Quantitative and Qualitative Disclosures About Market Risk
The market risk disclosures appearing on pages 64 and 65 of the Company's 2001
Annual Report as incorporated by reference on Form 10-K have not materially
changed from December 31, 2001.
At June 30, 2002, the fair values of the Company's financial instruments were as
follows:
($ in millions) Notional/
Description Contract Amount Carrying Value Fair Value
Forward contracts (1) $629.9 $8.1 $8.1
Option contracts (1) 650.5 (20.9) (20.9)
Interest rate swaps 1,500.0 67.4 67.4
Outstanding debt (2) 10,770.8 10,833.6 11,015.3
(1) If the value of the U.S. dollar were to increase or decrease by 10%, in
relation to all hedged foreign currencies, the net receivable on the forward
and option contracts would decrease or increase by approximately $79.4.
21
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2002
(2) If the interest rates were to increase or decrease by one percentage point,
the fair value of the outstanding debt would increase or decrease by
approximately $205.4.
The estimated fair values approximate amounts at which these financial
instruments could be exchanged in a current transaction between willing parties.
Therefore, fair values are based on estimates using present value and other
valuation techniques that are significantly affected by the assumptions used
concerning the amount and timing of estimated future cash flows and discount
rates that reflect varying degrees of risk. Specifically, the fair value of
outstanding debt instruments reflects a current yield valuation based on
observed market prices as of June 30, 2002; the fair value of interest rate
swaps and forward contracts reflects the present value of the future potential
gain or (loss) if settlement were to take place on June 30, 2002; and the fair
value of option contracts reflects the present value of future cash flows if the
contracts were settled on June 30, 2002.
Cautionary Statements for Forward-Looking Information and Factors that May
Affect Future Results
This Form 10-Q, including management's discussion and analysis set forth above,
contains certain forward-looking statements, including, among other things,
statements regarding the Company's results of operations, competition,
liquidity, financial condition and capital resources, PREVNAR sales,
PREMPRO/PREMARIN, product supply, foreign currency and interest rate risk, the
nationwide, class action settlement relating to REDUX and PONDIMIN, and
additional litigation charges related to REDUX and PONDIMIN including those for
opt outs. These forward-looking statements are based on current expectations of
future events that involve risks and uncertainties including, without
limitation, risks associated with the inherent uncertainty of pharmaceutical
research, product development, manufacturing, commercialization, economic
conditions including interest and currency exchange rate fluctuations, access to
capital markets, the impact of competitive or generic products, product
liability and other types of lawsuits, the impact of legislative and regulatory
compliance and obtaining approvals, and patents. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public. However, the Company assumes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. Certain factors which could cause the Company's actual
results to differ materially from expected and historical results are discussed
herein and others have been identified by the Company in Exhibit 99 to the
Company's 2001 Annual Report on Form 10-K, which exhibit is incorporated herein
by reference.
Prempro / Premarin - HRT Studies
Two subsets of the WHI enrolled a total of 27,000 predominantly healthy
postmenopausal women to assess the risks and benefits of either long-term
estrogen replacement therapy (ERT) or long-term hormone replacement therapy
(HRT). The primary endpoint of the WHI study was coronary heart disease, with
invasive breast cancer as the primary adverse outcome studied. In the HRT subset
of the WHI, involving women who received hormone replacement therapy for an
average of 5.2 years using a combination of conjugated estrogens and
medroxyprogesterone
22
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2002
acetate (PREMPRO), increased rates of cardiovascular disease and breast cancer
were observed. This subset was stopped early because, according to the
predefined stopping rule, the increased risk of breast cancer and cardiovascular
events exceeded the specified long-term benefits. The study observed an
increased incidence of cardiovascular disease and, over time, breast cancer
among women on HRT compared to those on placebo. The study also observed a
reduction in the incidence of hip, vertebral and other osteoporotic fractures
and of colon cancer among women on HRT compared to those on placebo. The study
did not evaluate the use of HRT for the treatment of menopausal symptoms, the
main use of the product. These findings provide additional information about the
risks of breast cancer and cardiovascular disease which are potential adverse
events identified in the existing labeling for the Company's HRT products. A
great deal of media attention has been focused on this subject.
As a result, sales of PREMPRO and other PREMARIN family products are likely to
be adversely affected. Although the Company is currently monitoring the
situation, including prescription trends for the PREMARIN family of products and
other relevant information, it is not yet able to specifically quantify the
impact on future sales or operating results. The study subset which was
terminated focused on the long-term use of PREMPRO and did not involve PREMARIN
(ERT). PREMPRO sales (including PREMPHASE) for the three and six months ended
June 30, 2002 represented approximately 5% of consolidated net revenue for both
periods. Set forth below are individual product operating results for
PREMPRO/PREMPHASE and PREMARIN for both the three and six months ended June 30,
2002 and 2001.
Prempro/Premphase
Three Months Six Months
Ended June 30, Ended June 30,
($ in millions) 2002 2001 2002 2001
Net revenue $171.5 $178.8 $387.6 $435.9
Gross profit 147.2 153.9 332.9 377.3
Premarin
Three Months Six Months
Ended June 30, Ended June 30,
($ in millions) 2002 2001 2002 2001
Net revenue $273.9 $249.4 $733.3 $624.1
Gross profit 247.0 226.6 676.1 574.2
Competition
The Company operates in the highly competitive pharmaceutical and consumer
health care industries. PREMARIN, the Company's principal conjugated estrogens
product manufactured from pregnant mare's urine, and related products PREMPRO
and PREMPHASE (which are single tablet combinations of the conjugated estrogens
in PREMARIN and the progestin medroxyprogesterone acetate), are the leaders in
their categories and contribute significantly to net revenue and results of
operations. PREMARIN's natural composition is not subject to patent protection
(although PREMPRO has patent protection). The principal uses of PREMARIN,
PREMPRO and PREMPHASE are to manage the symptoms of menopause and to prevent
23
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2002
osteoporosis, a condition involving a loss of bone mass in postmenopausal women.
Estrogen-containing products manufactured by other companies have been marketed
for many years for the treatment of menopausal symptoms, and several of these
products also have an approved indication for the prevention of osteoporosis.
During the past several years, other manufacturers have introduced products for
the treatment and/or prevention of osteoporosis. New products containing
different estrogens than those found in PREMPRO and PREMPHASE and having many
forms of the same indications have also been introduced. Some companies have
attempted to obtain approval for generic versions of PREMARIN. These products,
if approved, would be routinely substitutable for PREMARIN and related products
under many state laws and third-party insurance payer plans. In May 1997, the
FDA announced that it would not approve certain synthetic estrogen products as
generic equivalents of PREMARIN given known compositional differences between
the active ingredient of these products and PREMARIN. Although the FDA has not
approved any generic equivalent to PREMARIN to date, PREMARIN will continue to
be subject to competition from existing and new competing estrogen and other
products for its approved indications and may be subject to generic competition
from either synthetic or natural conjugated estrogens products in the future. At
least one other company has announced that it is in the process of developing a
generic version of PREMARIN from the same natural source, and the Company
currently cannot predict the timing or outcome of these or any other efforts.
The marketing exclusivity for CORDARONE I.V. expired on August 3, 2002. The
Company submitted an application to the FDA for a six month pediatric extension
of the marketing exclusivity. The Company cannot predict whether its application
will be granted or when any generic competition will be approved. CORDARONE I.V.
had sales of $192 million during the first six months of 2002.
Product Supply
Although the market demand for ENBREL is increasing, the sales growth currently
is constrained by limits on the existing source of supply. This is expected to
continue until the retrofitting of a Rhode Island facility owned by Amgen is
completed and approved, which is currently anticipated to occur in the first
quarter of 2003, although there is no assurance that this estimate will prove
accurate. If the market demand continues to grow, there may be further supply
constraints even after the Rhode Island facility begins producing ENBREL. In
April 2002, Immunex (prior to being acquired by Amgen) announced a manufacturing
agreement with Genentech, Inc. to produce ENBREL beginning in 2004, subject to
FDA approval. The current plan for the longer term includes an additional
manufacturing facility, which is being constructed by the Company in Ireland and
is expected to be completed during 2005.
The Company has been experiencing inconsistent results on dissolution testing of
certain dosage forms of PREMARIN and is working with the FDA to resolve this
issue. Until this issue is resolved, supply shortages of one or more dosage
strengths may occur. Although these shortages may adversely affect PREMARIN
sales in one or more accounting periods, the Company believes that, as a result
of current inventory levels and the Company's enhanced process controls, testing
protocols and the ongoing formulation improvement project, overall PREMARIN
family sales will not be significantly impacted by the dissolution issues (see
also Prempro / Premarin - HRT Studies).
24
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months and Six Months Ended June 30, 2002
Sales of PREVNAR continue to be affected by manufacturing-related constraints on
product availability. The Company is in the process of implementing
manufacturing improvements and allocating additional personnel and equipment to
increase production of PREVNAR. The Company's efforts are not expected to
significantly increase supply until 2003 and, as a result, 2002 PREVNAR sales
are not expected to significantly exceed prior year levels. However, the
manufacturing processes for this product are very complex and there can be no
assurance that manufacturing-related difficulties will not result in further
reductions in 2002 sales.
Litigation and Contingent Liabilities
The Company is involved in various legal proceedings, including product
liability and environmental matters that arise from time to time in the ordinary
course of business, the most significant of which are described in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 and this Quarterly
Report on Form 10-Q. These include allegations of injuries caused by drugs and
other over-the-counter products, including REDUX, PONDIMIN, DIMETAPP,
ROBITUSSIN, DURACT and PREMPRO. In addition, the Company has responsibility for
environmental, safety and cleanup obligations under various local, state and
federal laws, including the Comprehensive Environmental Response, Compensation
and Liability Act, commonly known as Superfund.
The estimated costs that the Company expects to pay in these cases are accrued
when the liability is considered probable and the amount can be reasonably
estimated. In many cases, future environmental-related expenditures cannot be
quantified with a reasonable degree of accuracy. As investigations and cleanups
proceed, environmental-related liabilities are reviewed and adjusted as
additional information becomes available. In addition, the Company is
self-insured against ordinary product liability risks and has liability
coverage, in excess of certain limits and subject to certain policy ceilings,
from various insurance carriers. It is the opinion of the Company that any
potential liability that might exceed amounts already accrued will not have a
material adverse effect on the Company's financial position but could be
material to the results of operations or cash flows in any one accounting
period.
25
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