ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Net earnings for the quarter ended December 31, 2000, were $37.6 million,
or $.30 per diluted share, compared to $40.4 million, or $.31 per diluted share,
for the same prior year period. Net loss for the nine month period then ended
was $4.9 million, or $.04 per diluted share, compared to net earnings of $109.5
million, or $.84 per diluted share, for the same prior year period. Excluding
the
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
$147.0 million effect of the Tentative Settlement ($94.0 million net of tax),
net earnings for the nine months ended December 31, 2000, would have been $89.1
million, or $.70 per diluted share.
In July 2000, the Company reached a tentative settlement with the FTC, State
Attorneys General, and certain private parties ("Tentative Settlement") with
regards to lawsuits filed against the Company relating to raw material contracts
on two of its products.
During the quarter ended June 30, 2000, the Company made a strategic business
decision relating to the sales and marketing of its generic products. Within the
generic industry, the buying patterns of certain classes of customers resulted
in a disproportionate amount of their purchases to occur late in the quarter.
The Company indirectly supported this practice through discount and incentive
programs. The Company decided to no longer support this practice and
discontinued its related incentive programs. While generic volume of products
shipped for the three months ended June 30, 2000, was adversely impacted by this
decision, subsequent quarters have approached more normal levels.
The following table presents the comparative operating results for the Company's
operating segments: (dollars in millions)
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 Change 2000 1999 Change
Generic Segment:
Net sales $ 181.9 $ 168.2 8% $ 493.9 $ 484.0 2%
Gross profit 77.4 86.0 (10%) 206.5 254.4 (19%)
Segment profit 55.4 65.5 (15%) 140.2 193.2 (27%)
Brand Segment:
Net sales $ 41.3 $ 35.7 16% $ 104.1 $ 91.5 14%
Gross profit 27.7 25.2 10% 69.8 63.8 9%
Corporate, net:
Income (expense) $ 1.6 $ (7.7) $(152.8) $ (34.1)
Consolidated:
Net sales $ 223.2 $ 203.9 9% $ 598.0 $ 575.5 4%
Gross profit 105.1 111.2 (5%) 276.3 318.2 (13%)
Pretax earnings (loss) 58.8 63.7 (8%) (7.7) 172.2 (104%)
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
Segment net sales represent sales to unrelated third parties. Segment gross
profit represents segment net sales less the corporate-wide costs of
manufacturing, warehousing and shipping associated with such sales. Segment
profit represents segment gross profit less direct research and development,
sales and marketing and administrative expenses. Corporate includes legal costs,
goodwill amortization, other corporate administrative expenses and other income
and expense. For the nine months ended December 31, 2000, Corporate includes the
expense of $147.0 million for the Tentative Settlement (see note G to the
consolidated financial statements).
Results of Operations
Net Sales and Gross Profit
Consolidated net sales for the three months ended December 31, 2000, were
$223.2 million compared to $203.9 million for the same prior year period, a
$19.3 million or 9% increase.
Generic net sales for the current three month period were $181.9 million
compared to $168.2 million for the same prior year period, a $13.7 million or 8%
increase. New products launched subsequent to December 31, 1999, increased net
sales for the current three month period by $57.2 million, with $42.0 million
resulting from nifedipine, over the same prior year period. This increase was
offset by decreased net sales of $32.5 million for products where prices had
been increased in prior years, primarily clorazepate and lorazepam, and other
products of $9.9 million. Generic volume decreased to 2.214 billion doses for
the current three month period from 2.377 billion doses for the same prior year
period, a 7% decrease.
Brand net sales for the current three month period were $41.3 million compared
to $35.7 million for the same prior year period, a $5.6 million or 16% increase.
The increase from the prior year period is primarily attributable to sales of
new products, Clozapine(R) and Digitek(R), marketed by Bertek Pharmaceuticals
Inc. ("Bertek") subsequent to December 31, 1999.
Consolidated net sales for the nine months ended December 31, 2000, were $598.0
million compared to $575.5 million for the same prior year period, a $22.5
million or 4% increase.
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
Generic net sales for the current nine month period were $493.9 million compared
to $484.0 million for the same prior year period, a $9.9 million or 2% increase.
New products launched subsequent to December 31, 1999, increased net sales for
the current nine month period by $154.3 million, with $110.9 million of the
increase from nifedipine, over the same prior year period. This increase was
offset by decreased net sales of $85.1 million for products where prices had
been increased in prior years, primarily clorazepate and lorazepam, and other
products of $53.6 million. Generic volume for the current nine month period was
6.078 billion doses compared to 6.437 billion doses for the same prior year
period, a 6% decrease. The decrease in generic volume primarily related to the
change in sales and marketing strategy implemented in the quarter ended June 30,
2000.
Brand net sales for the current nine month period were $104.1 million compared
to $91.5 million for the same prior year period, a $12.6 million or 14%
increase. New products marketed by Bertek subsequent to December 31, 1999,
Clozapine(R) and Digitek(R), increased net sales for the current nine month
period by $10.7 million over the same prior year period.
Consolidated gross profit for the three months ended December 31, 2000, was
$105.1 million or 47% of net sales compared to $111.2 million or 55% of net
sales for the same prior year period. For the nine months ended December 31,
2000, gross profit was $276.3 million or 46% of net sales compared to $318.2
million or 55% of net sales for the same prior year period.
Generic gross profit for the current three month period was $77.4 million or 43%
of generic net sales compared to $86.0 million or 51% of generic net sales for
the same prior year period, an $8.6 million or 10% decrease. For the current
nine month period, generic gross profit was $206.5 million or 42% of generic net
sales compared to $254.4 million or 53% of generic net sales for the same prior
year period, a $47.9 million or 19% decrease. In the current three and nine
month periods, gross profit contributed by new product launches subsequent to
December 31, 1999, were offset by decreased gross profit on clorazepate and
lorazepam, products where prices had been increased in prior years and other
core generics as compared to the same prior year periods. Additionally, due to
contractual obligations, net sales of nifedipine are at relatively lower margins
and, consequently, have contributed to the lower overall generic gross profit
realized by the Generic Segment.
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
Brand gross profit for the current three month period was $27.7 million or 67%
of brand net sales compared to $25.2 million or 71% of brand net sales for the
same prior year period, a $2.6 million or 10% increase. For the current nine
month period, brand gross profit was $69.8 million or 67% of brand net sales
compared to $63.8 million or 70% of brand net sales for the same prior year
period, a $6.0 million or 9% increase. Increases in gross profit for the three
and nine month periods were primarily attributable to new products marketed
subsequent to December 31, 1999.
Research and Development
Consolidated research and development expenses for the three months ended
December 31, 2000, were $15.8 million compared to $12.4 million for the same
prior year period, a $3.4 million increase. For the nine months ended December
31, 2000, consolidated research and development expenses were $49.6 million
compared to $35.7 million for the same prior year period, a $13.9 million
increase.
Generic research and development for the current three month period was $12.0
million compared to $9.7 million for the same prior year period. For the current
nine month period, generic research and development was $38.6 million compared
to $28.8 million for the same prior year period. The increases are primarily due
to increased studies and increased license expense for marketing rights to
certain products in development.
Brand research and development for the current three month period was $3.8
million compared to $2.7 million for the same prior year period. For the current
nine month period, brand research and development was $11.0 million compared to
$6.9 million for the same prior year period. These increases are primarily due
to increased studies expense associated with product line expansions.
The Company is actively pursuing joint development projects in an effort to
broaden its scope of capabilities in bringing to market new innovative products.
Such arrangements generally provide for payments by the Company only upon the
attainment of certain milestones. While such arrangements help to reduce the
Company's financial risk for unsuccessful projects, attainment of milestones may
result in fluctuations in quarterly research and development.
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
Selling and Administrative Expenses
Consolidated selling and administrative expenses were $40.6 million for the
three months ended December 31, 2000, compared to $40.4 million for the same
prior year period. For the nine months ended December 31, 2000, consolidated
selling and administrative expenses were $117.9 million compared to $117.4
million for the same prior year period.
Generic selling and administrative expenses for the current three month period
were $10.0 million, relatively unchanged from the same prior year period of
$10.8 million. For the current nine month period, generic selling and
administrative expenses decreased $4.7 million to $27.7 million from $32.4
million for the same prior year period. This decrease is primarily attributed to
decreased promotional expenses.
Brand selling and administrative expenses for the current three month period
were $22.1 million compared to $16.6 million for the same prior year period. For
the current nine month period, brand selling and administrative expenses were
$54.0 million compared to $43.8 million for the same prior year period. The
increase for the current three month period relates primarily to the charges
related to the Zagam(R) product license and employee severance and termination
costs related to the restructuring of the Brand Segment. Bertek decreased the
carrying value of the Zagam(R) product license by $3.6 million due to
difficulties related to product supply. Consequently, the carrying value of the
Zagam(R) product license was $3.2 million at December 31, 2000. The Brand
Segment recorded $1.0 million for employee severance and termination costs in
connection with the consolidation of its non-manufacturing operations in
Raleigh, North Carolina. For the current nine month period, the increase relates
primarily to Zagam(R) charges of $4.6 million, employee severance and
termination costs of $1.0 million and product sample expense of $2.8 million.
Other Income
Other income for the three months ended December 31, 2000, was $8.9 million
compared to $6.9 million for the same prior year period, a $2.0 million
increase. Under the terms of the August 2000 settlement with American
Bioscience, Inc. ("ABI"), the Company recognized $9.2 million in the current
three month period for the transfer to ABI of ABI's common stock owned by the
Company (see note G to the consolidated financial statements). This increase in
other income was partially offset by a loss recognized on the Company's
investment in a limited partnership. In addition, in the three month period
ended December 31, 1999, the Company recorded a reduction of the carrying value
of nonoperating assets.
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
Other income for the nine months ended December 31, 2000, was $31.1 million
compared to $9.6 million for the same prior year period, a $21.5 million
increase. This increase is primarily attributed to increased earnings recognized
in the Company's investment in a limited partnership, the ABI proceeds and
increased interest income.
Somerset
Equity in the earnings of Somerset was $1.3 million for the three months
ended December 31, 2000, compared to a loss of $1.5 million for the same prior
year period. Equity in the loss of Somerset was $0.8 million and $2.6 million
for the nine months ended December 31, 2000, and 1999. The increase in earnings
for the current three month period was primarily attributable to decreased
research and development and a settlement with the Internal Revenue Service.
Income Taxes
The Company's effective tax rate of 36% remained relatively unchanged from
the same prior year periods and is expected to remain at approximately this
level throughout fiscal year 2001.
Other Factors
The Tentative Settlement contributed primarily to the increase in total
current assets and total current liabilities.
The addition of nifedipine to the Company's product line during the current nine
month period resulted in increased finished goods inventories and increased
trade accounts payable.
During the current nine month period, the Company liquidated portions of its
marketable securities and investment in a limited partnership to fund the Stock
Repurchase Program and the Tentative Settlement. Consequently, other assets and
marketable securities have decreased for the current nine month period.
During the three month period ended June 30, 2000, the Company completed the
Stock Repurchase Program authorized and announced by the Board of Directors in
April 1997. The Company repurchased 4,855,100 shares of common stock for
approximately $91.5 million.
The Company has initiated the consolidation of its Brand Segment. In addition to
strengthening the management team, the Brand Segment is in the process of
relocating certain functions from three current locations to one location in
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
Raleigh, North Carolina. In addition to the $1.0 million in employee severance
and termination costs recorded in the current three month period, the remaining
costs associated with the consolidation are expected to be recognized in fiscal
year 2002.
In February 2001, the Food and Drug Administration approved Biovail
Corporation's ("Biovail") Abbreviated New Drug Application for 30mg nifedipine
extended-release tablets, the generic equivalent of Pfizer Inc.'s Procardia(R)
XL, which the Company currently markets. The Company believes the approval to be
contrary to the statute, case law and the FDA's own publicly announced position
concerning the 180-day exclusivity provision of the statute. If Biovail chooses
to launch its product, the Company would expect to experience decreased net
sales and, to a lesser degree, decreased gross profits. The Company is
evaluating its options and will take such steps as it deems appropriate to
protect its interests.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The effective date of this standard has been delayed to
fiscal years beginning after June 15, 2000. The Company is currently evaluating
the impact of this standard on its financial position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB No. 101").
The implementation date of SAB No. 101 has been delayed to the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company believes
the adoption of SAB No. 101 will not have a material impact on its financial
position or results of operations.
Liquidity, Capital Resources and Financial Condition
Working capital decreased to $516.8 million at December 31, 2000, from
$596.2 million at March 31, 2000. The ratio of current assets to current
liabilities decreased to 2.9 to 1 at December 31, 2000, from 7.8 to 1 at March
31, 2000. Primary causes for the change in the Company's current ratio were the
Tentative Settlement and completion of the Stock Repurchase Program.
The decrease in working capital was primarily attributed to the Tentative
Settlement and its partial funding, along with net fluctuations in accounts
receivable, inventories and income taxes. While the Tentative Settlement, along
with its partial funding, impacted working capital and cash provided from
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
operating activities, the liquidation of certain investments in anticipation of
the payment has resulted in the increase in cash provided from investing
activities. The cash used for the completion of the Stock Repurchase Program
also reduced working capital.
In December 2000, the Company placed into escrow $100.0 million in accordance
with the terms related to the Tentative Settlement. The remaining balance will
be funded through currently available funds. The entire $147.0 million
settlement remains subject to final court approval.
The Company believes that it has meritorious defenses, with respect to the
claims asserted, in those suits which are not part of the Tentative Settlement
and will vigorously defend its position. However, an adverse result in these
cases or, if the Tentative Settlement is not approved by the court, the
continued litigation of those cases could have a material adverse effect on the
Company's financial position and results of operations.
During the three month period ended June 30, 2000, the Company completed the
Stock Repurchase Program authorized and announced by the Board of Directors in
April 1997. The Company repurchased 4,855,100 shares of common stock for
approximately $91.5 million through the use of currently available funds.
The Company continues to examine opportunities to expand its business through
product and company acquisitions. The Company's capital resources, financial
condition and results of operations could be materially impacted if the Company
were to complete one or more of such acquisitions.
Forward-Looking Statements
The statements set forth in this Report concerning the manner in which the
Company intends to conduct its future operations, potential trends that may
impact future results of operations, and its beliefs or expectations about
future operations are forward-looking statements. The Company may be unable to
realize its plans and objectives due to various important factors, including,
but not limited to, an acceleration in the erosion of prices of the Company's
generic pharmaceutical products, the Company's inability to obtain timely FDA
approval for its new generic or brand products, the failure of the Company's
brand products to find acceptance in the marketplace, continuing litigiousness
by brand manufacturers designed to delay the introduction of the Company's
generic products, the failure of the court to approve the Tentative Settlement,
the failure of the Company to favorably litigate or resolve the remaining cases
that 17
MYLAN LABORATORIES INC. AND SUBSIDIARIES
are not a part of the Tentative Settlement, and the factors described under
"Forward Looking Statements" in Item 7 of the Company's Annual Report on Form
10-K for the year ended March 31, 2000.