ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
LEGAL PROCEEDINGS
Bayer is involved in a number of legal proceedings. As a global company
active in a wide range of life sciences and chemical activities, we may in the
normal course of our business become involved in proceedings relating to such
matters as:
- product liability;
- patent validity and infringement disputes;
- tax assessments;
- competition and antitrust; and
- past waste disposal practices and release of chemicals into the
environment.
We cannot predict with certainty the outcome of any proceedings in which we
are or may become involved. An adverse decision in a lawsuit seeking damages
from us could result in a monetary award to the plaintiff and, to the extent not
covered by our insurance policies, could significantly harm our business or the
result of our operations. If we lose a case in which we seek to enforce our
patent rights, we could sustain a loss of future revenue as other manufacturers
begin to market products we developed.
In the remainder of this subsection, we describe what we believe to be the
most significant of the proceedings in which Bayer AG or its subsidiaries are
currently involved.
PATENT VALIDITY CHALLENGES AND INFRINGEMENT PROCEEDINGS; PATENT-RELATED
ANTITRUST ACTIONS
In the United States, Bayer AG and its U.S. subsidiary Bayer Corporation
are plaintiffs or co-plaintiffs in a number of patent infringement actions
against generic drug manufacturers. The lawsuits arose because these
manufacturers filed applications in the United States for regulatory approval of
generic versions of products containing the active ingredients ciprofloxacin or
nifedipine marketed by Bayer or its licensees. Some of these actions have, in
turn, given rise to lawsuits alleging that Bayer AG, Bayer Corporation and other
parties had violated federal and state antitrust and similar statutes.
Generic drug manufacturers may receive approval to market formerly patented
products after all applicable patent protections have expired. A generic drug
manufacturer may, however, attempt to avoid a patent prior to its scheduled
expiry by attacking its validity or enforceability. In the United States, the
Federal Food, Drug, and Cosmetics Act enables generic manufacturers wishing to
market a bio-equivalent version of another manufacturer's product to seek
regulatory approval by filing an Abbreviated New Drug Application (ANDA). In its
ANDA the applicant must state the basis on which it seeks to avoid any
applicable patents.
One basis for seeking approval is a claim that the applicant's product does
not infringe existing patent rights or that the patent is invalid or
unenforceable. This claim is commonly known as a "paragraph IV certification" or
"ANDA (IV)." Under the Act, the filing of a paragraph IV certification is deemed
an infringement of patent rights. The Act permits the holder of the patent
rights to file an infringement action against the ANDA applicant within 45 days
of receiving notice of the paragraph IV certification. If the holder of the
patent rights chooses not to file suit within this period, the FDA may approve
the ANDA immediately. The filing of a suit, however, stays final FDA approval of
the ANDA for a period of 30 months. The court may shorten or extend this period.
If the court rules that the applicant's product will not infringe the patent or
that the patent is invalid or unenforceable, the FDA may grant approval
immediately. If, on the other hand, the court rules that the product will
infringe the patent, the FDA may not grant final approval until the original
patent has expired.
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Ciprofloxacin-related actions
Patent-related actions. In January 1997, Bayer AG and Bayer Corporation
settled a patent infringement suit against Barr Laboratories, Inc. This suit
arose when Barr filed an ANDA (IV) seeking regulatory approval of a generic form
of Bayer's ciprofloxacin anti-infective product, which we sell in the United
States under the trademark Cipro(R). Under the settlement agreement, Barr and
Rugby Laboratories Inc., another generic manufacturer that supported Barr during
the infringement suit, agreed to dismiss the litigation, acknowledging the
validity and enforceability of Bayer's patent rights, and we agreed to pay each
company $24.5 million. The agreement gave us the option, until our patent
expires in 2003, to supply Barr and Rugby's then parent company Hoechst Marion
Roussel Inc. with ciprofloxacin products which they could then market under a
license from Bayer using a single trade name, or else to make quarterly cash
payments. Since concluding the settlement agreement, we have opted to make
payments. Shortly after settling this suit, we applied to the U.S. Patent and
Trademark Office for a reexamination of our patent. The Patent and Trademark
Office reissued the patent in February 1999.
In April 1999, Danbury Pharmacal Inc., an affiliate of Schein
Pharmaceutical, Inc., filed an ANDA (IV) alleging that our ciprofloxacin patent
was invalid. Mylan Pharmaceuticals, Inc., an affiliate of Mylan Laboratories,
Inc., filed an ANDA (IV) challenging our ciprofloxacin patent in September 1999.
To protect and enforce our patent rights, Bayer AG together with Bayer
Corporation as licensee filed two lawsuits against Danbury Pharmacal and Schein
Pharmaceutical and one lawsuit against Mylan Pharmaceuticals and Mylan
Laboratories in 1999, and a second lawsuit against Mylan Pharmaceuticals and
Mylan Laboratories in 2000. Reddy Cheminor, Inc. intervened as an additional
defendant in the Danbury/Schein suits. All these suits were consolidated for
pre-trial proceedings and trial before the U.S. federal District Court for the
District of New Jersey.
In their responses the defendants alleged the invalidity and
unenforceability of our reexamined patent on several grounds. They then moved
for summary judgment on the invalidity issue, and we filed a cross-motion for
partial summary judgment. In February 2001, the district court denied the
defendants' motion and granted our cross-motion. The court subsequently entered
a final judgment in our favor, confirming the validity and enforceability of the
patent. The defendants appealed this judgment to the Court of Appeals for the
Federal Circuit, which heard oral arguments on January 7, 2002.
In addition, Bayer AG and Bayer Corporation filed a patent infringement
action in May 2001 against Carlsbad Technology, Inc., arising from Carlsbad's
ANDA (IV) filing seeking regulatory approval of its generic version of Cipro(R).
Carlsbad filed two motions for summary judgment. The first motion alleged as a
matter of patent procedure that Bayer's patent as it relates to ciprofloxacin
should expire in October 2002 and not, as determined by the Patent and Trademark
Office, in December 2003. Bayer filed a cross-motion for summary judgment that
the expiration date is in December 2003. In its second motion, Carlsbad alleged
that ciprofloxacin was obvious in light of the prior art. The federal District
Court for the Southern District of California denied both Carlsbad motions in
October, 2001 and granted summary judgment to Bayer on its cross-motion.
Carlsbad has appealed the decision denying the first motion to the Court of
Appeals for the Federal Circuit. A trial regarding the arguments of obviousness
raised in Carlsbad's second motion was held in April and May 2002. The court has
not yet made a ruling. Carlsbad has withdrawn all other defenses it had
originally raised challenging the validity and enforceability of Bayer AG's
ciprofloxacin patent.
If we lost our patent protection for ciprofloxacin, or if the expiration of
the patent were accelerated to October 2002, we believe that we would forego
significant revenue. We intend to continue taking vigorous action to maintain
our ciprofloxacin patent rights in the United States through their normal expiry
in December 2003.
Antitrust actions. Bayer Corporation has been named as a defendant in 39
putative class action lawsuits, one individual lawsuit and one consumer
protection group lawsuit filed in a number of state and federal courts in the
United States. Bayer AG has also been named as defendant in twenty of these
cases, including the individual lawsuit and the consumer protection group
lawsuit; it has been served with process in the individual lawsuit and twelve of
the putative class action lawsuits. In addition, Barr Laboratories, Aventis
S.A., Hoechst Marion Roussel, Inc., Rugby Laboratories, Inc. and Watson
Pharmaceuticals, Inc. have each been named as defendant in one or more of these
lawsuits. The plaintiffs in these suits allege that they are direct or indirect
purchasers of Cipro(R) who were damaged because Bayer's settlement of the Barr
ANDA (IV) litigation prevented generic
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manufacturers from selling a generic version of Cipro(R). The plaintiffs allege
that the defendants violated various federal antitrust and state business,
antitrust, unfair trade practices and consumer protection statutes, and seek
treble damages and injunctive relief.
These proceedings are at an early stage. None of the relevant courts have
certified a class. The Judicial Panel for Multidistrict Litigation, or MDL
Panel, transferred 35 of these cases to the U.S. federal District Court for the
Eastern District of New York for coordinated pre-trial proceedings. The federal
court ordered nine of those cases remanded to various state courts in October
2001. Nine cases are currently pending in a California state court. Bayer is
also involved in state court proceedings occurring in Florida, New York, Kansas,
Tennessee and Wisconsin.
The Barr settlement is also the subject of ongoing antitrust investigations
by the U.S. Federal Trade Commission and a number of state attorneys general.
Because these cases in the aggregate allege substantial unquantified
damages and also seek treble and punitive damages and penalties, it is possible
that the ultimate liability could be material to our results of operations and
cash flows. Although we cannot predict the outcome of these cases with
certainty, we believe that we have meritorious defenses to the antitrust
allegations and intend to defend them vigorously.
Nifedipine-related actions
Patent-related actions. Since 1997 Bayer AG and Bayer Corporation have
been involved in a number of patent infringement actions arising from ANDA (IV)s
filed by generic manufacturers seeking regulatory marketing approval for
allegedly bio-equivalent versions of our brand-name product Adalat(R) CC and
Pfizer, Inc.'s brand-name product Procardia(R) XL. The active ingredient of
these products is nifedipine. We own patent rights related to nifedipine drug
product formulations. In addition, because Pfizer markets Procardia(R) XL under
a license from Bayer, Bayer AG and Bayer Corporation became Pfizer's
co-plaintiffs in the infringement actions relating to that product.
In August 1997, Bayer AG and Bayer Corporation filed a patent infringement
suit against Elan Pharmaceutical Research Corp. and Elan's parent company, Elan
Corp., plc, arising from Elan's ANDA (IV) for a drug product containing
nifedipine in a 30mg dosage form. In March 1999, the U.S. federal District Court
for the Northern District of Georgia granted summary judgment against us,
holding that the particular generic product for which Elan sought marketing
approval as described in its ANDA would not violate our patent. In May 2000, the
U.S. Court of Appeals for the Federal Circuit affirmed this decision.
In March 2001, the same district court granted summary judgment against
Bayer AG and Bayer Corporation in a second ANDA (IV) related suit (60 mg dosage
form) that we had filed against Elan and later in another action that we had
filed against Elan, Biovail Labs, Inc., Biovail Corp. International and Teva
Pharmaceuticals USA, Inc., arising from these parties' commercial sale of an
allegedly bio-equivalent nifedipine product. We appealed these decisions to the
Court of Appeals for the Federal Circuit. The Federal Circuit vacated these
decisions of the District Court and remanded the cases to the District Court for
further proceedings.
Bayer AG and Bayer Corporation have also filed four ANDA (IV) related
lawsuits against Biovail and two lawsuits arising from the commercial sale of
nifedipine products by Biovail and Teva. These suits are currently stayed before
the U.S. federal District Court for the District of Puerto Rico.
As defendants have prevailed in some of these lawsuits, it is possible that
they may also prevail in the trials and appeals that may take place in the
future. We believe, however, that we have meritorious claims in the pending
cases, and intend to prosecute these claims vigorously. Because some of our
nifedipine dosages have already begun to face generic competition, we do not
believe that an adverse result in the pending cases would result in a material
amount of additional foregone revenue.
Antitrust actions. Biovail has filed an antitrust lawsuit against Bayer
AG, Bayer Corporation and Pfizer in the U.S. federal District Court for the
District of Western Pennsylvania. Biovail is seeking a declaratory judgment that
Bayer's nifedipine patents are invalid. Biovail also seeks damages under federal
and state antitrust statutes
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alleging, among other things, that Bayer illegally asserted its patent rights.
The district court has stayed this litigation pending resolution of the
nifedepine-related patent infringement actions against Biovail.
This proceeding is at an early stage. However, we believe that we have
meritorious defenses to the antitrust allegations, and we intend to defend this
case vigorously.
PRODUCT LIABILITY PROCEEDINGS
HIV-related actions. During the past decade, our U.S. subsidiary Bayer
Corporation, as well as other fractionators of plasma products, have been
involved in lawsuits alleging that hemophiliacs became infected with the human
immunodeficiency virus (HIV), or ultimately developed AIDS, by using clotting
factor concentrates derived from human plasma. Plaintiffs have brought actions
on these grounds in the United States, Ireland, Italy, Taiwan, Argentina,
Canada, Japan, and Germany.
In the United States, a class action against Bayer Corporation and three
other defendants consolidated the HIV-related claims of more than 6,000
claimants and claimant groups. The parties resolved this class action through a
$600 million settlement. Bayer Corporation's share of this settlement was
approximately $290 million. Bayer Corporation has also satisfactorily settled
nearly 400 lawsuits by plaintiffs who opted out of the class action. Seven suits
remain pending in the United States. Although Bayer Corporation has prevailed in
the majority of cases that have proceeded to trial, plaintiffs were successful
in three cases. The juries in each of these cases awarded damages not exceeding
$2 million. In addition, in 1999, a Louisiana jury awarded a plaintiff damages
of $35 million. However, the trial court set this award aside, and an appellate
court upheld this decision. Bayer Corporation has since settled this matter in
the context of a group settlement of nearly 100 Louisiana cases, of which Bayer
Corporation's share was less than $50 million.
Although Bayer Corporation intends to defend aggressively the remaining
HIV-related lawsuits in various countries, we have made what we believe to be
appropriate provisions should these suits result in judgments in favor of the
plaintiffs. These provisions are not material to the Bayer Group.
Cerivastatin-related actions. In August 2001, we voluntarily ceased
marketing our cerivastatin anticholesterol products in response to reports of
serious side effects in some patients. See Item 4, Information about the
Company -- Health Care -- Pharmaceuticals -- Products. Since this withdrawal,
about 1,700 lawsuits, many of them putative class actions, have been initiated
in the United States against Bayer Corporation and Bayer AG. The actions in the
United States have been primarily on theories of product liability, consumer
fraud, medical monitoring, predatory pricing and unjust enrichment. These
lawsuits seek remedies including compensatory and punitive damages, disgorgement
of funds received from the marketing and sale of cerivastatin and the
establishment of a trust fund to finance the medical monitoring of former
cerivastatin users. The federal cases are being transferred to the U.S. federal
District Court for the District of Minnesota for coordinated discovery and other
pre-trial proceedings. In addition, several actions have been initiated against
other companies of the Bayer Group in other countries. We expect additional
lawsuits to be filed in the United States and elsewhere. If the plaintiffs in
these actions were to be successful, it is possible that the ultimate liability
could be material to our results of operations and cash flows. We believe that
we have meritorious defenses in these actions and are defending them vigorously.
Without acknowledging any liability, we have settled a small number of these
cases in the past. We may, on a case-by-case basis, settle additional cases for
reasonable amounts when, in our judgment, settlement is economically feasible
given the risks and costs inherent in any litigation.
Phenylpropanolamine (PPA) actions. In late 2000, Bayer Corporation
discontinued marketing Alka-Seltzer Plus effervescent medicines containing PPA
in the United States, Canada and various Latin American countries in response to
a recommendation from the U.S. Food and Drug Administration to all manufacturers
of drugs and medicines containing PPA. The FDA issued this recommendation after
one epidemiological study of a small number of patients suggested a possible
association between PPA and hemorrhagic stroke in women of certain ages. More
than 540 class and individual lawsuits have been initiated in the United States
against Bayer Corporation. The MDL Panel has assigned management of the federal
court cases to the U.S. federal District Court for the Western District of
Washington. It is probable that additional actions will be initiated there or in
other jurisdictions where products containing PPA were marketed. Bayer
Corporation believes it has meritorious defenses to these actions and intends to
defend them vigorously.
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MEDICAID REBATE PROGRAM ALLEGATIONS
Our U.S. subsidiary, Bayer Corporation, is currently under investigation by
the U.S. Attorney's Office for the District of Massachusetts. The investigation,
which is assisted by the Department of Health & Human Services, focuses
primarily on allegations that Bayer Corporation improperly underpaid rebates
under the Medicaid Rebate Program during a period from 1995 to 2000.
These investigations could lead the government to bring criminal or civil
actions, or both, against Bayer Corporation. If the government brought such
actions and obtained a conviction or verdict against Bayer Corporation, we would
likely be required to reimburse the government the amount of the alleged
underpayment. We would also become liable to pay civil and/or criminal fines or
penalties, which could be substantial. Although we believe this outcome to be
unlikely, in the worst case a conviction or adverse verdict could result in the
exclusion of Bayer Corporation from participation in federal health programs.
Bayer Corporation is providing information to the government and otherwise
cooperating with the investigation. Bayer Corporation believes that its
practices complied in all material respects with all applicable laws and is
therefore seeking to persuade the government to discontinue its investigation.
If the government does bring civil or criminal charges against Bayer
Corporation, Bayer Corporation intends to defend itself vigorously.
AVERAGE WHOLESALE PRICE MANIPULATION PROCEEDINGS
Seven pending lawsuits allege that a number of pharmaceutical companies,
including Bayer Corporation, manipulated the average wholesale price of their
products. The suits allege that this manipulation resulted in overcharges to
Medicare beneficiaries, Medicaid recipients, state governmental health programs,
and private health plans. These suits generally seek damages, treble damages,
disgorgement of profits, restitution and attorney's fees. We expect that six of
these actions will be consolidated before the U.S. federal court for the
District of Massachusetts. The remaining case, in which the State of Nevada is
plaintiff, has been removed to federal court in Nevada but may be subject to
remand to a state court. Bayer Corporation has not yet responded to the
complaints in these actions, but intends to defend itself vigorously.
DIVIDEND POLICY AND LIQUIDATION PROCEEDS
Our shareholders may declare dividends at an ordinary general shareholders'
meeting, which must be held within the first eight months of each fiscal year.
Under German law, Bayer AG may pay dividends only from balance sheet
profits reflected in its unconsolidated financial statements (as opposed to the
consolidated financial statements of the Bayer Group), as adopted and approved
by the Board of Management and the Supervisory Board. In determining the balance
sheet profits that may be distributed as dividends, the Board of Management may
under German law allocate to retained earnings (Gewinnrucklagen) up to 50
percent of the net income of Bayer AG for the fiscal year that remains after
deducting amounts to be allocated to legal and statutory reserves and losses
carried forward. The Board of Management may also increase balance sheet profits
when preparing the financial statements with funds withdrawn from retained
earnings.
Our shareholders, in their resolution on the appropriation of balance sheet
profits, may carry forward balance sheet profits in part or in full and may
allocate additional amounts to retained earnings. Profits carried forward will
be automatically incorporated in the balance sheet profits of the next fiscal
year and may be used in their entirety to pay dividends in the next fiscal year.
Amounts allocated to the retained earnings are available for dividends only if
and to the extent the retained earnings have been dissolved by the Board of
Management when preparing the financial statements, thereby increasing the
balance sheet profits.
Dividends approved at an ordinary general shareholders' meeting are payable
promptly after the meeting, unless otherwise decided at the meeting. Because all
of Bayer AG's shares are in book-entry form represented by a global certificate
deposited with Clearstream Banking AG in Frankfurt am Main, Germany,
shareholders receive dividends through Clearstream for credit to their deposit
accounts.
We expect to continue to pay dividends, although we can give no assurance
as to the payment of a dividend for any particular year or as to the particular
amounts that we may pay from year to year.
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Apart from liquidation as a result of insolvency proceedings, Bayer AG may
be liquidated only with a combined majority of the votes cast and three-quarters
of the share capital present or represented at a shareholders' meeting at which
the vote is taken. In accordance with the German Stock Corporation Act, upon a
liquidation of Bayer AG, any liquidation proceeds remaining after paying off all
of Bayer AG's liabilities would be distributed among the shareholders in
proportion to the total number of shares held by each shareholder.
See also "Dividends" in Item 3, Key Information.
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