ITEM 1. BUSINESS
OVERVIEW
Pharmacia & Upjohn, Inc. ("the Company") is a global pharmaceutical group engaged in the research, development, manufacture and sale of pharmaceutical and healthcare products. The Company was formed in November 1995 through the combination (the "Combination") of Pharmacia Aktiebolag ("Pharmacia") and The Upjohn Company ("Upjohn"). The Company is engaged in discovery research, product development, manufacturing, sales and marketing of various prescription human pharmaceutical products.
In addition to prescription human pharmaceuticals, the Company manufactures and sells certain nonprescription drugs; manufactures pharmaceutical chemicals and intermediates for use in its own products and for sale to others; researches, develops, manufactures and markets pharmaceutical products for both food and companion animals; and markets specialty products in hospital care, diagnostics and nutritional supplements.
INDUSTRY BACKGROUND
The world market for advanced human pharmaceuticals is concentrated in the U.S., Western Europe and Japan. Regulatory pressures and pricing constraints have intensified as governmental and private healthcare providers strive to control the rapid growth in healthcare expenditures. Pharmaceuticals are increasingly chosen according to the therapeutic benefit in relation to cost, such that pharmaceuticals that minimize hospital stays and reduce treatment costs are increasingly preferred. It is therefore essential for pharmaceutical companies to develop new improved and more efficient products that increase the total value both for buyers and patients. The Company believes that these developments have also led to more intense competition in the pharmaceutical industry worldwide. Innovation, high-quality research and development focused on unmet medical needs, rapid product introduction, wide geographical distribution and cost efficiency are likely to be key competitive factors in the pharmaceutical industry.
PRESCRIPTION PHARMACEUTICAL PRODUCTS
The Company researches, develops, manufactures and markets human pharmaceutical products to healthcare providers worldwide. The following summary discusses the Company's principal human pharmaceutical products.
DETROL(R)/DETRUSITOL(R) Tablets (tolterodine tartrate tablets) has been approved for marketing in the U.S. under the trademark DETROL and in Europe under the trademark DETRUSITOL. This product offers a treatment for overactivity in the bladder, thus reducing symptoms such as increased frequency and urge to urinate, as well as urge incontinence episodes. The U.S. patent covering DETROL Tablets expires in 2012, and in 2009 in Europe and Japan, although patent term extensions may be possible.
GENOTROPIN(TM), a recombinant human growth hormone identical to the body's own hormone, is marketed in Europe, Japan and the U.S. The Company recently reacquired exclusive sales and marketing rights to GENOTROPIN in Japan from Sumitomo Pharmaceuticals. GENOTROPIN products are not covered by product patents, but patents covering processes to manufacture the product and delivery systems for the products offer some level of exclusivity for the specific presentations sold by the Company. GENOTROPIN, which promotes longitudinal
bone growth, is used for the treatment of growth hormone deficiency in children and adults and for patients with renal insufficiency.
The Company produces several drugs for CNS disorders, including XANAX(R), HALCION(R) and SERMION(R), none of which have significant patent protection and are subject to intense generic competition. XANAX Tablets, containing alprazolam, are used for symptomatic relief of anxiety with and without depressive symptoms and for the treatment of panic disorder. The use patent for the panic disorder indication for XANAX expires in 2002. HALCION Tablets, containing triazolam, are a hypnotic agent used for the treatment of insomnia. SERMION Tablets are used primarily to treat cognitive and behavioral disorders related to senile dementia.
EDRONAX (reboxetine), for the treatment of major depression, has been approved for marketing in several European countries and will be submitted for U.S. approval. European patents provide protection until 2001 and U.S. patents provide protection until 1999, although patent term extensions may be possible.
XALATAN(R) (latanoporost ophthalmic solution) is used in the U.S. for the treatment of open-angle glaucoma and ocular hypertension in patients who are either intolerant of, or insufficiently responsive to, other intraocular pressure-lowering medications. Approval for marketing in Europe is pending. XALATAN is covered by a patent in the U.S. expiring in 2011 and in Europe and Japan in 2009, although patent term extensions in Europe and Japan may be possible.
HEALON(R) Solution for Intraocular Use is a viscoelastic product which includes sodium hyaluronate and is used primarily in cataract surgery to facilitate the implantation of plastic intraocular lenses ("IOLs") without injuring the sensitive cells lining the cornea and functions as a soft surgical instrument. The Company markets HEALON and HEALON GV(R), a more viscous fluid form, directly to ophthalmologists in Europe, the U.S. and Japan and through independent distributors in certain other countries.
The Company is one of the world's leading producers of anticancer drugs. Its most important products in the oncology area are FARMORUBICIN(R) (or PHARMORUBICIN(R)) and ADRIAMYCIN(R) for use in chemotherapy. Each of these products is used in the treatment of breast cancer as well as other solid tumors. Both are among the world's most frequently prescribed anticancer drugs. ADRIAMYCIN was the Company's first anthracycline preparation and is no longer subject to patent protection. Subsequent research efforts to reduce the toxicity and increase the efficacy of ADRIAMYCIN led to the development of FARMORUBICIN, a second generation anthracycline product used primarily to treat solid tumors (primarily breast and bladder cancer) and lymphomas. Although the product patents on FARMORUBICIN have generally expired, patents on the best selling formulation of FARMORUBICIN do not expire until 2006.
CAMPTOSAR(R) (irinotecan hydrochloride injection), an injectable DNA topoisomerase-I inhibitor pro-drug licensed from Yakult Honsha for the U.S. and certain other territories, is marketed in the U.S. for refractory colorectal cancer. CAMPTOSAR Injection is protected by a patent in the U.S. until 2004, with a patent term extension until 2007 currently pending.
The Company also produces ZAVEDOS(TM)/IDAMYCIN(R) (idarubicin hydrochloride), an anthracycline used to treat acute leukemia that can be administered both intravenously and orally, as well as ESTRACYT(R), which is used for the treatment of advanced prostate cancer. Based on clinical tests to date, ZAVEDOS is superior to standard therapy in
extending the survival of certain patients who suffer from acute myeloblastic leukemia. Although the last product patents on ZAVEDOS expire in 1999-2002, patents on a new formulation do not expire until 2006. ESTRACYT/EMCYT has no patent protection and is subject to competition from other products and therapies. ZINECARD(R) (dexrazoxane for injection) sold in the U.S. and Canada, is a preparation for reducing cardiac side effects in women with metastatic breast cancer who are undergoing treatment with ADRIAMYCIN.
FRAGMIN(R) Injection is a low molecular weight heparin product for the prevention of thrombosis in connection with surgery, during hemodialysis, in the treatment of acute deep vein thrombosis and (in the U.K.) in the treatment of unstable angina. FRAGMIN is protected by patents in the U.S., Europe and Japan, with patent expiration dates ranging from the year 2000 in some European countries to 2005 in the U.S.
The Company provides a broad line of antibiotic products including CLEOCIN(R) (or DALACIN(R)) and LINCOCIN(R) products. CLEOCIN PHOSPHATE(R) is an injectable form of clindamycin that is used in the treatment of certain life-threatening anaerobic infections. CLEOCIN T(R) is a topical formulation for treatment of acne. CLEOCIN(R) Vaginal Cream is used to treat bacterial vaginosis. LINCOCIN is used in the treatment of serious infections caused by many strains of gram-positive bacteria. The Company has semi-exclusive U.S. marketing rights to VANTIN(R) Tablets and Oral Suspension, an advanced cephalosporin antibiotic, under patents licensed from Sankyo Company, Ltd., the last of which expires in the U.S. in late 2001.
The Company produces various forms of chemical modifications of hormone products under the trademark MEDROL(R) or DEPO-MEDROL(R), which are used to treat a number of inflammatory and allergic conditions. SOLU-CORTEF(R) Sterile Powder and SOLU-MEDROL(R) Sterile Powder are injectable corticosteroid products.
The Company markets several steroid hormone products having a variety of uses, including the treatment of allergic reactions, inflammation, asthma and certain hormone deficiencies. The Company's most important synthetic hormone product is PROVERA(R) Tablets, which is a female sex hormone replacement agent. The Company also markets DEPO-PROVERA(R) Contraceptive Injection and OGEN(R) Tablets and Vaginal Cream, an estrogen replacement product licensed from Abbott Laboratories. The Company intends to increase its marketing in this area directed towards the patient or ultimate consumer, who is increasingly participating in the choice of product.
CAVERJECT(R) (alprostadil injection), a treatment for erectile dysfunction due, among other reasons, to diabetes, cardiovascular problems, injuries and aging, is self-administered by intracavernosal injection. CAVERJECT is no longer covered by patents.
DOSTINEX(R) Tablets, an oral medication for hyperprolactinemia, a condition that can cause absence of menstruation (amenorrhea) and excessive breast milk discharge (galactorrhea), is effective and better tolerated than bromocriptine, the only other product indicated for hyperprolactinemia. DOSTINEX is covered by a patent in the U.S. expiring in 2002, although an extension application which would extend the patent term until late 2005 is currently pending. Patent expiration dates for the product in European countries under Supplemental Protection Certificates generally expire between 2002 and 2006.
MIRAPEX (pramipexole tablets) has been approved in the U.S. and Europe (sold under the tradename MIRAPEXIN) for the treatment of the signs and symptoms of Parkinson's disease. The product was licensed from Boehringer-Ingelheim, which has co-promotion rights in the U.S. A centralized European Commission application was filed in late 1996 under the mutual
recognition procedure. The compound patent expires in 2005 in Europe and Japan and in 2006 in the U.S. CABASER(R) (cabergoline) has also been approved in several European countries for treatment of Parkinson's disease and is subject to European patent protection until at least 2002.
The Company markets MYCOBUTIN Capsules(R), for the prevention of Mycobacterium Avium Complex, a fatal bacterial infection that is a common cause of death in HIV-positive individuals and people with AIDS. MYCOBUTIN is marketed to specialists in infectious diseases and to internists. The relevant patent rights in the U.S. have recently been extended until 1999 and Orphan Drug Exclusivity expiration is in late 1999. Corresponding patent rights expire in Europe generally during the period of 2000 to 2003 with the exception of Italy which expire in the year 2012.
RESCRIPTOR(R) (delavirdine mesylate tablets), a non-nucleoside reverse transcriptase inhibitor, has been approved in the U.S. for the treatment of HIV-1 infection in combination with appropriate antiretroviral agents when therapy is warranted. The product is protected by a U.S. patent until 2013.
The Company has worldwide marketing rights except in the U.S. to VISTIDE(R) (cidofovir injection), indicated for the treatment of cytomegalovirus (CMV) infection in the retina in AIDS patients unsuitable for other therapy.
The Company's major oral antidiabetes agents are MICRONASE(R) Tablets, containing glyburide, and GLYNASE(R) PresTab(R) Tablets, also containing glyburide, for the treatment of non-insulin-dependent diabetes. The Company is experiencing increased levels of competition from generic substitutes in this area.
The Company also markets certain prostaglandin products, including PROSTIN E2(R) Vaginal Suppository, which is generally used for pregnancy disorders, and PROSTIN VR PEDIATRIC(R) Sterile Solution, for cardiovascular use. PREPIDIL(R) Gel, used for cervical ripening, is protected by U.S. patents until 2004.
ESTRING(R) Vaginal Ring, a local hormone replacement therapy for post-menopausal women, is a soft intravaginal plastic ring that secretes a low dose of natural estrogen over a period of three months. The product is sold in the U.S. and in several European countries.
The Company markets several products for intravenous nutrition, including products that meet the body's nutritional needs for fats, amino acids, vitamins and trace elements. The Company's largest selling nutritional product is the fat emulsion INTRALIPID(R), launched in 1962. INTRALIPID has no patent protection and competes with other fat emulsions in all its major markets. The Company also markets KABIMIX and VITRIMIX, pre-mixed nutritional supplements, and GLAMIN and VAMIN(R), amino acid solutions. Management believes that there are limited opportunities for growth in this area except in developing countries such as China, where there are developing healthcare systems and large patient populations.
CONSUMER HEALTH CARE PRODUCTS
The Company develops, manufactures and markets nonprescription healthcare products to drug stores, food stores and mass merchandisers in the U.S. and Europe.
The Company developed and manufactures NICORETTE(R) and NICOTROL(R) for smokers who seek a medical product to aid in smoking cessation. NICORETTE Chewing Gum is
sold over-the-counter in the U.S. by SmithKline Beecham Consumer Pharmaceuticals. The Company's NICORETTE Chewing Gum and Transdermal Patch administer nicotine to the body through slow-release formulations in order to alleviate withdrawal symptoms. Although the Company's U.S. patent covering nicotine polacrilex, the active ingredient in NICORETTE Chewing Gum, expired in August 1992, the Company has market exclusivity for NICORETTE Chewing Gum in the U.S. until 1999, during which time no abbreviated new drug applications (ANDAs) for the product can be approved by the U.S. Food and Drug Administration. In other countries, the Company has no patent protection for NICORETTE Chewing Gum; however, the NICORETTE Transdermal Patch is patented in certain jurisdictions, and is sold in the U.S. by McNeil Consumer Products Company.
In addition, the Company produces and sells ROGAINE(R) Extra Strength for Men and ROGAINE(R) Regular Strength, a 5% and 2%, respectively, solution of minoxidil applied topically to treat hair loss in men with male pattern baldness and, in the Regular Strength formulation, in women with androgenetic alopecia or hereditary hair loss. The product is also sold in numerous foreign countries. Although the U.S. patents covering ROGAINE expired in February 1996, ROGAINE Extra Strength for Men is covered by a three-year ANDA moratorium. ROGAINE is sold over-the-counter in the U.S. and competes with several generic 2% topical minoxidil products not produced by the Company.
During 1997, the Company acquired NASALCROM, a nasal spray for allergic rhinitis, PEDIACARE, a line of children's cough and cold products, and MICATIN, an antifungal to treat athlete's foot, from Johnson & Johnson in exchange for MOTRIN IB, an analgesic, and MYCITRACIN, a topical antibiotic.
The Company also manufactures and distributes other non-prescription products including KAOPECTATE(R) products, for diarrhea; MICROLAX(R) Enema, for constipation; CORTAID(R) products, anti-inflammatory topical products; the family of UNICAP(R) vitamin products; and DRAMAMINE(R), anti-motion sickness products. The Company also holds a license from Hoechst-Roussel Pharmaceuticals Inc. for exclusive U.S. rights to the nonprescription laxative products DOXIDAN(R) and SURFAK(R).
RESEARCH AND DEVELOPMENT
The Company aims to direct its R&D efforts to develop new innovative pharmaceuticals and other healthcare products offering high therapeutic benefits in a number of therapeutic areas in which the Company believes it has the ability to establish a leading global position. The Company also seeks to expand the markets for its existing products by identifying new indications and administrative forms as well as by expanding their international market penetration and extending product life, including by converting suitable patented products to over-the-counter products. The Company concentrates its R&D resources on selected areas both where it has in-house expertise and where there are identified substantial unmet medical needs. The Company's research activities are being focused on four medically important therapeutic areas, including infectious disease, metabolic disease, CNS and oncology, and are conducted principally in the Company's three regional centers in Kalamazoo, Michigan, Stockholm, Sweden and Milan, Italy.
The R&D process has historically taken from 10 to 15 years from discovery to initial product launch and is conducted in various stages. During each stage of development, there is a substantial risk that the desired objectives will not be achievable and that the product will therefore have to be abandoned or the objectives modified. During the "preclinical" stage, generally the first two to four years, research is carried out in order to identify an active substance
in the laboratory and then perform pharmacology and toxicology studies of its effects in various animals. Before testing in humans, an application for the compound must be filed and processed by the requisite regulatory authorities. Testing in humans is performed in different clinical phases to assure the safety and efficacy of the new compound. In clinical Phase I, studies to establish the tolerance, absorption, distribution, metabolism and excretion of the compound are performed on healthy human subjects. Clinical Phase II studies are performed on a limited number of patients to determine efficacy and to define an effective dose. Clinical Phase III comparative studies are then performed on a larger number of patients in order to further establish efficacy and safety. Together, Phases I, II and III typically take from three to five years to complete. Thereafter, an application containing all data for the proposed drug is sent to regulatory authorities for approval, which may take an additional one to two years. Further clinical trials, called Phase IV trials, are generally carried out after product launch to continue to monitor the efficacy and safety of a new drug.
In the area of infectious disease research, oxazolidinones are a potentially important new class of antibiotics that have a novel mechanism of action: inhibition of mRNA translation. A compound (linezolid) is in Phase III clinical studies. In vitro studies show the oxazolidinones to be effective against gram-positive bacteria including antibiotic-resistant strains of staphylococci, streptococci and enterococci. Management believes that oxazolidinones have the potential to meet a significant unmet need due to the increasing incidence of resistant bacterial infections. Linezolid is claimed in a U.S. patent currently set to expire in 2014, but which could be extended depending on the date of NDA approval. Patents issuing on patent applications filed in various other countries will similarly expire generally in 2014, but may be subject to extension in certain countries.
The Company's primary research area in the field of metabolic disease concerns growth disorders. In addition, research projects are currently in process in the field of obesity, diabetes, arteriosclerosis and vascular disease. Research and development in the area of growth and growth factors is concentrated on a broader spectrum of indications for GENOTROPIN. In addition, the Company is pursuing further development of convenience products to administer GENOTROPIN.
Oncology is another major research focus for the Company with discovery and development efforts directed and focused on finding effective treatments for various forms of tumors, particularly those which respond poorly, or are resistant, to currently available therapy. The research programs cover chemotherapy, hormone therapy, immunotherapy of cancer as well as novel approaches and mechanisms of antitumor action which are being pursued mainly in discovery phase.
Development candidates licensed by the Company include almotriptan, an anti-migraine compound for which the Company will have exclusive U.S. marketing rights, and thrombopoietin (TPO), a compound being evaluated for use in treating cancer patients suffering from chemotheraphy.
ANIMAL HEALTH
The Company researches, develops, manufactures and markets a broad range of pharmaceutical products for both food and companion animals. These products are sold worldwide to veterinarians, feed manufacturers, distributors and growers who choose the Company's products primarily because of their efficacy and suitability for particular uses, as well as price and quality. Major products include NAXCEL(R) (or EXCENEL(R)) Sterile Powder, an antibiotic for bovine and swine respiratory disease and early chick mortality; LINCO-SPECTIN(R) Soluble Powder and
Premix, a combination lincomycin/spectinomycin antibiotic; LINCOMIX(R) 20 and LINCOMIX 50 Feed Medication, which are feed-additive antibiotics; MGA(R) Premix, which is a growth-promoting feed additive for feedlot heifers; various products for the treatment of mastitis, LINCOCIN(R), small-animal antibiotics; and LUTALYSE(R) (or DINOLYTIC(R)) Sterile Solution, which is used to synchronize breeding performance in mares and cattle.
In 1997, the Company sold its animal health vaccine business to Bayer Corporation.
CHEMICAL AND CONTRACT MANUFACTURING
The Company researches, develops, manufactures and markets bulk pharmaceutical chemicals and selected high-technology specialty (nonpharmaceutical) chemicals. In addition, the Company manufactures finished dosage forms for sale to third parties.
BIOTECHNOLOGY
The Company owns 45% of Amersham Pharmacia Biotech, Ltd. ("APB"), one of the world's leading suppliers of biotechnology equipment, systems, reagents and chemicals for pharmaceutical and biotechnology companies and for life science research in the public and private sectors. APB was formed in 1997 by the combination of the Company's biotechnology supply business with the life sciences business of Amersham International plc. The business area's traditional products are for use in laboratory-scale chromatography and electrophoresis, two key separation technologies for biomolecules, and also produces reagents, chemicals and systems used by researchers to perform experiments in the areas of molecular and cell biology, and media and systems devoted to large-scale purification of substances prepared by biotechnological methods in the pharmaceutical industry. In recent years, the market for biotechnology research instruments and other products has been adversely affected by budgeting constraints in universities and publicly funded research centers, resulting in increasing competition and downward price pressure.
DIAGNOSTICS
The Company is the world leader in the area of in vitro allergy diagnostics. The Company's main allergy diagnostic product, the Pharmacia CAP System(R), is a highly automated laboratory system that enables testing from patient blood samples for allergenic sensitivity to nearly 500 substances. The Company believes that no competitor in the allergy diagnostic business markets a product that can test allergenic sensitivity to as many different substances. The Company markets the Pharmacia CAP System to diagnostic laboratories worldwide. Patents on the Pharmacia CAP System expire in 2004. During 1996, a new easy-to-use, low-volume test instrument, UniCAP 100(R), was introduced for use by small to medium size laboratories and family physicians.
The Company's largest market for allergy diagnostics is Japan, while sales in the U.S. are relatively low because of the relatively high incidence of more traditional in vivo (skin prick) diagnostic testing by medical professionals in the U.S.
PRODUCTION
The Company produces its products mainly in the U.S., Sweden, Italy, Belgium, Ireland and Puerto Rico.
The Company purchases a variety of raw materials for use in its manufacturing processes. When available, the Company has a policy of maintaining multiple sources of supply for materials. The Company obtains its supplies of raw materials from several companies in a number of countries. The Company has not experienced any difficulty in obtaining a sufficient supply of raw materials in recent years and believes that it will be able to obtain them in sufficient quantities in the future. However, the price of its raw materials may vary from year to year.
MARKETING AND DISTRIBUTION
The Company's products are sold worldwide. The Company markets its products through its own marketing companies or through local distributors and licensees. As part of its ongoing commitment to its customers, the Company periodically organizes educational programs to provide specialist doctors with information on the most recent product innovations and scientific advances.
The Company's marketing companies are organized by geographical markets to meet the requirements of the markets in which they operate.
COMPETITION
The pharmaceutical industry is highly competitive. The Company's principal competitors consist of major international corporations with substantial resources. A drug may be subject to competition from alternative therapies during the period of patent protection and thereafter it will be subject to further competition from generic products. The manufacturers of generic products typically do not bear the related research and development costs and consequently are able to offer generic products at considerably lower prices than the branded equivalents. A research-based pharmaceutical company will therefore normally seek to achieve a sufficiently high profit margin and sales volume during the period of patent protection to justify the original investment and to fund research for the future. There are, however, a number of factors which may enable products to remain profitable once patent protection has ceased. These include the establishment of a strong brand image with the prescriber or the consumer, supported by an active trademark registration and enforcement policy, and the development of a broader range of alternative formulations than the generic manufacturer typically supplies.
As is the case for the pharmaceutical industry in general, the introduction of new products and processes by competitors may affect pricing levels or result in product replacement for existing products, and there can be no assurances that any of the Company's products may not become outmoded, notwithstanding patent or trademark protection. In addition, increasing governmental and other pressures towards the dispensing of generic products in substitution for brand-name drugs may increase competition for products no longer covered by patents.
Over the last few years, the pharmaceutical industry has experienced increased vertical and horizontal consolidation, and the breadth of products offered and distribution capabilities of a company may become a competitive feature. The Company competes with other pharmaceutical companies in discovering or licensing new chemical entities useful in treating medical conditions. In addition, significant changes in marketing conditions are occurring in the U.S., Swedish and other pharmaceutical markets, including decreased pricing flexibility, restrictions on promotional and marketing practices and the impact of managed care, particularly with respect to product selections and pricing concessions.
The Company's competitive position depends in part upon its ability to develop innovative, cost-effective new products, as well as new indications for, and improvements in,
existing products. Its competitive position also depends upon, among other things, its ability to compete on the basis of price as well as to maintain a reputation for quality, efficacy and cost-effectiveness with the specialist doctors and hospital purchasing groups to which its products are targeted, as well as with the wider group of customers which includes pharmacies, wholesalers, hospitals and insurers.
In addition, the Company's ability to maintain long-standing and interactive relationships with specialist doctors and its ability to attract and retain qualified scientific and other personnel, develop and implement production and marketing plans, obtain and maintain patent protection for selected products in its significant markets and secure adequate capital resources are also important competitive factors.
PRICING
In addition to the normal competitive forces that affect the level of prices, a further constraint exists in the form of price controls in most countries in which the Company sells its products. These controls arise either by law or because the government or other healthcare providers in a particular jurisdiction are the principal purchasers of the product or reimburse purchasers for the cost of the product. Price control mechanisms operate differently from jurisdiction to jurisdiction and can result in large price differentials between markets, which may be aggravated by currency fluctuations. These price differentials are exploited by traders (parallel importers) who purchase branded products in lower-priced markets for resale in higher-priced markets.
PRODUCT REGULATION
Like other pharmaceutical companies, the Company is subject to strict controls on the manufacture, labeling, distribution and marketing of its products. Further controls exist on the non-clinical and clinical development of pharmaceutical products. Of particular importance is the requirement to obtain and maintain regulatory approval for a pharmaceutical product from a country's national regulatory authority before such product may be marketed in a particular country.
The submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Furthermore, each regulatory authority may impose its own requirements and may delay or refuse to grant, or may require additional data before granting, an approval, even though the relevant product has been approved in another country. Regulatory authorities also have administrative powers that include product recalls, seizure of products and other sanctions.
The U.S., Europe, Japan, Australia and Canada have very high standards for technical appraisal and consequently, in most cases, a lengthy approval process. The time taken to obtain approval varies by country, but generally takes from six months to four years from the date of application, depending upon the quality of the data produced, the degree of control exercised by the regulatory authority, the efficiency of its review procedure and the nature of the product. The trend in recent years has been toward greater regulation and higher standards with higher levels of standardization among jurisdictions.
In Europe, the European Agency for the Evaluation of Medicinal Products (the "Medicinal Products Agency") was created in July 1993 and opened on January 1, 1995. Based in London, the Medicinal Products Agency will give opinions on medicinal products by using two
new procedures, a centralized community procedure and a decentralized procedure, the latter being based on the principle of mutual recognition of assessments.
In the U.S., most human and animal pharmaceutical products manufactured or sold by the Company are subject to regulation by the FDA as well as by other federal and state agencies. The FDA regulates the introduction of new drugs, advertising of prescription drug products, manufacturing, laboratory and clinical practices, labeling, packaging and record-keeping with respect to drug products. The FDA also reviews the safety and effectiveness of marketed drugs and may require withdrawal of products from the market and modification of labeling claims where necessary. In addition, the manufacturing, marketing and use of Animal Health drug products are closely regulated by the FDA.
Government approval of new drugs under the federal Food, Drug and Cosmetic Act requires substantial evidence of safety and efficacy. As a result of this requirement, as interpreted by the FDA, the length of time and the laboratory and clinical information required for approval of an NDA is considerable.
The FDA has adopted streamlined procedures for the approval of duplicate drugs (drugs containing the same active ingredient as the originator's product), including abbreviated NDAs. Approval of abbreviated NDAs may not be made effective prior to expiration of valid patents. The FDA has established a similar expedited approval process for antibiotics. The availability of the abbreviated NDA and expedited antibiotic approval processes has reduced the time required to obtain FDA approval of some competing products and has facilitated generic competition.
At the state level, so-called "generic substitution" legislation permits the dispensing pharmacist to substitute a different manufacturer's version of a drug for the one prescribed. In a number of states, such substitution is mandatory unless precluded by the prescribing physician.
U.S. pharmaceutical manufacturers are required to provide rebates to state governments for prescriptions covered by Medicaid. The issue of further price controls on sales of prescription drugs continues to be considered in Congress and various states, and additional federal or state legislation to limit prices of prescription drugs is possible.
It is difficult to predict the ultimate effect of streamlined approval of duplicate or generic drugs, "generic substitution," the Medicaid reimbursement and rebate programs and possible price limitations. However, the Company believes that its development of patented and exclusively licensed products may moderate the impact of programs and legislation focusing mainly on products available from multiple suppliers.
Financial information about industry segments and financial information about foreign and domestic operations and export sales is contained in the Company's financial statements.
EMPLOYEES
The Company has approximately 30,000 employees worldwide, although the number is changing based on realignment of operations and related reductions in force.
The Company believes that it has good relations with its employees. Employees at several non-U.S. locations are represented either by freely elected unions or by legally mandated workers' councils or similar organizations.
ENVIRONMENTAL MATTERS
The Company is subject to extensive environmental legislation and regulation, requiring substantial environmental compliance costs, including capital expenditures related to future production. Projects related to the prevention, mitigation and elimination of environmental effects are implemented worldwide.
Since several capital projects are undertaken for both environmental control and other business purposes, such as production process improvements, it is difficult to estimate the specific capital expenditures for environmental control. However, it is estimated that capital expenditures for environmental protection will exceed $25 million in both 1998 and 1999. Operating expenses for compliance with environmental protection laws and regulations in 1997 are estimated to have been in excess of $50 million. It is estimated that such operating expenses for 1998 will also be in excess of $50 million. Cash payments charged to the environmental reserves in 1997 were approximately $10 million and are estimated to be approximately $10 million in 1998.
ITEM 2.
ITEM 2. PROPERTIES
The Company's various businesses operate through a number of offices, research laboratories and production facilities throughout the world with principal locations in Kalamazoo, Michigan; Stockholm, Uppsala and Helsingborg, Sweden; Milan, Italy; and Puurs, Belgium. The Company also has major facilities in Japan and Puerto Rico. The Company will establish its headquarters in Bridgewater, New Jersey. The Company believes its properties to be adequately maintained and suitable for their intended use and its production facilities to have a capacity adequate for its current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various suits and claims arising in the ordinary course of business, primarily for personal injury alleged to have been caused by the use of the Company's products, are pending against the Company and its subsidiaries. Product liability is a significant commercial risk for the Company. Substantial damage awards have been made in certain jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products.
The Company is involved in several administrative and judicial proceedings relating to environmental concerns, including actions brought by the U.S. EPA and state environmental agencies for remedial cleanup at approximately 50 sites, including site clean-up at the Company's discontinued industrial chemical operations in North Haven, Connecticut. The Company's estimate of the ultimate cost to be incurred in connection with these environmental situations could change due to uncertainties at many sites, such as potential cleanup remedies, the estimated cost of cleanup and the Company's ultimate share of a site's cost.
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 to be adequate.
While it is not possible to predict or determine the outcome of legal actions brought against the Company, or the ultimate cost of environmental matters, the Company continues to believe that the unaccrued costs and liabilities associated with such matters will not have a material adverse effect on the Company's consolidated financial position, and unless there is a significant deviation from the historical pattern of resolution of these issues, there should not be a material adverse effect on the Company's results of operations or liquidity.
The Company is a party along with a number of other defendants (both manufacturers and wholesalers) in several federal civil antitrust lawsuits, some of which have been 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, and 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 ("HMOs") without offering the same discounts to retail drugstores, and (2) Section I of the Sherman Antitrust Act by entering into illegal vertical combination with other manufacturers and wholesalers to restrict certain discounts and rebates so they benefited only favored customers. The Federal District Court for the Northern District of Illinois certified a national class of retail pharmacies in November 1994. Similar actions by proposed retailer classes have been filed in the state courts of Alabama, California, Minnesota, Mississippi and Wisconsin. The California and Wisconsin courts have certified retailer classes. Motions to certify are pending in Alabama and Minnesota. The suits seek treble damages and an injunction prohibiting the alleged illegal practices. Fourteen of the twenty-four pharmaceutical company defendants (not including the Company) have reached settlement agreements with the plaintiffs in the class action pending in the Northern District of Illinois for amounts ranging from $10 to $60 million. These settlements were approved by the court in 1996.
Actions have been filed in 14 states and the District of Columbia on behalf of proposed consumer classes seeking damages based on the same alleged conduct. The Courts in California and the District of Columbia have certified the proposed consumer classes. After removal, the Federal District Court denied certification of a proposed Alabama consumer class, but a similar action was later remanded to the state court where it is pending. The state courts in Maine, Michigan and Minnesota denied certification of a consumer class, and plaintiffs' appeals are pending. The state courts in Colorado, New York and Washington dismissed complaints on behalf of proposed consumer classes. Plaintiffs appealed the dismissal in Washington and New York, and those appeals are pending. Similar actions by proposed consumer classes are pending in the state courts of Arizona, Florida, Kansas, North Carolina, Tennessee and Wisconsin. The U.S. Federal Trade Commission has instituted an inquiry into whether pharmaceutical companies, including the Company, may have violated federal antitrust laws in connection with establishing prices and rebates.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company
The Common Stock is listed and traded on the New York Stock Exchange (the "NYSE") under the symbol PNU. As of January 31, 1998, there were 36,914 holders of record of the Common Stock. Swedish Depositary Shares, each representing one share of Common Stock, are traded on the Stockholm Stock Exchange under the symbol PH&U.
Information regarding the market prices and dividends for the Company's Common Stock and related stockholder matters appearing under the caption "Quarterly Data" in the 1997 Annual Report to Shareholders (Exhibit 13) is hereby incorporated by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to the Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Background information for the Board of Directors, including Fred Hassan, the Company's President and Chief Executive Officer, is incorporated herein by reference from the Company's definitive proxy statement for the annual meeting of shareholders to be held on May 8, 1998.
In addition to Fred Hassan, the following are the Company's executive officers:
Goran A. Ando, M.D., age 48, Executive Vice President and President, Research & Development. He had been Executive Vice President and Deputy Chief Executive Officer of Pharmacia since February 1995, and before that had been at Glaxo Holdings p.l.c., where he was director of research and development activities.
Robert C. Salisbury, age 54, Executive Vice President, Finance and Administration, and Chief Financial Officer. He had been Executive Vice President and Chief Financial Officer for Upjohn since 1994, and before that had been Senior Vice President for Finance and Chief Financial Officer.
Richard T. Collier, age 44, Senior Vice President and General Counsel. He had been Senior Vice President, General Counsel and Member of the Executive Council of Rhone-Poulenc Rorer until December 1997. He joined Rhone-Poulenc Rorer in 1986 as Assistant Counsel and held various positions including Vice President and Assistant to the Chairman from 1991 to 1992.
Timothy G. Rothwell, age 46, Executive Vice President and President, Pharmaceutical Operations. He had been President of Rhone-Poulenc Rorer since 1996 and was a member of that Board of Directors since January 1997. He joined Rhone-Poulenc Rorer in 1995 as Executive Vice President and President, Pharmaceutical Operations. Prior to that he was CEO and President of the U.S. pharmaceutical business for Sandoz Pharmaceuticals.
Christopher J. Coughlin, age 45, Executive Vice President and Chief Financial Officer. He had been President of Nabisco International until February 1998. He joined Nabisco International as Executive Vice President and Chief Financial Officer in 1996. Prior to that he was Chief Financial Officer at Sterling Winthrop, Inc.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 8, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 8, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 8, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following are included in the 1997 Annual Report to Shareholders (Exhibit 13) and are incorporated by reference into this Form 10-K pursuant to Item 8.
Report of Independent Accountants - Coopers & Lybrand, L.L.P.
Consolidated Statements of Earnings, Years ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets, December 31, 1997 and 1996.
Consolidated Statements of Shareholders' Equity, Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996 and 1995.
Note 7. Earnings Per Common Share, Years ended December 31, 1997, 1996 and 1995.
Note 22. Segment and Geographic Information, Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(A)2. FINANCIAL STATEMENT SCHEDULES
NOTES:
(1) Schedules are omitted because they are either not required, are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.
(2) Financial statements of 50 percent-or-less-owned affiliated persons are omitted because such persons, in the aggregate, do not constitute a significant subsidiary.
(A)3. EXHIBITS
(B) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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 & UPJOHN, INC.
By: /s/ Fred Hassan ------------------------------------- Fred Hassan President and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Registration Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(3)(iii) Amendment to By-laws of the Registrant
(10)(h) Employment Agreement with Richard T. Collier
(10)(i) Employment Agreement with Timothy G. Rothwell
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(27) Financial Data Schedule