1
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, 2001
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)
Registrant's telephone number 908/901-8000
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. YES X NO
The number of shares of Common Stock, $2 Par Value, outstanding as of May 11,
2001 was 1,300,973,410.
Page 1 of 32 pages
The exhibit index is set forth on page 32
2
QUARTERLY REPORT ON FORM 10-Q
PHARMACIA CORPORATION
QUARTER ENDED MARCH 31, 2001
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 5. OTHER INFORMATION 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32
2
3
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 2001 2000
-------------------------------------------------------------------------
Net sales $ 4,516 $ 4,172
Cost of products sold 1,441 1,404
Research and development 747 695
Selling, general and administrative 1,723 1,602
Goodwill amortization 61 57
Merger and restructuring 145 461
Interest income (39) (29)
Interest expense 82 97
All other, net 17 (59)
-------------------------------------------------------------------------
Earnings(loss) before income taxes and 339 (56)
minority interest
Provision (benefit) for income taxes 77 (25)
Minority interest in agricultural
subsidiaries, net of tax 8 --
-------------------------------------------------------------------------
Earnings (loss) from continuing operations 254 (31)
(Loss) gain on sale of discontinued operations,
net of tax (5) 58
-------------------------------------------------------------------------
Earnings before cumulative effect
of accounting change 249 27
Cumulative effect of accounting change,
net of tax 1 (198)
-------------------------------------------------------------------------
Net earnings (loss) $ 250 $ (171)
========================================================================
========================================================================
Net earnings (loss) per common share:
Basic
Earnings (loss) from continuing operations $ .19 $ (.03)
Net earnings .19 (.14)
Diluted
Earnings (loss) from continuing operations $ .19 $ (.03)
Net earnings (loss) .19 (.14)
========================================================================
See accompanying notes.
3
4
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================
(Dollars in millions) (Unaudited)
For the three months ended March 31 2001 2000
-----------------------------------------------------------------------------------
Net cash (required) by continuing operations $ (628) $ (764)
Net cash provided by discontinued operations -- 21
-----------------------------------------------------------------------------------
Net cash (required) by operations $ (628) $ (743)
-----------------------------------------------------------------------------------
Cash flows (required) provided by investment activities:
Proceeds from sale of subsidiaries -- 64
Purchases of subsidiaries (65) --
Purchases of property, plant & equipment (278) (320)
Purchases of other acquisitions & investments (32) (41)
Proceeds from sales of investments 31 73
Proceeds from discontinued operations -- 570
Other (17) (20)
-----------------------------------------------------------------------------------
Net cash (required) provided by investment activities (361) 326
-----------------------------------------------------------------------------------
Cash flows provided by financing activities:
Proceeds from issuance of debt -- 7
Repayment of debt (18) (36)
Payments of ESOP debt (44) (31)
Net increase in short-term borrowings 830 151
Dividend payments (160) (163)
Issuance of stock 96 89
-----------------------------------------------------------------------------------
Net cash provided by financing activities 704 17
-----------------------------------------------------------------------------------
Effect of exchange rate changes on cash (42) (25)
-----------------------------------------------------------------------------------
Net change in cash and cash equivalents (327) (425)
Cash and cash equivalents, beginning of year 2,166 1,600
-----------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,839 $ 1,175
===================================================================================
See accompanying notes.
4
5
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================
(Dollars in millions, except par value)
(Unaudited)
March 31, December 31,
2001 2000
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,839 $ 2,166
Trade accounts receivable, less allowance
of $297 (2000: $292) 5,296 5,025
Inventories 2,738 2,772
Other current assets 1,856 1,604
--------------------------------------------------------------------------------
Total current assets 11,729 11,567
Long-term investments 353 444
Properties, net 7,106 7,171
Goodwill and other intangible assets, net 5,087 5,259
Other noncurrent assets 1,907 2,215
--------------------------------------------------------------------------------
Total assets $ 26,182 $ 26,656
================================================================================
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 1,690 $ 833
Accounts payable 995 1,361
Other current liabilities 3,437 3,967
--------------------------------------------------------------------------------
Total current liabilities 6,122 6,161
Long-term debt and guarantee of ESOP debt 4,497 4,586
Other noncurrent liabilities 2,663 2,904
Minority interest in agricultural subsidiaries 1,065 1,084
--------------------------------------------------------------------------------
Total liabilities 14,347 14,735
--------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, one cent par value; at
stated value; authorized 10 million shares;
issued 6,488 shares (2000: 6,518 shares) 261 263
Common stock, two dollar par value; authorized
3 billion shares; issued 1.468 billion
shares 2,937 2,937
Capital in excess of par value 2,727 2,694
Retained earnings 10,860 10,781
ESOP-related accounts (303) (307)
Treasury stock (1,972) (2,003)
Accumulated other comprehensive loss (2,675) (2,444)
--------------------------------------------------------------------------------
Total shareholders' equity 11,835 11,921
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 26,182 $ 26,656
================================================================================
See accompanying notes.
5
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(ALL U.S. DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA)
Trademarks are indicated in all upper case letters. In the notes that follow,
per-share amounts are presented on a diluted, after-tax basis.
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.
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited, other than
the condensed balance sheet at December 31, 2000, which 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.
In the opinion of management, the interim 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.
B - NEW ACCOUNTING STANDARDS
DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2001, the company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133) and its amendments. Under these provisions, all derivatives are
recognized on the balance sheet at their fair value. On the date that the
company enters into a derivative contract, it designates the derivative as (1) a
hedge of the fair value of a recognized asset or liability (a "fair value"
hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge); (3) a foreign-currency fair-value or cash
flow hedge (a "foreign currency" hedge); (4) a hedge of a net investment in a
foreign operation; or (5) an instrument that is not intended to receive hedge
accounting treatment. Changes in the fair value of a derivative that is highly
effective as and that is designated and qualifies as a fair-value hedge
(including foreign currency fair value hedges), along with changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk,
are recorded in current-period earnings. Changes in the fair value of a
derivative that is highly effective as and that is designated and qualifies as a
cash flow hedge (including foreign currency cash flow hedges), are recorded in
other comprehensive income and released into earnings upon the occurrence of the
anticipated transaction. Any hedge ineffectiveness is included in current-period
earnings. If a derivative is used as a hedge of a net investment in a foreign
operation, the changes in the derivative's fair value, to the extent that the
derivative is effective as a hedge, are recorded in the cumulative-translation-
adjustment account within other comprehensive income. In certain circumstances,
the company enters into derivative contracts and does not designate them as fair
value or cash flow hedges. This would be the case where the instrument serves as
an economic hedge of an existing asset or liability. Changes in the fair value
of instruments that do not receive hedge accounting are reported in
current-period earnings. The company does not hold any instruments for trading
purposes.
6
7
The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value, cash flow, or foreign-currency
hedges to (1) specific assets and liabilities on the balance sheet or (2)
specific firm commitments or forecasted transactions. The company also formally
assesses (both at the hedge's inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been highly effective in
offsetting changes in the fair value or cash flows of hedged items and whether
those derivatives may be expected to remain highly effective in future periods.
When it is determined that a derivative is not (or has ceased to be) highly
effective as a hedge, the company discontinues hedge accounting prospectively.
In accordance with the transition provisions of FAS 133, the company recorded a
net-of-tax cumulative effect adjustment in earnings as of January 1, 2001 for
approximately a $1 gain. This amount is comprised of the excluded component of
instruments previously designated in cash flow hedges and other changes in
recorded basis to bring derivatives to fair value, both of which were less than
$1 on an individual basis. Also included in the $1 gain were offsetting
adjustments to the carrying value of a hedged item and the hedging derivative
for a fair value hedge each in the amount of $19. A similar cumulative effect
adjustment in the amount of $3 (net of tax) has been made on the balance sheet
to other comprehensive income. This amount reflects the deferred amount of
derivative instruments previously designated in cash flow hedges.
Upon adopting FAS 133, the company elected to reclassify $52 of held-to-maturity
securities as available-for-sale securities. The unrealized gain associated with
the reclassification was not material and is recorded in other comprehensive
income. Under the provisions of FAS 133, such a reclassification does not call
into question the company's intent to hold current or future debt securities
until their maturity.
REVENUE RECOGNITION
In connection with the fourth quarter 2000 adoption of the interpretations of
Securities and Exchange Commission (SEC) Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101), the company recorded a
cumulative effect of a change in accounting principle, effective January 1,
2000, and has restated the quarterly results of 2000 as if SAB 101 had been
applied for each quarter. The company recorded a cumulative effect of a change
in accounting principle, effective January 1, 2000, in the after-tax amount of
$198 (net of taxes of $108). This amount primarily relates to certain
nonrefundable payments received from co-promotion partners that were recognized
in earnings in prior years as well as certain agricultural revenues from
biotechnology traits sold by third-party seed companies. Payments received in
1996 and 1998 from co-promotion partners comprised the majority of the
adjustment. These payments have now been treated as deferred revenue and are
being amortized over the terms of the underlying agreements. Quarterly
amortization is approximately $5. Also included in the $198 cumulative catch-up
adjustment was $26 (net of taxes of $16) recognized by Monsanto related to
biotechnology trait sales.
C - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The company's activities expose it to a variety of market risks, including risks
related to the effects of changes in foreign-currency exchange rates, interest
rates and commodity prices. These financial exposures are monitored and managed
by the company as an integral part of its overall risk-management program. The
company's risk-management program focuses on the unpredictability of financial
markets and seeks to reduce the potentially adverse effects that the volatility
of these markets may have on operating results.
7
8
The company maintains a foreign-currency risk-management strategy that uses
derivative instruments to protect cash flows from fluctuations that may arise
from volatility in currency exchange rates. The company is exposed to this risk
both on an intercompany and third party basis. These movements affect
cross-border transactions that involve sales and inventory purchases denominated
in foreign currencies. Additionally, the company is exposed to foreign currency
exchange risk for recognized assets and liabilities, royalties and net
investments in subsidiaries, all of which are denominated in non-functional
currencies of the holder. The company primarily uses foreign-currency
forward-exchange contracts, swaps and options to hedge these risks.
The company maintains an interest rate risk-management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations that may arise from volatility in interest rates. The company's
goals are to (1) manage interest rate sensitivity of debt and (2) lower (where
possible) the cost of its borrowed funds.
The company maintains a commodity-price risk-management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations that may arise from volatility in commodity prices. Price
fluctuations in commodities, mainly corn and soybean cause actual cash outlays
for the purchase of those commodities to differ from anticipated cash outlays.
The company uses futures and option contracts to hedge these risks.
By using derivative financial instruments to hedge exposures to changes in
exchange rates, interest rates and commodity prices, the company exposes itself
to credit risk. Credit risk is the risk that the counter-party might fail to
fulfill its performance obligations under the terms of the derivative contract.
The company minimizes its credit (or repayment) risk in derivative instruments
by entering into transactions with high-quality counter-parties and limiting the
amount of exposure to each.
FAIR-VALUE HEDGES
The company uses interest rate swaps to convert a portion of its fixed-rate debt
into variable-rate debt. The resulting cost of funds used may be lower than
it would have been if variable-rate debt had been issued directly. Under the
interest rate swap contracts, the company agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and floating-rate
interest amounts, calculated based on an agreed-upon notional amount.
The company uses futures and option contracts to manage price risks associated
with its purchase of corn and soybean inventory which the company buys from
growers. Generally, the company hedges from 75 to 100 percent of the corn and
soybean inventory value, depending on the crop and grower pricing.
For the quarter ended March 31, 2001, there was no ineffectiveness or excluded
ineffectiveness related to the company's fair-value hedges.
CASH FLOW HEDGES
The company is exposed to currency exchange rate fluctuations related to certain
intercompany and third party transactions. The company purchases
foreign-exchange options and forward-exchange contracts as hedges of anticipated
sales and purchases denominated in foreign currencies. The company enters into
these contracts to protect itself against the risk that the eventual cash flows
will be adversely affected by changes in exchange rates.
The company enters into contracts with a number of its growers to purchase their
output at market prices. As a hedge against possible price fluctuations, the
company purchases corn and soybean futures and options contracts. The futures
contracts hedge the commodity price paid for these
8
9
commodity purchases while the option contracts limit the unfavorable effect that
potential price increases would have on these purchases.
For the quarter ended March 31, 2001, the company recognized a net loss of $2
mainly in the All other, net and Cost of products sold sections of the
consolidated statement of earnings, which represented the total excluded
ineffectiveness of all cash flow hedges. Specifically, this represents the
changes in the time-value of option contracts, which the company excluded, from
its hedge effectiveness evaluation.
As of March 31, 2001, $7 of pretax deferred gains (net of losses) on derivative
instruments accumulated in other comprehensive income are expected to be
reclassified as earnings during the next twelve months. Transactions and events
that (1) are expected to occur over the next twelve months and (2) will
necessitate reclassifying the derivative gains as earnings include actual sales
and purchases of inventory. At March 31, 2001, the maximum term over which the
company has hedged its exposures to the variability of cash flow (for all
forecasted transactions, excluding interest payments on variable-rate debt) is
eighteen months.
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
The company has numerous investments in foreign subsidiaries. The net assets of
these subsidiaries are exposed to volatility in currency exchange rates. The
company uses both derivative and non-derivative financial instruments to hedge a
part of this exposure and measures ineffectiveness of such hedges based upon the
change in spot foreign exchange rates.
For the quarter ended March 31, 2001, $19 of gains was included in the company's
cumulative translation adjustment. For the same period, the net loss recorded in
earnings representing the amount of the hedge's excluded ineffectiveness was
less than $1.
D - INVENTORIES
------------------------------------
March 31, December 31,
2001 2000
------------------------------------
Estimated replacement cost (FIFO basis):
Finished products $ 1,056 $1,042
Raw materials, supplies
and work-in-process 1,898 1,941
------------------------------------
Inventories (FIFO basis) 2,954 2,983
Less reduction to LIFO cost (216) (211)
------------------------------------
$ 2,738 $2,772
===================================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $1,408 at March 31, 2001, and $1,434 at December 31, 2000.
E - 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 which, under
the Comprehensive Environmental Response, Compensation, and Liability Act, are
commonly known
9
10
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.
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
In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and Agrigenetics
filed suit against former Monsanto in California State Superior Court in San
Diego alleging that the company failed to license, under an option agreement,
technology relating to Bt corn and glyphosate-tolerant corn, cotton and canola.
On October 20, 1997, the court construed the agreement as a license to receive
genes rather than a license to receive germplasm. Jury trial of the damage claim
for lost future profits from the alleged delay in performance ended March 20,
1998, with a verdict against the company awarding damages totaling $175. On June
28, 2000, the California Court of Appeals for the Fourth Appellate District
issued its opinion reversing the jury verdict and related judgment of the trial
court, and directed that judgment should be entered in the company's favor.
Mycogen's subsequent motion for rehearing has been denied. Mycogen's petition
with the California Supreme Court requesting further review was granted on
October 25, 2000, and their appeal of the reversal of judgment is continuing. No
provision has been made in the company's consolidated financial statements with
respect to this verdict.
In April 1999, a jury verdict was returned against DEKALB (which is now a wholly
owned subsidiary of Monsanto) in a lawsuit filed in U.S. District Court in North
Carolina. The lawsuit was brought by Aventis CropScience S.A. (formerly Rhone
Poulenc Agrochimie S.A.) (Aventis), claiming that a 1994 license agreement was
induced by fraud stemming from DEKALB's nondisclosure of relevant information
and that DEKALB did not have the right to license, make or sell products using
Aventis's technology for glyphosate resistance under this agreement. The jury
awarded Aventis $15 in actual damages for unjust enrichment and $50 in punitive
damages. DEKALB has appealed this verdict, believes it has meritorious grounds
to overturn the verdict and intends to vigorously pursue all available means to
have the verdict overturned. An arbitration has been filed on behalf of Calgene
LLC, a wholly-owned subsidiary of Monsanto, claiming that as a former partner of
Aventis, Calgene is entitled to at least half of any damages, royalties or other
amounts recovered by Aventis from Monsanto or DEKALB pursuant to these
proceedings. No provision has been made in the company's consolidated financial
statements with respect to the award for punitive damages.
The company has been a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits, some
of which were consolidated and transferred to the Federal District Court for the
Northern District of Illinois. These suits, brought by independent pharmacies
and chains, generally allege unlawful conspiracy, price discrimination and price
fixing and, in some cases, unfair competition. These suits specifically allege
that the company and the other named defendants violated the following: (1) the
Robinson-Patman Act by giving substantial discounts to hospitals, nursing homes,
mail-order pharmacies and health maintenance organizations without offering the
same discounts to retail drugstores, and (2) Section 1 of the Sherman Antitrust
Act by entering into agreements with other manufacturers and wholesalers to
restrict certain discounts and rebates so they benefited only favored customers.
10
11
The Federal District Court for the Northern District of Illinois certified a
national class of retail pharmacies in November 1994. Pharmacia & Upjohn Company
announced in 1998 that it reached a settlement with the plaintiffs in the
federal class action cases for $103; and Searle received a favorable verdict in
1999. Eighteen class action lawsuits seeking damages based on the same alleged
conduct were filed in 14 states and the District of Columbia. The plaintiffs
claim to represent consumers who purchased prescription drugs in those
jurisdictions and four other states. All but one of the state cases have been
dismissed or settled. All that remains of the federal cases are those brought by
plaintiffs who opted out of the federal class and have Robinson-Patman Act and
Sherman Antitrust Act claims.
On April 11, 2000, the University of Rochester filed suit in U.S. District Court
for the Western District of New York, asserting patent infringement against the
company and certain of its subsidiaries as well as Pfizer, Inc. The University
asserts that its U.S. patent granted on April 11, 2000, is infringed by the sale
and use of CELEBREX. The patent has claims directed to a method of treating
human patients by administering a selective COX-2 inhibitor. The University has
sought injunctive relief, as well as monetary compensation for infringement of
the patent. The trial date is tentatively scheduled for September 2002.
The company is also a defendant in a suit filed by Great Lakes Chemical Company.
The original complaint was filed in the U.S. District Court in Delaware on
January 20, 2000, alleging violations of Federal and Indiana Securities Laws,
common law fraud and breach of contract claims. The lawsuit itself is a result
of Great Lakes' purchase of the NSC Technologies unit of former Monsanto.
According to Great Lakes, NSC's actual sales for 1999 were significantly below
the projected sales. On May 25, 2000, the Federal Court dismissed Great Lakes'
complaint for lack of federal subject matter jurisdiction holding that the sale
of NSC was not a "security" under federal law. On June 9, 2000, Great Lakes
filed a new complaint in Delaware Superior Court. The company's motion to move
the case from Superior Court to Delaware Equity Court was granted. On February
13, 2001, oral argument was held on the company's motion to dismiss the state
court action.
On April 12, 2001, the company was sued by CP Kelco in the U.S. District Court
in Delaware. CP Kelco is seeking compensatory and punitive damages for alleged
breach of contract, common law fraud and securities law violations arising from
the sale of the business. Lehman Brothers Merchant Banking Partners II, L.P.
purchased the Kelco business from Monsanto for $592 with funded debt to form CP
Kelco with a combination of the Kelco assets and a similiar business purchased
from Hercules, Inc. According to CP Kelco, the financial projections for the
Kelco biogums business were materially lower than the projections provided by
Monsanto management before the closing of the transaction, which occurred on
September 28, 2000.
With respect to the matters described above for which no range has been given,
the company believes it is not possible to estimate a range of potential losses
at this time. Accordingly, it is not possible to determine what, if any,
additional exposure exists at this time. The company intends to vigorously
defend itself in these matters.
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.
11
12
F - COMPREHENSIVE INCOME
Quarterly comprehensive income for the three months ended March 31, 2001 and
2000 was $19 and $104, respectively.
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.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
FOR THE THREE MONTHS ENDED MARCH 31,
2001 2000
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
EPS numerator:
Earnings from continuing operations $ 254 $ 254 $ (31) $ (31)
Less: Preferred stock dividends,
net of tax (3) -- (3) --
Less: ESOP contribution, net of tax -- (2) -- (1)
-------- -------- ------- --------
Earnings from continuing operations
available to common shareholders $ 251 $ 252 $ (34) $ (32)
======== ======== ======= ========
EPS denominator:
Average common shares outstanding 1,298 1,298 1,257 1,257
Effect of dilutive securities:
Stock options and stock warrants -- 18 -- 17
Convertible instruments and
incentive compensation -- 12 -- 12
-------- -------- ------- --------
Total shares (in millions) 1,298 1,328 1,257 1,286
======== ======== ======= ========
Earnings (loss) per share:
Continuing operations $ .19 $ .19 $ (.03) $ (.03)
Discontinued operations -- -- .04 .04
Cumulative effect of accounting change -- -- (.15) (.15)
-------- -------- ------- --------
Net earnings (loss) $ .19 $ .19 $ (.14) $ (.14)
======== ======== ======= ========
H - SEGMENT INFORMATION
The company's reportable segments are organized principally by product line.
They are: Prescription Pharmaceuticals, Agricultural Productivity, and Seeds and
Genomics. The Prescription
12
13
Pharmaceuticals segment includes general therapeutics, ophthalmology and
hospital products including oncology, and diversified therapeutics. The
Agricultural Productivity segment consists of crop protection products, animal
agriculture and environmental technologies business lines. The Seeds and
Genomics segment is comprised of global seeds and related trait businesses and
genetic technology platforms.
The company also operates several business units that do not constitute
reportable business segments. These operating units include consumer health
care, animal health, diagnostics, plasma, pharmaceutical commercial services and
biotechnology. Due to the size of these operating units, they have been included
in an "Other Pharmaceuticals" category.
Corporate amounts represent general and administrative expenses of Pharmacia
corporate support functions, restructuring charges relating to the
pharmaceutical and corporate functions and other corporate items such as
litigation accruals, merger costs and non-operating income and expense.
Corporate support functions and costs are allocated to agricultural segments.
Accordingly, these costs are only shown separately in the following table for
the non-agricultural segments. Certain goodwill and intangible assets and
associated amortization are not allocated to segments.
The following table shows revenues and earnings for the company's operating
segments and reconciling items necessary to total to the amounts reported in the
consolidated financial statements. Information about 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-segment revenues. Long-lived assets are not allocated to segments and
accordingly, depreciation is not available. Historical segment information has
been restated to conform to the current presentation.
Sales EBIT*
----- -----
For the three months ended March 31, 2001 2000 2001 2000
---- ---- ---- ----
Prescription Pharmaceuticals $ 2,729 $ 2,374 $ 437 $ 430
Other Pharmaceuticals 481 477 104 103
Corporate -- -- (266) (652)
------- ------- ------- --------
Total Pharmaceuticals & Corporate 3,210 2,851 275 (119)
Productivity 808 833 139 198
Seeds & Genomics 498 488 (32) (67)
------- ------- ------- --------
Total Agricultural 1,306 1,321 107 131
------- ------- ------- --------
Total Pharmacia $ 4,516 $ 4,172 $ 382 $ 12
======= =======
Interest expense, net (43) (68)
Income tax provision (77) 25
Minority interest in agricultural subsidiaries,
net of tax (8) --
------- --------
Net earnings (loss) from continuing operations $ 254 $ (31)
======= ========
* 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 flows or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
I - ACQUISITION
13
14
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. Cash paid in connection with this purchase
was $65 and included certain direct closing costs and is net of contractual
holdback amounts.
J - RESTRUCTURINGS
The company recorded an additional $146 of merger and restructuring charges
during the first quarter of 2001 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. Of the total charges, $145, comprised of $56 of
merger costs and $89 of restructuring expenses, was recorded on the merger and
restructuring line of the earnings statement and an additional $1 of
restructuring expense was recorded in cost of products sold.
The $56 of merger costs relates to costs incurred to integrate the former
companies into a single organization such as consultant and relocation costs.
The $90 of aggregate restructuring costs comprises $60 associated with
prescription pharmaceuticals, $6 in connection with corporate and administrative
functions, $2 relating to other pharmaceuticals, and $22 associated with the
agricultural subsidiary.
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 such as leases, $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 from the
involuntary separation of 60 employees and the $2 associated with other
pharmaceutical operations is the result of the involuntary separation of 10
employees.
The $22 charge in connection with the Monsanto agricultural subsidiary is
comprised of workforce reduction costs of $15, asset impairments of $3 and other
exit costs of $4. The workforce reduction costs include involuntary employee
separation costs for approximately 120 employees worldwide, including positions
in administration, manufacturing and research and development. The other exit
costs include expenses associated with contract terminations, equipment disposal
and other shutdown costs resulting from the exit of certain research programs
and non-core activities.
During the first quarter of 2000, the company recorded approximately $460 in
merger-related costs comprised, in part, of transaction costs including
investment bankers, attorneys, registration and regulatory fees and other
professional services. In addition, these costs included various employee
incentive and change-of-control costs directly associated with the merger. The
latter includes a non-cash charge of $232 related to certain employee stock
options that were repriced in conjunction with the merger pursuant to change
of control provisions. Pursuant to the terms of these "premium options," at
consummation of the merger, the original above-market exercise price was reduced
to equal the fair market value on the date of grant.
A roll-forward from year-end 2000 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies and the restructuring of
the agricultural products and other pharmaceutical operations are
14
15
included in the table below. As of March 31, 2001, the company has paid a total
of $317 relating to the separation of approximately 2,170 employees associated
with these restructuring plans.
Workforce Other
Reductions Exit Costs Total
---------------------------------------
December 31, 2000 $ 192 $ 15 $ 207
1Q2001 charges 69 12 81
1Q2001 spending (170) (17) (187)
-------------------------------------------------------------------
March 31, 2001 $ 91 $ 10 $ 101
-------------------------------------------------------------------
In addition to the above, the former Pharmacia & Upjohn has $25 of restructuring
liabilities remaining related to separation annuity payments associated with its
restructuring plans undertaken prior to the merger with the former Monsanto.
15
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Trademarks 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.
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.
FINANCIAL REVIEW
OVERVIEW
The table below provides a comparative overview of consolidated results for the
first quarters of 2001 and 2000 in millions of dollars, except per-share data.
--------------------------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------
Percent
2001 Change 2000
--------------------------------------------------------------------------------------------------
Net sales $4,516 8% $4,172
Earnings from continuing
operations before interest
and income taxes* 382 n.m. 12
Earnings (loss) from continuing
operations 254 n.m. (31)
Discontinued operations (5) n.m. 58
Cumulative effect of an
accounting change 1 n.m. (198)
Net earnings (loss) 250 n.m. (171)
Earnings (loss) per common share:
Continuing operations
Basic $ .19 n.m. $ (.03)
Diluted .19 n.m. (.03)
Net earnings
Basic $ .19 n.m. $ (.14)
Diluted .19 n.m. (.14)
--------------------------------------------------------------------------------------------------
n.m. = not meaningful
* 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 flows or other measures of financial performance prepared
in accordance with generally accepted accounting principles. Determination
of EBIT may vary from company to company.
Year-to-year comparisons are complicated by a number of factors including
charges incurred during the first quarter of 2001. Specifically, there are
merger and restructuring charges totaling $146 million before tax. Of these
charges, $145 million is recorded within merger and restructuring ($98 million
after tax or $0.08 per share) and $1 million is recorded within cost of products
sold. A charge of $67 million before tax was recorded in research and
development in association with the acquisition of Sensus ($42 million after tax
or $0.03 per share) and an additional $50 million expense in research and
development relates to an agreement with Celltech Group plc in connection with
the compound CDP 870 ($31 million after tax or $0.02 per share).
16
17
Certain other charges recorded in the first quarter of 2000 also may affect
comparability. These are: merger costs approximating $460 million before tax
($320 million after tax or $0.25 per share) and a charitable cash contribution
of $100 million ($62 million after tax or $0.05 per share).
NET SALES
-----------------------------------------------------------------------------------
Three months ended March 31
---------------------------
Net Percent
(Dollars in millions) 2001 Change 2000
-----------------------------------------------------------------------------------
Sales:
Pharmaceuticals
Prescription Pharmaceuticals $2,729 15% $2,374
Other Pharmaceuticals 481 1 477
------- ------- -------
Total Pharmaceuticals 3,210 13 2,851
Agricultural
Productivity 808 (3) 833
Seeds & Genomics 498 2 488
------- ------- -------
Total Agricultural 1,306 (1) 1,321
-----------------------------------------------------------------------------------
Total sales $4,516 8% $4,172
-----------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Consolidated net sales for the first quarter rose 8 percent to $4.5 billion as
compared to the same quarter of 2000. The increase in sales growth was primarily
the result of volume increases of 13 percent partly offset by lower prices
and negative effects of currency exchange rates. The impact of currency exchange
rates on consolidated sales was 3 percent unfavorable due to weaker currencies
in Europe and Japan.
PHARMACEUTICAL SALES
Pharmaceutical sales rose 13 percent to $3.2 billion in the first quarter of
2001 compared to $2.9 billion in the comparable period of the prior year.
Excluding the impact of currency exchange, global pharmaceutical sales increased
17 percent. The pharmaceutical sales growth was driven by a 15 percent growth in
prescription pharmaceutical sales to $2.7 billion in the first quarter of 2001.
Pharmaceutical sales growth was led by CELEBREX, which had improved sales by
$124 million, or 24 percent, compared to the first quarter of 2000.
In the company's largest market, the U.S., pharmaceutical sales growth for the
quarter was 13 percent. Japan, the company's second largest market, recorded a
decline in pharmaceutical sales of 7 percent. Excluding the impact of foreign
exchange, Japan had sales growth of 3 percent. Sales performance in the
following table is based on location of the customer.
---------------------------------------------------------------------------------
Three months ended March 31
---------------------------
%Change
Net % Excluding
(Dollars in millions) 2001 Change Exchange* 2000
---------------------------------------------------------------------------------
United States $1,671 13% 13% $1,484
Japan 194 (7) 3 209
Italy 142 4 11 137
France 141 57 68 90
Germany 126 16 24 108
17
18
United Kingdom 119 17 26 102
Rest of world 817 14 22 721
---------------------------------------------------------------------------------
Pharmaceutical net sales $3,210 13% 17% $2,851
=================================================================================
* Underlying growth reflects the percentage change excluding currency exchange
effects.
A comparison of the period-to-period consolidated net sales of the company's
major pharmaceutical products (including generic equivalents where applicable)
is provided in the table below.
-------------------------------------------------------------------------------
Three months ended March 31
---------------------------
Net Percent
(Dollars in millions) 2001 Change 2000
-------------------------------------------------------------------------------
CELEBREX $ 649 24% $ 525
AMBIEN 215 114 100
XALATAN 200 24 161
CAMPTOSAR 137 72 80
DETROL LA/DETROL 135 35 101
GENOTROPIN 117 4 113
XANAX 76 (10) 84
CLEOCIN/DALACIN 75 (7) 80
MEDROL 72 8 66
NICORETTE LINE 66 20 55
DEPO-PROVERA 65 17 56
PHARMORUBICIN/ELLENCE 60 18 50
FRAGMIN 53 (9) 58
ARTHROTEC 45 (20) 55
ALDACTONE/SPIRO Line 42 (6) 44
MIRAPEX 39 28 30
CABASER/DOSTINEX 37 50 25
ROGAINE 34 8 32
PLETAL 26 184 9
ZYVOX 23 n.m. --
-------------------------------------------------------------------------------
Total $2,166 26% $1,724
===============================================================================
n.m. = not meaningful
PRESCRIPTION PHARMACEUTICALS SEGMENT
----------------------------------------------------------------------------
(Dollars in millions)
For the three months ended March 31 2001 2000
----------------------------------------------------------------------------
Sales $ 2,729 $ 2,374
Cost of products sold 543 493
Research and development 570 513
Selling, general and administrative 1,134 948
EBIT* 437 430
----------------------------------------------------------------------------
* 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 flows or other measures of financial performance
prepared in accordance with generally accepted accounting principles.
Determination of EBIT may vary from company to company. Merger and
restructuring charges for the pharmaceutical segments have been included
as part of corporate costs in the determination of EBIT.
Prescription pharmaceutical sales, which constitute 85 percent of overall
pharmaceutical sales, increased by 18 percent in the U.S. and 15 percent on a
global basis driving the pharmaceutical
18
19
business. The growth driver products, CELEBREX, XALATAN, CAMPTOSAR, DETROL LA
and ZYVOX accounted for 42 percent of prescription pharmaceutical sales in the
first quarter of 2001, a 32 percent increase in sales over the same period of
2000.
CELEBREX, the company's leading product and the number-one selling prescription
arthritis medication worldwide, recorded sales of $649 million in the first
quarter. Sales in the U.S. were negatively impacted by trade purchasing in the
fourth quarter of 2000 due to a price increase. In Europe, CELEBREX achieved
sales of over $100 million as a result of the ongoing successful launch of
CELEBREX in the key European markets.
During the quarter, the U.S. Food and Drug Administration (FDA) issued an
approvable letter for the supplemental New Drug Application (sNDA) submitted by
Pharmacia seeking changes in the prescribing information for CELEBREX. The
company is seeking to include the safety data from the CELEBREX long-term safety
trial in the label. An approvable letter does not constitute formal approval of
an application, but indicates the FDA's willingness to approve an application
should specific information and/or conditions be met.
XALATAN, the top-selling glaucoma medication in the U.S. and worldwide, achieved
sales of $200 million, a 24 percent increase over the first quarter of 2000.
XALATAN continues to grow rapidly in all key markets as it expands its market
leadership position. During the quarter, XALATAN became the number one selling
glaucoma medication in Japan after its launch in May of 1999. In March, two new
competitors to XALATAN entered the U.S. market.
CAMPTOSAR, the leading treatment for colorectal cancer in the U.S., recorded
sales of $137 million, an increase of 72 percent. In 2000, the FDA approved
CAMPTOSAR for the first-line treatment of colorectal cancer after a
CAMPTOSAR-containing regimen prolonged survival in patients with colorectal
cancer. Sales in this indication accounted for more than half of CAMPTOSAR sales
in the first quarter.
Sales of DETROL LA/DETROL, the world's leading treatment for overactive bladder,
increased 35 percent to $135 million in the first quarter. Sales in the U.S.
were $105 million reflecting strong demand for the new, once-daily DETROL LA
which Pharmacia introduced in January. The launch of DETROL LA has increased
Pharmacia's share of new prescriptions in the U.S. overactive bladder market
from 47 percent at the end of 2000 to 53 percent in the first quarter. During
the quarter, DETROL LA also received its first European Union approval in Sweden
where it will be marketed as DETRUSITOL SR.
ZYVOX, the company's new antibiotic for Gram-positive infections, recorded sales
of $23 million in the quarter. ZYVOX is the first antibiotic from a completely
new class of antibiotics in over 30 years. ZYVOX is indicated for the treatment
of patients with severe Gram-positive infections including pneumonia, skin and
skin structure infections, and bacteremia. Following the recent approvals in the
United Kingdom and Japan, ZYVOX is now approved in each of the major regions of
the world.
Sales of AMBIEN, the market leading treatment for short-term insomnia in the
U.S., increased 114 percent to $215 million in the first quarter. First quarter
sales were positively influenced by wholesale inventory levels that are higher
than normal due to purchasing prior to a March price increase.
GENOTROPIN, the world's leading growth hormone, recorded sales of $117 million
during the first quarter, an increase of 4 percent. In the U.S., sales increased
19 percent to $24 million. Outside the U.S., sales gains were offset by weaker
currencies in Europe and Japan.
19
20
Sales of the company's Parkinson's disease drug, MIRAPEX, increased 28 percent
in the first quarter to $39 million. Sales of CABASER/DOSTINEX for Parkinson's
disease/hyperprolactinemia grew 50 percent in the quarter to $37 million.
PLETAL, for the treatment of intermittent claudication, a form of peripheral
vascular disease, generated sales of $26 million in the quarter. PLETAL is being
co-promoted in the U.S. with Otsuka of America Pharmaceuticals, Inc.
Sales of FRAGMIN for the prevention of blood clots after surgery declined 9
percent. Weaker currencies and a price reduction in Japan in the second quarter
of 2000 offset a 26 percent increase in U.S. sales.
Sales of the company's older prescription products like XANAX, CLEOCIN, and the
ALDACTONE/SPIRO Line, declined in the quarter. The MEDROL line, which also faces
generic competition, experienced an 8 percent increase reflecting quarterly
fluctuations in buying patterns.
Sales of ARTHROTEC, the company's older arthritis medication, declined 20
percent in the first quarter as the COX-2 inhibitors, led by CELEBREX, continue
to take a larger share of the U.S. market.
In other developments related to the pharmaceutical segment, Pharmacia submitted
an NDA for valdecoxib, a second-generation COX-2 specific inhibitor, for the
treatment of acute pain, dysmenorrhea, osteoarthritis, and rheumatoid arthritis.
In March 2001, Pharmacia and Celltech announced an agreement for the
co-development and co-promotion of Celltech's CDP 870 for the treatment of
rheumatoid arthritis. The company also completed the acquisition of Sensus Drug
Development Corporation following the submission of an NDA for SOMAVERT for the
treatment of acromegaly.
Cost of products sold for the quarter ended March 31, 2001 and 2000 was $543
million and $493 million, respectively. A favorable shift in the product mix
resulted in cost of products sold as a percent of sales to drop one percentage
point to 20 percent over the corresponding period amount of 21 percent.
Research and development (R&D) spending increased by $57 million or 11 percent
as compared to the first quarter of 2000. The increase was mainly attributable
to two events that occurred during the quarter. During March 2001, the company
completed the acquisition of Sensus Drug Development Corp. and accounted for the
transaction as a purchase. In conjunction with this accounting, an expense
relating to in-process research and development was incurred for $67 million.
Also, during the quarter, the company entered into an agreement with Celltech
Group plc for the co-development and co-promotion of Celltech's proprietary
compound CDP 870. CDP 870 belongs to a new therapeutic class of medicines, which
shows promise in certain autoimmune and inflammatory diseases. In connection
with this multi-year agreement, the company recorded an R&D expense of $50
million during the quarter. Offsetting these increases were lower development
spending related to recent sNDA and NDA filings for the COX-2 projects
(CELEBREX, valdecoxib, and parecoxib) and ZYVOX as well as the cancellation of
certain other projects.
Selling, general and administrative (SG&A) expenses increased $186 million, or
20 percent between the first quarter 2000 and 2001. This rise was driven mainly
by increased co-promotion payments related to CELEBREX sales growth plus
expansion of the sales force. The sales force increase has been to support
CELEBREX, LUNELLE, ACTIVELLA and ZYVOX. Also contributing to the comparative
increase in SG&A was a reduction in the amount of partnership payments received
during the first quarter of 2001 as compared to 2000.
20
21
OTHER PHARMACEUTICALS
=========================================================================
(Dollars in millions)
For the three months ended March 31 2001 2000
-------------------------------------------------------------------------
Sales $ 481 $ 477
Cost of products sold 197 217
Research and development 43 36
Selling, general and administrative 144 139
EBIT* 104 103
=========================================================================
* 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 flows or other measures of financial performance
prepared in accordance with generally accepted accounting principles.
Determination of EBIT may vary from company to company. Merger and
restructuring charges for the pharmaceutical segments have been included
as part of corporate costs in the determination of EBIT.
Sales in the company's other pharmaceutical businesses are comprised of consumer
health care (over-the-counter products), animal health, pharmaceutical
commercial services, plasma and diagnostics. Sales increased during the first
quarter 2001 versus 2000 by $4 million or 1 percent to $481 million. Increases
in consumer health care and animal health products are the main drivers behind
the favorable results.
In the consumer health care products business, the company's leading products
are the NICORETTE line to treat tobacco dependency, and ROGAINE/REGAINE, the
treatment for hereditary hair loss. Sales of these products increased 20 percent
and 8 percent, respectively, during the first quarter 2001 versus the prior year
quarter. Overall consumer health care sales grew 9 percent to $179 million.
Sales in the animal health business grew 14 percent during the current quarter
to $113 million. Animal health sales were driven by NAXCEL/EXCENEL, which grew
28 percent over the comparable 2000 period to $32 million.
AGRICULTURAL SALES
-------------------------------------------------------------------------
Three months ended March 31
---------------------------
Net Percent
(Dollars in millions) 2001 Change 2000
-------------------------------------------------------------------------
Agricultural Sales:
Productivity $ 808 (3)% $ 833
Seeds & Genomics 498 2 488
-------------------------------------------------------------------------
Agricultural sales $1,306 (1)% $1,321
-------------------------------------------------------------------------
Agricultural EBIT*:
Productivity $ 139 (30) $ 198
Seeds & Genomics (32) 52 (67)
-------------------------------------------------------------------------
Agricultural EBIT* $ 107 (18)% $ 131
-------------------------------------------------------------------------
* Earnings before interest and taxes (EBIT) is presented herein and the
following two tables 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 flows or other measures
of financial performance prepared in accordance with generally accepted
accounting principles. Determination of EBITmay vary from company to
company.
21
22
Net sales for the company's agricultural business decreased 1 percent as global
sales of its ROUNDUP family of herbicides, excluding ROUNDUP lawn and garden
products, declined 8 percent in the first quarter of 2001 compared with the same
period of 2000. Sales of selective chemistries products and worldwide corn sales
were lower in the first quarter of 2001 compared with the same period of 2000;
however, corn sales in the United States were flat quarter-to-quarter. Higher
soybean seed sales and biotechnology trait revenues combined with increased
cotton royalty trait revenues largely offset the lower chemical and corn product
seed sales.
AGRICULTURAL PRODUCTIVITY SEGMENT
===================================================================
(Dollars in millions)
For the three months ended March 31 2001 2000
-------------------------------------------------------------------
Net Sales $808 $833
EBIT $139 $198
===================================================================
Net sales for the Agricultural Productivity segment decreased 3 percent to $808
million in the first quarter of 2001 compared with $833 million in the first
quarter of 2000. Worldwide net sales of ROUNDUP herbicide and other glyphosate
products, excluding ROUNDUP lawn and garden products, were 8 percent lower as
slightly higher sales volumes were more than offset by lower prices. Global
price competition combined with unfavorable weed-control weather conditions in
Canada and a weakened currency in Japan were primarily responsible for the
decline. However, in the United States, a modest price decline, driven primarily
by product mix, was more than offset by volume growth of five percent, resulting
in a slight increase in U.S. sales. On September 20, 2000, the compound per se
patent protection for the active ingredient in ROUNDUP herbicide expired in the
U.S. Although the company has not had patent protection on glyphosate outside
the U.S. for several years, the company anticipates continued increases in
competition from lower-priced generic and other branded glyphosate products.
Sales of selective chemistry products were also lower, primarily in the United
States and China. ROUNDUP lawn and garden first quarter 2001 net sales increased
over the same period last year due primarily to strong performance at home
centers and mass merchants, and price increases on certain products. Improvement
in economic conditions in the sulfuric acid and fertilizer industries led to an
increase in net sales of the environmental technologies business.
EBIT for the Agricultural Productivity segment decreased 30 percent to $139
million in the first quarter of 2001 compared with $198 million in the same
period of 2000. Lower gross profit was the main reason for the decline in EBIT
as operating expenses for this segment remained relatively unchanged quarter to
quarter. Lower net sales resulted in reduced gross profit. Excluding costs of
$13 million associated with facility closures and employee terminations, EBIT
decreased 22 percent from the prior year quarter.
SEEDS AND GENOMICS SEGMENT
=====================================================================
(Dollars in millions)
For the three months ended March 31 2001 2000
---------------------------------------------------------------------
Net Sales $ 498 $ 488
22
23
EBIT $ (32) $ (67)
=====================================================================
In the first quarter of 2001, net sales for the Seeds and Genomics segment
increased 2 percent to $498 million from $488 million in the same period of
2000. This growth was led by particularly strong results for Monsanto's
biotechnology traits. The soybean product line contributed with increased
biotechnology trait revenues and higher seed sales. Royalty revenues generated
from cotton trait sales increased significantly in the current quarter.
Conventional soybean seed sales also increased. Worldwide corn seed sales
decreased substantially, partly offsetting soybean and cotton improvements,
primarily due to higher than anticipated product returns in Latin America.
EBIT for the Seeds and Genomics segment improved from a loss of $67 million in
the first quarter of 2000 to a loss of $32 million in the first quarter of 2001.
Lower operating expenses and higher gross profit were the reasons for the
improvement. Gross profit improved largely as the result of higher biotechnology
trait revenues from cotton and soybeans in the first quarter of 2001, offset
to some extent by lower corn gross profit.
EBIT for the first quarter of 2001 included $9 million of expenses related to
facility closures and employee terminations. EBIT, excluding restructuring and
one-time items, improved $45 million from the first quarter of 2000 compared to
the same period of 2001.
CORPORATE AND OTHER
Corporate expenses of $266 million in the first quarter 2001 include $56 million
of merger costs and $68 million of pharmaceutical and corporate restructuring
charges. Restructuring charges associated with the agricultural segments are
included in the respective segments. The $652 million of corporate expenses in
the first quarter of 2000 include approximately $460 million of merger-related
costs and a $100 million charitable contribution.
The net interest position improved to $43 million expense compared to $68
million expense in the first quarter of the prior year as the result of
significantly reduced net debt levels and increased cash balances.
The estimated annual effective tax rate for 2001 is 29 percent, excluding merger
and restructuring and certain other costs. This compares with a 30-percent rate
for the full year 2000.
RESTRUCTURINGS
The company recorded an additional $146 million of merger and restructuring
charges during the first quarter of 2001 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. Of the total charges, $145
million, comprised of $56 million of merger costs and $89 million of
restructuring expenses, was recorded on the merger and restructuring line of the
earnings statement and an additional $1 million of restructuring expense was
recorded in cost of products sold.
The $56 million of merger costs relates to costs incurred to integrate the
former companies into a single organization such as consultant and relocation
costs.
The $90 million of aggregate restructuring costs comprises $60 million
associated with prescription pharmaceuticals, $6 million in connection with
corporate and administrative functions, $2 million relating to other
pharmaceuticals, and $22 million associated with the agricultural subsidiary.
23
24
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 termination of contracts such as leases, $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 from
the involuntary separation of 60 employees and the $2 million associated with
other pharmaceutical operations is the result of the involuntary separation of
10 employees.
The $22 million charge in connection with the Monsanto agricultural subsidiary
is comprised of workforce reduction costs of $15 million, asset impairments of
$3 million and other exit costs of $4 million. The workforce reduction costs
include involuntary employee separation costs for approximately 120 employees
worldwide, including positions in administration, manufacturing and research and
development. The asset impairments consist of $2 million for intangible assets
and $1 million (recorded within cost of products sold) for the write-off of seed
inventories. The other exit costs include expenses associated with contract
terminations, equipment disposal and other shutdown costs resulting from the
exit of certain research programs and non-core activities.
During the first quarter of 2000, the company recorded approximately $460
million in merger-related costs comprised, in part, of transaction costs
including investment bankers, attorneys, registration and regulatory fees and
other professional services. In addition, these costs included various employee
incentive and change-of-control costs directly associated with the merger. The
latter includes a non-cash charge of $232 million related to certain employee
stock options that were repriced in conjunction with the merger pursuant to
change of control provisions. Pursuant to the terms of these "premium options,"
at consummation of the merger, the original above-market exercise price was
reduced to equal the fair market value on the date of grant.
A roll forward from year end 2000 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies and the restructuring of
the agricultural products and other pharmaceutical operations are as follows. As
of March 31, 2001, the company has paid a total to $317 relating to the
separation of approximately 2,170 employees.
========================================================================
Workforce Other
(Dollars in millions) Reductions Exit Costs Total
------------------------------------------------------------------------
December 31, 2000 $ 192 $ 15 $ 207
1Q2001 charges 69 12 81
1Q2001 spending (170) (17) (187)
------------------------------------------------------------------------
March 31, 2001 $ 91 $ 10 $ 101
========================================================================
Due to the comprehensive nature of the restructuring and integration, the
company anticipates the restructuring activities to span multiple years with
total merger and restructuring costs equaling $2.0 billion to $2.5 billion with
annual savings estimated to total $600 million.
In addition to the above, the former Pharmacia & Upjohn has $25 million of
restructuring liabilities remaining related to separation annuity payments
associated with its restructuring plans undertaken prior to the merger with the
former Monsanto.
COMPREHENSIVE INCOME
24
25
Comprehensive income equals net earnings plus other comprehensive income (OCI).
For Pharmacia Corporation, OCI includes currency translation adjustments,
deferred amounts for hedging purposes, unrealized gains and losses on
available-for-sale securities, and minimum pension liability adjustments.
Comprehensive income for the three months ended March 31, 2001, and March 31,
2000, was $19 million and $104 million, respectively. The difference between net
earnings and comprehensive income in both years was largely due to fluctuations
in the currency translation adjustments reflecting the changes in the strength
of the dollar against other currencies at March 31 as compared to the previous
December 31.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
March 31, December 31,
2001 2000
--------------------------------------------------------------------------------
(Dollars in millions)
Working capital $ 5,607 $ 5,406
Current ratio 1.92:1 1.88:1
Debt to total capitalization 34.1% 31.1%
--------------------------------------------------------------------------------
Working capital has increased $201 million or four percent over the year-end
period ending December 31, 2000. Increases in accounts receivable due to sales
volume, program changes for certain selling arrangements and seasonality
relating to the agricultural business accounted for the increase in current
assets. Offsetting the growth in these assets was the decrease in cash and cash
equivalents. This decrease was due to the normal business cycle. Increases in
short-term debt had an unfavorable effect on working capital and the debt to
total capitalization ratio. Similar to accounts receivables, the increase is due
to the seasonal cycles of the agricultural business.
Cash outlays for property, plant and equipment of $278 million were reduced as
compared to the prior year by $42 million. The reduction is mainly due to the
completion of certain glyphosate expansion projects that were underway during
2000.
During the quarter, the company acquired Sensus Drug Development Corp. The cash
paid in connection with this transaction was approximately $65 million. See
additional information regarding this transaction under this item number.
The company continues to monitor the economic conditions in certain Latin
American countries and the impact that an adverse change could have on working
capital, liquidity and profitability.
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
Various suits and claims arising in the ordinary course of business, including
suits for personal injury alleged to have been caused by the use of the
company's products, are pending against the company and its subsidiaries. The
company also is involved in several administrative and judicial proceedings
25
26
relating to environmental concerns, including actions brought by the U.S.
Environmental Protection Agency (EPA) and state environmental agencies for
remediation.
In April 1999, a jury verdict was returned against DEKALB in a lawsuit filed in
U.S. District Court in North Carolina. The lawsuit claims that a 1994 license
agreement was induced by fraud stemming from nondisclosure of relevant
information and that DEKALB did not have the right to license, make or sell
products using the plaintiff's technology for glyphosate resistance under this
agreement. The jury awarded $15 million in actual damages for unjust enrichment
and $50 million in punitive damages. DEKALB has appealed this verdict, has
meritorious grounds to overturn the verdict and intends to vigorously pursue all
available means to have the verdict overturned. No provision has been made in
the company's consolidated financial statements with respect to the award for
punitive damages.
In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and Agrigenetics
filed suit against former Monsanto in California State Superior Court in San
Diego alleging that the company failed to license, under an option agreement,
technology relating to Bt corn and glyphosate-tolerant corn, cotton and canola.
On October 20, 1997, the court construed the agreement as a license to receive
genes rather than a license to receive germplasm. Jury trial of the damage claim
for lost future profits from the alleged delay in performance ended March 20,
1998, with a verdict against the company awarding damages totaling $175 million.
On June 28, 2000, the California Court of Appeals for the Fourth Appellate
District issued its opinion reversing the jury verdict and related judgment of
the trial court, and directed that judgment should be entered in the company's
favor. Mycogen's subsequent motion for rehearing has been denied. Mycogen's
petition with the California Supreme Court requesting further review was granted
on October 25, 2000, and their appeal of the reversal of judgment is continuing.
No provision has been made in the company's consolidated financial statements
with respect to this verdict.
Based on information currently available and the company's experience with
lawsuits of the nature of those currently filed or anticipated to be filed which
have resulted from business activities to date, the amounts accrued for product
and environmental liabilities are considered adequate. Although the company
cannot predict and cannot make assurances with respect to the outcome of
individual lawsuits, the ultimate liability should not have a material effect on
its consolidated financial position. Unless there is a significant deviation
from the historical pattern of resolution of such issues, the ultimate liability
should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
The company's estimate of the ultimate cost to be incurred in connection with
environmental situations could change due to uncertainties at many sites with
respect to potential clean-up remedies, the estimated cost of clean-up, and the
company's share of a site's cost. 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 EPA. As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. 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,
exposure exists at this time or when the expenditures might be made.
EURO CONVERSION
26
27
Effective January 1, 1999, eleven European countries began operating with a new
common currency, the euro. This has now increased to twelve with the addition of
Greece. The euro will completely replace these countries' national currencies by
January 1, 2002. The conversion to the euro requires changes in the company's
operations as systems and commercial arrangements are modified to deal with the
new currency. Management created a project team to evaluate the impact of the
euro conversion on the company's operations and develop and execute action
plans, as necessary, to successfully effect the change. As of December 31, 2000,
the company's systems were euro compliant, and during 2001 they all will have
been converted to euro as their local currency. The cost of this effort through
2000 was approximately $9 million with an additional amount of $3 million
expected before January 1, 2002.
The conversion to the euro may have competitive implications on pricing and
marketing strategies. However, any such impact is not known at this time. The
introduction of the euro will not significantly change the currency exposure of
the company, but will reduce the number of transactions performed in the market.
At this point in its overall assessment, management believes the impact of the
euro conversion on the company will not be significant. Still, uncertainty
exists as to the effects the euro currency will have on the marketplace and, as
a result, there is no guarantee that all problems will be foreseen and
corrected, or that no material disruption of the company's business will occur.
Three significant European governments (UK, Sweden, Denmark) had not approved
measures to convert to the euro as of March 31, 2001. The impact of an
abstention from conversion may have on the operations of the company, if any, is
not known.
NEW ACCOUNTING STANDARD
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities (FAS 133)." This statement requires companies
to record derivatives on the balance sheet as assets and liabilities measured at
fair value. The accounting treatment of gains and losses resulting from changes
in the value of derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. Management created a project team to evaluate
the impact of the new rules on its systems, policies and practices.
Under the new rules, the net consolidated income statement effect of adopting
SFAS 133 is presented as a cumulative effect adjustment of an accounting change
and is less than $1 million (net of tax). This amount is comprised of the
excluded component of instruments previously designated in cash flow hedges and
other changes in the recorded basis to bring derivatives to fair value, both of
which were less than $1 million on an individual basis. There was no net impact
to the cumulative effect adjustment required to reflect the fair value of
derivatives that are designated as fair value hedges, as the adjustments to
recognize the difference between the carrying values and the fair values of
hedged items and related derivatives offset. A similar cumulative effect
adjustment in the amount of $3 million (net of tax) has been made on the balance
sheet to other comprehensive income. This amount reflects the deferred amount of
derivative instruments previously designated in cash flow hedges.
Upon adopting FAS 133, the company elected in accordance with the rules to
reclassify $52 million of held-to-maturity securities as available-for-sale
securities. The unrealized gain associated with this reclassification is not
material and is recorded in shareholders equity.
27
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There are 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, 2000.
28
29
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the company's Annual Meeting of Shareholders on April 17, 2001, six 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 2004 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"
---------------------------------------------------------------------------------------
M. Kathryn Eickhoff 1,008,145,184 35,144,275
---------------------------------------------------------------------------------------
Fred Hassan 1,015,156,510 28,132,949
---------------------------------------------------------------------------------------
Philip Leder 1,015,235,921 28,053,538
---------------------------------------------------------------------------------------
Berthold Lindqvist 1,007,828,601 35,460,858
---------------------------------------------------------------------------------------
William D. Ruckelshaus 1,006,962,287 36,327,172
---------------------------------------------------------------------------------------
The following directors have continuing current terms expiring at the 2002
Annual Meeting: Gwendolyn S. King, C. Steven McMillan, William U. Parfet,
Jacobus F. M. Peters and Ulla Reinius. The following directors have continuing
current terms expiring at the 2003 Annual Meeting: Frank C. Carlucci, Michael
Kantor, Olof Lund, John E. Robson and Bengt Samuelsson.
2. A proposal by management relating to approval of the 2001 Long Term
Incentive Plan was submitted to a vote of shareholders. The Board
recommended a vote for the proposal. A total of 849,920,973 votes were
cast in favor of this proposal, a total of 181,056,587 votes were cast
against it, 12,311,377 votes were counted as abstentions; and 522 votes
were counted as broker non-votes.
3. A proposal by management relating to approval of the Operations Committee
Incentive Plan was submitted to a vote of shareholders. The Board
recommended a vote for the proposal. A total of 969,327,670 votes were
cast in favor of this proposal, a total of 56,579,956 votes were cast
against it, 17,381,311 votes were counted as abstentions; and 522 votes
were counted as broker non-votes.
4. A proposal by management relating to approval of the Global Employee Stock
Purchase Plan was submitted to a vote of shareholders. The Board
recommended a vote for the proposal. A total of 928,958,826 votes were
cast in favor of this proposal, a total of 104,564,582 votes were cast
against it, 9,766,051 votes were counted as abstentions; and 0 votes were
counted as broker non-votes.
5. A proposal by certain shareholders relating to price restraints on
prescription drugs was submitted to a vote of shareholders. The Board
recommended a vote against the proposal. A total of 102,149,320 votes were
cast in favor of this proposal, a total of 786,451,328 votes were cast
against it, 28,220,502 votes were counted as abstentions, and 126,468,309
votes were counted as broker non-votes.
6. A proposal by a certain shareholder relating to the reduction in the
number of directors was submitted to a vote of shareholders. The Board
recommended a vote against the proposal. A total of 37,282,819 votes were
cast in favor of this proposal, a total of 863,927,011 votes were cast
against it, 15,611,843 votes were counted as abstentions, and 126,467,786
votes were counted as broker non-votes.
29
30
Item 5. OTHER INFORMATION CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
INFORMATION
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 future matters.
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, 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 later prove to be incorrect.
Among the many factors that may cause or contribute to actual results or events
being materially different from those expressed or implied by such
forward-looking statements are acquisitions, divestitures, mergers,
restructurings or strategic initiatives that change the Company's structure or
business; competitive effects from current and new products, including generic
products, sold by other companies; price constraints imposed by managed care
groups, institutions and government agencies; governmental actions which result
in lower prices for the Company's products; the Company's ability to discover
and license new compounds, develop product candidates, obtain regulatory
approvals and market new products; the Company's ability to secure and defend
its intellectual property rights; the Company's ability to attract and retain
management and other key employees; product developments, including adverse
reactions or regulatory actions; social, legal, political and governmental
developments, especially those relating to health care reform, pharmaceutical
pricing and agricultural biotechnology; seasonal and weather conditions
affecting agricultural markets; new product, antitrust, intellectual property or
environmental liabilities; changes in foreign currency exchange rates or in
general economic or business conditions; changes in applicable laws and
regulations; changes in accounting standards or practices; and such other
factors that may be described elsewhere in this Report or in other Company
filings with the U.S. Securities and Exchange Commission ("SEC").
(a)2. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits - See the Exhibit Index
(b) Reports on Form 8-K during the quarter ended March 31, 2001:
Report on Form 8-K dated January 31, 2001 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits).
30
31
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)
DATE: May 15, 2001
/s/ R. G. Thompson
R. G. Thompson
Senior Vice President
and Corporate Controller
31
32
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) (19) 2001 Long Term Incentive Plan
(20) The Operations Committee Incentive Plan
(21) Employee Stock Purchase Plan
(22) Amendment No. 2001-1 to 2001 Long Term Incentive Plan
11. Omitted - Inapplicable; see Note G of Notes to Financial Statements
on page 12
15. Omitted - Inapplicable
18. Omitted - Inapplicable
19. Omitted - Inapplicable
22. Omitted - Inapplicable
23. Omitted - Inapplicable
24. Omitted - Inapplicable
99. Omitted - Inapplicable
32