 31
Item 2 - Changes in Securities and Use of Proceeds 31
Item 6 - Exhibits and Reports on Form 8-K 31
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 281,208 $ 174,794
Marketable securities 136,958 76,734
Accounts receivable, net of allowances for doubtful
accounts of $24,792 in 2001 and $19,703 in 2000 274,822 155,685
Inventories 251,051 178,910
Other current assets 94,296 72,991
----------- -----------
Total current assets 1,038,335 659,114
Property, plant and equipment, net 335,703 250,852
Intangible assets, net 628,610 117,171
Other assets 76,806 41,049
----------- -----------
Total assets $ 2,079,454 $ 1,068,186
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 15,213 $ 1,877
Current portion of long-term debt 67,197 934
Accounts payable 79,460 49,951
Accrued income taxes payable 16,123 11,854
Accrued expenses and other current liabilities 192,695 156,008
----------- -----------
Total current liabilities 370,688 220,624
Long-term debt, net of current portion 913,714 253,755
Other long-term liabilities 35,528 23,472
Minority interest 14,683 1,712
Put options -- 84,503
Shareholders' equity:
Common stock, $.10 par value, authorized 437,500 shares,
issued and outstanding 197,851 in 2001 and 198,546 in 2000 19,785 19,855
Capital in excess of par value 340,050 315,039
Put options 52,450 --
Retained earnings 392,662 203,206
Accumulated other comprehensive loss (60,106) (53,980)
----------- -----------
Total shareholders' equity 744,841 484,120
----------- -----------
Total liabilities and shareholders' equity $ 2,079,454 $ 1,068,186
=========== ===========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
2
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands, except per share data) 2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues $ 321,990 $ 182,567 $ 883,704 $ 550,651
Cost of sales 150,128 94,391 417,191 284,769
--------- --------- --------- ---------
Gross profit 171,862 88,176 466,513 265,882
--------- --------- --------- ---------
Operating expenses:
Selling 41,036 23,818 98,641 62,434
General and administrative 32,042 19,599 84,669 62,414
Research and development 26,307 17,017 65,210 49,626
Amortization of intangible assets 5,404 2,653 13,226 6,408
Restructuring costs (accrual reversal) 1,317 (895) 1,097 (4,039)
--------- --------- --------- ---------
Total operating expenses 106,106 62,192 262,843 176,843
--------- --------- --------- ---------
Income from operations 65,756 25,984 203,670 89,039
Other income (expense):
Interest income 5,892 4,708 19,633 9,397
Interest expense (13,913) (3,637) (28,731) (10,882)
Other income, net 6,316 8,312 17,247 14,020
Gain on partial sale of IVAX Diagnostics, Inc. -- -- 10,278 --
--------- --------- --------- ---------
Total other income (expense), net (1,705) 9,383 18,427 12,535
--------- --------- --------- ---------
Income from continuing operations before
income taxes and minority interest 64,051 35,367 222,097 101,574
Provision for income taxes 9,938 4,352 39,904 10,975
--------- --------- --------- ---------
Income from continuing operations before
minority interest 54,113 31,015 182,193 90,599
Minority interest 228 (95) 143 (533)
--------- --------- --------- ---------
Income from continuing operations 54,341 30,920 182,336 90,066
Extraordinary item - gain (loss) on extinguishment
of debt, net of taxes 7,120 -- 7,120 (2,254)
Cumulative effect of a change in accounting
principle, net of tax benefit of $2,773 -- -- -- (6,471)
--------- --------- --------- ---------
Net income $ 61,461 $ 30,920 $ 189,456 $ 81,341
========= ========= ========= =========
(Continued)
3
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continuation)
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
(In thousands, except per share data) 2001 2000 2001 2000
-------- -------- -------- --------
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ 0.27 $ 0.16 $ 0.91 $ 0.46
Extraordinary item 0.04 -- 0.04 (0.01)
Cumulative effect of a change in accounting
principle -- -- -- (0.03)
-------- -------- -------- --------
Net income $ 0.31 $ 0.16 $ 0.95 $ 0.42
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations $ 0.26 $ 0.15 $ 0.88 $ 0.44
Extraordinary item 0.04 -- 0.03 (0.01)
Cumulative effect of a change in accounting
principle -- -- -- (0.03)
-------- -------- -------- --------
Net income $ 0.30 $ 0.15 $ 0.91 $ 0.40
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 200,089 198,452 199,743 195,323
======== ======== ======== ========
Diluted 214,497 206,786 224,144 203,106
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
COMMON STOCK ACCUMULATED
-------------------- CAPITAL IN OTHER
NUMBER OF EXCESS OF PUT RETAINED COMPREHENSIVE
SHARES AMOUNT PAR VALUE OPTIONS EARNINGS INCOME(LOSS) TOTAL
--------- ------ ---------- -------- ----------- ------------- --------
BALANCE, December 31, 2000 158,837 $15,884 $319,010 $- $203,206 $(53,980) $484,120
Effect of 5-for-4 stock split 39,709 3,971 (3,971) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Split adjusted, December 31, 2000 198,546 19,855 315,039 -- 203,206 (53,980) 484,120
Comprehensive income:
Net income -- -- -- -- 189,456 -- 189,456
Translation adjustment -- -- -- -- -- (7,747) (7,747)
Unrealized net gain on
available-for-sale equity
securities, net of tax -- -- -- -- -- 1,621 1,621
--------
Comprehensive income 183,330
Exercise of stock options 1,453 145 13,368 -- -- -- 13,513
Tax effect of option exercises -- -- 18,037 -- -- -- 18,037
Employee stock purchases 28 3 635 -- -- -- 638
Repurchase and retirement of
common stock (5,145) (515) (113,553) -- -- -- (114,068)
Shares issued in acquisitions 2,907 291 77,266 -- -- -- 77,557
Put options issued, net of premium -- -- (66,252) 71,075 -- -- 4,823
Expired put options -- -- 68,933 -- -- -- 68,933
Value of stock options issued to
non-employees -- -- 173 -- -- -- 173
Issued to settle put options 62 6 26,404 (18,625) -- -- 7,785
------- ------- -------- -------- -------- -------- --------
BALANCE, September 30, 2001 197,851 $19,785 $340,050 $ 52,450 $392,662 $(60,106) $744,841
======= ======= ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
--------- ---------
(In thousands, except per share data)
Cash flows from operating activities:
Net income $ 189,456 $ 81,341
Adjustments to reconcile net income to net cash
flows from operating activities:
Restructuring costs (reversal of restructuring reserve
established in prior years) 1,097 (4,039)
Depreciation and amortization 36,192 23,872
Deferred tax provision (17,461) (13,961)
Tax effect of current year stock option exercises 10,647 13,549
Compensation expense related to partial sale of IVAX Diagnostics 1,041 --
Value of stock options issued to non-employees 173 --
Provision for doubtful accounts 2,852 664
Provision for inventory obsolescence 7,973 2,424
Minority interest (143) 533
Equity in earnings of affiliates (882) (556)
(Gain) loss on extinguishment of debt (7,120) 2,254
Gain on partial sale of IVAX Diagnostics (10,278) --
Gain on sale of product rights (8,312) (6,074)
Gains on disposal of assets, net (3,436) (480)
Cumulative effect of a change in accounting principle -- 6,471
Changes in operating assets and liabilities:
Accounts receivable (65,448) 7
Inventories (26,875) (38,332)
Other current assets (11,300) (4,637)
Other assets 2,007 (6,569)
Accounts payable, accrued expenses, and other
current liabilities 14,770 (9,908)
Other long-term liabilities (1,626) (3,160)
--------- ---------
Net cash flows from operating activities 113,327 43,399
--------- ---------
Cash flows from investing activities:
Proceeds from sale of product rights 8,312 6,074
Capital expenditures (44,255) (28,627)
Proceeds from sales of assets 19,015 417
Proceeds from partial sale of IVAX Diagnostics 22,285 --
Acquisitions of patents, trademarks, licenses and other
intangible assets (11,162) (1,516)
Acquisitions of businesses, net of cash acquired (467,511) (10,007)
Investment in affiliated companies (14,266) (4,126)
Investment in marketable securities (57,457) (82,783)
--------- ---------
Net cash flows from investing activities (545,039) (120,568)
--------- ---------
Cash flows from financing activities:
Borrowings on long-term debt and loans payable 724,235 251,960
Payments on long-term debt and loans payable (78,197) (52,665)
Exercise of stock options and employee stock purchases 14,151 33,733
Repurchases of common stock net of put option premium (117,030) (13,784)
--------- ---------
Net cash flows from financing activities 543,159 219,244
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (5,033) (3,496)
--------- ---------
Net increase in cash and cash equivalents 106,414 138,579
Cash and cash equivalents at the beginning of the year 174,794 41,408
--------- ---------
Cash and cash equivalents at the end of the period $ 281,208 $ 179,987
========= =========
(Continued)
6
IVAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continuation)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
--------- ---------
(In thousands, except per share data)
Supplemental disclosures:
Interest paid $ 12,047 $ 3,268
========= =========
Income tax payments $ 46,033 $ 14,645
========= =========
Supplemental schedule of non-cash investing and financing activities:
Information related to acquisitions which were accounted for under the
purchase method of accounting is summarized as follows:
Fair value of assets acquired $ 228,114 26,173
Liabilities assumed (165,097) (11,465)
--------- ---------
63,017 14,708
Reduction of minority interest -- 7,202
--------- ---------
Net assets acquired 63,017 21,910
========= =========
Purchase price:
Cash, net of cash acquired 461,153 9,932
Acquisition costs 6,359 75
Fair market value of stock and options issued 77,056 86,922
--------- ---------
Total 544,568 96,929
--------- ---------
Goodwill $ 481,551 $ 75,019
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
7
IVAX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share data)
(1) GENERAL:
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q and, therefore, do not include
all information normally included in audited financial statements. However, in
the opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the results of operations, financial
position and cash flows have been made. The results of operations and cash flows
for the nine months ended September 30, 2001, are not necessarily indicative of
the results of operations and cash flows which may be reported for the remainder
of 2001. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in IVAX' Annual Report on Form 10-K
for the year ended December 31, 2000.
Certain prior period amounts presented in the consolidated financial
statements have been reclassified to conform to the current period's
presentation.
(2) CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES
All liquid interest-earning investments with original maturities of
three months or less are classified as cash equivalents. Short-term investments
in marketable debt securities generally mature between three months and three
years from date of purchase. These cash equivalents and other short-term
marketable securities consist primarily of taxable municipal bonds, corporate
bonds, government agency securities and commercial paper. It is IVAX'
intent to maintain a liquid portfolio to take advantage of investment
opportunities; therefore all securities are deemed short term, are classified as
available for sale securities and are recorded at market value using the
specific identification method. Unrealized gains and losses, net of tax, are
reflected in other comprehensive income in the accompanying balance sheets.
Realized gains and losses are included in earnings using the specific
identification method.
(3) INVENTORIES:
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Raw materials $101,332 $ 72,991
Work-in-process 30,405 27,683
Finished goods 119,314 78,236
-------- --------
Total inventories $251,051 $178,910
======== ========
8
(4) EARNINGS PER SHARE:
On April 20, 2001, IVAX' Board of Directors approved a 5-for-4 stock
split effective May 18, 2001, in the form of a stock dividend for shareholders
of record on May 1, 2001, and a proportional increase in the number of
authorized shares. All share and per share amounts have been retroactively
restated for the split, except where otherwise indicated. Reconciliations of the
numerator and denominator of the basic and diluted earnings per share
computation for income from continuing operations are as follows:
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Income from continuing operations, basic $ 54,341 $ 30,920 $182,336 $ 90,066
Interest reduction on conversion of convertible debt 2,183 -- 15,070 --
-------- -------- -------- --------
Income from continuing operations, diluted $ 56,524 $ 30,920 $197,406 $ 90,066
======== ======== ======== ========
Denominator:
Basic weighted average number of shares outstanding 200,089 198,452 199,743 195,323
Effect of dilutive securities - stock options and
warrants, and convertible debt 14,408 8,334 24,401 7,783
-------- -------- -------- --------
Diluted weighted average number of shares
outstanding 214,497 206,786 224,144 203,106
======== ======== ======== ========
Not included in the calculation of diluted earnings
per share because their impact is antidilutive:
Stock options outstanding 413 13 326 333
Convertible debt 18,017 8,413 -- 8,413
Put options 1,850 1,250 450 1,250
(5) REVENUES:
Net revenues are comprised of gross revenues less provisions for
expected customer returns, inventory credits, discounts, promotional allowances,
volume rebates, chargebacks and other allowances. The reserve balances related
to these provisions are included in "Accounts receivable, net of allowances for
doubtful accounts" and "Accrued expenses and other current liabilities" in the
accompanying consolidated balance sheets in the amounts of $120,412 and $75,621
respectively, at September 30, 2001, and $51,080 and $63,448, respectively, at
December 31, 2000.
(6) PARTIAL SALE OF IVAX DIAGNOSTICS, INC.:
On March 14, 2001, IVAX' wholly-owned subsidiary, IVAX Diagnostics,
Inc., was merged with b2bstores.com, a non-operating company with a significant
amount of cash, approximately $22,285, resulting in IVAX owning approximately
70% of the newly merged public company. IVAX received 20,000 shares of
b2bstores.com common stock in exchange for all of the outstanding shares of IVAX
Diagnostics, Inc. and b2bstores.com's name was changed to IVAX Diagnostics, Inc.
For accounting purposes, this transaction is treated as a partial sale of IVAX
Diagnostics, Inc. in exchange for cash of b2bstores.com. IVAX elected income
statement recognition as its accounting policy for sales of subsidiary stock and
recorded a gain of $10,278. Deferred taxes have not been recorded related to the
gain as it represents an outside basis difference and IVAX expects it can
recover its investment in IVAX Diagnostics, Inc. tax-free. Also recorded was
$1,041 of nondeductible compensation expense from outstanding options under the
IVAX Diagnostics, Inc. 1999 Stock Option Plan converting to a fair value plan as
a result of the merger. IVAX Diagnostics, Inc. is engaged in the development,
manufacture and marketing of diagnostic test kits, reagents and instruments.
9
(7) ACQUISITIONS:
On February 9, 2001, IVAX indirectly acquired Laboratorios Fustery,
S.A. de C.V. ("Fustery"), a Mexican pharmaceutical company, by purchasing the
outstanding securities of Fustery's parent, Maancirkel Holding B.V.
("Maancirkel"), a corporation organized under the laws of The Netherlands, from
Morcob CVA, an entity organized under the laws of Belgium pursuant to a stock
purchase agreement entered into among the parties on October 11, 2000. During
the first quarter of 2001, IVAX acquired Maancirkel for 1,656 shares of IVAX'
common stock, valued at $57,000, and $57,210 in cash, net of cash acquired. In
addition, IVAX paid $4 of other costs. During the second quarter of 2001, in
accordance with the stock purchase agreement, IVAX made an additional payment of
$16,309 in lieu of additional shares, representing contingent consideration
based on the market value of IVAX' common stock. The preliminary fair value of
net assets acquired was $19,768 resulting in goodwill of $94,446 being recorded.
This preliminary allocation is subject to change based on receipt of final
appraised values of assets acquired and liabilities assumed, which is expected
to be received within the allocation period. The operating results of Fustery
are included in the consolidated financial statements subsequent to the February
9, 2001, acquisition date.
On February 26, 2001, IVAX acquired the assets of a research
organization located in the United States for 609 shares of IVAX' common stock,
valued at $18,000, $4,650 in cash, net of cash acquired, and other costs of $51.
The fair value of net assets acquired was $7,085 resulting in goodwill of
$15,616 being recorded. The operating results of this company are included in
the consolidated financial statements subsequent to the February 26, 2001,
acquisition date.
On March 13, 2001, IVAX acquired Netpharma Scandinavia AB
("Netpharma"), a Swedish pharmaceutical company, for 624 shares of IVAX' common
stock, valued at $18,365, other costs of $20 and received cash of $1,036 in
excess of cash paid. In addition, additional shares of IVAX' common stock,
valued at $2,052, will be issued contingent on achievement of earnout targets
for each of the next two years. If the earnout targets are achieved, the number
of additional shares issued will be based on the exchange rate in effect on the
payment dates and the average price of IVAX' common stock just prior to April
30, 2002 and 2003. The preliminary fair value of net assets acquired was $227,
resulting in goodwill of $17,122 being recorded. This preliminary allocation is
subject to change based on receipt of final appraised values of assets acquired
and liabilities assumed, which is expected to be received within the allocation
period. The operating results of Netpharma are included in the consolidated
financial statements subsequent to the March 13, 2001, acquisition date.
On April 3, 2001, IVAX acquired the remaining 70% of Indiana Protein
Technologies, Inc. ("Indiana Protein") that it did not already own. Indiana
Protein was previously accounted for as an investment under the equity method of
accounting. This additional interest was acquired for $4,122 in cash, net of
cash acquired, and other costs of $10, of which $2,500 is subject to an earnout
period of 5 years. This acquisition resulted in an increase in net assets of $37
and goodwill of $4,095 being recorded. The operating results of Indiana Protein
are included in the consolidated financial statements subsequent to the April 3,
2001, acquisition date.
During the third quarter of 2001, IVAX acquired 99.9% of the
outstanding shares and American Depositary Shares ("ADS") of Laboratorio Chile
S.A. ("Lab Chile"), a Chilean pharmaceutical company, in two tender offers for
cash. On July 5, 2001, IVAX acquired the shares and ADS' tendered in the first
offer. IVAX commenced a second tender offer on July 31, 2001, that expired
August 29, 2001, for the remaining outstanding shares of Lab Chile. The total
purchase price, including acquisition costs of $6,274 less cash acquired of
$13,368, was $387,708. The fair value of net assets acquired, based on a balance
sheet as of July 5, 2001, was $35,900, resulting in an amount of cost in excess
of fair value of net assets of $351,808. Included in the preliminary fair value
of net assets acquired were approximately $3,900 of intangible assets with
definite lives and approximately $27,800 of intangible assets with indefinite
lives. This preliminary allocation is subject to change
10
based on receipt of final appraised values of assets acquired and liabilities
assumed, which is expected to be received within the allocation period.
Proforma information for the above acquisitions as if the purchases
occurred on January 1 of each year are presented below.
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
2001 2000 2001 2000
-------- -------- ---------- --------
Revenues $320,423 $257,166 $998,425 $778,125
Net income 57,141 36,810 201,301 110,113
Diluted weighted average shares 206,085 209,676 224,678 205,995
Diluted earnings per share $ 0.28 $ 0.18 $ 0.96 $ 0.53
The calculation of diluted earnings per share for the nine months ended
September 30, 2001, includes $15,070 of interest reduction on the assumed
conversion of convertible debt. These proforma results of operations are not
necessarily indicative of results that might have been achieved if the
acquisitions had actually occurred at the beginning of the periods presented.
During the first quarter of 2001, IVAX received $1,673 representing a
reduction of purchase price and goodwill of Laboratorios Elmor, S.A. that was
acquired in June 2000. In addition, IVAX paid $137 of other costs, representing
an increase to the purchase price and goodwill of Wakefield Pharmaceuticals,
Inc. that was acquired in September 2000.
(8) ACQUISITION OF PATENTS, TRADEMARKS, LICENSES AND OTHER INTANGIBLE ASSETS
During 2001, IVAX acquired the exclusive rights to develop and market
Talampanel for $10,000. In addition, IVAX issued 17 shares of its common stock
valued at $500 to acquire a patent.
(9) DEBT:
On May 4, 2001, IVAX sold $725,000 of its 4.5% Convertible Senior
Subordinated Notes due 2008 to UBS Warburg LLC (the "Initial Purchaser"). The
Initial Purchaser then sold the 4.5% Notes to Qualified Institutional Buyers
pursuant to Rule 144A of the Securities Act to institutional "accredited
investors" (as defined in Rule 501 under the Securities Act) in compliance with
Regulation D under the Securities Act and to non-U.S. persons outside the United
States in compliance with Regulation S. IVAX received net proceeds of
approximately $706,150. The 4.5% Notes were initially issued in transactions
exempt from registration under the Securities Act; however, as of November 2001,
IVAX has registered the resale of the 4.5% Notes by certain noteholders. The
4.5% Notes are convertible at any time prior to maturity, unless previously
redeemed, into .02496875 shares of IVAX' common stock per $1 of principal amount
of the 4.5% Notes. This ratio results in a conversion price of approximately
$40.05 per share. The 4.5% Notes are redeemable by IVAX on or after May 29,
2004. The net proceeds from the sale of the 4.5% Notes are expected to be used
primarily to fund the acquisition of businesses and products, to fund the
research, development, testing and commercialization of IVAX' pharmaceutical
products and for general working capital purposes.
During the third quarter of 2001, IVAX repurchased $65,000 face value
of the 4.5% Convertible Senior Subordinated Notes due 2008 at a total cost of
$52,070, and expensed $1,628 of related debt issuance costs. This resulted in an
extraordinary gain on extinguishment of debt of $11,302, net of income taxes of
$4,182.
As of September 30, 2001, the outstanding current portion of long-term
debt included $66,100 assumed in the acquisition of Lab Chile. These loans
mature between March 2002 and September 2002 and bear interest rates of LIBOR
plus .9% to LIBOR plus 1%.
Lab Chile engaged in a partial hedge of its $63,000 U.S. dollar
denominated loans against a possible devaluation of the Argentine peso, by
entering into forward contracts, in early 2001, to purchase $55,000 U.S.
dollars at contract prices ranging from 1.0408 to 1.0412 pesos with expiration
dates in January 2002. If the contracts expire unexercised, a fee of $2,247
would be paid. Due to the lack of liquidity in the currency forwards market in
Argentina, the most reliable indicator of fair value is the amortized amount of
the original contract fee. Accordingly, these contracts were recorded as an
asset and a liability at the original contract fee amount and are being
amortized over the life of the contracts.
11
(10) INCOME TAXES:
The provision for income taxes from continuing operations consists of
the following:
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
2001 2000 2001 2000
------ -------- -------- --------
Current:
Domestic $ 984 $ 14,369 $ 41,690 $ 14,863
Foreign 8,732 1,490 15,675 10,073
Deferred 222 (11,507) (17,461) (13,961)
------ -------- -------- --------
Total $9,938 $ 4,352 $ 39,904 $ 10,975
====== ======== ======== ========
The domestic current provision for the nine months ended September 30,
2001, was favorably impacted by $21,259 from utilization of previously reserved
net operating loss and tax credit carryforwards and the non-taxable gain on the
partial sale of IVAX Diagnostics, Inc. offset by a $7,600 tax provision
associated with a U.S. taxable gain on the intercompany assignment of a
contract, which was eliminated for financial reporting purposes. Payment of the
current tax liability for the year ended December 31, 2001, for domestic and
foreign operations will be reduced by $8,132 and $2,515, respectively,
representing the incremental impact of compensation expense deductions
associated with non-qualified stock option exercises during the nine months
ended September 30, 2001. These amounts were credited to "Capital in excess of
par value."
During the second quarter of 2001, $11,216 of the valuation allowance
previously recorded against the domestic net deferred tax asset was reversed due
to management's expectation of increased domestic taxable income in future years
partially offset by $7,390 tax effect of prior years' stock option exercises,
which was credited to "Capital in excess of par value." In addition, during the
second and third quarters of 2001, domestic deferred tax assets of $12,606 were
recognized relating to originating temporary differences and to reversal,
through the effective rate calculation, of the valuation allowance previously
recorded against the domestic net deferred tax asset based on management's
expectation of increased domestic taxable income in the current year. As of
September 30, 2001, a domestic net deferred tax asset of $64,768 and an
aggregate foreign net deferred tax asset, in jurisdictions with positive net
deferred tax assets, of $9,318 are included in "Other current assets" and "Other
assets" in the accompanying consolidated balance sheet. The domestic net
deferred tax asset was approximately 9% reserved as of September 30, 2001.
Realization of the net deferred tax assets is dependent upon generating
sufficient future domestic and foreign taxable income. Although realization is
not assured, management believes it is more likely than not that the net
deferred tax assets will be realized.
(11) COMPREHENSIVE INCOME:
The components of IVAX' comprehensive income are as follows:
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
2001 2000 2001 2000
------- -------- -------- --------
Net income $61,461 $ 30,920 $189,456 $ 81,341
Unrealized gains (losses) on marketable securities
and derivative contracts, net of taxes 1,619 (95) 1,621 89
Foreign currency translation adjustments 7,305 (10,434) (7,747) (34,598)
------- -------- -------- --------
Comprehensive income $70,385 $ 20,391 $183,330 $ 46,832
======= ======== ======== ========
12
(12) SHAREHOLDERS' EQUITY:
On April 20, 2001, IVAX' Board of Directors approved a 5-for-4 stock
split effective May 18, 2001, in the form of a stock dividend. All weighted
average shares, outstanding shares, per share earnings and price and stock plan
data contained in the accompanying financial statements have been retroactively
adjusted to give effect to the stock split. To reflect the split, common stock
was increased and capital in excess of par value was decreased by $3,971.
In connection with the share repurchase program, during the first nine
months of 2001, IVAX issued nine free-standing put options for 2,475 shares,
bearing strike prices ranging from $19.00 to $31.50, expiring from November 2001
through April 2002 and collected premiums totaling $4,823. The market value of
IVAX' common stock on November 7, 2001 was $18.95. In addition, free-standing
put options for 2,488 shares of IVAX common stock expired unexercised. One put
option for 281 shares was exercised by the holder at a strike price of $27.68.
IVAX elected the physical settlement method and paid $7,785 in exchange for the
underlying shares. Two put options for 906 shares were exercised by the holder
at strike prices ranging from $27.68 to $29.80. IVAX elected the net share
settlement method and issued 62 shares of IVAX' common stock in settlement of
the obligation.
During the first nine months of 2001, IVAX repurchased 5,145 shares of
its common stock at a total cost, including commissions, of $121,853. This was
partially offset by $7,785 reclassified from temporary equity upon exercise
of one put option for 281 shares mentioned above.
(13) BUSINESS SEGMENT INFORMATION:
IVAX is a multinational company with subsidiaries that operate in the
pharmaceutical business and are engaged in the research, development,
manufacture, marketing and sale of pharmaceutical products. Pharmaceutical
products include prescription drugs and over-the-counter products. IVAX reviews
financial information, allocates resources and manages its business by major
operating subsidiary. However, IVAX' pharmaceutical subsidiaries utilize similar
production processes, and sell similar types of products to similar types of
customers under similar regulatory environments using similar methods of
distribution. IVAX also expects these subsidiaries to have similar long-term
financial performance. Since these pharmaceutical subsidiaries meet the
aggregation criteria under paragraph 17 of Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, the pharmaceutical operating subsidiaries are aggregated into one
reportable segment, pharmaceutical, and all other subsidiaries are reported in
Corporate and Other.
To provide additional information, IVAX has disaggregated its
pharmaceutical segment results into the geographic regions in which the
subsidiaries are located. The North America region contains IVAX' subsidiaries
in the United States and Canada. The Europe region contains subsidiaries located
in Europe. Latin America consists of subsidiaries in South America and Mexico.
Corporate and Other includes the diagnostic subsidiaries, animal health
subsidiary and subsidiaries located in other geographic regions as well as
corporate activities and elimination of intercompany transactions.
The information provided is based on internal reports and was developed
and utilized by management for the sole purpose of tracking trends and changes
in the results of the regions. The information, including the allocations of
expense and overhead, was calculated based on a management approach and may not
reflect the actual economic costs, contributions or results of operations of the
regions as stand alone businesses. If a different basis of presentation or
allocation were utilized, the relative contributions of the regions might differ
but the relative trends would, in management's view, likely not be materially
impacted.
13
Other revenues included in "Net revenues" in the accompanying
consolidated statements of operations consist of license fees, royalties and
product development fees, received primarily from one company.
REVENUES BY REGION
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
2001 2000 2001 2000
--------- --------- --------- ---------
North America
External sales $ 139,804 $ 71,098 $ 440,793 $ 213,336
Intersegment sales 758 121 1,221 422
Other revenues 1,152 274 1,420 20,281
--------- --------- --------- ---------
Net revenues - North America 141,714 71,493 443,434 234,039
--------- --------- --------- ---------
Europe
External sales 75,646 62,203 221,844 205,220
Intersegment sales 13,923 6,786 35,123 22,387
Other revenues 14,562 20,351 43,451 45,492
--------- --------- --------- ---------
Net revenues - Europe 104,131 89,340 300,418 273,099
--------- --------- --------- ---------
Latin America
External sales 78,375 19,240 143,545 37,531
Other revenues 1,021 378 1,556 1,188
--------- --------- --------- ---------
Net revenues - Latin America 79,396 19,618 145,101 38,719
--------- --------- --------- ---------
Corporate & Other
External sales 9,615 9,126 27,346 27,694
Intersegment sales (14,681) (6,906) (36,344) (22,809)
Other revenues 1,815 (104) 3,749 (91)
--------- --------- --------- ---------
Net revenues - Corporate & Other (3,251) 2,116 (5,249) 4,794
--------- --------- --------- ---------
Consolidated net revenues $ 321,990 $ 182,567 $ 883,704 $ 550,651
========= ========= ========= =========
PROFITS BY REGION
PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS
2001 2000 2001 2000
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST:
North America $ 25,742 $ 9,222 $ 123,371 $ 62,324
Europe 16,420 10,510 6,114 18,365
Latin America 11,307 539 14,395 1,397
Corporate & Other 644 10,744 38,313 8,513
--------- --------- --------- ---------
Income from continuing operations
before minority interest 54,113 31,015 182,193 90,599
--------- --------- --------- ---------
NET INCOME:
Minority interest 228 (95) 143 (533)
Extraordinary item 7,120 -- 7,120 (2,254)
Cumulative effect of a change in accounting principle -- -- -- (6,471)
--------- --------- --------- ---------
Net income $ 61,461 $ 30,920 $ 189,456 $ 81,341
========= ========= ========= =========
14
SEPTEMBER 30,
LONG-LIVED ASSETS: 2001 2000
---------- --------
North America $ 77,663 $ 57,279
Europe 224,454 215,706
Latin America 593,197 65,012
Corporate & Other 109,050 36,065
---------- --------
Total $1,004,364 $374,062
========== ========
(14) RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 2001, IVAX adopted SFAS No. 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in
Accumulated Other Comprehensive Loss ("OCL") and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
Certain forecasted transactions are exposed to foreign currency risk.
The principal currency hedged is the Irish punt against the British pound.
Forward options used to hedge a portion of forecasted international expenses for
up to one year in the future are designated as cash flow hedging instruments.
The adoption of SFAS 133 on January 1, 2001, resulted in an increase to OCL of
$1,613, net of tax of $179. The increase to OCL is mostly attributable to
unrealized gains on cash flow hedges. The net derivative gains included in OCL
as of January 1, 2001, will be reclassified into earnings during the twelve
months ended December 31, 2001.
During the first quarter of 2001, IVAX adopted EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock, which addresses the classification and
accounting treatment of equity derivative contracts (such as IVAX' put options)
as equity instruments (either temporary or permanent) or assets and liabilities.
As a result, put options were reclassified from temporary equity to permanent
equity. As of September 30, 2001, IVAX had outstanding eight freestanding put
options for 1,850 shares of IVAX' common stock that were issued in connection
with the share repurchase program. The put options bore strike prices ranging
from $19.00 to $31.50 and expire from November 2001 through April 2002.
During the first quarter of 2001, IVAX adopted Issue #3 of EITF Issue
No. 00-22, Accounting for Points and Certain Other Time or Volume Based Sales
Incentive Offers and Offers for Free Products or Services to be Delivered in the
Future. Final consensus was reached on the recognition, measurement and income
statement classification of cash rebates or refunds that are time and volume
based. Final consensus has not been reached on four other items under
consideration. EITF 00-22 requires that cash rebates or refunds redeemable if
the customer completes a specified cumulative level of revenue transactions or
remains a customer for a specified time period should be recognized as a
reduction of revenue based on a systematic and rational allocation of the cost
of honoring the rebate or refund earned and claimed to each of the underlying
revenue transactions that result in progress toward earning the
15
rebate or refund. The effective date of adoption is fiscal quarters ending after
February 15, 2001. The impact of adoption was not significant.
EITF Issue No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products, is effective for
periods beginning after December 31, 2001. It states that consideration paid by
a vendor to a reseller should be classified as a reduction of revenues in the
income statement unless an identifiable benefit is or will be received from the
reseller that is sufficiently separable from the purchase of the vendor's
products and the vendor can reasonably estimate the fair value of the benefit.
Management believes that the impact of adoption will not be significant.
Effective July 1, 2001, IVAX adopted SFAS 141, Business Combinations,
which addresses the financial accounting and reporting for business
combinations. It supersedes APB Opinion No. 16, Business Combinations, and SFAS
38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises. All
business combinations under the scope of this statement must be accounted for
using the purchase method of accounting. This statement applies to all business
combinations initiated after June 30, 2001. The adoption of SFAS 141 did not
have a material impact on IVAX' financial condition or results of operations.
SFAS 142, Goodwill and Other Intangible Assets, addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses accounting for
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) at acquisition. It also
addresses accounting for goodwill and other intangible assets after they have
been initially recognized in the financial statements. Intangible assets that
have indefinite lives and goodwill will no longer be amortized, but rather they
must be tested at least annually for impairment using fair values. Intangible
assets that have finite useful lives will be amortized over their useful lives.
The statement is effective in fiscal years beginning after December 15, 2001;
except that goodwill and intangible assets acquired after June 30, 2001, will be
subject immediately to the non-amortization and amortization provisions of this
statement. Beginning in 2002, IVAX will reverse the entire balance of negative
goodwill recorded in the balance sheet as of January 1, 2002, of $4,200, through
a cumulative effect of a change in accounting principle; thereby increasing net
income by this amount for the year. In addition, amortization of goodwill
acquired prior to June 30, 2001 will cease. This will increase net income by
approximately $2,700 per quarter, or $10,800 per year. However, management is
unable to estimate the extent of impairment, if any, of intangible assets with
indefinite lives and goodwill, that may need to be recorded in 2002 or future
years.
SFAS 143, Accounting for Asset Retirement Obligations, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal operation of a long-lived asset, except for certain obligations
of lessees. It requires that the fair value of an asset retirement obligation be
recognized as a liability in the period in which it is incurred if a reasonable
estimate can be made and that the associated retirement costs be capitalized as
part of the carrying amount of the long-lived asset. It is effective for fiscal
years beginning after June 15, 2002. Management believes that the impact of
adoption of this statement will not be significant.
SFAS 144, Accounting for the Impairment or Disposal of Long-lived
Assets, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS 121, Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of, and
certain provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a
Segment of a Business
16
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. It also amends ARB No. 51,
Consolidated Financial Statements. It establishes a single accounting model for
the accounting for a segment of a business accounted for as a discontinued
operation that was not addressed by SFAS 121 and resolves other implementation
issues related to SFAS 121. It is effective for fiscal periods beginning after
December 15, 2001. Management believes that the impact of adoption of this
statement will not be significant.
(15) LEGAL PROCEEDINGS:
With respect to the case styled American BioScience, Inc. v. Donna E.
Shalala, et al., previously reported in IVAX' Annual Report on Form 10-K for the
year ended December 31, 2000, on March 30, 2001, the appellate court vacated the
district court's decision and remanded the case based on the Food and Drug
Administration's ("FDA") failure to file an administrative record in the court
below. On April 6, 2001, the FDA filed its administrative record and American
BioScience, Inc. ("ABI") renewed its motion for a temporary restraining order or
preliminary injunction. On April 19, 2001, the district court again denied ABI's
motion. ABI appealed this ruling, and on May 4, 2001, the appellate court
ordered that the appeal be expedited. On November 6, 2001, the federal appeals
court for the D.C. circuit reversed a prior order by the U.S. District Court in
Washington, D.C., which subsequently allowed the FDA to grant final marketing
approval for IVAX Research, Inc.'s (formerly Baker Norton Pharmaceuticals, Inc.)
generic paclitaxel product. The appellate court directed the district court to
vacate the FDA's order and remanded the matter to the agency. IVAX is reviewing
the appellate opinion and has 45 days in which to ask for reconsideration by the
appellate court. The appellate court's ruling will not become final prior to the
expiration of the 45-day period. IVAX believes the appellate court's decision is
incorrect and intends to seek reconsideration of the ruling. While management
believes it has meritorious defenses and that ABI's underlying patent claim is
"frivolous", the process of resolving matters through litigation is inherently
uncertain. Although management believes it unlikely, a final decision
unfavorable to IVAX in the case on appeal or in the case involving the
non-infringement, validity, and enforceability of ABI's patents could prevent
IVAX from continuing its sales of paclitaxel and could, with respect to ABI's
claims of infringement of its patent, result in damages being imposed on IVAX,
any of which could have a material adverse effect on IVAX' results of operations
and financial position. Based on management's review with legal counsel of the
cases and ABI's claims, and a review of the related regulatory and political
issues, management considers an unfavorable outcome unlikely and does not
believe that IVAX will be prevented from continuing to market paclitaxel. IVAX
will continue to pursue its counterclaims against ABI based on antitrust and
unfair competition.
With respect to the case styled Bristol Myers Squibb Company v. Zenith
Goldline Pharmaceuticals, Inc., et al., previously reported in IVAX' Annual
Report on Form 10-K for the year ended December 31, 2000, on April 20, 2001, the
appellate court affirmed the district court's grant of summary judgment of
invalidity with respect to all but two of the asserted claims of Bristol's
patents and remanded the remaining claims to the district court for further
proceedings. The Company will now pursue its counterclaims against Bristol based
on antitrust and unfair competition.
17
(16) RESTRUCTURING COSTS:
The components of restructuring costs, spending and other activity, as
well as the remaining reserve balances at September 30, 2001, which are included
in "Accrued expenses and other current liabilities" in the accompanying
consolidated balance sheets, are as follows:
EMPLOYEE TOTAL
TERMINATION PLANT RESTRUCTURING
BENEFITS CLOSURES RESERVES
----------- -------- -------------
Balance at January 1, 2001 $ 110 $ 619 $ 729
Provisions (reversals) 4 (69) (65)
Cash payments (78) (78) (156)
Non-cash activities (9) (9) (18)
----- ----- -----
Balance at September 30, 2001 $ 27 $ 463 $ 490
===== ===== =====
During the third quarter of 2001, IVAX incurred $1,317 of
restructuring costs, primarily severance, related to the integration of IVAX'
Argentine operations with the Argentine operations of Lab Chile. These costs
were expensed when paid.
(17) SUBSEQUENT EVENTS:
On October 8, 2001, IVAX acquired the worldwide rights for the
dermatological use of loteprednol etabonate, a new "soft" corticosteroid to
treat dermatological conditions for $500 in cash.
On October 16, 2001, IVAX completed the acquisition of the currently
marketed intranasal steroid brand products, Nasarel and Nasalide, for the
treatment of allergic rhinitis, from Elan Corporation, plc. for $120,000 in
cash.
During October 2001, IVAX repaid $15,000 of long-term debt assumed
in the acquisition of Lab Chile.
Through October 31, 2001, IVAX repurchased 528 shares of its common
stock at a total cost, including commissions, of $11,472.
On November 1, 2001, one put option for 250 shares was exercised by the
holder at a strike price of $31.50. IVAX has elected the net share settlement
method and will issue approximately 138 shares in settlement of the obligation.
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements, the related notes to consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations included in IVAX' Annual Report on Form 10-K
for the year ended December 31, 2000, and the unaudited interim consolidated
financial statements and the related notes to unaudited interim consolidated
financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
All per share amounts have been retroactively restated to reflect the 5-for-4
stock split paid May 18, 2001, to shareholders of record on May 1, 2001. Certain
prior period amounts presented have been reclassified to conform to the current
period's presentation.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Net income was $189.5 million, or $.91 per share (diluted), for the
nine months ended September 30, 2001, compared to $81.3 million, or $.40 per
share, for the nine months ended September 30, 2000. Income from continuing
operations was $182.3 million, or $.88 per share (diluted), for the nine months
ended September 30, 2001, compared to $90.1 million, or $.44 per share, for the
same period of the prior year.
NET REVENUES AND GROSS PROFIT
Net revenues for the nine months ended September 30, 2001, totaled
$883.7 million, an increase of $333.0 million, or 61%, from the $550.7 million
reported in the same period of the prior year. This increase was comprised
primarily of increases of $209 million, $106 million and $27 million in net
revenues from North American, Latin American and European subsidiaries,
respectively.
North American subsidiaries net revenues totaled $443 million for the
nine months ended September 30, 2001, compared to $234 million for the same
period of 2000. The $209 million, or 89%, increase in net revenues was primarily
attributable to increased sales volume, in part due to new product releases,
including paclitaxel, and higher sales prices for certain products, partially
offset by higher sales returns and allowances. North American subsidiaries
recorded provisions for sales returns and allowances that reduced gross sales by
$275 million and $131 million in 2001 and 2000, respectively. The increase of
$144 million, or 110%, was primarily due to reduced prices on certain
brand-equivalent pharmaceutical products and increase in sales volume. During
the third quarter of 2001, IVAX offered extended payment terms to certain
customers and extended the terms of sale on certain second quarter sales. In
addition, during the second quarter IVAX offered extended payment terms to
certain customers related to the launch of a product to a new class of
customers, which receivables were subsequently collected.
European subsidiaries generated net revenues of $300.4 million for the
nine months ended September 30, 2001, compared to $273.1 million for the same
period of the prior year. The $27.3 million, or 10%, increase in net revenues
was primarily due to higher sales volume and prices of certain products and
increased product development fees, partially offset by the effect of
unfavorable exchange rates. European subsidiaries recorded provisions for sales
returns and allowances that reduced gross sales by $24.8 million and $19.6
million in 2001 and 2000, respectively.
19
Latin American subsidiaries generated net revenues of $145.1 million
for the nine months ended September 30, 2001, compared to $38.7 million for the
same period of the prior year. The increase was primarily due to the sales
volume of Laboratorio Chile S.A. ("Lab Chile"), Laboratorios Fustery, S.A. de
C.V. ("Fustery"), and Laboratorios Elmor, S.A. ("Elmor") which were acquired
July 5, 2001, February 9, 2001, and June 19, 2000, respectively. Latin American
subsidiaries recorded provisions for sales returns and allowances that reduced
gross sales by $15 million and $3.4 million in 2001 and 2000, respectively.
Gross profit for the nine months ended September 30, 2001, increased
$200.6 million, or 75%, from the same period of the prior year. Gross profit was
$466.5 million (53% of net revenues) for the nine months ended September 30,
2001, compared to $265.9 million (48% of net revenues) for the nine months
ended September 30, 2000. The increase in gross profit percentage was primarily
attributable to the launch of paclitaxel in North America and higher margin
sales from the operations of Lab Chile, Fustery and Elmor. Increased competition
for paclitaxel and resulting pricing and volume pressures on paclitaxel, could
have an impact on future net revenues and gross profit.
OPERATING EXPENSES
Selling expenses totaled $98.6 million (11.2% of net revenues) for the
nine months ended September 30, 2001, compared to $62.4 million (11.3% of net
revenues) for the nine months ended September 30, 2000, an increase of $36.2
million, or 58%. The increase was due to higher expenses from the operations of
Lab Chile, Elmor, Fustery and Wakefield Pharmaceuticals, Inc. ("Wakefield"), and
increased sales force and promotional expenses at the European subsidiaries.
General and administrative expenses totaled $84.7 million (9.6% of net
revenues) for the nine months ended September 30, 2001, compared to $62.4
million (11.3% of net revenues) for the nine months ended September 30, 2000, an
increase of $22.3 million, or 35.7%. The increase is due to increased
professional fees at Corporate and additional general and administrative
expenses from the operations of Lab Chile, Fustery and Elmor.
Research and development expenses for the nine months ended September
30, 2001, increased $15.6 million, or 31.4%, to a total of $65.2 million (7.4%
of net revenues), compared to $49.6 million (9% of net revenues) for the nine
months ended September 30, 2000 due primarily to increased biostudies. IVAX'
future level of research and development expenditures will depend on, among
other things, the outcome of clinical testing of products under development,
delays or changes in government required testing and approval procedures,
technological and competitive developments, strategic marketing decisions and
liquidity.
Amortization expense for the nine months ended September 30, 2001,
increased $6.6 million, from $6.4 million to $13.2 million, due primarily to the
amortization of goodwill arising from the acquisitions of Elmor and Fustery.
OTHER INCOME (EXPENSE)
Interest income and interest expense increased $10.2 million and $17.8
million, respectively, for the nine months ended September 30, 2001, as compared
to the nine months ended September 30, 2000. The increases in interest income
and expense are due primarily to additional cash on hand and indebtedness from
the issuance of $725 million of 4.5% Convertible Senior Subordinated Notes in
May 2001.
20
Other income, net increased $3.2 million for the nine months ended
September 30, 2001, as compared to the nine months ended September 30, 2000. The
increase is primarily due to $6.3 million of investment gains and $2 million of
other income from the operations of Fustery and Lab Chile partially offset by
foreign currency losses at various European subsidiaries. Additionally, IVAX
recorded a gain on the partial sale of IVAX Diagnostics, Inc. of $10.3 million
in connection with IVAX Diagnostics, Inc.'s merger with b2bstores.com, Inc.
While IVAX does not currently have plans to sell additional shares of its
subsidiaries, such transactions could occur in the future.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net income was $61.5 million, or $.30 per share (diluted), for the
three months ended September 30, 2001, compared to $30.9 million, or $.15 per
share, for the three months ended September 30, 2000. Income from continuing
operations was $54.3 million, or $.26 per share (diluted), for the three months
ended September 30, 2001, compared to $30.9 million, or $.15 per share, for the
same period of the prior year.
NET REVENUES AND GROSS PROFIT
Net revenues for the three months ended September 30, 2001, totaled
$322 million, an increase of $139.4 million, or 76.4%, from the $182.6 million
reported in the same period of the prior year. This increase was comprised
primarily of increases of $70.2 million, $59.8 million and $14.8 million in net
revenues from North American, Latin American and European subsidiaries,
respectively.
North American subsidiaries net revenues totaled $141.7 million for the
three months ended September 30, 2001, compared to $71.5 million for the same
period of 2000. The $70.2 million, or 98%, increase in net revenues was
primarily attributable to increased sales volume, in part due to new product
releases, including paclitaxel, and higher sales volume and sales prices for
certain products, partially offset by higher sales returns and allowances. North
American subsidiaries recorded provisions for sales returns and allowances that
reduced gross sales by $135.8 million and $48.1 million in 2001 and 2000,
respectively. The increase of $87.7 million, or 182.2%, was primarily due to
reduced prices on certain brand-equivalent pharmaceutical products and increase
in sales volume. During the third quarter of 2001, IVAX offered extended
payment terms to certain customers.
European subsidiaries generated net revenue of $104.1 million for the
three months ended September 30, 2001, compared to $89.3 million for the same
period of the prior year. The $14.8 million, or 16.6%, increase in net revenues
was primarily due to higher sales prices for certain products and increased
product development fees, partially offset by the effect of unfavorable exchange
rates. European subsidiaries recorded provisions for sales returns and
allowances that reduced gross sales by $8.4 million and $7.2 million in 2001 and
2000, respectively.
Latin American subsidiaries generated net revenues of $79.4 million for
the three months ended September 30, 2001, compared to $19.6 million for the
same period of the prior year. The increase was primarily due to the sales
volume of Lab Chile, Fustery and Elmor. Latin American subsidiaries recorded
provisions for sales returns and allowances that reduced gross sales by $11.6
million and $1.6 million in 2001 and 2000, respectively.
Gross profit for the three months ended September 30, 2001, increased
$83.7 million, or 95%, from the same period of the prior year. Gross profit was
$171.9 million (53.4% of net revenues) for the three months ended September 30,
2001, compared to $88.2 million (48.3% of net revenues) for the three months
ended September 30, 2000. The increase in gross profit percentage is primarily
due to the launch
21
of paclitaxel, higher sales volume of certain products in North America and
higher margin sales from the operations of Lab Chile, Fustery and Elmor offset
by increased sales returns and allowances.
OPERATING EXPENSES
Selling expenses totaled $41 million (12.7% of net revenues) for the
three months ended September 30, 2001, compared to $23.8 million (13% of net
revenues) for the three months ended September 30, 2000, an increase of $17.2
million, or 72%. The increase was due to higher expenses from the operations of
Lab Chile, Fustery and Wakefield, and increased promotional expenses at the
European subsidiaries.
General and administrative expenses totaled $32 million (9.9% of net
revenues) for the three months ended September 30, 2001, compared to $19.6
million (10.7% of net revenues) for the three months ended September 30, 2000,
an increase of $12.4 million, or 63.3%. The increase is due to higher legal fees
at Corporate and additional general and administrative expenses from the
operations of Lab Chile and North American subsidiaries.
Research and development expenses for the three months ended September
30, 2001, increased $9.3 million, or 55%, to a total of $26.3 million (8.2% of
net revenues), compared to $17 million (9.3% of net revenues) for the three
months ended September 30, 2000 due primarily to increased biostudies. IVAX'
future level of research and development expenditures will depend on, among
other things, the outcome of clinical testing of products under development,
delays or changes in government required testing and approval procedures,
technological and competitive developments, strategic marketing decisions and
liquidity.
OTHER INCOME (EXPENSE)
Interest income increased $1.1 million and interest expense increased
$10.3 million for the three months ended September 30, 2001, compared to the
three months ended September 30, 2000, as a result of additional cash on hand
and indebtedness from the issuance of $725 million of 4.5% Convertible Senior
Subordinated Notes in May 2001. Other income, net decreased $2 million for the
three months ended September 30, 2001, compared to the three months ended
September 30, 2000, as a result primarily of a decrease of $4.2 million of
milestone fees offset by $2.7 million of investment gains.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2001, IVAX adopted SFAS No. 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in
Accumulated Other Comprehensive Loss ("OCL") and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
Certain forecasted transactions are exposed to foreign currency risk.
The principal currency hedged is the Irish punt against the British pound.
Forward options used to hedge a portion of forecasted
22
international expenses for up to one year in the future are designated as cash
flow hedging instruments. The adoption of SFAS 133 on January 1, 2001, resulted
in an increase to OCL of $1.6 million, net of tax of $.2 million. The increase
to OCL is mostly attributable to gains on cash flow hedges. The net derivative
gains included in OCL as of January 1, 2001, will be reclassified into earnings
during the twelve months ended December 31, 2001.
During the first quarter of 2001, IVAX adopted EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock, which addresses the classification and
accounting treatment of equity derivative contracts (such as IVAX' put options)
as equity instruments (either temporary or permanent) or assets and liabilities.
As a result, put options were reclassified from temporary equity to permanent
equity. As of September 30, 2001, IVAX had outstanding eight freestanding put
options for 1.85 million shares of IVAX' common stock that was issued in
connection with the share repurchase program. The put options bore strike prices
ranging from $19.00 to $31.50 and expire from November 2001 through April 2002.
During the first quarter of 2001, IVAX adopted Issue #3 of EITF Issue
No. 00-22, Accounting for Points and Certain Other Time or Volume Based Sales
Incentive Offers and Offers for Free Products or Services to be Delivered in the
Future. Final consensus was reached on the recognition, measurement and income
statement classification of cash rebates or refunds that are time and volume
based. Final consensus has not been reached on four other items under
consideration. EITF 00-22 requires that cash rebates or refunds redeemable if
the customer completes a specified cumulative level of revenue transactions or
remains a customer for a specified time period should be recognized as a
reduction of revenue based on a systematic and rational allocation of the cost
of honoring the rebate or refund earned and claimed to each of the underlying
revenue transactions that result in progress toward earning the rebate or
refund. The effective date of adoption is fiscal quarters ending after February
15, 2001. The impact of adoption was not significant.
EITF No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products, is effective for
periods beginning after December 31, 2001. It states that consideration paid by
a vendor to a reseller should be classified as a reduction of revenues in the
income statement unless an identifiable benefit is or will be received from the
reseller that is sufficiently separable from the purchase of the vendor's
products and the vendor can reasonably estimate the fair value of the benefit.
Management believes that the impact of adoption will not be significant.
Effective July 1, 2001, IVAX adopted SFAS 141, Business Combinations,
which addresses the financial accounting and reporting for business
combinations. It supersedes APB Opinion No. 16, Business Combinations, and SFAS
38, Accounting for Pre-acquisition Contingencies of Purchased Enterprises. All
business combinations under the scope of this statement must be accounted for
using the purchase method of accounting. This statement applies to all business
combinations initiated after June 30, 2001. The adoption of SFAS 141 did not
have a material impact on IVAX' financial condition or results of operations.
SFAS 142, Goodwill and Other Intangible Assets, addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses accounting for
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) upon acquisition. It also
addresses accounting for goodwill and other intangible assets after they have
been initially recognized in the financial statements. Intangible assets that
have indefinite lives and goodwill will no longer be amortized, but rather they
must be tested at least annually for impairment using fair values. Intangible
assets that have finite useful lives
23
will be amortized over their useful lives. The statement is effective in fiscal
years beginning after December 15, 2001; except that goodwill and intangible
assets acquired after June 30, 2001, will be subject immediately to the
non-amortization and amortization provisions of this statement. Beginning in
2002, IVAX will reverse the entire balance of negative goodwill recorded in the
balance sheet as of January 1, 2002, of $4.2 million, through a cumulative
effect of a change in accounting principle; thereby increasing net income by
this amount for the year. In addition, amortization of goodwill acquired prior
to June 30, 2001, will cease. This will increase net income by approximately
$2.7 million per quarter, or $10.8 million per year. However, management is
unable to estimate the extent of impairment, if any, of intangible assets with
indefinite lives and goodwill, that may need to be recorded in 2002 or future
years.
SFAS 143, Accounting for Asset Retirement Obligations, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal operation of a long-lived asset, except for certain obligations
of lessees. It requires that the fair value of an asset retirement obligation be
recognized as a liability in the period in which it is incurred if a reasonable
estimate can be made and that the associated retirement costs be capitalized as
part of the carrying amount of the long-lived asset. It is effective for fiscal
years beginning after June 15, 2002. Management believes that the impact of
adoption of this statement will not be significant.
SFAS 144, Accounting for the Impairment or Disposal of Long-lived
Assets, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
certain provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. It also
amends ARB No. 51, Consolidated Financial Statements. It establishes a single
accounting model for the accounting for a segment of a business accounted for as
a discontinued operation that was not addressed by SFAS 121 and resolves other
implementation issues related to SFAS 121. It is effective for fiscal periods
beginning after December 15, 2001. Management believes that the impact of
adoption of this statement will not be significant.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, IVAX' working capital was $667.6 million,
compared to $438.5 million at December 31, 2000. Cash and cash equivalents
totaled $281.2 million at September 30, 2001, compared to $174.8 million at
December 31, 2000. On July 5, 2001, IVAX acquired 99.6% of Lab Chile for $387.7
million in cash, net of cash acquired. See Note 7, Acquisitions, in the Notes to
Consolidated Financial Statements for additional information.
Net cash of $110.7 million was provided by operating activities during
the first nine months of 2001, compared to $43.4 million during the same period
of 2000. The increase in cash provided by operating activities was primarily the
result of improved operating earnings, partially offset by increases in
accounts receivable and inventories.
Net cash of $542.6 million was used for investing activities during the
first nine months of 2001, compared to $120.6 million during the same period
of the prior year. During the first nine months of 2001, $467.5 million was used
to acquire new businesses, consisting of $387.7 million for Lab Chile, $73.5
million for Fustery and $4.7 million for the assets of a U.S. research
organization, partially offset by $1 million of net cash provided from the
acquisition of Netpharma Scandinavia AB. During the first
24
nine months of 2000, IVAX spent $10.0 million to acquire businesses, primarily
Elmor and Wakefield as well as additional shares of its Czech Republic
subsidiary, IVAX-CR a.s. During the first nine months of 2001, IVAX spent $11.1
million to acquire patents and other intangible assets, primarily the exclusive
rights to develop and market Talampanel, compared to $1.5 million used to
acquire patents and other intangible assets during the nine months ended
September 30, 2000. IVAX spent $44.3 million on capital expenditures during the
first nine months of 2001 compared to $28.6 million in the same period of the
prior year. During 2001, IVAX purchased American Depositary Shares ("ADSs") of
Lab Chile for a total of $15.2 million, which were subsequently sold at a profit
of $3.6 million prior to commencement of the tender offer for Lab Chile in the
same period. In addition, IVAX' wholly-owned subsidiary, IVAX Diagnostics, Inc.,
was merged with b2bstores.com which provided cash of $22.3 million. IVAX
invested $55 million in marketable securities in the first nine months of 2001
compared to $82.8 million in the same period of 2000.
Net cash of $543.3 million was provided by financing activities during
the first nine months of 2001, compared to $219.2 million provided during the
same period of the prior year, primarily reflecting the $725 million 4.5%
Convertible Senior Subordinated Notes sold in May 2001, compared to the $250
million 5.5% Convertible Senior Subordinated Notes sold in May 2000. The
proceeds from the $725 million Convertible Senior Subordinated Notes were
partially offset by the $117.0 million repurchase of IVAX' common stock, net of
premiums collected on put options issued, during the first nine months of 2001
and the repurchase of $65 million face value of the 4.5% Convertible Senior
Subordinated Notes at a total cost of $52 million.
On October 8, 2001, IVAX acquired the worldwide rights for the
dermatological use of loteprednol etabonate, a new "soft" corticosteroid to
treat dermatological conditions for $.5 million in cash. On October 16, 2001,
IVAX completed the acquisition of the currently marketed intranasal steroid
brand products, Nasarel and Nasalide, for the treatment of allergic rhinitis,
from Elan Corporation, plc for $120 million in cash. During October 2001, IVAX
repaid $15 million of long-term debt assumed in the acquisition of Lab Chile.
IVAX plans to spend substantial amounts of capital in 2001 to continue
the research and development of pharmaceutical products. Although research and
development expenditures are expected to be between $90 million and $100 million
during 2001, actual expenditures will depend on, among other things, the outcome
of clinical testing or products under development, delays or changes in
government required testing and approval procedures, technological and
competitive developments, strategic marketing decisions and liquidity. In
addition, IVAX plans to spend between $60 million and $70 million in 2001 to
improve and expand its pharmaceutical and other related facilities.
CURRENCY FLUCTUATIONS
For the nine months ended September 30, 2001 and 2000, approximately
51% and 58%, respectively, of IVAX' net revenues were attributable to operations
which principally generated revenues in currencies other than the United States
dollar. Fluctuations in the value of foreign currencies relative to the United
States dollar affect the reported results of operations for IVAX. If the United
States dollar weakens relative to the foreign currency, the earnings generated
in the foreign currency will, in effect, increase when converted into United
States dollars and vice versa. Although IVAX does not speculate in the foreign
exchange market, it does, from time to time, manage exposures that arise in the
normal course of business related to fluctuations in foreign currency exchange
rates by entering into offsetting positions through the use of foreign exchange
forward contracts. As a result of exchange rate differences, net revenues
decreased by approximately $18 million for the nine months ended September 30,
2001, compared to the same period of the prior year.
25
INCOME TAXES
IVAX recognized a $39.9 million tax provision for the nine months ended
September 30, 2001, of which $14.6 million related to foreign operations. The
$25.3 million tax provision recognized by domestic operations was favorably
impacted by $21.3 million from utilization of previously reserved net operating
loss and tax credit carryforwards and the non-taxable gain on the partial sale
of IVAX Diagnostics, Inc. offset by a $7.6 million tax provision associated with
a U.S. taxable gain on the intercompany assignment of a contract, which was
eliminated for financial reporting purposes. Payment of the current tax
liability for the year ended December 31, 2001, for domestic and foreign
operations will be reduced by $8.1 million and $2.5 million, respectively,
representing the incremental impact of compensation expense deductions
associated with non-qualified stock option exercises during the nine months
ended September 30, 2001. These amounts were credited to "Capital in excess of
par value."
During the second quarter of 2001, $11.2 million of the valuation
allowance previously recorded against the domestic net deferred tax asset was
reversed due to management's expectation of increased domestic taxable income in
future years partially offset by $7.4 million tax effect of prior years' stock
option exercises, which was credited to "Capital in excess of par value." In
addition, during the second and third quarters of 2001, domestic deferred tax
assets of $12.6 million were recognized relating to originating temporary
differences and to reversal, through the effective rate calculation, of the
valuation allowance previously recorded against the domestic net deferred tax
asset based on management's expectation of increased domestic taxable income in
the current year. As of September 30, 2001, a domestic net deferred tax asset of
$64.8 million and an aggregate foreign net deferred tax asset, in jurisdictions
with positive net deferred tax assets, of $9.3 million are included in "Other
current assets" and "Other assets" in the accompanying consolidated balance
sheet. The domestic net deferred tax asset was approximately 9% reserved as of
September 30, 2001. Realization of the net deferred tax assets is dependent upon
generating sufficient future domestic and foreign taxable income. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized. IVAX expects its future domestic
tax rate will be at 35%. Management's estimates of future taxable income are
subject to revision due to, among other things, regulatory and competitive
factors affecting the pharmaceutical industries in the markets in which IVAX
operates. Such factors are further discussed in management's discussion and
analysis of financial condition and results of operations included in IVAX'
Annual Report on Form 10-K for the year ended December 31, 2000. SALES RETURNS
AND ALLOWANCES
IVAX' pharmaceutical revenues may be affected by the level of
provisions for estimated returns, inventory credits and chargebacks, as well as
other sales allowances established by IVAX. The custom in the pharmaceutical
industry is generally to grant customers the right to return purchased goods. In
the brand-equivalent pharmaceutical industry, this custom has resulted in a
practice of suppliers issuing inventory credits (also known as shelf-stock
adjustments) to customers based on the customers' existing inventory following
decreases in the market price of the related brand-equivalent pharmaceutical
product. Therefore, if new competitors enter the marketplace and significantly
lower the prices of any of our products, we may have to provide additional
credits that could reduce sales and gross margin. The determination to grant a
credit to a customer following a price decrease is generally at the discretion
of IVAX, and generally not pursuant to contractual agreements with customers.
These credits allow customers with established inventories to compete with those
buying product at the current market price, and allow IVAX to maintain shelf
space, market share and customer loyalty.
26
Provisions for estimated returns, inventory credits, and chargebacks,
as well as other sales allowances are established by IVAX concurrently with the
recognition of revenue. The provisions are established in accordance with
generally accepted accounting principles based upon consideration of a variety
of factors, including actual return and inventory credit experience for products
during the past several years by product type, the number and timing of
regulatory approvals for the product by competitors of IVAX, both historical and
projected, the market for the product, estimated customer inventory levels by
product, changes in net sales prices by product and projected economic
conditions. Actual product returns and inventory credits incurred are, however,
dependent upon future events, including price competition and the level of
customer inventories at the time of any price decreases. IVAX continually
monitors the factors that influence the pricing of its products and customer
inventory levels and makes adjustments to these provisions when management
believes that actual product returns, inventory credits and other allowances may
differ from established reserves.
RISK OF PRODUCT LIABILITY CLAIMS
Testing, manufacturing and marketing pharmaceutical products subjects
IVAX to the risk of product liability claims. IVAX is a defendant in a number of
product liability cases, none of which IVAX believes will have a material
adverse effect on IVAX' financial condition or results of operations. IVAX
believes that it maintains an adequate amount of product liability insurance,
but there can be no assurance that its insurance will cover all existing and
future claims or that IVAX will be able to maintain existing coverage or obtain
additional coverage at reasonable rates. There can be no assurance that claims
arising under any pending or future product liability cases, whether or not
covered by insurance, will not have a material adverse effect on IVAX' financial
condition or results of operations.
27
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations or cash flows of IVAX.
IVAX, in the normal course of doing business, is exposed to the risks associated
with foreign currency exchange rates and changes in interest rates.
Foreign Currency Exchange Rate Risk - IVAX is exposed to exchange rate
risk when its U.S. and non-U.S. subsidiaries enter into transactions denominated
in currencies other than their functional currency. Certain firmly committed
transactions are hedged with foreign exchange forward contracts. As exchange
rates change, gains and losses on the exposed transactions are partially offset
by gains and losses related to the hedging contracts. Both the exposed
transactions and the hedging contracts are translated at current spot rates,
with gains and losses included in earnings. IVAX' derivative activities, which
primarily consist of foreign exchange forward contracts, are initiated primarily
to hedge third-party transactions.
The foreign exchange forward contracts generally require IVAX to
exchange local currencies for foreign currencies based on pre-established
exchange rates at the contracts' maturity dates. If the counterparties to the
exchange contracts do not fulfill their obligations to deliver the contracted
currencies, IVAX could be at risk for currency related fluctuations. IVAX enters
into these contracts with counterparties that it believes to be credit worthy
and does not enter into any leveraged derivative transactions.
Lab Chile engaged in a partial hedge of its $63 million U.S. dollar
denominated loans against a possible devaluation of the Argentine peso, by
entering into forward contracts, in early 2001, to purchase $55 million U.S.
dollars at contract prices ranging from 1.0408 to 1.0412 pesos with expiration
dates in January 2002. If the contracts expire unexercised, a fee of $2.2
million would be paid. Due to the lack of liquidity in the currency forwards
market in Argentina, the most reliable indicator of fair value is the amortized
amount of the original contract fee. Accordingly, these contracts were recorded
as an asset and a liability at the original contract fee amount and are being
amortized over the life of the contracts.
Interest Rate Risk - IVAX' only material debt obligations are its 4.5%
and 5.5% Convertible Senior Subordinated Notes which bear fixed rates of
interest. During the third quarter of 2001, IVAX acquired $66.1 million of loans
in connection with its acquisition of Lab Chile, which bear interest rates
ranging from Libor plus .9% to Libor plus 1.0%. IVAX believes that its exposure
to market risk relating to interest rate risk is not material.
Commodity Price Risk - IVAX does not believe it is subject to any
material risk associated with commodity prices.
28
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We caution the reader that certain important factors may affect our
actual results and could cause such results to differ materially from any
forward-looking statement which may have been deemed to have been made in this
report or which are otherwise made by us or on our behalf. For this purpose any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "would", "estimate", "continue" or "pursue", or
the negative other variations thereof or comparable terminology are intended to
identify forward-looking statements. Forward-looking statements involve risks
and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among other
things:
- - difficulties in product development and uncertainties related to the
timing or outcome of product development;
- - the timing with which regulatory authorizations and product roll-out
may be achieved, if at all;
- - efficacy or safety concerns with respect to marketed products, whether
or not scientifically justified, leading to recalls, withdrawals or
declining sales;
- - our ability to identify potential acquisitions and to successfully
acquire and integrate such operations or products;
- - that we may not realize the anticipated benefits of the acquisition of
Laboratorio Chile;
- - that risks will arise from the operation of Laboratorio Chile;
- - Recently, two competitors received FDA approval for the sale of their
paclitaxel products and others may receive similar approvals. As our
competitors receive regulatory approvals on paclitaxel products, they
may lower the price of such products and could gain market share;
- - that our proposed spending on facilities improvement and expansion may
not be as projected;
- - our ability to obtain approval from the FDA to market new
pharmaceutical products;
- - the acceptance of new products by the medical community as effective as
alternative forms of treatment for indicated conditions;
- - the outcome of any pending or future litigation (including patent,
trademark and copyright litigation), particularly patent litigation
concerning paclitaxel, and the cost, expenses and possible diversion of
management's time and attention arising from such litigation;
- - the impact of new regulations or court decisions regarding the
protection of patents and the exclusivity period for the marketing of
branded drugs;
- - the impact of the adoption of certain accounting standards;
- - our success in acquiring or licensing proprietary technologies that are
necessary for our product development activities;
- - our ability to obtain and maintain a sufficient supply of products to
meet market demand;
- - our dependence on sole or limited source suppliers and the risk
associated with a production interruption or shipment delays at such
suppliers;
- - the availability on commercially reasonable terms of raw materials,
particularly raw materials for our paclitaxel product, and other
third-party sourced products;
- - our successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions;
- - our ability to successfully compete in both the branded and
brand-equivalent pharmaceutical sectors; and
29
- - other risks and uncertainties detailed herein and from time to time in
our Securities and Exchange Commission filings.
The information in this Form 10-Q is as of September 30, 2001 or, where
clearly indicated, as of the date of this filing. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. We also may make additional disclosures
in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K that we may file from time to time with the Securities and
Exchange Commission. Please also note that we provide a cautionary discussion of
risks and uncertainties under the section entitled "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2000. These are factors that
we think could cause our actual results to differ materially from expected
results. Other factors besides those listed here could also adversely affect us.
This discussion is provided as permitted by the Private Securities Litigation
Reform Act of 1995.
30
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
IVAX is party to certain lawsuits and legal proceedings, which are
described in "Part I, Item 3. Legal Proceedings," of our Annual Report on Form
10-K for the year ended December 31, 2000. The following is a description of
material developments during the period covered by this Quarterly Report and
should be read in conjunction with the Annual Report referenced above.
With respect to the case styled American BioScience, Inc. v. Donna E.
Shalala, et al., previously reported in IVAX' Annual Report on Form 10-K for the
year ended December 31, 2000, on March 30, 2001, the appellate court vacated the
district court's decision and remanded the case based on the Food and Drug
Administration's ("FDA") failure to file an administrative record in the court
below. On April 6, 2001, the FDA filed its administrative record and American
BioScience, Inc. ("ABI") renewed its motion for a temporary restraining order or
preliminary injunction. On April 19, 2001, the district court again denied ABI's
motion. ABI appealed this ruling, and on May 4, 2001, the appellate court
ordered that the appeal be expedited. On November 6, 2001, the federal appeals
court for the D.C. circuit reversed a prior order by the U.S. District Court in
Washington, D.C., which subsequently allowed the FDA to grant final marketing
approval for IVAX Research, Inc.'s (formerly Baker Norton Pharmaceuticals, Inc.)
generic paclitaxel product. The appellate court directed the district court to
vacate the FDA's order and remanded the matter to the agency. IVAX is reviewing
the appellate opinion and has 45 days in which to ask for reconsideration by the
appellate court. The appellate court's ruling will not become final prior to the
expiration of the 45-day period. IVAX believes the appellate court's decision is
incorrect and intends to seek reconsideration of the ruling. While management
believes it has meritorious defenses and that ABI's underlying patent claim is
"frivolous", the process of resolving matters through litigation is inherently
uncertain. Although management believes it unlikely, a final decision
unfavorable to IVAX in the case on appeal or in the case involving the
non-infringement, validity, and enforceability of ABI's patents could prevent
IVAX from continuing its sales of paclitaxel and could, with respect to ABI's
claims of infringement of its patent, result in damages being imposed on IVAX,
any of which could have a material adverse effect on IVAX' results of operations
and financial position. Based on management's review with legal counsel of the
cases and ABI's claims, and a review of the related regulatory and political
issues, management considers an unfavorable outcome unlikely and does not
believe that IVAX will be prevented from continuing to market paclitaxel. IVAX
will continue to pursue its counterclaims against ABI based on antitrust and
unfair competition
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
IVAX issued 8 put options for 1,850 shares during the third quarter of
2001. The put options bore strike prices ranging from $19.00 to $31.50 and
expire in November 2001 through April 2002. The put options were issued under
Section 4(2) of the Securities Act.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
31
On July 20 2001, IVAX filed a report dated July 5, 2001 under
Item 2 - Acquisition or Disposition of Assets on Form 8-K reporting the
acquisition of 99.6% of the outstanding shares and American Depositary
Shares of Lab Chile.
On July 31, 2001, IVAX filed a report dated July 27, 2001
under Item 9 - Regulation FD Disclosure on Form 8-K reporting the
filing of Listing Particulars with the United Kingdom Listing Authority
for the purpose of having IVAX' shares listed on the London Stock
Exchange.
On August 1, 2001, IVAX filed a report dated July 5, 2001
amending the 8-K filed on July 20, 2001 relating to the acquisition of
Lab Chile to include information required by Item 7 of Form 8-K with
respect to the acquisition.
On August 16, 2001, IVAX filed a report dated August 14, 2001
under Item 5 - Other Events and Regulation FD Disclosure on Form 8-K
reporting that IVAX issued a press release announcing it was sending a
letter to shareholders regarding certain current events.
32
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.
IVAX CORPORATION
Date: November 13, 2001 By: /s/ Thomas E. Beier
--------------------------
Thomas E. Beier
Senior Vice President-Finance
Chief Financial Officer
33