UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 1-2516
PHARMACIA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 43-0420020
(State of incorporation) (I. R. S. Employer
Identification No.)
Pharmacia Corporation, 100 Route 206 North, Peapack, NJ 07977
(Address of principal executive offices) (Zip Code)
908/901-8000
Registrant's telephone number
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
The number of shares of Common Stock, $2 Par Value, outstanding as of May 9,
2002 was 1,293,119,029.
Page 1 of 36 pages
The exhibit index is set forth on page 36
QUARTERLY REPORT ON FORM 10-Q
PHARMACIA CORPORATION
QUARTER ENDED MARCH 31, 2002
INDEX OF INFORMATION INCLUDED IN REPORT
Page
----
PART I - FINANCIAL INFORMATION................................................................3
Item 1. Financial Statements..................................................................3
Consolidated Statements of Earnings.........................................................3
Condensed Consolidated Statements of Cash Flows.............................................4
Condensed Consolidated Balance Sheets ......................................................5
Notes to Consolidated Financial Statements .................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..........................28
PART II - OTHER INFORMATION .................................................................29
Item 1. Legal Proceedings....................................................................29
Item 4. Submission of Matters to a Vote of Security Holders .................................32
Item 5. Other Information ...................................................................32
Item 6. Exhibits and Reports on Form 8-K ....................................................34
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per-share data)
(Unaudited)
For the Three Months
Ended March 31,
-------------------
2002 2001
---- ----
Net sales $ 3,127 $ 3,210
Cost of products sold 697 750
Research and development 548 638
Selling, general and administrative 1,395 1,380
Amortization of goodwill -- 30
Merger and restructuring 20 124
Interest expense 55 68
Interest income (19) (44)
All other, net (87) 11
------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 518 253
Provision for income taxes 125 45
------------------------------------------------------------------------------------------------
Earnings from continuing operations 393 208
Income from discontinued operations, net of tax -- 46
Gain (loss) on disposal of discontinued operations, net of tax 64 (5)
------------------------------------------------------------------------------------------------
Earnings before extraordinary item and cumulative
effect of accounting change 457 249
Extraordinary item, net of tax 649 --
Cumulative effect of accounting change, net of tax -- 1
------------------------------------------------------------------------------------------------
Net earnings $ 1,106 $ 250
================================================================================================
Net earnings per common share:
Basic
Earnings from continuing operations $ .30 $ .16
Net earnings .85 .19
Diluted
Earnings from continuing operations $ .30 $ .16
Net earnings .84 .19
================================================================================================
See accompanying notes.
3
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the Three Months
Ended March 31,
--------------------
2002 2001
---- ----
Net cash (required) provided by continuing operations $ (94) $ 163
Net cash provided by discontinued operations 26 20
--------------------------------------------------------------------------------------------------
Net cash (required) provided by operations (68) 183
--------------------------------------------------------------------------------------------------
Cash flows provided (required) by investment activities:
Purchases of property, plant and equipment (182) (162)
Other acquisitions and investments (141) (97)
Investment and property disposal proceeds 30 31
Proceeds from sale of equity investment 1,000 --
Discontinued operations, net (358) (195)
--------------------------------------------------------------------------------------------------
Net cash provided (required) by investment activities 349 (423)
--------------------------------------------------------------------------------------------------
Cash flows provided (required) by financing activities:
Repayment of long-term debt (23) (8)
Net increase in short-term borrowings 869 12
Issuance of stock 48 96
Treasury stock purchases (254) --
Dividend payments (179) (137)
Other financing activities (43) (44)
--------------------------------------------------------------------------------------------------
Net cash provided (required) by financing activities 418 (81)
--------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 17 (42)
--------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 716 (363)
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 1,276 2,035
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,992 $1,672
==================================================================================================
See accompanying notes.
4
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
March 31, December 31,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 1,992 $ 1,276
Short-term notes receivable-Monsanto 592 254
Trade accounts receivable, less allowance
of $137 (2001: $132) 2,387 2,434
Inventories 1,768 1,684
Receivables-Monsanto 20 87
Other current assets 2,102 1,931
--------------------------------------------------------------------------------------------------
Total Current Assets 8,861 7,666
Long-term investments 282 288
Properties, net 4,923 4,875
Goodwill, net 1,035 1,059
Other intangible assets, net 413 425
Other noncurrent assets 1,526 1,748
Net assets of discontinued operations 6,342 6,316
--------------------------------------------------------------------------------------------------
Total Assets $23,382 $22,377
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 1,344 $ 484
Short-term notes payable-Monsanto 11 30
Trade accounts payable 789 1,048
Payables-Monsanto 26 44
Other current liabilities 3,076 3,397
--------------------------------------------------------------------------------------------------
Total Current Liabilities 5,246 5,003
Long-term debt and guarantee of ESOP debt 2,641 2,731
Other noncurrent liabilities 2,359 2,253
--------------------------------------------------------------------------------------------------
Total Liabilities 10,246 9,987
--------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, one cent par value; at stated value;
authorized 10 million shares;
issued 6,356 shares (2001: 6,401 shares) 256 258
Common stock, two dollar par value; authorized
3 billion shares; issued 1.485 billion shares 2,970 2,970
Capital in excess of par value 3,514 3,499
Retained earnings 12,514 11,586
ESOP-related accounts (246) (294)
Treasury stock (2,984) (2,789)
Accumulated other comprehensive loss (2,888) (2,840)
--------------------------------------------------------------------------------------------------
Total Shareholders' Equity 13,136 12,390
--------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $23,382 $22,377
==================================================================================================
See accompanying notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Dollars in millions, except per-share data)
The term "the company" is used to refer to Pharmacia Corporation or to Pharmacia
Corporation and its subsidiaries, as appropriate to the context. The term
"former Monsanto" will be used to refer to pre-merger operations of the former
Monsanto Company and "Monsanto" will refer to the agricultural subsidiary.
As outlined in Note F, beginning in the fourth quarter 2001, the company began
treating it's agricultural subsidiary, Monsanto Company, as a discontinued
operation. Accordingly, the focus of these financial statements and related
notes is on the company's pharmaceutical businesses unless otherwise indicated.
The results of operations and net assets of Monsanto are reflected on one line
of the consolidated statements of earnings and the condensed consolidated
balance sheets, respectively. Similar adjustments were made to the consolidated
statements of cash flows.
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all
upper case letters. In the notes that follow, per-share amounts are presented on
a diluted, after-tax basis.
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited, however
the condensed consolidated balance sheet at December 31, 2001 is derived from
audited financial statements. The interim financial statements and notes thereto
do not include all disclosures required by generally accepted accounting
principles and should be read in conjunction with the financial statements and
notes thereto included in Pharmacia Corporation's annual report filed on Form
10-K for the year ended December 31, 2001.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. The current period's results of
operations are not necessarily indicative of results that ultimately may be
achieved for the year.
Prior year data have been reclassified for discontinued operations treatment of
Monsanto and certain other reclassifications were made to conform the prior
period's data to the current presentation.
B - NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING PRINCIPLE
Classification of the Extinguishment of Debt
On May 1, 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 145 "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections". Under the current
rules, SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt"
requires that all gains and losses from the extinguishment of debt are to be
classified as extraordinary on the company's consolidated statements of earnings
net of applicable taxes. SFAS No. 145 rescinds the automatic classification as
extraordinary and requires that the company evaluate whether the gains or losses
qualify as extraordinary under Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The company expects to adopt SFAS No. 145 on January
1, 2003.
6
Asset Impairments
On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," became effective. It provides guidance on the accounting for
the impairment or disposal of long-lived assets. For long-lived assets to be
held and used, the new rules are similar to previous guidance which required the
recognition of an impairment when the undiscounted cash flows would not recover
its carrying amount. The impairment to be recognized will continue to be
measured as the difference between the carrying amount and fair value of the
asset. The computation of fair value now removes goodwill from consideration and
incorporates a probability-weighted cash flow estimation approach. The previous
guidance provided in SFAS No. 121 is to be applied to assets that are to be
disposed of by sale. Additionally, assets qualifying for discontinued operations
treatment have been expanded beyond the former major line of business or class
of customer approach. Long-lived assets to be disposed of by other than sale
will now be considered assets to be held and used until the disposal date, at
which time an impairment will be recognized. There was no material impact on the
company's consolidated financial statements due to the adoption of these rules.
Asset Retirements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The company is currently evaluating the effects the
new rules may have on its consolidated financial statements and expects to adopt
SFAS No. 143 on January 1, 2003 in accordance with the rules.
Business Combinations, Goodwill and Intangibles
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 141
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and set out specific criteria for
the initial recognition and measurement of intangible assets apart from
goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142,
unamortized negative goodwill be written off immediately as a change in
accounting principle instead of being deferred and amortized, and that certain
intangible assets be reclassified into or out of goodwill. The provisions of
SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived
intangible assets and require that they be tested annually for impairment or on
an interim basis if indications of a possible impairment arise. If the book
value of goodwill or an indefinite-lived intangible is greater than its fair
value, an impairment loss is recognized for the difference. In addition, SFAS
No. 142 requires that reporting units be identified for purposes of assessing
potential future impairments of goodwill, and removes the 40-year limitation on
the amortization period of intangible assets that have finite lives.
The company adopted the provisions of SFAS No. 141 on January 1, 2002 with the
exception of the immediate requirement to use the purchase method of accounting
for all business combinations initiated after June 30, 2001. The transition and
disclosure provisions of SFAS No. 142 were implemented with first quarter 2002
reporting and the company expects to adopt the remaining provisions in the
second quarter. The company does not expect to record an impairment loss upon
the adoption of SFAS No. 142 related to its continuing operations.
Monsanto has completed the first step of the transitional goodwill impairment
test and has identified two reporting units that may be impaired. Any resulting
impairment charge will be specific to the corn and wheat reporting units,
relating to goodwill that resulted primarily from the 1998 and, to a lesser
extent, 1997 seed company acquisitions. The second step of the transitional
goodwill impairment test, which will determine the actual impairment charge, if
any, is expected to be completed in the second quarter of 2002.
7
Any transitional impairment charge will be recorded as a change in accounting
principle net of applicable taxes effective as of January 1, 2002.
The following tables reflect information pertaining to the continuing operations
of the company.
March 31, 2002 December 31, 2001
---------------------------------------- -----------------------------------------
Amortized Amortized
------------------ ------------------
Not Subject to Accumulated Not Subject to Accumulated
Amortization Gross Amortization Net Amortization Gross Amortization Net
--------------------------------------------------------------------------------------------------------
Patents and trademarks $ 58 $ 410 $ (268) $ 200 $ 58 $ 413 $ (263) $ 208
Rights and licenses -- 487 (284) 203 -- 441 (256) 185
Other -- 35 (25) 10 -- 74 (42) 32
--------------------------------------------------------------------------------------------------------
Total $ 58 $ 932 $ (577) $ 413 $ 58 $ 928 $ (561) $ 425
========================================================================================================
Intangible Assets Amortization Expense
--------------------------------------
Year ended December 31, 2001 $ 59
Quarter ended March 31, 2002 $ 15
Annual amortization expense for the years 2002 through 2006 is estimated to be
$71, $68, $58, $52 and $32, respectively.
Goodwill
--------
The changes in the carrying amount of goodwill for the quarter ended March 31,
2002, are as follows:
Prescription
Total Pharmaceuticals All Other
--------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $1,059 $ 954 $ 105
Net intangible reclassifications (6) (6) --
Foreign exchange (18) (19) 1
--------------------------------------------------------------------------------------------------------
Balance March 31, 2002 $1,035 $ 929 $ 106
Earnings Excluding Goodwill Amortization
----------------------------------------
March 31, 2002 March 31, 2001
------------------------- -------------------------
Earnings Earnings
Before Net Before Net
Items* Earnings Items* Earnings
--------------------------------------------------------------------------------------------------------
Earnings as reported $ 457 $ 1,106 $ 249 $ 250
Goodwill amortization, net of tax -- -- 28 28
--------------------------------------------------------------------------------------------------------
Adjusted earnings $ 457 $ 1,106 $ 277 $ 278
Basic earnings per share:
Earnings as reported $ 0.35 $ 0.85 $ 0.19 $ 0.19
Goodwill amortization, net of tax -- -- 0.02 0.02
--------------------------------------------------------------------------------------------------------
Adjusted earnings $ 0.35 $ 0.85 $ 0.21 $ 0.21
Diluted earnings per share:
Earnings as reported $ 0.35 $ 0.84 $ 0.19 $ 0.19
Goodwill amortization, net of tax -- -- 0.02 0.02
--------------------------------------------------------------------------------------------------------
Adjusted earnings $ 0.35 $ 0.84 $ 0.21 $ 0.21
* Excludes extraordinary items and cumulative effect of accounting change.
8
C - MERGER AND RESTRUCTURING CHARGES
The company recorded $20 of merger and restructuring charges during the first
quarter of 2002 in connection with the merger and integration of former Monsanto
and Pharmacia & Upjohn companies into Pharmacia Corporation. These charges are
part of the comprehensive integration plan approved by the board of directors
during 2000.
The $20 recorded on the merger and restructuring line of the consolidated
statement of earnings was comprised of $10 of merger costs related to
information technology projects necessary to integrate the former companies into
a single organization and $10 of aggregate restructuring costs comprised of $7
associated with prescription pharmaceuticals and $3 relating to other
pharmaceuticals. The $7 relating to prescription pharmaceuticals consists of $5
associated with the involuntary separation of approximately 45 employees and $2
relating to other exit costs. The $3 associated with other pharmaceuticals
relates to the involuntary separation of 35 employees.
During the first quarter of 2001, the company recorded $124 in merger and
restructuring charges. The $124 in total charges recorded on the merger and
restructuring line of the consolidated statement of earnings was made up of $56
in merger costs and $68 in restructuring charges. The $56 in merger costs
relates to costs incurred to integrate the former companies into a single
organization such as consultant, relocation and information technology
integration costs. The $68 of restructuring charges is comprised of $60
associated with prescription pharmaceuticals, $6 in connection with corporate
and administrative functions and $2 relating to other pharmaceuticals.
The $60 relating to prescription pharmaceuticals consists of $46 associated with
the involuntary separation of approximately 290 employees, $5 resulting from the
termination of contracts, $3 relating to other exit costs and $6 resulting from
the write-down of assets such as duplicate computer systems and leasehold
improvements. The $6 associated with corporate and administrative functions is
the result of the involuntary separation of approximately 60 employees and the
$2 associated with other pharmaceutical operations is the result of the
involuntary separation of approximately 10 employees.
A roll-forward from year-end 2001 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies is included in the table
below. As of March 31, 2002, the company has paid a total of $391 relating to
the separation of approximately 2,740 employees associated with these
restructuring plans.
Workforce Other
Reductions Exit Costs Total
-------------------------------------------------------------------------------------------------
December 31, 2001 $ 115 $ 10 $ 125
First quarter 2002 charges 8 2 10
First quarter 2002 spending (51) (2) (53)
-------------------------------------------------------------------------------------------------
March 31, 2002 $ 72 $ 10 $ 82
-------------------------------------------------------------------------------------------------
D - EXTRAORDINARY ITEM
During the first quarter of 2002, the company sold its 45 percent minority
interest in Amersham Biosciences to Amersham plc for $1,000. The investment
basis as of March 2002 was $227. The sale resulted in a gain of $649 (net of
taxes of $124). The gain on the sale has been classified as an extraordinary
item in the accompanying consolidated statements of earnings in accordance with
Accounting Principles Board Opinion No. 16 because the sale of this investment
took place within the two-
9
year period following the merger of Pharmacia & Upjohn and former Monsanto which
was accounted for under the pooling of interests accounting method. The sale of
this investment was not contemplated at the time of the pooling.
E - COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2002 and 2001 was
$1,058 and $55, respectively.
F - DISCONTINUED OPERATIONS
Monsanto
On November 28, 2001, the board of directors approved a formal plan to
distribute to Pharmacia shareholders the remaining outstanding shares held of
Monsanto, the company's agricultural subsidiary, in a tax-free spin-off
transaction. The distribution of spin-off shares is planned to occur in the
fourth quarter of 2002.
The results of operations, financial position and cash flows of Monsanto have
been reclassified in the consolidated financial statements as discontinued
operations. Income from discontinued operations has been reduced for amounts
allocable to the minority interest. The company estimates that net income will
be realized from Monsanto operations during the disposal period, net of seasonal
net operating losses expected in the fourth quarter of 2002 and transaction
costs. Income from the date of the decision to dispose of Monsanto through March
31, 2002 has been reduced by the estimated amount of seasonal losses and
transaction costs. During the first quarter 2002, the accumulated net income of
Monsanto exceeded anticipated seasonal net losses and transaction costs and
therefore, amounts above this estimate have been recognized in discontinued
operations as realized. Through March 2002, the net gain realized was $64, net
of income taxes of $29.
On September 1, 2000, the company entered into a Transition Services Agreement
with Monsanto Company, the company's agricultural subsidiary. Under the
agreement, Pharmacia primarily provides information technology support for
Monsanto while Monsanto provides certain administrative support services for
Pharmacia. In addition, the two companies pay various payroll charges, taxes,
and travel costs that are associated with the business activities of the other.
Pharmacia and Monsanto also rent research and office space from each other.
Since the initiation of the agreement, each party has charged the other entity
rent based on a percentage of occupancy multiplied by the cost to operate the
facilities. At March 31, 2002 and December 31, 2001 the company had receivable
balances of $20 and $87 reported on the consolidated balance sheets,
respectively. Similarly, a payable of $26 and $44 was recorded at March 31, 2002
and December 31, 2001 respectively. Balances for both are largely associated
with transactions related to the separation agreement.
Since October 23, 2000, Pharmacia Treasury Services AB, a wholly-owned
subsidiary of Pharmacia, has managed the loans and deposits of Monsanto.
Interest rates and fees are comparable to the Commercial Paper (CP) rate and
fees that Monsanto would have incurred with an independent CP dealer. Net
interest income recorded by the company was $4 and $7 for the quarters ended
March 31, 2002 and 2001, respectively.
As of March 31, 2002 and December 31, 2001, a related-party note receivable of
$592 and $254 is separately stated on the company's consolidated balance sheets,
respectively. Additionally, the company had recorded balances of $11 and $30 in
short-term debt at March 31, 2002 and December 31, 2001, respectively.
10
Net Assets of Monsanto: March 31, December 31,
2002 2001
--------------------------------------------------------------------------------------------------------
Current assets $ 5,314 $ 4,797
Noncurrent assets 6,554 6,676
--------------------------------------------------------------------------------------------------------
Total assets 11,868 11,473
--------------------------------------------------------------------------------------------------------
Current liabilities 2,722 2,367
Noncurrent liabilities 1,652 1,695
--------------------------------------------------------------------------------------------------------
Total liabilities 4,374 4,062
--------------------------------------------------------------------------------------------------------
Net assets of Monsanto before minority interest 7,494 7,411
Minority interest 1,152 1,095
--------------------------------------------------------------------------------------------------------
Net assets of discontinued operations $ 6,342 $ 6,316
========================================================================================================
Other
The majority of the $5 loss from other discontinued operations recorded in the
first quarter of 2001 consisted of legal and related costs in connection with
the sale of the artificial sweetener ingredient business that occurred in 2000.
There were no net sales included in the company's consolidated financial
statements during the quarters ended March 31, 2002 and 2001 related to other
discontinued businesses.
For The Three Months Ended March 31,
------------------------------------------------
2002 2001
---------------------- ---------------------
Monsanto Other Monsanto Other
---------------------------------------------------------------------------------------------------
Net sales $ 1,221 $ - $ 1,306 $ -
Income (loss) from discontinued
operations, before tax 93 - 74 (9)
Income tax expense (benefit) 29 - 28 (4)
---------------------------------------------------------------------------------------------------
Net income (loss) from discontinued operations $ 64 $ - $ 46 $ (5)
===================================================================================================
G - EARNINGS PER SHARE
Basic earnings per share is computed by dividing the earnings measure by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed assuming the exercise of stock options, conversion of
preferred stock and the issuance of stock as incentive compensation to certain
employees. Also in the diluted computation, earnings from continuing operations
and net earnings are reduced by an incremental contribution to the Employee
Stock Ownership Plan (ESOP). This contribution is the after-tax difference
between the income that the ESOP would have received in preferred stock
dividends and the dividend on the common shares assumed to have been
outstanding.
11
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
For the Three Months Ended March 31,
------------------------------------------------
2002 2002 2001 2001
Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------
EPS numerator:
Earnings from continuing operations $ 393 $ 393 $ 208 $ 208
Less: Preferred stock dividends, net of tax (3) -- (3) --
Less: ESOP contribution, net of tax -- (2) -- (2)
---------------------------------------------------------------------------------------------------
Earnings from continuing operations
available to common shareholders $ 390 $ 391 $ 205 $ 206
===================================================================================================
EPS denominator:
Average common shares outstanding 1,297 1,297 1,298 1,298
Effect of dilutive securities:
Stock options -- 8 -- 18
Convertible instruments and
incentive compensation -- 12 -- 12
---------------------------------------------------------------------------------------------------
Total shares (in millions) 1,297 1,317 1,298 1,328
===================================================================================================
Earnings per share:
Continuing operations $ .30 $ .30 $ .16 $ .16
Discontinued operations .05 .05 .03 .03
Extraordinary item .50 .49 -- --
---------------------------------------------------------------------------------------------------
Net earnings $ .85 $ .84 $ .19 $ .19
===================================================================================================
See Note B-New Accounting Standards and Changes in Accounting Principle for the
effect of goodwill on earnings per share.
H - INVENTORIES
March 31, December 31,
2002 2001
--------------------------------------------------------------------------------------------------------
Estimated replacement cost (FIFO basis):
Finished products $ 190 $ 202
Raw materials, supplies and work in process 1,816 1,662
--------------------------------------------------------------------------------------------------------
Inventories (FIFO basis) 2,006 1,864
Less reduction to LIFO cost (238) (180)
--------------------------------------------------------------------------------------------------------
Total $ 1,768 $ 1,684
========================================================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $1,217 at March 31, 2002, and $1,060 at December 31, 2001.
I - COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION
The consolidated balance sheets include accruals for estimated product,
intellectual property and other litigation and environmental liabilities. The
latter includes exposures related to discontinued operations, including the
industrial chemical facility referred to below and several sites that, under the
Comprehensive Environmental Response, Compensation and Liability Act, are
commonly known as Superfund sites. The company's ultimate liability in
connection with Superfund sites depends on many factors, including the number of
other responsible parties and their financial
12
viability and the remediation methods and technology to be used. Actual costs to
be incurred may vary from the estimates, given the inherent uncertainties in
evaluating environmental exposures.
Environmental Matters
With regard to the company's discontinued industrial chemical facility in North
Haven, Connecticut, the company will be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency (EPA). It is reasonably
possible that a material increase in accrued liabilities will be required. It is
not possible, however, to estimate a range of potential losses. Accordingly, it
is not possible to determine what, if any, additional exposure exists at this
time.
Litigation Matters
The company has been a defendant, along with a number of other manufacturers and
wholesalers, in several civil antitrust lawsuits, including a federal class
action, brought by retail pharmacies alleging that the defendants violated the
law by providing discounts to hospitals, nursing homes, mail-order pharmacies
and health maintenance organizations that were not offered on equal terms to
retail pharmacies. Pharmacia & Upjohn, a subsidiary of the company, settled the
federal class action for $103, and G.D. Searle & Co. (Searle), another
subsidiary of the company, received a favorable verdict in the federal class
action in 1999. State class action lawsuits seeking damages based on the same
alleged conduct were filed in 14 states and the District of Columbia, all but
one of which have been settled or dismissed. A number of the federal cases
brought by plaintiffs who opted out of the federal class action are still
pending.
The company and Pfizer, Inc. (Pfizer) are defendants in a lawsuit brought by the
University of Rochester in Federal Court in New York alleging infringement of
the University's U.S. patent by the sale and use of CELEBREX. The University's
patent has claims directed to a method of treating human patients by
administering a selective COX-2 inhibitor. The case, which seeks injunctive
relief and monetary damages, is expected to be tried in the first half of 2003.
The company is a defendant in a lawsuit brought by CP Kelco in Federal Court in
Delaware seeking compensatory and punitive damages for alleged breach of
contract, fraud and securities law violations arising out of the purchase of the
company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the company who were transferred to
CP Kelco. The company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint. Discovery has been completed in the
lawsuit. A trial date has not been set.
The company, Searle and Pfizer are defendants in a purported class action
complaint filed in Federal Court in New Jersey seeking damages based on the
claim that the defendants misrepresented and over-promoted CELEBREX in violation
of state law and misled and defrauded the FDA during the CELEBREX approval
process. The complaint seeks economic damages and claims no specific medical
injury. The company, G.D. Searle and Pfizer were also sued in State Court in New
Jersey by a purported class alleging the same set of facts and seeking the same
relief as the federal case.
The company, Pfizer and Merck & Co., Inc. are defendants in a purported class
action complaint filed in Federal Court in New York alleging medical concerns
related to Vioxx and CELEBREX and seeking reimbursement of the purchase price
for the Vioxx and CELEBREX used by the plaintiffs, medical expenses and
attorneys' fees. The complaint also seeks revised labeling for the
13
products, emergency notice to the class and a medical monitoring program funded
by defendants.
Pursuant to the Separation Agreement between Monsanto and Pharmacia, Monsanto
assumed and agreed to indemnify Pharmacia for liabilities primarily related to
the agriculture business. Therefore, Pharmacia may remain the named party in
certain legal proceedings, but Monsanto will manage the litigation, including
indemnifying Pharmacia for costs, expenses and any judgments or settlements. In
addition, Monsanto has assumed, and agreed to indemnify Pharmacia for, any
liabilities primarily related to old Monsanto's former chemical businesses,
including any liabilities that Solutia Inc. has assumed from Pharmacia in
connection with the spin-off of Solutia on September 1, 1997, to the extent
Solutia fails to pay, perform or discharge these liabilities. This includes
litigation and environmental liabilities assumed by Solutia, which are not
discussed herein.
With respect to the matters described above, the company cannot estimate a range
of potential losses or what, if any, additional exposure exists at this time.
The company believes it has valid defenses to these matters and intends to
vigorously contest them.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, management's belief is that any potential remaining liability from
such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the company's consolidated financial position,
profitability or liquidity.
J - ACQUISITION
During March 2001, the company completed the acquisition of Sensus Drug
Development Corporation by purchasing the remaining 80.1 percent of its stock.
The assets purchased were valued at $117, which includes $67 allocated to
in-process research and development.
K - SEGMENT INFORMATION
The company's core business is the development, manufacture and sale of
pharmaceutical products. Prescription pharmaceuticals is the company's only
reportable segment and includes primary care, hospital care, cancer care,
ophthalmology and endocrine care products.
The company also operates several business units that do not constitute
reportable business segments. These operating units include consumer health
care, animal health, diagnostics, contract manufacturing and bulk pharmaceutical
chemicals. Due to the size of these operating units, they have been grouped into
the other pharmaceuticals category.
Corporate amounts represent general and administrative expenses of corporate
support functions, restructuring charges and other corporate items such as
litigation accruals, merger costs and non-operating income and expense. Certain
goodwill (prior year) and intangible assets and associated amortization are not
allocated to segments.
The following table shows revenues and earnings by category and reconciling
items necessary to total to the amounts reported in the consolidated financial
statements. Information about segment interest income and expense, and income
taxes is not provided on a segment level as the segments are reviewed based on
earnings before interest and income taxes (EBIT). There are no inter-category
revenues. Long-lived assets are not allocated to categories and accordingly,
depreciation is not available.
14
For The Three Months Ended March 31,
-------------------------------------------
Sales EBIT*
----------------- -----------------
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------
Prescription Pharmaceuticals $ 2,653 $ 2,729 $ 558 $ 399
Other Pharmaceuticals 474 481 118 102
Corporate -- -- (122) (224)
---------------------------------------------------------------------------------------------------
Total Pharmacia $ 3,127 $ 3,210 554 277
---------------------------------------------------------------------------------------------------
Interest expense, net (36) (24)
Income tax provision (125) (45)
---------------------------------------------------------------------------------------------------
Net earnings from continuing operations $ 393 $ 208
===================================================================================================
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with U.S. generally accepted accounting principles. Determination of
EBIT may vary from company to company.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The term "the company" is used to refer to Pharmacia Corporation or to Pharmacia
Corporation and its subsidiaries, as appropriate to the context. The term
"former Monsanto" will be used to refer to pre-merger operations of the former
Monsanto Company and "Monsanto" will refer to the agricultural subsidiary.
On November 28, 2001, Pharmacia Corporation announced a plan to spin-off its
Monsanto agricultural subsidiary. Under the plan, Pharmacia plans to distribute
its entire ownership of Monsanto stock to its shareholders by means of a
tax-free dividend during the fourth quarter of 2002.
As such, the results of operations and net assets of Monsanto are reported as
discontinued operations in one line in the consolidated statements of earnings
and balance sheets. Similar adjustments have been made to the consolidated
statements of cash flows.
Prior year data have been reclassified accordingly. Unless otherwise indicated,
the following discussion and analysis relates to the company's pharmaceutical
operations.
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all
upper case letters. In the following discussion of consolidated results,
per-share amounts are presented on a diluted, after-tax basis.
FINANCIAL REVIEW
Overview
The table below provides a comparative overview of consolidated results for the
first quarters of 2002 and 2001.
%
2002 Change 2001
-----------------------------------------------------------------------------------------------------
Dollars in millions, except per-share data
Sales $ 3,127 (3)% $ 3,210
Earnings from continuing operations before income taxes 518 104 253
Earnings from continuing operations 393 88 208
Net earnings 1,106 342 250
Net earnings per common share (EPS):
-- Basic $ .85 347 $ .19
-- Diluted $ .84 342 $ .19
======================================================================================================
The company's key growth products now number six: CELEBREX, XALATAN, DETROL
LA/DETROL, CAMPTOSAR, ZYVOX and recently added BEXTRA. Sales for these key
prescription products increased 6 percent in the first quarter of 2002 as
compared with the prior year. Overall, sales for the company decreased in the
first quarter of 2002 by 3 percent as compared to the first quarter of 2001.
At December 31, 2001, the Company relinquished control over Ambien to
Sanofi~Synthelabo, Inc. (Sanofi) and ceased recording sales and expenses of
AMBIEN as of January 1, 2002. In the first quarter of 2001, Ambien results were
included in sales and the company reported related payments to Sanofi as an
expense. In the first quarter of 2002, the company no longer recorded the
results in consolidated sales but received a profit sharing payment for its
share of Ambien earnings and recorded the payment in all other, net in the
amount of $73 million. Excluding Ambien from prior year data, sales of
16
continuing products rose 4 percent over the prior year period and by 7 percent
when also excluding the impact from currency exchange.
Earnings from continuing operations increased 88 percent to $393 million or
$0.30 per share. Year-to-year comparisons are affected by a number of factors,
including reduced merger and restructuring charges of $20 million ($13 million
net of tax or $0.01 per share) in the first quarter of 2002 as compared to $124
million ($80 million net of tax or $0.07 per share) in the first quarter of
2001. Certain other charges recorded in the first quarter of 2001 also may
affect comparability. A charge of $67 million before tax ($42 million net of tax
or $0.03 per share) was recorded in research and development (R&D) in
association with the acquisition of Sensus Drug Development Corp. (Sensus), a
privately held company focused on developing drugs to treat endocrine disorders.
An additional $50 million ($31 million net of tax or $0.02 per share) expense in
R&D relates to an agreement with Celltech Group plc (Celltech) in connection
with the compound CDP 870. This compound is being developed to treat certain
autoimmune and inflammatory diseases. Excluding merger and restructuring charges
and the 2001 R&D items referred to above, a growth rate of 11 percent is
indicated for earnings from continuing operations.
Net earnings increased by 342 percent to $1.1 billion for the first quarter of
2002. This significant increase for the first quarter of 2002 primarily results
from an extraordinary gain of $649 million net of tax or $0.49 per share from
the sale of Pharmacia's minority stake in Amersham Biosciences. Further
affecting the year-to-year growth rate analysis are the items noted above and
discontinued operations. First-quarter results of operations of the company's
discontinued Monsanto agricultural business, net of minority interest, certain
accruals and taxes amounted to $64 million ($0.05 per share) and are reflected
as gain on disposal of discontinued operations. This exceeds the income from
discontinued operations recorded in the prior year by $23 million.
Further details regarding period-to-period sales comparisons by segment, by
country and by major product are provided in the tables that follow:
Net Sales
-----------------------------------------------------------------------------------------------------
%
Sales by Segment 2002 Change 2001
-----------------------------------------------------------------------------------------------------
Dollars in millions
Prescription pharmaceuticals $ 2,653 (3)% $ 2,729
Other pharmaceuticals 474 (2) 481
-----------------------------------------------------------------------------------------------------
Total consolidated sales $ 3,127 (3)% $ 3,210
=====================================================================================================
17
For The Three Months Ended March 31,
----------------------------------------
% Change
% Excluding
Dollars in millions 2002 Change Exchange* 2001
--------------------------------------------------------------------------------------------------------
United States $ 1,667 --% --% $ 1,671
Japan 184 (6) 5 194
Italy 151 7 13 142
Germany 126 -- 6 126
United Kingdom 121 2 4 119
France 119 (16) (11) 141
Rest of world 759 (7) (3) 817
--------------------------------------------------------------------------------------------------------
Net sales $ 3,127 (3)% --% $ 3,210
========================================================================================================
* Underlying growth reflects the percentage change excluding currency exchange
effects.
For The Three Months Ended March 31,
%
Sales of Top Products 2002 Change 2001
-----------------------------------------------------------------------------------------------------
Dollars in millions
CELEBREX $ 607 (7)% $ 649
BEXTRA 58 n.m. --
XALATAN 220 10 200
DETROL LA/DETROL 174 29 135
GENOTROPIN 117 -- 117
CAMPTOSAR 91 (34) 137
XANAX 86 14 76
NICORETTE Line 80 21 66
DEPO-PROVERA 80 23 65
CLEOCIN/DALACIN 74 (2) 75
PHARMORUBICIN/ELLENCE 71 19 60
MEDROL 66 (7) 72
ARTHROTEC 64 43 45
FRAGMIN 61 15 53
ZYVOX 57 154 23
CABASER/DOSTINEX 52 39 37
COVERA/CALAN 52 110 25
MIRAPEX 51 30 39
PLETAL 44 70 26
ALDACTONE/Spiro Line 43 4 42
-----------------------------------------------------------------------------------------------------
Total $ 2,148 11% $ 1,942
=====================================================================================================
n.m. = not meaningful
Costs and Expenses
For The Three Months Ended March 31,
% of % of
Dollars in millions 2002 Sales 2001 Sales
-----------------------------------------------------------------------------------------------------
Cost of products sold $ 697 22.3% $ 750 23.4%
Research and development 548 17.5 638 19.9
Selling, general and administrative 1,395 44.6 1,380 43.0
Merger and restructuring 20 0.7 124 3.9
18
Consolidated cost of products sold decreased 7 percent to $697 million in the
first quarter of 2002 versus prior year partly due to the elimination of Ambien
sales and a more favorable product mix. The one-percentage point improvement
in cost of products sold as a percent of sales from 23 percent to 22 percent,
was also attributable to product mix including the launch of BEXTRA.
Research and development spending decreased by $90 million to $548 million in
the first quarter of 2002 compared to $638 million in the first quarter of 2001.
This decrease was largely due to prior year payments of $67 million for the
completion of the Sensus acquisition and $50 million to Celltech for the
development and promotion of the new compound CDP 870.
Selling, general and administrative spending of $1.4 billion in the first
quarter of 2002 increased marginally compared to the first quarter of 2001, but
increased as a percent of sales to almost 45 percent due largely to the
previously mentioned decrease in sales.
Prescription Pharmaceuticals
For The Three Months Ended March 31,
%
Dollars in millions 2002 Change 2001
-----------------------------------------------------------------------------------------------------
Sales $ 2,653 (3)% $ 2,729
Cost of products sold 518 (5) 547
Research and development 520 (13) 595
Selling, general and administrative 1,134 (1) 1,143
EBIT, before merger and restructuring* 558 40 399
* Earnings before interest and taxes (EBIT) and before merger and restructuring
is presented here to provide additional information about the company's
operations and is in keeping with the manner in which the company manages its
segments. This item should be considered in addition to, but not as a substitute
for or superior to, net earnings, cash flows or other measures of financial
performance prepared in accordance with U.S. generally accepted accounting
principles. Determination of EBIT may vary from company to company.
Prescription pharmaceutical net sales, constitute 85 percent of total sales for
the quarter ended March 31, 2002. Prescription sales decreased 3 percent in the
first quarter of 2002 as compared with the first quarter of the prior year.
Excluding the effects from foreign currency exchange and the impact of the
transfer of AMBIEN, worldwide prescription pharmaceutical sales increased 8
percent in the first quarter of 2002 driven by a 16 percent increase in the U.S.
CELEBREX, XALATAN, DETROL LA/DETROL, CAMPTOSAR, BEXTRA and ZYVOX drove the
overall sales growth in the prescription pharmaceutical business. Sales of these
products for the quarter totaled $1.2 billion, a 6 percent increase from the
first quarter of 2001, and represented 46 percent of the quarter's prescription
pharmaceutical sales compared to 42 percent for the same period in 2001.
CELEBREX, the company's leading product and the number-one selling prescription
arthritis medication worldwide, recorded sales of $607 million in the first
quarter, down 7 percent versus the prior year period. CELEBREX is a member of a
class of drugs known as selective COX-2 inhibitors. Sales reflect a reduction in
U.S. trade inventory during the first quarter following a fourth quarter 2001
price increase. Unfavorable comparisons in France and Australia, where the
company had exclusive reimbursement during the first half of 2001 also impacted
sales results in the first quarter of 2002.
BEXTRA, the company's new selective COX-2 inhibitor, was approved by the U.S.
Food and Drug Administration (FDA) in November 2001 for the treatment of
osteoarthritis, rheumatoid arthritis and dysmenorrhea (menstrual pain). During
the first quarter, BEXTRA was shipped to distributors and a limited early
experience program was initiated with targeted physicians. The full launch of
BEXTRA began in April 2002.
19
Sales of XALATAN, the top-selling glaucoma medication in the U.S. and worldwide,
increased 10 percent in the first quarter to $220 million. XALATAN is the
number-one prescribed glaucoma medication in the U.S., Europe and Japan.
Increasing market penetration in Japan and Europe and the early launch of
XALACOM, a fixed combination of XALATAN and timolol, in Europe, drove sales
growth in the quarter. In addition, the company received European approval for
XALATAN to be used as first-line therapy for patients with glaucoma. In the
U.S., sales increased 8 percent, in part due to trade buying patterns in advance
of an anticipated price increase.
Sales of DETROL LA/DETROL, the world's leading treatment for overactive bladder,
increased 29 percent to $174 million in the first quarter. U.S. sales of DETROL
LA/DETROL increased 31 percent to $137 million in the quarter, reflecting
strong demand for the once-daily DETROL LA, which Pharmacia introduced in
January 2001, and some trade buying in advance of an anticipated price increase.
GENOTROPIN, the world's leading growth hormone, recorded sales of $117 million
during the first quarter, in line with sales in the prior year period. Sales in
the U.S. increased 22 percent, as the company continues to increase market
share. Sales outside the U.S. were negatively impacted by foreign exchange
rates. Excluding the impact of foreign exchange, global GENOTROPIN sales
increased 6 percent.
CAMPTOSAR, the leading treatment for colorectal cancer in the U.S., recorded
sales of $91 million, a decrease of 34 percent. Sales reflect a reduction in
U.S. trade inventory during the first quarter following a fourth quarter 2001
price increase.
PHARMORUBICIN, a widely used chemotherapeutic agent for breast cancer,
experienced sales growth of 19 percent to $71 million in the quarter. Sales of
ELLENCE, the trade name for PHARMORUBICIN in the U.S. more than doubled to $23
million in the quarter, driving the overall increase in sales of the
PHARMORUBICIN brand.
Sales of ZYVOX, the company's antibiotic for Gram-positive infections, more
than doubled to $57 million in the quarter, reflecting increased demand and some
trade purchasing. ZYVOX is the first antibiotic from a completely new class of
antibiotics in over 30 years. Following its successful U.S. launch in 2000,
ZYVOX was launched in Europe and Japan in 2001.
The company's Parkinson's disease drugs, MIRAPEX and CABASER continued to grow
during the first quarter 2001. MIRAPEX sales increased 30 percent in the first
quarter to $51 million. Meanwhile, sales of CABASER/DOSTINEX for Parkinson's
disease and hyperprolactinemia grew 39 percent to $52 million.
Sales of ARTHROTEC, one of the company's older arthritis medications, increased
43 percent in the quarter, primarily due to a U.S. trade inventory reduction in
the first quarter 2001.
Among the company's older products, sales of XANAX, for anxiety, increased 14
percent in the quarter and DEPO-PROVERA, a hormonal product for women increased
23 percent, while the antibiotic CLEOCIN, decreased 2 percent and the
anti-inflammatory steroid MEDROL deceased 7 percent in the quarter due to
continued generic competition.
Sales of FRAGMIN, for the prevention of blood clots after surgery, increased 15
percent in the first quarter as sales grew 42 percent in the U.S.
Key prescription pharmaceutical segment operating expenses, stated as a
percentage of net prescription pharmaceutical sales, are provided in the table
below.
20
For The Three Months
Ended March 31,
2002 2001
-------------------------------------------------------------------------------------------------------
Cost of products sold 19.5% 20.0%
Research and development 19.6 21.8
Selling, general and administrative 42.7 41.9
EBIT, before merger and restructuring * 21.1 14.6
* Earnings before interest and taxes (EBIT) and before merger and restructuring
is presented here to provide additional information about the company's
operations and is in keeping with the manner in which the company manages its
segments. This item should be considered in addition to, but not as a substitute
for or superior to, net earnings, cash flows or other measures of financial
performance prepared in accordance with U.S. generally accepted accounting
principles. Determination of EBIT may vary from company to company.
Cost of products sold as a percent to sales was less than 20 percent for the
first quarter ended March 31, 2002 and was essentially unchanged versus the
prior year quarter. In dollars, cost of products sold decreased versus the prior
year quarter by $29 million due mainly to the cessation of Ambien sales, a
favorable shift in product mix and the launch of the company's new product
BEXTRA.
Research and development expense (R&D) decreased $75 million or 13 percent for
the quarter ended March 31, 2002 versus the same period in the prior year. The
decline in comparative spending between the periods was mainly attributable to
two large payments in the first quarter of 2001. In the prior year quarter, the
company completed the acquisition of Sensus and incurred an expense of $67
million to complete the transaction. Additionally, the company entered into an
agreement with Celltech for the development and promotion of the new compound
CDP 870. In connection with this multi-year agreement, the company recorded an
R&D expense of $50 million. Excluding these items, quarter-to-quarter spending
increased $42 million or 9 percent. The increase in spending is mainly
attributable to Phase IV expenses and development costs. Increased expenditures
relative to the prior year for oncology compounds and BEXTRA largely account for
the quarter-to-quarter trend in Phase IV related costs. Development spending for
CDP 870 and to a lesser degree CELEBREX and DEPO-PROVERA led the increase in
this area of R&D versus the prior year quarter. Lower spending on eplerenone
related costs partially offset other development spending increases.
Selling, general and administrative expense (SG&A) decreased $9 million or one
percent during the first quarter ended March 31, 2002 versus the same prior year
quarter. SG&A expense stated as a percent to sales increased over the prior year
quarter by one percentage point to 43 percent. The dollar spending decrease is
mainly due to the timing of sales training costs and lower overall promotional
costs.
Other Pharmaceuticals
For The Three Months Ended March 31
%
Dollars in millions 2002 Change 2001
-------------------------------------------------------------------------------------------------------
Sales $ 474 (2)% $ 481
Cost of products sold 190 (5) 201
Research and development 28 (34) 43
Selling, general and administrative 142 (2) 145
Sales in the company's other pharmaceuticals businesses are comprised of
consumer health care (over the counter products), animal health, contract
manufacturing, bulk pharmaceutical chemicals and diagnostics. Sales for the
first quarter 2002 decreased by 2 percent overall, but increased by 3 percent in
the U.S. The primary reason for the overall decrease in sales is the partial
divestiture of the plasma business during the second half of 2001.
21
Sales in the consumer health care business increased for the first quarter of
2002 over the prior year by 2 percent, and 5 percent excluding the impact from
foreign currency. The business' leading products are for the treatment of
tobacco dependency and hereditary hair loss. Sales growth was driven primarily
from the September 2001 launch of NICORETTE in Japan, market share growth of
NICORETTE in Canada and the U.S. acquisition of LUDEN'S in September of 2001.
This favorable impact more than offset the decrease in U.S. sales of ROGAINE as
generic competition continued.
Sales in the animal health business increased for the first quarter of 2002 over
the prior year by 5 percent, and 7 percent excluding the impact from foreign
currency. NAXCEL/EXCENEL, an antibiotic used to treat a variety of infections in
animals, was the main driver of sales growth with an increase in the first
quarter of 2002 of 25 percent over the prior year period.
Corporate and Other
Corporate related expenses were $122 million in the first quarter of 2002, a
decrease of $102 million versus the first quarter of 2001. The 46 percent
decrease was mainly due to reduced merger and restructuring costs.
Net interest expense increased $12 million to $36 million compared to $24
million net expense in the first quarter of the prior year. The change is mainly
attributable to lower interest income received on excess cash balances due to
lower U.S. interest rates partially offset by reduced long-term debt balances.
The estimated annual effective tax rate for 2002 is 24.5 percent excluding
merger and restructuring costs. This compares with a tax rate of 25 percent for
the full year 2001. The effective tax rate for continuing operations was 24
percent and 18 percent for the first quarters ended March 31, 2002 and 2001,
respectively.
Merger and Restructuring Charges
The company recorded $20 million of merger and restructuring charges during the
first quarter of 2002 in connection with the merger and integration of former
Monsanto and Pharmacia & Upjohn companies into Pharmacia Corporation. These
charges are part of the comprehensive integration plan approved by the board of
directors during 2000. The $20 million recorded on the merger and restructuring
line of the consolidated statement of earnings was comprised of $10 million of
merger costs related to costs incurred for information technology projects
necessary to integrate the former companies into a single organization and $10
million of aggregate restructuring costs comprised of $7 million associated with
prescription pharmaceuticals and $3 million relating to other pharmaceuticals.
The $7 million relating to prescription pharmaceuticals consisted of $5 million
associated with the involuntary separation of approximately 45 employees and $2
million relating to other exit costs. The $3 million associated with other
pharmaceuticals related to the involuntary separation of 35 employees.
During the first quarter of 2001, the company recorded $124 million in merger
and restructuring charges. The $124 million in total charges recorded on the
merger and restructuring line of the consolidated statement of earnings was made
up of $56 million in merger costs and $68 million in restructuring charges. The
$56 million in merger costs relates to costs incurred to integrate the former
companies into a single organization such as consultant, relocation and
information technology integration costs. The $68 million of restructuring
charges is comprised of $60 million associated with prescription
pharmaceuticals, $6 million in connection with corporate and administrative
functions and $2 million relating to other pharmaceuticals.
The $60 million relating to prescription pharmaceuticals consists of $46 million
associated with the involuntary separation of approximately 290 employees, $5
million resulting from the
22
termination of contracts, $3 million relating to other exit costs and $6 million
resulting from the write-down of assets such as duplicate computer systems and
leasehold improvements. The $6 million associated with corporate and
administrative functions is the result of the involuntary separation of
approximately 60 employees and the $2 million associated with other
pharmaceutical operations is the result of the involuntary separation of
approximately 10 employees.
A roll-forward from year-end 2001 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies is included in the table
below. As of March 31, 2002, the company has paid a total of $391 million
relating to the separation of approximately 2,740 employees associated with
these restructuring plans.
Workforce Other
Dollars in millions Reductions Exit Costs Total
-------------------------------------------------------------------------------------------------
December 31, 2001 $ 115 $ 10 $ 125
First quarter 2002 charges 8 2 10
First quarter 2002 spending (51) (2) (53)
-------------------------------------------------------------------------------------------------
March 31, 2002 $ 72 $ 10 $ 82
-------------------------------------------------------------------------------------------------
Due to the comprehensive nature of the restructuring and integration, the
company anticipates the restructuring activities to continue into 2003 as
Pharmacia continues to streamline operations. Total remaining pretax changes
from this plan are expected to be $50 million to $75 million. The company
expects to have fully implemented these actions by the end of 2003. The
company's aggregate merger and restructuring charges relating to the Pharmacia
merger have been approximately $1.7 billion and the restructuring plan is
expected to yield savings of approximately $600 million that will be reinvested
into the company's operations.
Comprehensive Income
Comprehensive income equals net earnings plus other comprehensive income (OCI).
For Pharmacia Corporation, OCI includes currency translation adjustments (CTA),
deferred amounts for hedging purposes, unrealized holding gains and losses on
available-for-sale (AFS) securities, and minimum pension liability adjustments.
Comprehensive income for the three months ended March 31, 2002 and 2001, was
$1.1 billion and $55 million, respectively. Changes in CTA account for the
principal difference between net earnings and comprehensive income for the
quarter ended March 31, 2002. Increases in unrealized losses on AFS securities
and changes in CTA offset by a decrease in the minimum pension liability account
for the principal difference between net earnings and comprehensive income for
the quarter ended March 31, 2001. Fluctuations in CTA reflect the changes in the
strength or weakness of the dollar against other currencies in the current year
as measured to the comparable periods in the prior year.
Financial Condition, Liquidity, and Capital Resources
The company has no off-balance-sheet special purpose entities used for
financing.
March 31, December 31,
Dollars in millions 2002 2001
--------------------------------------------------------------------------------------------------------
Working capital $ 3,615 $ 2,663
Current ratio 1.69:1 1.53:1
Debt to total capitalization 23.3% 20.1%
Working capital for the quarter ended March 31, 2002 increased $1.0 billion or
36 percent versus the prior year end. Similarly, the current ratio also improved
during the first quarter increasing 10
23
percent over prior year-end levels. Increases in cash and short-term investments
coupled with declines in accounts payable and other accrued expenses are the
main factors contributing to the improvement. Cash received from the closing of
the Amersham Biosciences transaction (See "Extraordinary Item" under this Item
number) and seasonal lending to Monsanto resulted in the increased cash and
short-term investments at March 31, 2002. Accounts payable and accrued
liabilities decreased mainly due to timing differences of actual payments.
Increases in short-term debt due to seasonal funding requirements was the main
contributor to the 3 percent unfavorable change in the debt-to-total-
capitalization ratio and also partially offset the favorable trend in working
capital and current ratio.
The company completed the sale of its minority interest in Amersham Biosciences
during the first quarter of 2002. Proceeds received from the sale of these
shares were $1.0 billion. The company will use the funds for general corporate
purposes. Prior to the disposition, the investment was accounted for on the
equity method of accounting and its contribution to Pharmacia's liquidity was
immaterial.
During 2001, the company announced the initiation of a stock buy-back program.
The program authorized the repurchase of up to $3.0 billion in company stock
over the next three years. For the quarter ended March 31, 2002, $254 million of
Pharmacia shares were repurchased. Since inception of the program, $1.1 billion
of company shares have been acquired. The shares acquired through the buy-back
program will be used principally to fund employee benefit programs. The timing
of future transactions and the exact number of shares to be repurchased will be
determined by management based on market conditions, share prices and other
factors.
In accordance with an earlier agreement, the company transferred to Sanofi all
of its rights relating to Ambien in April 2002. On April 16, 2002, the company
completed the transaction and received a one-time payment of $671 million from
Sanofi in connection with the transfer.
On April 25, 2002, the company announced its intention to acquire land and
buildings located in New Jersey from AT&T Corp. The acquisition price of
the facilities is approximately $200 million and is planned to be funded out of
existing current assets.
The company is currently in the process of assessing whether or not funding
contributions will be required for the qualified U.S. pension plans. Although a
final determination of funding requirements has not been completed, it is
possible that from zero to $60 million may be required to be contributed to the
plans during the remainder of 2002. Additionally, the company may choose to make
contributions in excess of the minimum required contributions.
The company's future cash provided by operations and borrowing capacity is
expected to cover normal operating cash flow needs, planned capital
acquisitions, dividend payments and stock repurchases as approved by the board
of directors for the foreseeable future.
Contingent Liabilities and Litigation
The consolidated balance sheets include accruals for estimated product,
intellectual property and other litigation and environmental liabilities. The
latter includes exposures related to discontinued operations, including the
industrial chemical facility referred to below and several sites that, under the
Comprehensive Environmental Response, Compensation and Liability Act, are
commonly known as Superfund sites. The company's ultimate liability in
connection with Superfund sites depends on many factors, including the number of
other responsible parties and their financial viability and the remediation
methods and technology to be used. Actual costs to be incurred may vary from the
estimates, given the inherent uncertainties in evaluating environmental
exposures.
24
Environmental Matters
With regard to the company's discontinued industrial chemical facility in North
Haven, Connecticut, the company will be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency (EPA). It is reasonably
possible that a material increase in accrued liabilities will be required. It is
not possible, however, to estimate a range of potential losses. Accordingly, it
is not possible to determine what, if any, additional exposure exists at this
time.
Litigation Matters
The company has been a defendant, along with a number of other manufacturers and
wholesalers, in several civil antitrust lawsuits, including a federal class
action, brought by retail pharmacies alleging that the defendants violated the
law by providing discounts to hospitals, nursing homes, mail-order pharmacies
and health maintenance organizations that were not offered on equal terms to
retail pharmacies. Pharmacia & Upjohn, a subsidiary of the company, settled the
federal class action for $103 million, and G.D. Searle & Co. (Searle), another
subsidiary of the company, received a favorable verdict in the federal class
action in 1999. State class action lawsuits seeking damages based on the same
alleged conduct were filed in 14 states and the District of Columbia, all but
one of which have been settled or dismissed. A number of the federal cases
brought by plaintiffs who opted out of the federal class action are still
pending.
The company and Pfizer, Inc. (Pfizer) are defendants in a lawsuit brought by the
University of Rochester in Federal Court in New York alleging infringement of
the University's U.S. patent by the sale and use of CELEBREX. The University's
patent has claims directed to a method of treating human patients by
administering a selective COX-2 inhibitor. The case, which seeks injunctive
relief and monetary damages, is expected to be tried in the first half of 2003.
The company is a defendant in a lawsuit brought by CP Kelco in Federal Court in
Delaware seeking compensatory and punitive damages for alleged breach of
contract, fraud and securities law violations arising out of the purchase of the
company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the company who were transferred to
CP Kelco. The company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint. Discovery has been completed in the
lawsuit. A trial date has not been set.
The company, Searle and Pfizer are defendants in a purported class action
complaint filed in Federal Court in New Jersey seeking damages based on the
claim that the defendants misrepresented and over-promoted CELEBREX in violation
of state law and misled and defrauded the FDA during the CELEBREX approval
process. The complaint seeks economic damages and claims no specific medical
injury. The company, G.D. Searle and Pfizer were also sued in State Court in New
Jersey by a purported class alleging the same set of facts and seeking the same
relief as the federal case.
The company, Pfizer and Merck & Co., Inc. are defendants in a purported class
action complaint filed in Federal Court in New York alleging medical concerns
related to Vioxx and CELEBREX and seeking reimbursement of the purchase price
for the Vioxx and CELEBREX used by the plaintiffs, medical expenses and
attorneys' fees. The complaint also seeks revised labeling for the products,
emergency notice to the class and a medical monitoring program funded by
defendants.
Pursuant to the Separation Agreement between Monsanto and Pharmacia, Monsanto
assumed and agreed to indemnify Pharmacia for liabilities primarily related to
the agriculture business.
25
Therefore, Pharmacia may remain the named party in certain legal proceedings,
but Monsanto will manage the litigation, including indemnifying Pharmacia for
costs, expenses and any judgments or settlements. In addition, Monsanto has
assumed, and agreed to indemnify Pharmacia for, any liabilities primarily
related to old Monsanto's former chemical businesses, including any liabilities
that Solutia Inc. (Solutia) has assumed from Pharmacia in connection with the
spin-off of Solutia on September 1, 1997, to the extent Solutia fails to pay,
perform or discharge these liabilities. This includes litigation and
environmental liabilities assumed by Solutia, which are not discussed herein.
With respect to the matters described above, the company cannot estimate a range
of potential losses or what, if any, additional exposure exists at this time.
The company believes it has valid defenses to these matters and intends to
vigorously contest them.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, management's belief is that any potential remaining liability from
such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the company's consolidated financial position,
profitability or liquidity.
Extraordinary Item
During the first quarter of 2002, the company sold its 45 percent minority
interest in Amersham Biosciences to Amersham plc. The investment basis as of
March 2002 was $227 million. The sale resulted in a gain of $649 million (net of
taxes of $124 million) and has been classified as an extraordinary on the
company's consolidated statements of earnings. The gain on the sale has been
classified as an extraordinary item in the accompanying consolidated statements
of earnings in accordance with Accounting Principles Board Opinion No. 16
because the sale of this investment took place within the two year period
following the merger of Pharmacia & Upjohn and former Monsanto which was
accounted for under the pooling of interests accounting method. The sale of this
investment was not contemplated at the time of the pooling.
Discontinued Operations
Monsanto
On November 28, 2001, the board of directors approved a formal plan to
distribute to Pharmacia shareholders the remaining outstanding shares held of
Monsanto, the company's agricultural subsidiary, in a tax-free spin-off
transaction. The distribution of spin-off shares is planned to occur in the
fourth quarter of 2002.
The results of operations, financial position and cash flows of Monsanto have
been reclassified in the consolidated financial statements as discontinued
operations. Income from discontinued operations has been reduced for amounts
allocable to the minority interest. The company estimates that net income will
be realized from Monsanto operations during the disposal period, net of seasonal
net operating losses expected in the fourth quarter of 2002 and transaction
costs. Income from the date of the decision to dispose of Monsanto through March
31, 2002 has been reduced by the estimated amount of seasonal losses and
transaction costs. During the first quarter 2002, the accumulated net income of
Monsanto exceeded anticipated seasonal net losses and transaction costs and
therefore amounts above this estimate will be recognized in discontinued
operations as realized.
Since the method of disposition of Monsanto is a spin-off of its shares to
holders of Pharmacia stock, there will be no gain or loss on the transaction.
There will be certain transaction costs, however, and for accounting purposes,
the net results of operations of Monsanto for the period November 29, 2001
through to the actual disposal, net of minority interest and transaction costs,
26
will be shown as gain on disposal. Through March 2002, the net gain realized was
$64 million, net of income taxes of $29 million.
Other
The majority of the $5 million loss from other discontinued operations recorded
in the first quarter of 2001 consisted of legal related costs in connection with
the sale of the sweetner ingredient business that occurred in 2000. There were
no net sales included in the company's consolidated financial statements during
the quarters ended March 31, 2002 and 2001 related to this business.
Agreements with Sanofi~Synthelabo
Pursuant to existing agreements, the company had rights from Sanofi to
manufacture, sell and market two products in North America: Ambien and Kerlone.
Ambien is a prescription medicine used in the treatment of sleep disorders
including insomnia. Kerlone, also a prescription medicine, is used in the
treatment of hypertension and cardiovascular disease.
At December 31, 2001, the company relinquished control over the products to
Sanofi and ceased recording sales and expenses of Ambien and Kerlone as of
January 1, 2002. In the first quarter 2002, the company received a profit-
sharing payment for its share of Ambien earnings of $73 million that was
recorded in all other, net on the consolidated statements of earnings. No such
payment was received for Kerlone.
On April 16, 2002, Sanofi exercised its right to acquire all rights to the
products in North America in accordance with the agreements. In connection with
such acquisition, the company received a payment of $671 million for its
interest that will be recorded in the second fiscal quarter of 2002. See
Pharmacia Corporation Form 8-K filed with the Securities and Exchange
Commission on April 30, 2002.
New Accounting Standards
Classification of the Extinguishment of Debt
On May 1, 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 145 "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections". Under the current
rules, SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt"
requires that all gains and losses from the extinguishment of debt are to be
classified as extraordinary on the company's consolidated statements of earnings
net of applicable taxes. SFAS No. 145 rescinds the automatic classification as
extraordinary and requires that the company evaluate whether the gains or losses
qualify as extraordinary under Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The company expects to adopt SFAS No. 145 on
January 1, 2003.
Asset Retirements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The company is currently evaluating the effects the
new rules may have on its consolidated financial statements and expects to adopt
SFAS No. 143 on January 1, 2003 in accordance with the rules.
27
Business Combinations, Goodwill and Intangibles
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 141
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and set out specific criteria for
the initial recognition and measurement of intangible assets apart from
goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142,
unamortized negative goodwill be written off immediately as a change in
accounting principle instead of being deferred and amortized, and that certain
intangible assets be reclassified into or out of goodwill. The provisions of
SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived
intangible assets and require that they be tested annually for impairment or on
an interim basis if indications of a possible impairment arise. If the book
value of goodwill or an indefinite-lived intangible is greater than its fair
value, an impairment loss is recognized for the difference. In addition, SFAS
No. 142 requires that reporting units be identified for purposes of assessing
potential future impairments of goodwill, and removes the 40-year limitation on
the amortization period of intangible assets that have finite lives.
The company adopted the provisions of SFAS No. 141 on January 1, 2002 with the
exception of the immediate requirement to use the purchase method of accounting
for all business combinations initiated after June 30, 2001. The transition and
disclosure provisions of SFAS No. 142 were implemented with first quarter 2002
reporting, and the company expects to adopt the remaining provisions in the
second quarter. The company does not expect to record an impairment loss upon
the adoption of SFAS No. 142 related to its pharmaceutical operations.
Monsanto has completed the first step of the transitional goodwill impairment
test and has identified two reporting units that may be impaired. Any resulting
impairment charge will be specific to the corn and wheat reporting units,
relating to goodwill that resulted primarily from the 1998 and, to a lesser
extent, 1997 seed company acquisitions. The second step of the transitional
goodwill impairment test, which will determine the actual impairment charge, if
any, is expected to be completed in the second quarter of 2002. Any transitional
impairment charge will be recorded as a change in accounting principle net of
applicable taxes.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes from the disclosures in Pharmacia Corporation's
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2001.
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
References to Pharmacia throughout Part II, Item I will include "former
Monsanto" when referring to the pre-merger activities of the former Monsanto
Company. References to "Monsanto" or "new Monsanto" refers to the company's
agricultural subsidiary.
Pursuant to the Separation Agreement between Pharmacia and Monsanto ("Separation
Agreement"), Monsanto assumed and agreed to indemnify Pharmacia for liabilities
related to the agricultural business. In addition, in the proceedings where the
company is the defendant, Monsanto will indemnify the company for costs,
expenses and any judgments or settlements; and in the proceedings where the
company is the plaintiff, Monsanto will pay the fees and costs of, and receive
any benefits from, the litigation. Therefore, Pharmacia may remain the named
party in certain legal proceedings, but Monsanto will manage the litigation
including indemnifying Pharmacia for costs, expenses and any judgments or
settlements.
In connection with the spin-off of Solutia Inc. ("Solutia") on September 1,
1997, Solutia assumed from Pharmacia liabilities related to the chemical
businesses. As a result, Pharmacia remains the named defendant in certain legal
proceedings but Solutia manages the litigation and pays all costs, expenses and
any judgements or settlements.
Monsanto has assumed, and agreed to indemnify Pharmacia for, any liabilities
primarily related to former Monsanto's former chemical businesses, including any
liabilities that Solutia Inc. has assumed from Pharmacia in connection with the
spin, to the extent Solutia fails to pay, perform or discharge these
liabilities. This indemnification obligation applies to litigation,
environmental and other liabilities assumed by Solutia, which are not discussed
herein. For example, pursuant to the Distribution Agreement entered into in
connection with the spin-off (the "Distribution Agreement"), Solutia assumed
responsibility for litigation currently pending in state and federal court in
Alabama brought by several thousand plaintiffs, alleging property damage,
anxiety and emotional distress and personal injury arising from exposure to
polychlorinated biphenyls (PCBs), which were discharged from an Anniston,
Alabama plant site that was formerly owned by Pharmacia and that was transferred
to Solutia as part of the spin-off. Pursuant to the terms of the Distribution
Agreement, Solutia is required to indemnify Pharmacia for liabilities that
Pharmacia incurs in connection with this litigation. Pursuant to the terms of
the Separation Agreement, Monsanto would be required to indemnify Pharmacia in
the event that Solutia failed to pay or discharge such liabilities or to
indemnify Pharmacia therefor.
On April 19, 2002, NeoPharm filed a Demand for Arbitration with the company
pursuant to the terms of the February 19, 1999 License Agreement. A contractual
dispute has arisen between NeoPharm and Pharmacia involving our partnership to
develop LEP (Liposomal Encapsulated Paclitaxel) and LED (Liposomal Encapsulated
Doxorubicin). NeoPharm claims that Pharmacia failed to use "reasonable efforts"
to develop, market and sell LEP/LED. NeoPharm is seeking specific performance
and monetary damages.
On November 20, 1997, Aventis CropScience S.A., formerly Rhone Poulenc
Agrochimie S.A. (Aventis) filed suit in the U.S. District Court in North
Carolina against former Monsanto and DEKALB Genetics alleging that because
DEKALB Genetics failed to disclose a research report involving the testing of
plants to determine glyphosate tolerance, Aventis was induced by fraud to enter
into a 1994 license agreement relating to technology incorporated into a
specific type of herbicide-tolerant corn. Aventis also alleged that DEKALB
Genetics did not have a right to license, make or sell products using Aventis'
technology for glyphosate resistance under the terms of the 1994 agreement. On
April 5, 1999, the trial court rejected Aventis' claim that the contract
language did not convey a license. Jury trial of the fraud claims ended April
22, 1999, with a verdict for Aventis and against DEKALB Genetics. The jury
awarded Aventis $15 million in actual damages and $50 million in punitive
damages. In the fourth quarter 2001, new Monsanto established a reserve for the
$50 million judgment entered on the verdict. The trial was bifurcated to allow
claims for patent infringement and misappropriation of trade secrets to be tried
before a different jury. Jury trial on these claims ended June 3, 1999, with
a verdict for Aventis and against
29
DEKALB Genetics. The district court had dismissed the former Monsanto from both
phases of the trial prior to verdict on the legal basis that it was a bona
fide licensee of the corn technology. On or about February 8, 2000, the district
court affirmed both jury verdicts against DEKALB Genetics, and enjoined DEKALB
Genetics from future sales of the specific type of herbicide-tolerant corn
involved in the agreement (other than materials held in DEKALB's inventory on
June 2, 1999). Judgment was entered March 10, 2000. DEKALB Genetics appealed the
jury verdict and damage award, and Aventis appealed the finding that former
Monsanto was a bona fide licensee. On November 22, 2001 the United States Court
of Appeals for the Federal Circuit upheld the prior judgments. On March 26,
2002, the Court of Appeals for the Federal Circuit reversed its decision
regarding the bona fide licensee issue and declined rehearing on the petition
of DEKALB Genetics regarding the monetary awards. Subsequent to those appellate
rulings, DEKALB Genetics has paid the monetary judgments. Monsanto and DEKALB
Genetics will file certiorari petitions with the United States Supreme Court to
overturn the appellate rulings. Monsanto, its licensees and DEKALB Genetics (to
the extent permitted under the district court's order and an agreement with
Aventis) continue to sell the specific type of herbicide-tolerant corn pursuant
to a royalty-bearing agreement with Aventis, entered prior to the June 3, 1999,
jury verdict. In addition, Monsanto and DEKALB Genetics are replacing this
specific type of herbicide-tolerant corn with new technology not associated
with Aventis' claims in this litigation. The district court held an advisory
jury trial which ended with a verdict in favor of Aventis on September 1, 2000,
regarding claims that certain employees of Aventis should be named as
"co-inventor" on two patents issued to DEKALB Genetics. No monetary relief was
sought. DEKALB Genetics continues to deny that Aventis employees should be
named as "co-inventor" on the two patents since those individuals made no
inventive contribution. The parties have submitted proposed findings of fact
and conclusions of law on the verdict. DEKALB will appeal any adverse final
decision or judgement.
As described in Pharmacia's annual report on Form 10-K for the year ending
December 31, 2001, on March 27, 2000, E.I. DuPont DeNemours and Company (DuPont)
filed a suit against former Monsanto in the U.S. District Court for the District
of South Carolina, seeking unspecified damages and injunctive relief for alleged
violations of federal antitrust acts and state law in connection with
glyphosate-related business matters. On April 1, 2002, Monsanto entered into a
Master Settlement Agreement with DuPont and its subsidiary, Pioneer Hi-Bred
International Inc. (Pioneer). Pursuant to this agreement (the
"Dupont/Pioneer Settlement"), the parties resolved a number of important
business and patent disputes, and also agreed to new business arrangements,
including the granting of licenses.
As described in Pharmacia's annual report on Form 10-K for the year ending
December 31, 2001, on March 30, 2000, DuPont filed a suit against former
Monsanto and Asgrow in the U.S. District Court for Delaware, seeking damages and
equitable relief including the divestiture of Asgrow by former Monsanto for
alleged violations of federal antitrust acts and state law in connection with
glyphosate tolerant soybean business matters.
30
On April 1, 2002, Monsanto entered into a Master Settlement Agreement with
DuPont and its subsidiary, Pioneer. Pursuant to this agreement (the
"Dupont/Pioneer Settlement"), the parties resolved a number of important
business and patent disputes, and also agreed to new business arrangements,
including the granting of licenses.
On March 7, 2000, the U.S. Department of Justice filed suit on behalf of the EPA
in U.S. District Court for the District of Wyoming against former Monsanto,
Solutia (the former Monsanto's chemical business spun-off in 1997) and P4
Production, seeking civil penalties for alleged violations of Wyoming's
environmental laws and regulations, and of an air permit issued in 1994 by the
Wyoming Department of Environmental Quality. The permit had been issued for a
coal coking facility in Rock Springs, Wyoming that is currently owned by P4
Production. The United States sought civil penalties of up to $25,000 per day
(or $27,500 per day for violations occurring after January 30, 1997) for the air
violations, and immediate compliance with the air permit. The companies have
already paid a $200,000 fine covering the same Clean Air Act violations pursuant
to a consent decree entered in the First Judicial District Court in Laramie
County, Wyoming on June 25, 1999. On April 12, 2000, the Department of Justice
revised its settlement demand, from $2.5 million to $1.9 million plus injunctive
relief to ensure P4 Production's compliance with the Clean Air Act. On April 21,
2000, the companies filed a motion for dismissal or summary judgement on the
grounds of claim preclusion, including the doctrines of res judicata and
release. In an opinion dated March 29, 2002, the court denied the companies'
motion for summary judgment. On April 19, 2002, the companies filed a motion for
certification of an appeal of the order denying the motion for summary judgment.
Any liability would be shared by Monsanto and Solutia, based upon the purchases
from P4 Production.
On November 13, 2001, Chemical Products Technologies, Inc. (CPT) initiated a
lawsuit in the United States District Court for the District of South Carolina,
Florence Division, against Monsanto. In its Complaint, CPT seeks damages arising
out of alleged violations of Section 1 of the Sherman Act (antitrust), the
Lanham Act and the South Carolina Unfair Trade Practices Act. CPT claims that
Monsanto has violated the Sherman Act in several respects in connection with
glyphosate-related business matters, and has violated the Lanham Act by unfairly
disparaging CPT's ClearOut herbicide product, thereby interfering with CPT's
customer relationships. Monsanto denies CPT's allegations and filed an Answer
and Affirmative Defenses on December 31, 2001. On February 8, 2002, the CPT
matter was consolidated with the DuPont litigation pending in the South Carolina
court. On March 1, 2002, Zetachem USA, Inc. ("Zetachem USA") applied for leave
to be added as an additional plaintiff in the South Carolina action. Monsanto
denies that it has any liability to CPT or Zetachem USA. In May 2002, in light
of the settlement of the DuPont litigation pursuant to the DuPont/Pioneer
Settlement, Monsanto requested a transfer of this litigation to the United
States District Court for the Southern District of Missouri, where, as described
in its annual report on Form 10-K for the year ended December 31, 2001, Monsanto
has sued CPT, Inc., for patent infringement.
Since the 1984 termination of the class action litigation against various
manufacturers, including former Monsanto, of the herbicide Agent Orange used in
the Vietnam War, former Monsanto has successfully defended against various
lawsuits associated with the herbicide's use. A few matters remain pending,
including three separate actions, now consolidated, initially filed against
former Monsanto and The Dow Chemical Company in Seoul, Korea in October 1999.
Approximately 13,760 Korean veterans of the Vietnam war allege they were exposed
to, and suffered from, herbicides manufactured by the defendants. The complaints
fail to assert any specific causes of action, but seek damages of 300 million
won (approximately $250,000) per plaintiff. Monsanto is defending ancillary
actions in Korea, including a request for provisional relief pending
resolution of the main lawsuit. The trial court has advised that a ruling in the
main lawsuit will be announced in court on May 23, 2002 at 1:30 pm local time.
After the ruling, the non-prevailing parties are expected to file a de novo
appeal on behalf of the non-prevailing parties. On December 2, 1999, plaintiffs
filed a class action lawsuit against former Monsanto and five other herbicide
manufacturers in the U.S. District Court for the Eastern District of
Pennsylvania. The plaintiffs purport to represent a class of over 9,000 Korean
and 1,000 U.S. service persons allegedly exposed to the herbicide Agent Orange
and other herbicides sprayed from 1967 to 1970 in or near the demilitarized zone
separating North Korea from South Korea. The complaint does not assert any
specific causes of action or demand a specified amount in damages. The Judicial
Panel on Multidistrict Litigation has granted transfer of the case to the U.S.
District Court for the Eastern District of New York for coordinated pretrial
proceedings as part of In re "Agent Orange" Product Liability Litigation, which
is the multidistrict litigation proceeding established in 1977 to coordinate
Agent Orange-related litigation in the United States. Two suits filed by
individual U.S. veterans contesting their denial of claims subsequent to the
class action settlement have been consolidated in the multidistrict litigation,
and were dismissed by the District Court. In an opinion dated November 30, 2001,
the United States Court of Appeals for the Second Circuit vacated the District
Court's dismissal of the claims and remanded the cases to the District Court
for further proceedings. On December 14, 2001 defendants filed with the Court
of Appeals a Petition for Rehearing and Rehearing En Banc. On May 8, 2002, the
appeals court denied the request for rehearing.
Pharmacia will be required to submit a corrective measures study report to the
EPA with regard to the company's discontinued industrial chemical facility in
North Haven, Connecticut. While the company has existing reserves designated for
remediation in the light of changing circumstances, it is reasonably possible
that a material increase in accrued liabilities will be required. However, it is
not possible to determine what, if any, additional exposure exists at this time.
Please see the discussion in Item 1, Environmental Matters, above.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, the company does not believe that the resolution of these
proceedings, either individually or taken as a whole, will have a material
adverse effect on its financial position, profitability or liquidity. The
company believes it has valid defenses to these matters and intends to
vigorously contest them.
31
Item 4. Submission of Matters to a Vote of Security Holders
At the company's Annual Meeting of Shareholders on April 30, 2002, three matters
were submitted to a vote of shareholders. Pursuant to the company's By-Laws,
abstentions and votes withheld by brokers in the absence of instructions from
beneficial holders (broker nonvotes) have the same effect as votes cast against
a management or shareholder proposal.
1. The following directors were elected, each to hold office until the
Annual Meeting to be held in 2005 or until a successor is elected and
has qualified or until his or her earlier death, resignation or
removal. Votes were cast as follows:
Name Votes "For" Votes "Withhold Authority"
---------------- --------------------------
Gwendolyn S. King 1,054,959,671 9,074,472
C. Steven McMillan 1,055,784,475 8,249,668
William U. Parfet 1,047,553,501 16,480,642
Jacobus F.M. Peters 1,042,135,614 21,898,529
Ulla Reinius 1,047,636,552 16,397,591
The following directors have continuing current terms expiring at the 2003
Annual Meeting: Frank C. Carlucci, Michael Kantor, Olof Lund and Bengt
Samuelsson. The following directors have continuing current terms expiring at
the 2004 Annual Meeting: M. Kathryn Eickhoff, Fred Hassan, Philip Leder,
Berthold Lindqvist and William D. Ruckelshaus.
2. A proposal by a certain shareholder requiring the Board to get
shareholders' approval prior to adopting a "poison pill" and also to
require the Board to redeem any "poison pill" now in effect was
submitted to a vote of shareholders. The Board recommended a vote
against the proposal. A total of 674,162,140 votes were cast in favor
of this proposal, a total of 250,527,489 votes were cast against it,
7,363,930 votes were counted as abstentions, and 131,980,584 votes were
counted as broker non-votes. The proposal received an affirmative vote
of a majority of the votes represented at the meeting in person or by
proxy.
3. A proposal by a certain shareholder to change the current "classified"
Board to an annually elected Board was submitted to a vote of
shareholders. The Board recommended a vote against the proposal. A
total of 668,807,187 votes were cast in favor of this proposal, a total
of 262,533,613 votes were cast against it, 6,601,151 votes were counted
as abstentions, and 126,092,192 votes were counted as broker non-votes.
The proposal received an affirmative vote of a majority of the votes
represented at the meeting in person or by proxy.
Item 5. Other Information Cautionary Statements Regarding Forward-Looking
Information
Forward-Looking Statements
Certain statements contained in this Report, as well as in other documents
incorporating by reference all or part of this Report, are "forward-looking
statements" provided under the "safe harbor" protection of the Private
Securities Litigation Reform Act of 1995. These statements are made to enable a
better understanding of the company's business, but because these
forward-looking statements are subject to many risks, uncertainties, future
developments and changes over time, actual results may differ materially from
those expressed or implied by such forward-looking statements. Examples of
forward-looking statements are statements about anticipated financial or
operating results, financial projections, business prospects, future product
performance, future research and development results, anticipated regulatory
filings and approvals and other matters that are not historical facts. Such
statements often include words such as: believes, expects, anticipates, intends,
plans, estimates or similar expressions.
These forward-looking statements are based on the information that was currently
available to the company, and the expectations and assumptions that were deemed
reasonable by the company,
32
at the time when the statements were made. The company does not undertake any
obligation to update any forward-looking statements in this Report or in any
other communications of the company, whether as a result of new information,
future events, changed assumptions or otherwise, and all such forward-looking
statements should be read as of the time when the statements were made, and with
the recognition that these forward-looking statements may not be complete or
accurate at a later date.
Many factors may cause or contribute to actual results or events being
materially different from those expressed or implied by such forward-looking
statements. Although it is not possible to predict or identify all such factors,
they may include the following factors discussed below:
Competition for our products: Competitive effects from current and new products,
including generic products, sold by other companies; competition and loss of
patent protection could lead to significant loss of sales.
Pharmaceutical pricing: Price constraints and other restrictions on the
marketing of products imposed by governmental agencies or by managed care
groups, institutions and other purchasing agencies could result in lower prices
for the company's products.
Product discovery and approval: The company's ability to discover and license
new compounds, develop product candidates, obtain regulatory approvals and
market new products is risky and uncertain.
Product recalls or withdrawals: Efficacy or safety concerns raised in the
scientific literature, increase in trends of adverse events in the marketplace,
and/or manufacturing quality issues with respect to our products, could lead to
product recalls, withdrawals or declining sales.
Manufacturing facilities: Failure to comply with Current Good Manufacturing
Practices and other applicable regulations and quality assurance guidelines
could lead to temporary manufacturing shutdowns, product shortages and delays in
product manufacturing.
Restrictions on marketing: Restrictions on promotion in patient populations as a
result of FDA warning letters on promotional materials could effect sales of the
company's products and could lead to holds on current and future New Drug
Applications and supplements filed with the FDA.
Legal claims: The company's ability to secure and defend its intellectual
property rights; the company's involvement in numerous lawsuits including
product liability claims, antitrust litigation, environmental concerns,
commercial disputes, any of which could affect the company's profits or ability
to sell and market its products. In addition, in connection with the separation
of the agricultural business from the pharmaceutical business on September 1,
2000, Monsanto assumed, and agreed to indemnify Pharmacia Corporation for, any
liabilities primarily related to Pharmacia's former agricultural or chemical
businesses, including any liabilities that Solutia had assumed from Pharmacia in
connection with the spin-off of Solutia on September 1, 1997, to the extent that
Solutia fails to pay, perform or discharge those liabilities. This includes
among other things, litigation and environmental liabilities that were assumed
by Solutia.
Employees: The company's ability to attract and retain management and other key
employees.
External pressures: Social, legal, political and governmental developments,
especially those relating to health care reform, pharmaceutical pricing and
reimbursement, patient privacy, tax laws and agricultural biotechnology;
seasonal and weather conditions affecting agricultural markets.
Economic conditions: Changes in foreign currency exchange rates or in general
economic or business conditions including inflation and interest rates.
33
Business combinations: Acquisitions, divestitures, mergers, restructurings or
strategic initiatives that change the company's structure; business combinations
among the company's competitors and major customers could affect our competitive
position.
Accounting policies and estimates: Changes to accounting standards or generally
accepted accounting principles, which may require adjustments to financial
statements and may affect future results.
Such other factors that may be described elsewhere in this Report or in other
company filings with the U.S. Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Exhibit Index
(b) There were no reports on Form 8-K filed during the three-month period
ending March 31, 2002.
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SIGNATURE:
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.
PHARMACIA CORPORATION
---------------------------------
(Registrant)
/s/ R.G. THOMPSON
---------------------------------
R.G. Thompson
Senior Vice President
and Corporate Controller
DATE: May 15, 2002
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EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit
Number Description
-------- -----------
2. Omitted - Inapplicable
4. Omitted - Inapplicable
10. Long-Term Performance Share Unit Incentive Plan
11. Omitted - Inapplicable; see Note G of Notes to Financial Statements on page 11
15. Omitted - Inapplicable
18. Omitted - Inapplicable
19. Omitted - Inapplicable
22. Omitted - Inapplicable
23. Omitted - Inapplicable
24. Omitted - Inapplicable
99. Omitted - Inapplicable
36